November 17, 2004
Many people shudder to think of the impact of financing long term care on the financial resources that they spend a lifetime building. Long term care, more commonly known as nursing home care, is very expensive, with the average cost being approximately $7,000 per month or more. There are various means of financing long term care; however, most Americans believe that the federal government will pay for their long term care costs. Unfortunately, this is not the case. This article will explore the options available to people who may be facing long term care costs now or in the near future.
Initially, in order for Medicare benefits to be available to pay for long term care costs, the admission to the nursing facility must follow a three day hospital stay. Assuming a three day hospital stay preceding the admission to the facility, Medicare may pay up to the first 100 days of nursing care. Note well that there is no entitlement to 100 days of Medicare benefits, as Medicare benefits can be stopped at any time during the 100 days if the patient is not improving or has otherwise reached a "plateau" in their recovery. In addition, after the first 20 days, Medicare will only cover 80% of long term care costs. After the Medicare benefit has ended, or assuming a Medicare benefit was never available, an institutionalized individual must seek an alternative source of paying for their care.
One way that people pay for their long term care is by accessing the benefits of a previously purchased long term care insurance policy. Long term care insurance is insurance that will pay a daily benefit toward the cost of long term care. While it is always extremely helpful to plan for long term care before the need occurs, this is especially true with respect to long term care insurance. A person must be insurable in order to be able to purchase long term care insurance, and various medical conditions will prevent a person from being deemed insurable. In addition, as there is a premium associated with a long term care insurance policy, it may not be appropriate for individuals with smaller estates. Ultimately, personal circumstances will dictate whether or not this option is appropriate; however, if the policy is not owned at the time of the admission to the facility, it will not be possible to then obtain the policy, and this option would be non-existent.
In the absence of long term care insurance, private payment is generally the next financing source. Private payment for long term care means that the institutionalized individual liquidates his/her assets and sends payment to the nursing home each month for his/her long term care costs. At the average rate of care today, many people are unable to finance their long term care privately for any extended period of time. Furthermore, given the fact that planning can be done even if institutionalization has already occurred, many people seek to reduce the amount of private payment that would be necessary before another source of payment is available. For example, planned gifting, which will be discussed below, is available even when a person has entered the nursing home and is privately paying for his/her care. Fortunately, if assets remain, there is almost always some planning that can be done in order to preserve some assets for the family.
The final option for financing long term care is to obtain approval for Medicaid benefits for the institutionalized individual. Medicaid is a joint federal and state program that provides long term care benefits to qualifying applicants. The federal government has established the basic Medicaid guidelines, and each state is allowed to enact its own rules and regulations in accordance with the federal guidelines. As such, the Medicaid rules and regulations vary from state to state, and it is the state in which the applicant resides that determines the standards for benefits qualification. The Long Term Care Unit of the Division of Medical Assistance is the agency that determines Medicaid eligibility in the Commonwealth of Massachusetts.
The process of applying for Medicaid benefits in order to cover nursing home costs can be a daunting task. Since most families facing this dilemma are unfamiliar with Medicaid rules and regulations, they are confused by the process and overwhelmed by the paperwork. In addition, this process is particularly emotional since it is usually the result of an illness of or trauma to a loved one. With respect to obtaining Medicaid benefits, the earlier the planning begins, the more likely that approval can be obtained while preserving a significant amount of assets for the family of the institutionalized individual.
A brief overview of the Medicaid qualification requirements, as well as some of the planning techniques, highlights the need to begin planning sooner rather than later. An institutionalized individual must reduce his countable personal resources to $2,000 before Medicaid will begin paying for the cost of nursing home care. In determining Medicaid eligibility, essentially all assets are countable, except those that are exempted by law or that are legally inaccessible to the individual. Those assets that are exempted by law include, but are not limited to, prepaid irrevocable funerals and burial accounts. If an applicant has more than $2,000 in countable assets, the Division of Medical Assistance will deny the application for benefits and will inform the applicant that their assets must be "spent down" on their care to the $2,000 level before they will qualify.
With respect to a married couple when one spouse is in the nursing home and the other spouse is at home ("community spouse"), essentially all assets are counted for purposes of determining the institutionalized spouse’s eligibility. This applies regardless of the source of the asset or whether the assets are owned by both spouses jointly or separately. Exempted resources include the couple’s primary residence so long as the community spouse lives in the residence, household goods, an automobile for the benefit of the community spouse, prepaid funerals and burial accounts for each spouse and a nominal amount of life insurance. All remaining assets are counted to determine the amount of assets that must be contributed toward long term care before the individual qualifies for Medicaid. The assets are totaled as of the day of institutionalization and the community spouse will be allotted one-half of the countable assets up to $92,760 as their community spouse resource allowance ("CSRA"). Any countable assets over the $2,000 allotted to the institutionalized spouse and the allotted CSRA must be spent down before eligibility can be obtained for the institutionalized spouse.
