by Mary Beth Franklin
For some individuals, long-term care insurance may not be an option. And some people give away their money and property in order to qualify for Medicaid help sooner, a practice known as Medicaid planning. One way to deal with both situations is to earmark funds sufficient to pay for care, establishing an irrevocable trust removing the remaining assets from the estate, says Barbara Culver, President of Resonate, a wealth advisory service in Cincinnati. But Medicaid planning, always a touchy subject, has become an even dicier issue since Congress enacted new rules to crack down on such tactics.
Tougher restrictions. The government doesn’t want to finance long-term care for people who are sheltering assets that could go toward paying their bills. So the new rules, which took effect in February 2006, extend the “look back” period from three to five years. If an individual gives away money or property during the five-year look-back, it triggers a penalty period during which he or she is ineligible for governmental aid.
The penalty period equals the amount given away divided by the average cost of nursing-home care in your area. So, for example, if you give $60,000 to family members and a nursing home where you live costs $6,000 a month, you can’t qualify for Medicaid for ten months.
Under the old rules, the penalty period was less onerous because it began the day you transferred the assets. That meant it often expired before you were admitted to a nursing home, so you could still qualify for government aid when you applied.
Now, however, the penalty period begins the day you apply for Medicaid, which by definition means you have already spent virtually all of your money and need public assistance to pay the bills. (Asset transfers made before February 8, 2006, are grand fathered under the old rules.) That means the family members who receive your gifts may have to pay nursing-home bills during the penalty period until you qualify for Medicaid.
Creative solutions. Since the new rules took effect, Jennifer Cona, an Elder Law attorney in Melville, N.Y., says she has seen a stream of clients who are “kicking themselves because they didn’t plan earlier.” Says Cona, “We’ve had to become more creative.”
Cona is setting up irrevocable trusts so that clients can shelter their assets and continue to live in their homes or receive income (but not principle) from the trust. Under the old Medicaid rules, trusts were subject to a five-year look-back period, compared with three years for other asset transfers. Now that the five-year look-back period applies across the board, the added protection of a trust is more appealing.
If the client needs long-term care before the five-year look-back ends, Cona explains, beneficiaries of the trust may take an advance on their inheritance or sell the house to raise cash. If the client doesn’t need care until after the five-year window closes, the trust assets are protected and the client is eligible for Medicaid as soon as remaining unprotected assets are spent.
For those who need immediate care, Cona sometimes drafts a “caregiver agreement,” under which a parent agrees to pay an adult child for care giving services, such as driving to medical appointments, helping with household chores and coordinating or providing care. The payments help draw down the parent’s assets closer to the point of Medicaid eligibility while passing cash on to a family member, who may have to-take leave from his or her job to become a care giver. Because the payments are considered wages rather than gifts, they avoid the restrictions on asset transfers. Such wages must reflect current rates for local home-health care aides (the average wage is about $19 per hour nationwide), and the recipient must pay taxes on the income.
Don’t jump in. Even though many adult children are willing (even eager) to help their parents deal with long term care bills, it’s often better to wait, recommends James Ryan, of Lenox Advisors, in New York City. If you intervene too soon, all of your financial gifts will be considered your parents’ assets and will go toward paying nursing home bills.
And don’t let your parent take out a home-equity loan to pay long term care bills, says Ryan. Up to $500,000 of home equity ($750,000 in New York and some other states) is excluded from assets used to calculate Medicaid eligibility. Once your parent qualifies for Medicaid, he says, you can be as generous as you like with gifts and cash.
Remember, though, that Medicaid is not an ideal solution even if you can protect some assets. “Medicaid comes up short in protecting your freedom of choice,” says Ryan. You or your parent would probably have to go into a nursing home to receive government-financed care, rather than remain at home, which most people prefer. As a result of the tougher Medicaid rules, Ryan says, more people are interested in buying long-term care insurance.