Some Thoughts On Long-Term Health Care Planning

Overview

For many persons, estate planning also includes planning for the possibility of long-term health care.  Nursing home care is expensive and can require the liquidation of assets to generate the funds necessary to pay the nursing home bill unless appropriate planning has been taken.  Medicaid is the joint federal/state program that pays for long-term health care in a nursing home.  To be able to receive Medicaid benefits, an individual must meet numerous eligibility requirements but, in short, must have a very minimal level of income and assets.  States set their own asset limits and determine what assets count toward the limit.  Assets exceeding the limit must be spent on the applicant’s nursing home care before Medicaid eligibility can be established.

The Scope of the Problem

Presently, data indicates that 88 million Americans will be 65 and older by 2050.  That data also indicates that the cost of a private room in a nursing home ranges from $66,000 to $95,000.  Medicaid is the primary means of financing long-term care, with only about 10 percent of persons having any type of long-term care policy in place.  Thus, an understanding of the basic planning options for funding long-term care and preserving family assets is critical.

Basic Asset Transfer and Eligibility Rules

For married couples, at the time of the initial Medicaid eligibility application for one of the spouses, a one-time computation is made of the non-exempt assets of both the institutionalized spouse (the spouse in the nursing home) and the community spouse (the spouse remaining at home).  The total fair market value of the assets is considered available to the institutionalized spouse for purposes of eligibility.  But, a married couple is not required to impoverish themselves before one spouse may gain eligibility for Medicaid.  Instead, the community spouse is permitted to retain half of the couple’s combined resources up to a maximum of $119,220 (for 2015) (minimum of $23,844 for 2015),[1] and at least the first $1,966.25 (through Jun. 30, 2015) of combined monthly income.  If the community spouse’s own monthly income, separate from the institutionalized spouse’s is less than $1,966.25, the community spouse must use a share of the institutionalized spouse’s income to raise the community spouse’s income to the minimum. 

The community spouse’s assets and income that do not exceed the prescribed amount at the time the institutionalized spouse applies for Medicaid will not be considered to be available to the institutionalized spouse for purposes of eligibility.  Thus, the institutionalized spouse must deplete his or her own spousal share down to the non-exempt asset limit and the community spouse must deplete his or her spousal share down to the spousal share asset limit before the institutionalized spouse can receive Medicaid benefits. 

The value of any non-exempt asset owned by a Medicaid applicant or applicant’s spouse that is disposed of for less than fair market value within five years of an application for Medicaid is treated as an available asset for purposes of Medicaid eligibility.  That is the rule for outright transfers as well as transfers to or from a trust.  If such a transfer occurs, a penalty period is triggered that could further delay Medicaid eligibility.  The penalty period is determined by dividing the uncompensated value of the transfer by the average monthly cost of nursing home care in the individual’s state.  The resulting figure is the number of months the individual’s penalty period will last

Planning Strategies

Transfer of Assets. While the asset transfer rules complicate traditional estate planning, transfers made more than five years before a Medicaid application are not penalized.  If that approach is utilized, sufficient funds should be set aside to enable nursing home care to be paid for on a private-pay basis for five years.  That would require approximately $400,000-$500,000 to be set aside to fund the nursing home bill while waiting out the five-year period. 

A similar approach is to transfer all of the assets to the children and let the children pay for the parent’s nursing home care for five years.  One of the children can then claim the parent as a medical dependent on the child’s tax return.

An asset-transfer approach that can protect at least a portion of the assets from depletion involves transferring assets to the children and then applying for Medicaid.  The application will be denied (due to the application of the five-year look-back period).  The child can then re-transfer roughly half of the assets to the parent.  The parent can then re-apply for Medicaid with the application again being rejected (because the parent has excess assets).  The parent then liquidates those re-transferred assets to pay for nursing home care for five years. 

Long-term care insurance.  Another alternative would be to transfer assets and cover the cost of care during the five-year period with long-term care insurance.[2]  Unfortunately, only about a dozen companies sell long-term care coverage.  That number was close to 100 slightly over ten years ago.  According to the American Association for Long-Term Care Insurance, premiums for a 60-year old married couple range from $1,685 to $2,813 annually for both policies combined that provide $164,000 of proceeds for each spouse.  Obviously, the premium cost is higher for greater benefits.  This has caused some to say (including Andy Morehead, one of CALT’s summer seminar speakers) that long-term care insurance is not needed by those that can afford it and those that need it can’t afford it! 

If a person is too old to obtain long-term care insurance with a manageable premium (generally, a policy should be obtained no later than when the insured is between ages 60 and 65), it may be possible to sell small tracts of farmland over time to family members.  With this approach, it is critical to ensure that the contract is cancelled upon death of the transferor and that there is a conveyance to the buyer of only the fractional part of the contract that has been paid for.  As a variation of this approach, family members could loan funds to the person in the nursing home.  The loan should be documented carefully and a mortgage obtained with copies made of all checks.

Asset Sheltering Trusts.  An asset sheltering trust is a trust designed to enable the grantor to be eligible for Medicaid for long-term health care costs that would be incurred if the grantor entered a nursing facility.  The rules surrounding these types of trusts are quite complex and are constantly changing given the public policy concerns that surround the creation of these types of trusts.

In general, these trusts contain language explicitly evidencing the grantor’s intent to give the trustee complete discretion (a “fully discretionary” trust) to distribute trust income and principal.  Similar language might also be used to assure that the grantor’s intent was to supplement rather than supplant public benefits that might be otherwise available.  The purpose of these types of provisions is that if the grantor ever is in need of long-term medical assistance in a nursing facility then the trustee has the discretion to withhold the payment of funds from the grantor’s property contained in the trust to permit the grantor to receive Medicaid benefits at taxpayer expense and preserve the grantor’s assets for the heirs.[3] For some, such sheltering strategies raise ethical questions as well as difficult legal issues.  In addition, it’s not at all settled whether the court’s will respect such trusts as legitimate planning devices.

Other Options. Some people have planned to self-insure the cost of any potential long-term care.  For those that can do it, self-insuring is a viable option.  Remember, it’s only the shortfall between the income coming in on a monthly basis and the monthly cost of long-term care that needs to be addressed.  So, income in the form of interest, dividends, rents, annuities, royalties and similar income items should be totaled up and compared to the anticipated cost of nursing care to see if there is a projected shortfall.

Others may find that some sort of annuity hybrid that offers long-term care benefits might be an option.  Certain life insurance products may also be utilized.  These policies may offer long-term care riders that are tax-qualified. 

Another option is the reverse mortgage.  The equity in the home is used to pay for long-term care, but the heirs of the individual homeowner will not likely receive the home when the homeowner dies.  The home will most likely be sold to pay off the reverse mortgage. 

A long term disability plan could revert to long-term coverage at a specified age. 

Conclusion

Long-term care planning is a necessary part of an estate plan.  Whether or not long-term care is ever needed, having a plan in place in the event it is required could go a long way to preserving family and business assets.