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SCHEDULE A CALLOne of the greatest fears of older Americans is that they may end up in a nursing home. This not only means a great loss of personal autonomy, but also a tremendous financial price. Depending on location and level of care, nursing homes cost between $35,000 and $150,000 a year. In Mississippi, they typical nursing home costs $5,000 per month.
Most people end up paying for nursing home care out of their savings until they run out. Then, they can qualify for Medicaid to pick up the cost. The advantages of paying privately are that you are more likely to gain entrance to a better quality facility and it eliminates or postpones dealing with your state’s welfare bureaucracy — an often demeaning and time-consuming process. The disadvantage is that it’s expensive.
Careful planning, whether in advance or in response to an unanticipated need for care, can help protect your estate, whether for your spouse or for your children. This can be done by purchasing long-term care insurance or by making sure you receive the benefits to which you are entitled under the Medicare and Medicaid programs. Veterans may also seek benefits from the Veterans Administration.
Medicare Part A covers up to 100 days of “skilled nursing” care per spell of illness. However, the definition of “skilled nursing” and the other conditions for obtaining this coverage are quite stringent, meaning that few nursing home residents receive the full 100 days of coverage. As a result, Medicare pays for only about 9 percent of nursing home care in the United States. Check out the Medicare section of this site for tips on making sure you receive the nursing care benefits to which you are entitled.
For all practical purposes, in the United States the only “insurance” plan for long-term institutional care is Medicaid. Lacking access to alternatives such as paying privately or Medicare, most people pay out of their own pockets for long-term care until they become eligible for Medicaid. Although their names are confusingly alike, Medicaid and Medicare are quite different programs. For one thing, all retirees who receive Social Security benefits also receive Medicare as their health insurance. Medicare is an “entitlement” program. Medicaid, on the other hand, is a form of welfare — or at least that’s how it began. So to be eligible for Medicaid, you must become “impoverished” under the program’s guidelines.
Also, unlike Medicare, which is totally federal, Medicaid is a joint federal-state program. Each state operates its own Medicaid system, but this system must conform to federal guidelines in order for the state to receive federal money, which pays for about half the state’s Medicaid costs. (The state picks up the rest of the tab.)
This complicates matters, since the Medicaid eligibility rules are somewhat different from state to state, and they keep changing. (The states also sometimes have their own names for the program, such as “MediCal” in California and “MassHealth” in Massachusetts.) Both the federal government and most state governments seem to be continually tinkering with the eligibility requirements and restrictions. The rules for gaining eligibility to the program are explained in detail in the Medicaid section of this site. But to be certain of your rights, consult an expert. He or she can guide you through the complicated rules of the different programs and help you plan ahead.
Those who are not in immediate need of long-term care may have the luxury of distributing or protecting their assets in advance. This way, when they do need long-term care, they will quickly qualify for Medicaid benefits. Giving general rules for so-called “Medicaid planning” is difficult because every client’s case is different. Some have more savings or income than others. Some are married, others are single. Some have family support, others do not. Some own their own homes, some rent. Still, a number of basic strategies and tools are typically used in Medicaid planning. These are described below.
As explained in the Medicaid section of this site (see The Transfer Penalty), Congress has established a period of ineligibility for Medicaid for those who transfer assets. This period of ineligibility is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state. However, state Medicaid officials will look only at transfers made within the 36 months for transfers made prior to February 8th, 2006, and 60 months for transfers made on or after this date. Thus, if you can plan ahead and make transfers well in advance of needing Medicaid (up to five years, depending on when you are transferred the money), the transfers will not affect your Medicaid eligibility.
Even if you are not in a situation where you can plan ahead, you can generally protect about half of your savings by consulting with an Elder Law attorney. Using such strategies as income-only trusts, children’s trusts, self-managed trusts, annuities, notes and loans, and family service agreements, an Elder Law attorney can usually preserve half or more of the assets immediately prior to entering a nursing home. Often, the amount saved for the benefit of the at-home spouse or nursing home spouse can be considerably greater. A qualified elder law attorney can advise you on all of your options.
Any current transfer strategy must take into account a 60 month look-back period, a 1 month penalty for each $4,600 transferred, along with the nursing home resident’s income and all of her expenses, including the cost of the nursing home. Also, be very, very careful before making transfers. If you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.
In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren’s eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property, they will have to pay a much higher tax on capital gains than they would have if they had inherited it.
