AVOIDING NURSING HOME POVERTY
NURSING HOME POVERTY:
When planning for the future, no one enjoys considering the possibility of spending time in a nursing home. Yet, in more and more cases, it becomes necessary. Failing to consider the implications of this possible future event can severely damage otherwise healthy and well thought out financial plans.
According to statistical analysis of the U.S. population, the older age bracket is expected to see considerable growth in the coming decades. While medical advances have dramatically increased life expectancy and quality of life for those enjoying their golden years, science has not yet pinpointed a method of preventing, stopping or reversing the natural aging process. The passage of time continues on, causing physical and mental deterioration. This, in combination with longer life expectancies, leaves us with a fact that many like to ignore: the majority of people living in the United States will spend some time in a long-term care facility. Those who do not plan for this eventuality could see devastating financial consequences from disrupted financial plans to an unexpected state of poverty. Poverty due to unplanned expenses related to long-term care facilities is becoming so common that it has a name: nursing home poverty.
AVOIDING NURSING HOME POVERTY WITH MEDICAID PLANNING:
The most obvious first step towards avoiding nursing home poverty is Medicaid planning. Medicaid is an entitlement program receiving the majority of its funding from the federal government, but administered at a state level. The principal benefit of the Medicaid program is that it provides payment for long-term care in a nursing home setting once you are qualified.
Sadly, many individuals who are seeking this benefit receive advice outside of the legal industry and are told to spend down their assets. They are actually advised to reduce their life savings to a point at which they can qualify for Medicaid coverage.
If you are considering the benefits of Medicaid, PLEASE SEEK QUALIFIED LEGAL COUNSEL ON THE MATTER. Through the integration of Medicaid planning in an all-inclusive estate plan, hard-earned assets can be protected while simultaneously qualifying for Medicaid coverage when long-term care expenses present themselves.
In most cases, Medicaid covers nursing home residents staying at long-term care facilities. Their nursing home stays are paid for in full (or at least in part) through Medicaid coverage. The cost of a nursing home stay will vary depending on the level of care necessary, the location (city to city), and the length of the stay. But for general information purposes, it can be useful to know that the 2015 average monthly cost to stay at a nursing home was $7,600, that’s $91,200 for the year. If an older couple requiring nursing home care is staying together at a nursing home, their living expenses can easily reach over $15,000 per month (i.e. nursing home care, medicines, outside medical treatments, necessities, etc.)
Considering the numbers, it is easy to see how an extended stay in a nursing home can completely obliterate a family’s life savings in just a short time. Nursing home poverty has become a commonplace occurrence in America, leaving many seeking out information on qualifying for Medicaid, which covers the costs. To qualify for Medicaid, an individual must be able to meet the program’s definition of “poor” in addition to other stated requirements. To meet the definition of “poor” provided by Medicaid, many will need to limit both income and assets.
HOW TO BECOME ELIGIBLE FOR MEDICAID AS A SINGLE PERSON:
In order to be eligible for the Medicaid program, a single person (unmarried) must pass both an income test and an asset test. Income requirements are designated by the state of residency within federally regulated minimum standards. The allowed monthly personal needs allowance will also vary due to the state of residency. Any additional income, with only a few exceptions, such as health insurance premiums, must be paid to the long-term care facility or nursing home. The facility then bills the Medicaid program for any shortage.
Many have been led to believe that they must spend a significant portion or all of their assets prior to entering into a nursing home in order to qualify for Medicaid coverage. While there are strict guidelines regarding assets that a person may hold, Medicaid coverage qualification does not require that an individual spend all their assets. In fact, certain assets are countable, while others are excluded by law. For instance, a single person applying for Medicaid can only have $2,000 of “countable” assets. (Countable assets include, but are not limited to: cash, bank account balances, IRAs, 401(k) accounts, certificates of deposit, cash value in life insurance policies, bonds, stocks, lump sum annuities, real estate investment properties, business interests, or other assets that are easily converted to cash.
QUALIFYING FOR MEDICAID: WHAT ASSETS ARE EXCLUDED?
