Aging is inevitable, and a gradual (or not so gradual) inability to function independently is a great concern for many people. While the prospect of entering a nursing home is a daunting one, equally frightening is the expense of nursing home care. Although purchasing long-term care insurance might be the most logical move, not everyone can afford the cost of its premiums. Many people feel that their only option is to spend down their life savings in order to private-pay nursing home care. Once this money has been exhausted, they’ll apply for Medicaid. But this isn’t the way it has to be. To qualify for Medicaid, both your income and the value of your assets must fall below certain limits, which vary from state to state. In determining your eligibility for Medicaid, a state may count only the income and assets that are legally available to you for paying your bills. Consequently, a number of tools have arisen to facilitate Medicaid qualification.
What are the goals of Medicaid planning?
Medicaid planning serves to accomplish a number of goals: (1) qualifying for Medicaid, (2) exchanging “countable” assets for exempt assets, (3) preserving assets (including the family home) for loved ones, and (4) protecting the healthy spouse (if any).
What are the primary tools and strategies for attaining these goals?
Purchase of exempt assets
It has become standard practice for a Medicaid applicant to use countable resources to purchase exempt assets. Exempt assets are those that do not affect your eligibility for Medicaid; each state composes a list of exempt assets, based on federal guidelines. Typically, this list may include such items as a family home, prepaid burial plots and contracts, one automobile, and term life insurance.
Instead of spending your money solely on nursing home bills, therefore, you can pay off the mortgage on your family home, make home improvements and repairs, pay off your debts, purchase a car for your healthy spouse, and prepay burial expenses.
Caution: In 2017, a family home with equity above $560,000 (or $840,000 if increased by your state) makes you ineligible for Medicaid. An exception applies if your spouse, child under age 21, or child who is blind or disabled resides in the home.
Using immediate annuities to convert countable assets into an income stream
A healthy spouse may want to take jointly owned, countable assets to purchase a single premium immediate annuity that is Medicaid-compliant for the benefit of himself or herself alone. You convert countable assets into an income stream. This is beneficial, since each spouse is entitled to keep all of his or her own income. (This stands in contrast to the treatment of assets, whereby all assets of a married couple are pooled together and totaled.) By purchasing an immediate annuity in this manner, the institutionalized spouse can qualify more easily for Medicaid, and the healthy spouse can enjoy a higher standard of living.
Caution: Generally, for annuities purchased on or after February 8, 2006 (this date may be slightly different in your state), the annuity will be counted as an asset unless the state is named as the primary beneficiary (unless the beneficiary is your spouse or minor or disabled child), in which case the state must be named as the secondary beneficiary. There is an exception for annuities held within a retirement plan. Further, any interest you have in an annuity must be disclosed at the time you apply for Medicaid.
Transfer of assets under “reverse half-a-loaf”
Prior to the enactment of the Deficit Reduction Act of 2005 (the Act), the “half-a-loaf” strategy was often used to preserve assets and facilitate eligibility for Medicaid. Basically, you would give approximately one-half of your assets away (to loved ones) in order to preserve those assets; you used the remaining money to pay for your nursing home care during the period of ineligibility for Medicaid caused by the transfer. This strategy worked because the period of ineligibility was triggered when the transfer was made. Under the Act, the period of ineligibility now starts when you apply for benefits, effectively eliminating the half-a-loaf strategy in most cases.
But since the enactment of the Deficit Reduction Act, a strategy referred to as “reverse half-a-loaf” is being used. With a reverse half-a-loaf, you transfer assets to loved ones in an amount that will qualify you for Medicaid in the same month that you apply for benefits. Due to this transfer, a period of ineligibility will apply. You then purchase an annuity or a promissary note that will “cure the transfer” by having a portion of the transfer returned, which shortens the eligibility period.
Caution: The reverse half-a-loaf strategy is not permitted in all states. It will not work in states that do not allow partial cures. An attorney or advisor who is experienced with Medicaid planning can give you more information about the rules in your state.