Transfers should be made carefully, with an understanding of all the consequences. In any case, as a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid; and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.
Remember: You do not have to save your estate for your children. The bumper sticker that reads “I’m spending my children’s inheritance” is a perfectly appropriate approach to estate and Medicaid planning.
Even though in most cases a nursing home resident may receive Medicaid while owning a home, if she is married she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows him or her to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at his or her death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.
While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:
In addition, you may transfer your home to the following individuals (as well as to those listed above):
The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in a living (or “inter vivos”) trust. A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries.” The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it.
A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
An “irrevocable” trust, on the other hand, is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be touched during your life. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or for your benefit. However, if you do move to a nursing home, the trust income will have to go to the nursing home.
You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.
You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.
One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a “special testamentary power of appointment” so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.
Remember, funding an irrevocable trust can cause you to be ineligible for Medicaid for up to five years, depending on the value of what you place in the trust. Transfers to individuals have a maximum transfer penalty of only three years for transfers made prior February 8, 2006, and five years on or after this date.
Testamentary trusts are trusts created under a will. The Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are considered unavailable.
Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid.These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.
The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called “special needs trusts”) is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.
Supplemental needs trusts are usually created by a parent or other family member for a disabled child (even though the child may be an adult). Or, the disabled individual can create the trust with his or her own money, provided the trust meets certain requirements. These latter trusts are sometimes called “(d)(4)(A)” trusts, which refers to the authorizing statute.
After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” For many people, setting up a “life estate” is the most simple and appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a future or “remainder” interest in the property. He or she has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period.
Jane gives a remainder interest in her house to her children, George and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of George and Mary, the remainder interest holders.
When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane’s probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a “step up” in the property’s basis.
Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. Once the house passes to George and Mary, the state cannot recover against it for any Medicaid expenses Jane may have incurred.
Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. On the other hand, since the entire house is transferred to the trust, rather than a partial ownership, the resulting period of ineligibility for Medicaid is longer — up to five years.
Applicants for Medicaid and their spouses may protect savings by spending them on noncountable assets. This may include:
In the case of married couples, it is often important that any spend-down steps be taken only after the unhealthy spouse moves to a nursing home if this would affect the community spouse’s resource allowance.
Immediate annuities can be ideal planning tools for spouses of nursing home residents. For single individuals, they are less useful. An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life.
In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem. Under newly enacted legislation, annuities must name the division of Medicaid as an irrevocable beneficiary of any funds remaining upon the annuitant’s death. It is unclear whether this restriction only applies to an annuity on the life of the institutionalized spouse, or whether this also applies to annuities for the benefit of the stay-home spouse.
Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $95,100. However, Mrs. Jones has $208,280 in countable assets. She can take the difference of $111,000 ($208,280 minus the sum of $95,100 and the $2,000 Medicaid recipients are allowed to retain) and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life. (In certain states, following the death of the community spouse the state may be able to recover what’s left of the annuity as reimbursement for Medicaid expenditures to the institutionalized spouse.)
Except in the case of clients with substantial savings, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain, the term must be shorter than the life expectancy of the healthy spouse. Finally, where the healthy spouse has a relatively low income, the annuity may provide little benefit since it will only supplant income that he or she would be entitled to from the unhealthy spouse.
Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home. Additionally, under new rules, the division of Medicaid must be named as an irrevocable beneficiary of such an annuity. Such an annuity may be an appropriate tool to gain immediate Medicaid qualification to start a penalty period, and provide income for nursing home during the penalty period, but this would be a very specialized use of such an annuity and it must be carefully timed with the Medicaid application, qualification for Medicaid, and with the term of the penalty period. Extreme caution is advised if attempting this strategy.
In short, immediate annuities are a very powerful tool in the right circumstances, but of little or no use in other cases. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose.
Additionally, the use of immediate annuities as a Medicaid planning tool is under attack in some states. Be sure to consult with a qualified elder law attorney before pursuing any of the strategies described above.