Assets that are excluded during the Medicaid qualification process are referred to as non-countable assets. Owning these assets will not affect Medicaid eligibility. Primary non-countable assets include a primary home, many household goods and personal effects, a single vehicle, and funeral/burial funds and spaces.
Home Property: The largest non-countable asset most Americans own is their home. The home is considered to be the property in which you hold an ownership interest that serves as your primary residence and includes the house or lot, contiguous property, and other buildings on the property. If you are living in the home or are only not living in your home due to a medical condition and keeping the home available for your return as soon as your condition permits, the entire home property is excluded. The home property is also excluded if you are away from home, but you have a spouse or other dependent/relative living on the premises.
The home property is NOT excluded when qualifying for Medicaid if it is offered for sale. This failure to exclude is based on a lack of intent to return to the home. In most cases, a nursing home resident cannot establish a new home property while they are in residence at the facility since they have never lived there. The new residence would not be able to meet the definition of “home property” according to the Medicaid program requirements. If a home property is located outside of the Medicaid applicant’s state of residence, its value is typically a countable asset.
Household Goods and Personal Effects: The following household goods and personal effects can be excluded from the Medicaid qualification process, regardless of value: one wedding ring and one engagement ring per individual, prosthetic devices, wheelchairs, hospital beds, dialysis machines, and any other items required by a person’s physical condition as long as they are not used extensively and primarily by other members of the applicant’s household. There is also a general exclusion of up to $2,000 applicable to the total equity value of household goods and personal effects outside of those that can be excluded regardless of their total value.
Vehicles: Medicaid applicants can exclude one vehicle per household regardless of its value as long as someone in the applicant’s household uses it for transportation. If an applicant owns more than one vehicle, the exclusion is applied to the vehicle with a greater equity value. Additional vehicles’ equity value is counted regardless of type of vehicle or use of vehicle. (For instance, inoperable vehicles and antique cars are counted). The Medicaid program uses the NADA “Blue Book” trade-in value accessible at www.nadaguides.com.
Burial Contracts & Burial Funds: If an applicant’s burial contract is revocable, salable, or includes conditions for liquidation that do not present a significant hardship, the burial contract is countable. Any portion of the burial contract that represents the purchase of burial space may be excluded and some or all of the remaining value may be excludable as burial funds. If the burial contract cannot be revoked or sold without significant hardship to the individual, the burial contract is not countable.
Burial Spaces: If the Medicaid applicant has a fully paid burial space or an agreement representing the purchase of burial space on their own behalf, their spouse or the burial of an immediate family member, it is excluded regardless of value.
HOW TO BECOME ELIGIBLE FOR MEDICAID AS A MARRIED PERSON:
Income and asset levels for Medicaid qualification are determined at a state level. These income and asset levels are significantly different if one spouse is in the nursing home and the other spouse is at home or “in the community.” Yet many assume the “community spouse’s” income is used when determining eligibility for the institutionalized spouse. This is not the case. The community spouse’s income is not a determining factor for eligibility for an institutionalized spouse.
Medicaid even offers protection for the spouse of a Medicaid applicant through the Maintenance Needs Allowance, which is designed to ensure that the spouse has the minimum support necessary to live in the community while their spouse is in a long-term care facility. The Allowance specifics vary by state.
ARE ASSET RULES DIFFERENT IF YOU ARE MARRIED?
Single Medicaid applicants must have no more than $2,000 in countable assets. For a married couple, with one spouse in the nursing home and the other is at home, the asset rules are significantly different. The married couple’s countable assets will include the community spouse’s assets, the institutionalized spouse’s assets and any joint or shared assets. The institutionalized spouse can qualify for Medicaid if the couple’s combined countable assets do not exceed the Spousal Impoverishment Standard, which is $120,900 for 2017 in Indiana, but varies in other States.
ESTATE RECOVERY: CAN MEDICAID TAKE YOUR HOME?
