Our August 20th post discussed the definition, the concerns, and some options regarding long-term care. One of those options presented was protecting your assets. Staying at home while you still need some care can mean an aide coming into the house a few hours a day or a few hours a week. Maybe you need more and are needing to move into an assisted living facility or even to full-blown nursing care. A nursing home in our local area has a cost of $100,000 to $135,000. Whether it is home care or nursing care, the question is how to pay for it?
Medicare or your health insurance will not pay for long-term expenses. Income and assets will need to be used. If there are not sufficient means of paying, generally, that means that an individual will need Medicaid to cover the balance of the expenses. However, this does not mean that you must spend down every asset before you qualify. There are some protected assets.
Retirement accounts – Traditional and Roth IRAs, 401(k)s, 403(b)s, 457, Simple or SEP IRAs, tax-deferred savings, deferred compensation, whatever the retirement plan name is, are not required to be entirely spent. These accounts need to be put into Required Minimum Distribution (RMD) status, and that payment is part of the income to be used to pay the bill. Usually, Roth accounts do not have an RMD requirement. For purposes of Medicaid, they need to be placed into that status.
Primary residence – If a spouse will be remaining in the home, it is a protected asset. There cannot be a forced sale of this asset. If there is no spouse, and the client is entering a nursing home, there can be a forced sale of the house with the proceeds being used to pay for care.
Married couple – If there is a person needing admittance into a nursing home, the person remaining home is known as the community spouse. The community spouse can keep a portion of income for their living expenses. Each state, including New York State, has a maximum amount allowable to be kept by the community spouse. Any monthly income exceeding that amount needs to be used to pay for nursing care.
Bank and non-retirement investment accounts will need to be liquidated to pay for care. Non-qualified annuities and life insurance will need to be cashed in to pay for care. Collectibles, excess personal property, and savings bonds may need to be sold to generate cash to pay a nursing home bill. Once assets are used up, an individual would qualify for Medicaid to pay the remainder of the bill after the monthly income.
There are two primary methods of protecting assets to avoid them having to be spent down before qualifying for Medicaid. Assets can be protected through the purchase of long-term care insurance or ownership transfer.
Long-term care insurance can be purchased to provide a monthly benefit when long-term care expenses are incurred. The younger an individual is when the policy goes into effect, the lower the premiums will be. Traditional long-term care is generally paid for life. You may pay premiums for many years, even decades, die in your sleep, and never need care. This and the premium costs are often the arguments that individuals use against purchasing insurance.
More recently, there are hybrid policies. With one type of hybrid policy, the policy will pay out a death benefit if the individual does not use long-term care benefits. The second type of hybrid policies allows for annuity payments if the individual does not use the long-term care benefits. There are also now several life insurance companies that offer a rider as part of a life insurance policy. These allow the owner to obtain the death benefit proceeds in advance to help pay long-term care expenses. Typically, this requires that the individual be terminally ill.
Long-term care insurance policies are purchased to cover expenses for a specified period. Insurance can be purchased to cover all or part of the cost of care. Often, there can be an elimination period during which expenses are not covered and must be paid out of pocket. Insurance usually will start when someone cannot perform two or three activities of daily living.
A second option to help protect assets is for those assets not to be owned by the individual. Individuals will transfer homeownership to their children. Most often, the parents retain life use to make sure that they can stay in the home. Any assets can be transferred – life insurance, investment accounts or bank accounts. Understand when assets are transferred, they no longer belong to you and become the asset of the individual to whom they were transferred.
Individuals may create an irrevocable trust, move assets into the trust, and create protection. The trust must be irrevocable. The grantor cannot take assets back out of the trust, and they cannot control the assets within the trust.
There is a period of up to five years between the transfer and when the assets may be fully protected, whether assets are given to an individual or placed in a trust. If the individual tries to qualify for Medicaid during these five years, the state can require the individual to make payments equal to the trust amount before being willing to make payments.
A long-term care illness can be devastating – for your health, for your emotions, for your finances. An individual can elect to not doing any preplanning and see where “the chips fall.” For some individuals who have primarily protected assets or who have little assets, this may be the better or only option. An individual can choose to protect themselves through the purchase of long-term care insurance – either traditional or hybrid insurance. An individual may choose to protect some assets through the creation of an irrevocable trust. An individual electing to purchase insurance or create a trust needs advanced planning. Managing the potential for long-term care expenses is generally part of an excellent overall estate plan.
A financial planner and estate planning attorney are invaluable in helping you determine a reasonable course of action and making sure that your plans get implemented.