Unfortunately, there are some insurance sales people that offer annuities as the only answer to every Medicaid applicant. Unlike elder law attorneys, who are paid a fee for their objective advice, and present the client with a menu of options, most insurance and annuity sales people are only paid upon the sale of an annuity product. As a result, some of these commission based advisors will always recommend the purchase of an annuity as the appropriate Medicaid strategy. On the other hand, Morton Law Firm works with many insurance professionals who offer fair objective advice regardless of the commission to be earned. The point is not necessarily to completely avoid the insurance industry, but rather to be cautions, and perhaps a little skeptical, if the only recommendation made is the purchase of an annuity. While the annuity may in fact be the correct strategy, other strategies may be more appropriate given the applicant’s health and age.
Some unscrupulous insurance brokers have even gone so far to suggest a strategy of purchasing an annuity and relying upon the division of Medicaid ignoring its obligation to recover certain funds from a special type of Medicaid Income Trust, also known as a Miller trust, and further ignoring the trustee’s obligation to repay the division of Medicaid. A Miller trust is a vehicle used to qualify an individual for Medicaid who would otherwise be ineligible due to excess income (greater than $1,809 per month for 2006). In essence, money in excess of this amount his held in trust for the division of Medicaid, and is annually paid to them as partial reimbursement for the beneficiary’s Medicaid benefits.
This firm is aware of some insurance brokers who routinely suggest that individuals who purchase annuities will get all of their money back by failing to repay it annually to the state as agreed in the Miller trust document. At best this is a breach of the trustee’s contractual and fiduciary duty, since that trustee signed an agreement to repay this money annually. At worst, this is a form of Medicaid fraud, and is subject to criminal prosecution as such. This firm strongly recommends that you have nothing to do with any person or group who suggests that you or anyone else avoid performing a contractual or fiduciary duty that you agree to undertake, or that you fail to report or misreport certain assets to the Medicaid authorities, as such strategies are dangerous and may be illegal.
If anyone suggests a strategy that makes you feel uncomfortable or dishonest, there is likely a good reason for your concern, and you should proceed with extreme caution. There are numerous ethical and legal options for preserving assets under existing federal and state law, and the purchase of an annuity is one tool in the tool kit, but it is only one tool of many, and is not always the best strategy, or even appropriate, in every circumstance.
In some states, community spouses whose own income is less than their MMMNA (see discussion under Medicaid section of site) have an alternative to receiving the shortfall from the income of the nursing home spouse. These community spouses can petition the state Medicaid agency for an increase in their standard resource allowances (called the community spouse resource allowance, or CSRA) so that the additional funds can be invested in order to generate income to make up the shortfall in the MMMNA. This often permits the community spouse to retain a substantial level of savings above the state’s standard resource allowance, while maintaining eligibility for the nursing home spouse.
Mrs. Henderson’s husband moves to a nursing home. Prior to his illness, the Hendersons have been living on his income of $1,500 a month, Mrs. Henderson’s income of $500 a month and income from their investments, which total $220,100. On applying for Medicaid to cover her husband’s nursing home care, the state Medicaid agency informs Mrs. Henderson that her MMMNA is $1,700 and that the Hendersons must spend down their savings to $97,100 — $2,000 for Mr. Henderson and $95,100 for Mrs. Henderson. Once they have spent down to $97,100, Mrs. Henderson will be entitled to $1,200 of her husband’s monthly income in order to make up the difference between her own income of $500 a month and her MMMNA of $1,700.
Mrs. Henderson decides to appeal this determination, arguing that she would prefer to keep enough funds invested to generate the difference between her income and her MMMNA rather than receive $1,200 a month from her husband. On appeal, the hearing officer estimates that she should receive $200 a month from her standard $95,100 resource allowance, bringing her income up to $700 a month and her shortfall down to $1,000 a month. To generate $1,000 a month at an interest rate of 6 percent, Mrs. Henderson would have to have $200,000 invested. Since $200,000 plus $95,100 exceeds Mr. and Mrs. Henderson’s savings of $220,100, Mr. Henderson is determined to be eligible for Medicaid.
Before pursuing this increased resource allowance strategy you need to check on how it is applied in your state. Some states permit this approach only if both spouses’ combined income falls below the community spouse’s MMMNA.
Do you need an attorney for even “simple” Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be “yes.” The social worker at your mother’s nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you’re applying for Medicaid, you may have missed out on significant planning opportunities.
The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. As described above, this may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.
If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets.
Under our “system” of paying for long-term care, you may be able to qualify for Medicaid to pay for nursing home care, but in most states there’s little public assistance for home care. Most people want to stay at home as long as possible, but few can afford the high cost of home care for very long. One solution is to tap into the equity built up in your home.