Every state is required by the federal government to establish an estate recovery program. The purpose of the program is to recover payments made to nursing homes on behalf of Medicaid recipients. When a resident applies for Medicaid, they are informed of federal law mandating estate recovery actions and that payments made by Medicaid could be subject to estate recovery. Estate recovery can be made only after the death of both the patient and the patient’s spouse. After death, Medicaid will serve a notice to the family or heirs of the estate regarding the action to be taken by Medicaid.
For example: Brian Walters is in a nursing home on Medicaid. His wife, Barbara, lives in their family home. Brian and Barbara’s home was an exempt asset according to Medicaid eligibility requirements and their countable assets were less than $120,900 (2017), which is the Spousal Impoverishment Standard in Indiana. During Brian’s stay in the long-term care facility, Medicaid paid out $150,000. After both Brian and Barbara pass away, Medicaid can force the sale of their primary home in order to reimburse Medicaid for the funds spent on Brian’s long-term care in the nursing home.
HOW TO PLAN AHEAD FOR MEDICAID ELIGIBILITY:
Many Medicaid applicants do not qualify because they have too many assets. To avoid this scenario, there are a number of financial options and tools to reduce income and protect countable assets while planning for Medicaid eligibility. The simple transfer of countable assets into non-countable assets or property can help, but may not protect your assets for your heirs. In order to preserve your assets for your heirs, you can consider a timely gift or a trust.
The Timely Gifting of Assets: Making gifts of your assets in order to qualify for Medicaid can be one of the most complicated aspects of Medicaid Planning. The best-case scenario is to structure your estate appropriately, and then stay out of the nursing home for five years after the plan is put in place. In this way, you can protect the entire estate.
However, many do not consider the need for Medicaid Planning until they actually need nursing home or long-term facility care. In this scenario, you may still be able to protect approximately half of your countable assets using different methods.
Five Year Rule and Penalties for Transfers: When applying for Medicaid, you must list any transfers or gifts made to an individual or trust in the previous five years. A transfer discovered within this five-year period disqualifies the applicant due to a federally mandated period of ineligibility meant to prevent individuals from simply transferring all assets out of their name as soon as they need Medicaid coverage. Disqualified applicants must wait until the “penalty period” expires. The penalty period is determined by dividing the value of the transfer by the Average Monthly Cost to Private Patients of Nursing Facility Services.
For Example: Brian Walters would qualify for Medicaid coverage except that he holds a bank account with a current balance of $39,634. He decides to gift $38,634 to his daughter, Barbara. After the gift, Brian’s bank balance is $1,000 and he assumes he will now qualify for Medicaid. He does not. Indiana’s average cost for a nursing home in 2017 was $6,439. So, since Brian\ made a transfer or “gift” of $38,634 to his daughter, he would be ineligible for Medicaid for 6 months ($38,634 gift divided by $6,439 nursing home cost per month).
If You Don’t Have Five Years? You aren’t alone if you didn’t spend a lot of time thinking about Medicaid coverage until nursing home care became necessary in your life or the life of a loved one. When you or someone you love needs immediate long-term care, waiting five years to qualify is not a valid option. In this situation, you face the possibility of depleting both savings and assets before the five years pass.
In this situation, you can utilize specific techniques to qualify while protecting half of your countable assets as long as you are currently in a nursing home or will be entering a nursing home soon. These techniques require someone experienced in the transfer of assets out of your name and then returning assets back to you.
WHERE SHOULD YOU PLACE YOUR ASSETS?
When attempting to decide whom to gift your assets to, there are a few obvious options. The most common are your own children, a trust, or a combination of both. Families actively involved in Medicaid Planning usually agree that money taken out of the parents’ names should be set aside in accounts for the children. The children in this type of situation usually informally agree that they will spend the money on the parents, if necessary.
When considering this line of action, there are some negative aspects that should be considered: if you need to enter the nursing home within five years of the transfer, you lose Medicaid eligibility, you lose sole control over the asset/s, you lose ownership interest if a child files for bankruptcy or gets a divorce, you lose ownership to your child’s heirs if you outlive your child, potential for adverse tax consequences following the “gift,” you could lose the homestead exemption, and other potential negative tax consequences.