The spend down of assets is devastating to personal finances and is frustrating for the community spouse who is left to prepare and file the Medicaid application. In most cases, the community spouse is left with significantly less assets and income. Unfortunately, if planning does not begin until institutionalization has occurred, a greater portion of the personal assets must be used to fund long term care expenses before an individual can qualify for Medicaid because the individual will need to pay privately for his/her care until eligibility can be obtained. Conversely, if planning begins several years before institutionalization, it is possible to preserve a large amount of the assets for the family as there are no long term care costs to finance while the plan is pending.
A popular planning option is to reduce assets through transfers of assets (gifts) to family members years or months before a nursing home admission occurs. Occasionally, and only in the most appropriate of circumstances, an irrevocable trust may be used to hold any gifts. The timing of the transfer of assets is especially important as there is a thirty-six (36) month look back period for transfers. In addition, there is a sixty (60) month look back period for transfers to or from a trust. This means that the Division of Medical Assistance can look back into an applicant’s financial history for gifts for three (3) or five (5) years prior to the date of the application, as the case may be. Most importantly, any transfer of assets for less than fair market value triggers a disqualification period during which the applicant would not be eligible for benefits even if all of the other requirements for eligibility are met. As such, if assets are transferred, it is important to know the length of the resulting disqualification period.
As part of a gifting plan, many older people choose to transfer their home to trusted family members and reserve a life estate that allows them to live in, occupy, and have the benefit of the home throughout their lifetime. Upon the death of the life tenant, the home will pass to the persons named in the deed without the necessity of probate. In addition, the surviving owners of the property will receive a step up in the basis in the property for income tax purposes, which will be beneficial when the property is sold. The deed reserving a life estate option is effective for asset preservation as a life estate does not count for Medicaid purposes when calculating the value of countable assets. As long as the home is not sold during the lifetime of the life tenant, and assuming any resulting disqualification period has run prior to the applicant’s admission to the facility, the home will be protected against nursing home costs, including Medicaid liens for estate recovery, absent, of course, a change in the rules and regulations surrounding life estates.
Another option aside from gifting is to keep the assets at status quo, and then in the event of a nursing home admission, convert any excess assets into an annuity. In the case of single person, the annuity would contain any assets over and above $2,000. The income stream created as a result would go to the nursing facility during the applicant’s lifetime, and any residual benefit would pass to the named beneficiaries upon the applicant’s death. In the case of a married couple, the annuity would contain any assets over and above the allotted CSRA. The income stream would benefit the community spouse while he/she remains at home. If excess assets are placed into an annuity and annuitized, the institutionalized spouse will qualify for Medicaid benefits immediately. Again, a designated beneficiary would receive any remaining funds in the event that the community spouse does not survive the lifetime of the annuity.
While annuity planning appears to be an extraordinary option, there are hidden pitfalls. Once an annuity is annuitized, there is no way to recover the assets, that is, the annuitization is irrevocable. In addition, if the community spouse is later institutionalized, the income stream will follow the community spouse to the nursing home and will be applied toward his/her long term care expenses. Further, to be a viable planning option, annuity contracts must follow the standardized life expectancy tables used by the Division of Medical Assistance to determine an annuity’s maximum payout value. If the community spouse outlives the standardized life expectancy, the annuity will end and so will the income stream. Nonetheless, annuity planning is often preferred over paying out funds for nursing home costs until the couple reaches the assets limits for Medicaid.
Planning for the financing of long term care can be complex and confusing. Families are usually confronted with the issue of how to pay for long term care when they are emotionally fragile due to the illness of or trauma to a loved one. When a loved one needs long term care, the apparent imminence of financial devastation can be overwhelming, and the planning opportunities can seem extremely complicated. Everyone’s circumstances are different, so there is no cookie cutter solution. The best course of action is to consult a legal professional who specializes in Medicaid/elder law as early as possible to discuss available options to preserve assets. Planning in the absence of a crisis usually results in being able to preserve the greatest amount of assets, and guidance from a professional specializing in this areas is necessary to ensure that all viable options are explored and that the best choices are made in each individual case.
Gina M. Barry is an Associate with the law firm of Bacon & Wilson, P.C., Attorneys at Law. She is a member of the National Academy of Elder Law Attorneys and concentrates her practice in the areas of Estate Planning, Probate Administration and Litigation, Guardianships, Conservatorships and Residential Real Estate. Gina may be reached at (413) 781-0560 or email@example.com.
by: Gina M. Barry, Esquire