If you own a home and are at least 62 years old, you may be able to quickly get money to pay for long-term care (or anything else) by taking out a reverse mortgage. Reverse mortgages, financial arrangements designed specifically for older homeowners, are a way of borrowing that transforms the equity in a home into liquid cash without having to either move or make regular loan repayments. They permit house-rich but cash-poor elders to use their housing equity to, for example, pay for home care while they remain in the home, or for nursing home care later on. The loans do not have to be repaid until the last surviving borrower dies, sells the home or permanently moves out.
In a reverse mortgage, the homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the age of the borrower, and current interest rates. For example, a 70-year-old borrower with a $200,000 house in Westchester County, New York, would be able to receive a maximum loan of $103,483 (based on 2002 figures; see chart below). The lower the interest rate and the older the borrower, the more that can be borrowed.
Homeowners can get the money in one of three ways (or in any combination of the three): in a lump sum, as a line of credit that can be drawn on at the borrower’s option, or in a series of regular payments, called a “reverse annuity mortgage”. The most popular choice is the line of credit because it allows a borrower to decide when he or she needs the money and how much. Moreover, no interest is charged on the untapped balance of the loan.
Although it is often assumed that an elderly person would want to use the funds from a reverse mortgage loan for health care, there are no restrictions — the funds can be used in any way. For instance, the loan could be used to pay back taxes, for house repairs, or to retrofit a home to make it handicapped-accessible.
Borrowers who take out a reverse mortgage still own their home. What is owed to the lender — and usually paid by the borrower’s estate — is the money ultimately received over the course of the loan, plus interest. In addition, the repayment amount cannot exceed the value of the borrower’s home at the time the loan is repaid. All borrowers must be at least 62 years of age to qualify for most reverse mortgages. In addition, a reverse mortgage cannot be taken out if there is prior debt against the home. Thus, either the old mortgage must be paid off before taking out a reverse mortgage or some of the proceeds from the reverse mortgage used to retire the old debt.
Reverse mortgages are somewhat underutilized now — only an estimated 60,000 to 75,000 of the loans have been made. But financial institutions, sensing an opportunity as the population ages and people live longer lives, are expanding their reverse mortgage programs.
The most widely available reverse mortgage product — and the source of the largest cash advances — is the Home Equity Conversion Mortgage (HECM), the only reverse mortgage program insured by the Federal Housing Administration (FHA). However, the FHA sets a ceiling on the amount that can be borrowed against a single-family house, which is determined on a county-by-county basis. In Westchester County, New York, for example, that ceiling is $237,500 (in 2002). High-end borrowers must look to the proprietary reverse mortgage market, which imposes no loan limits.
Is a Reverse Mortgage Right for You?
While reverse mortgages look like no-lose propositions on the surface, they also have some significant downsides. First, the closing costs for these loans are about double those for conventional mortgages. Closing costs on a reverse mortgage for the $200,000 home described above would be more than $10,000. These costs can be financed by the loan itself, but that reduces the money available to you.
Reverse mortgage payments also may affect your eligibility for government benefits, including Medicaid. Generally, these payments will not be counted as income as long as they are spent within the same month that they are received. If the funds are not spent, however, they could accumulate and push your resources over the allowable limits for Medicaid or SSI eligibility. In addition, payments from reverse annuity mortgages may be counted as income for purposes of Medicaid and SSI whether or not they are spent within the month they are received. This shouldn’t be treated as income, since it simply involves withdrawing equity from one’s home, but the state may view it differently since the funds come in a regular monthly check. In any case, you should consult with an elder lawyer in your state if you have any concern about how a reverse mortgage will affect your eligibility for federal benefits.
Also, bear in mind that if your major objective is to safeguard an inheritance for your children, a reverse mortgage may not be a good idea. As soon as the elderly person (or the survivor of an elderly couple) dies, it will be necessary to sell the home and much — if not all — of the sales proceeds will have to be paid to the lender. But if you have a pressing need for additional income and have no close heirs, or if you do not intend to benefit your children or your children don’t particularly want to inherit the house, a reverse mortgage can be a way to supplement income, perhaps without jeopardizing Medicaid eligibility.
Reverse mortgages are complex products and borrowers are advised to acquaint themselves with the different options available and then carefully compare competing loan offerings. Following are two outstanding Web sites to get you started in that process:
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