Medicare, the federal health insurance program primarily for adults 65 years of age and over, pays doctor and hospital bills for many older Americans. However, it doesn’t cover everything. For example, long-term custodial care for help with the “activities of daily living,” such as bathing, dressing, and eating, are not covered under the plan. There are other uncovered costs as well.
For people who don’t need the level of care that a nursing home provides, a one-bedroom unit in an assisted living community runs about $119 a day, or $3,628 a month. Home health aides, for people who are able to remain in their own homes but still need some assistance, charge about $20.50 an hour, HHS says. These are just averages, of course. In high-cost areas such as New York City, the bills can run much higher.
Privately purchased long-term care insurance is one way to handle some of these costs, though it can be expensive and is not for everyone. It’s also generally most cost-effective when purchased before age 60.
Traditionally, people often reached the eligibility threshold either by giving money to family members or through a spend down – paying for their own care until enough of their assets were depleted, which was often quickly. However, there are legal strategies that can help older people qualify for Medicaid without impoverishing themselves or their spouse. Though the rules are complex, some of the specifics vary by state and the services of a knowledgeable lawyer are essential, here are five key options to investigate.
Asset Protection Trusts
A properly established irrevocable trust can be one way to shelter assets where they will not affect Medicare eligibility. An irrevocable trust, which transfers assets to the control of a trustee, effectively removes them from the older person’s control. This is in contrast to a revocable trust, in which the person retains the right to change the arrangement. Revocable trusts, which are also referred to as revocable living trusts, have their uses, but qualifying for Medicaid isn’t one of them.
Gifting Assets Before Eldercare
Another option, of course, would simply be to give the money to a responsible child or another relative. However, David A. Cutner, an elder law attorney with Lamson & Cutner, P.C., in New York City, says that route can be far riskier. Once the money is transferred, it legally belongs to the other person. So even if the person is totally trustworthy, events in their own life – a divorce, a business failure, a lawsuit, their death – could put that money in jeopardy. Creating a trust instead can avoid these risks.
An Example of an Irrevocable Trust
Attorney Cutner offers an example using his state’s rules that here is slightly simplified: Suppose a person transfers $120,000 to an irrevocable trust and soon thereafter enters a nursing home and applies for Medicaid. Using Medicaid’s “regional rate” of $12,000 per month for nursing home care in that geographic region, the “penalty period” of ineligibility can be easily calculated: the $120,000 transfer divided by the regional rate of $12,000 equals a 10-month period of ineligibility. The penalty period starts when the person is in the nursing home, has applied for Medicaid and is “otherwise eligible” for benefits – that is, he or she has less than $15,150 in total resources. (Note that in New York the look-back period applies only to nursing homes and not to assisted living or home care; in other states, it may apply to all three.)
In most cases, the actual cost of nursing home care is higher than Medicaid’s regional rate. As a result, the out-of-pocket cost of nursing home care during the penalty period will be greater than the amount of the transfer that caused the penalty. That is where the next strategy comes in.
Set Up an Annuity
If a person needs to apply for Medicaid before the five-year look-back period is up, it still may be possible to preserve a significant portion of their assets by using a properly drafted private annuity or promissory note that complies with federal law, Cutner says.
Pooled Trusts
States differ in how they treat income for Medicaid purposes. In general, a Medicaid recipient who is in a nursing home must turn over all of their income, except for a small monthly allowance, in order to defray the cost of care. If the person needs home care or lives in a continuing-care retirement community, the state may consider any income over a certain limit to be excess or surplus and require that it go toward the cost of care. In those instances, a pooled trust can be a way to protect some of that income.
Personal Care Agreements
A lump sum paid to a caregiver for future services may not be considered a penalized transfer if it is structured correctly. That can serve a number of purposes. One is to reduce the size of the estate, so the person will be eligible for Medicaid. Another is to buy the older person some care beyond what Medicaid provides.
This kind of personal care agreement can also help ease the financial strain on a child or other relative who has given up work and sacrificed income in order to provide care. Often, Cutner says, it can help prevent family rifts when the burden of caregiving falls disproportionately on a particular child. Such an agreement can also be used with an agency that provides home care services.
Spousal Transfers and Spousal Refusal
A transfer of assets from one spouse to the other is not penalized under Medicaid, so a common move is for a spouse who needs to go into a nursing home to turn over their assets to their spouse. Even so, the spouse is still legally obligated to provide for the other spouse’s care, and their collective assets will be considered for Medicaid eligibility purposes. By signing a spousal refusal, however, the healthy spouse may be able to renounce that responsibility, making the other spouse immediately eligible for Medicaid.
Later, Medicaid can attempt to collect reimbursement from the spouse, though Cutner says that strategies are available that may lessen the impact. Even if Medicaid does collect, the couple is likely to benefit, because Medicaid’s reimbursement will be based on the discounted rate it pays nursing homes rather than on the private-payer rate the couple would otherwise have had to pay. This option may not be available in your state.
The Bottom Line
If seniors lack the funds to pay for the care they need when they become mentally or physically frail, investigate these ways to help pay the bills without impoverishing the individual or their spouse. Healthy seniors should use this information to plan ahead for the care they might need in the future.