Many people are forced to sell their homes and deplete their life savings to pay for nursing home care. With a sound estate planning strategy, you can protect your assets without sacrificing quality care. Here’s how:
How do I protect my assets from nursing home expenses?
If you need long-term skilled care in a nursing home, you must pay the expenses out of pocket. Depending on the state where you receive care, monthly costs can range from $6,000 to $12,000.
Fortunately, there are several strategies to help cover nursing home costs.
Purchase long term care insurance
Buying long-term care insurance gives you access to a stream of income to help you pay for nursing home care so that you don’t have to tap into your own savings. Long-term care policies vary but generally cover nursing home care, assisted living, adult daycares, and home care for those with chronic illnesses that can’t perform certain activities of daily living such as feeding, dressing, or bathing.
Things to look for when comparing long term care policies:
- Future benefit: You want to compare the amount of money the policy will payout in the future if you need to access long-term care. Care costs can vary significantly depending on your location, so it’s crucial to review your policy to ensure the benefit amount will be sufficient to cover expenses.
- Inflation protection: Nursing home care costs increase faster than average, so having an inflation feature is important. Compound inflation riders provide greater protection but will cost more than a simple inflation policy, but having an inflation rider is better than not having one, so go with the option you can afford.
- Length of coverage: It’s important to consider the amount of time you’d like the policy to cover your long-term care expenses. Long-term care insurance doesn’t cover your care costs indefinitely — unless you buy a lifetime benefit policy. Most companies give you the option of choosing coverage periods between 2-5 years. The longer the benefit period, the more you can expect to pay for a policy.
- Waiting period: The waiting period on a long-term care insurance policy is the amount of time you must wait until your policy kicks in to cover your care expenses. Most waiting periods are between 30-90 days, so it’s essential to have savings to cover out-of-pocket costs until your insurance kicks in.
Gift money ahead of time
Giving gifts to your loved ones ahead of time can help “spend down” your assets for Medicaid eligibility purposes. Be aware there is a 5-year lookback period in most states which means the government will review your financial transactions for the last five years when determining your eligibility for Medicaid.
Since it’s impossible to know if or when you will need nursing home care, it’s best to plan ahead and consider a proactive gifting strategy to help you qualify.
Consider an annuity
Medicaid-compliant annuities are often used to provide the healthy spouse with a source of income. Putting some of your money into an annuity shields it from being counted against you in terms of eligibility for Medicaid.
When you purchase an annuity, you give a lump sum to an annuity company. In exchange, the healthy spouse will receive monthly payments to help them meet their living expenses while you are getting care covered by Medicaid.
Create an irrevocable trust
Another option is to transfer your assets into an irrevocable trust. Once you transfer your assets into a trust, no changes can be made, which means you give up control of your assets. The benefit is that now those assets don’t count against you for Medicaid eligibility.
Property, such as your home, held in an irrevocable trust 'that is not included in the taxable estate at death' will no longer receive a step-up in basis. Here’s why the wording of that is key.
In March 2023, the IRS issued Revenue Ruling 2023-2, which had a substantial impact on estate planning, particularly where an irrevocable trust is involved. In the last decade or so, more families have begun utilizing irrevocable trusts to protect their assets from spend-down in order to qualify for government benefits, such as Medicaid and VA Aid and Attendance.
Does Medicaid pay for nursing home care?
Many people wonder if Medicaid will pay for nursing home care if they cannot pay out of pocket for it themselves. Generally, Medicaid only pays for the care if someone has less than $2,000 of countable resources.
Countable resources are assets or property that, in theory, could be sold to pay for your care costs. Therefore, they count against you when determining your eligibility for Medicaid. If your countable resources exceed a certain amount, you are not eligible for Medicaid. Countable resources may include:
- Bank accounts
- Certificates of deposit
- Investments (stocks, bonds, mutual funds, etc.)
- Rental properties
However, some assets are exceptions to this rule, known as “non-countable resources,” such as your primary home and vehicle.
While your home is not a countable resource, Medicaid has something called “estate recovery rights,” which means when you die, the government could force the sale of the home to reimburse Medicaid for the nursing home expenses you incurred.
Generally, you cannot qualify for Medicaid to pay your long-term care expenses if you own more than $2,000 of countable resources and have transferred assets out of your name in the previous five years before applying for Medicaid.
How to qualify for Medicaid if your assets exceed the limit
If your assets exceed the limit to be eligible for Medicaid, one option is to remove assets out of your name at least five years before you go into a nursing home to avoid the 5-year lookback period.
Another tip is to avoid applying for Medicaid unless you are sure you will qualify. This is because Medicaid has “penalty periods” for those that apply and are deemed ineligible due to transfers of assets within the last five years.
Figuring out how to pay for a nursing home can be complicated. With long-term care expenses rising nationwide, it’s crucial to be proactive about affording care to protect your life savings. Creating a trust, purchasing long-term care insurance, and giving away some of your wealth are strategies to consider implementing today.