The simple transfer of assets to your children or heirs is not the best solution. There are too many negatives and potential negatives associated with the action. Instead, take advantage of more favorable legal strategies based on the creation of specific types of trusts designed to protect assets from nursing home poverty.
Trusts Transfer Assets: Putting a trust in place can legally designate a situation in which one person holds title to assets, but they are subject to an obligation to keep or use the assets for the benefit of another.
For example: Brian Walters has 5 children. He wants to give his children a gift of $100,000 - $20,000 each, but he doesn’t want them to spend it immediately. He knows that at 3 of his 5 children would spend the money immediately if he simply gave it to them. He knows that his oldest daughter, Barbara, is responsible and will act in accordance with his wishes. So Brian creates the Walters Family Trust and names Barbara as the trustee of the trust. Brian names himself as the income beneficiary of the trust so that he will continue receiving the interest from the $100,000. He wants the principal ($100,000) to be distributed to his children after his death. Barbara goes to the bank and sets up the Walters Family Trust bank account. Only Barbara has signature authority on the account, as she is the sole trustee. Brian then transfers $100,000 of his money into the trust account. From this point forward, Barbara, as the trustee, manages the money for the rest of Brian’s lifetime. She makes sure that Brian continues to receive the interest as income beneficiary of the trust, and Barbara distributes the principal to the other children (all designated as principal beneficiaries) after Brian’s death. If Brian had needed to move into a nursing home five years after the trust was created, the $100,000 would not be considered as a countable asset for Medicaid eligibility.
Trusts Offer Control: Trusts are a popular tool for Medicaid Planning. When the trust is established correctly, it allows individuals and married couples to transfer assets out of their name, but retain control of the same assets after they are transferred. The creation of a trust should be given careful thought in order to plan for the future.
For example: In 2005, Larry set up a revocable living trust in order to avoid probate. When he established the trust, Larry didn’t have any conversations about nursing home poverty and how to avoid it or include any specific provisions regarding the matter. In 2010, Larry suffered a series of strokes that resulted in a severe decline in his overall health and ability to function. Nursing home care became necessary. Larry’s two children were advised that his assets were not in the correct type of trust. They were told to spend the assets within the next two years or lose them.
Individual Retirement Accounts & Medicaid Eligibility: Many Americans hold a significant portion of their money in Individual Retirement Accounts (IRAs). One benefit of this is that IRAs can be left in your name and probate will be avoided, but IRAs cannot be transferred to a trust or to your children without first taking a distribution from the IRA, paying taxes on it, then transferring the after-tax proceeds to the right kind of trust. When managing an IRA in connection with avoiding nursing home poverty and creating Medicaid eligibility you have a couple options. You can take the minimum amount of distribution each year, but if you need to enter a nursing home, you will be forced to spend the IRA assets to become Medicaid eligible. Or you can take more of the IRA than the required distribution rules allow and pay tax on the distribution. The after-tax distributions must be transferred to a trust account in order to protect the funds from nursing home expenses in the future.
America’s population is aging. The cost of long-term care and nursing home facilities is skyrocketing. With the amount of government funding for this type of care dwindling, it would seem that the importance of Medicaid Planning is becoming more and more important. Every few years the Medicaid eligibility rules change, making it hard for individuals and families to protect their assets and qualify for Medicaid. Thankfully, there is a means of avoiding the loss of hard-earned assets in the event that you or a loved one requires long-term care during your later years. If you are attempting to put a plan in place to avoid nursing home poverty, there are a number of concerns that must be addressed: obtaining the proper level of countable assets, a thorough understanding of the rules and guidelines for gifting assets, planning far enough in advance to protect your estate from the government, establishing a trust to allow control of assets, and working with an experienced estate planning attorneys at Jones, McGlasson & Arter who knows you don’t want the government to take your assets and is ready to help you prevent that eventuality. As experts in estate planning law, Jones, McGlasson & Arter attorneys are committed to helping you and others like you by listening to you, determining what you want and what you need, and creating a plan that will make it happen. Let’s set up your estate the right way, right now, to protect all that you have worked so hard to achieve.