Written by P. Mark Accettura

As you move forward, you should plan for the possibility that at some point you may not be able to live independently. Advances in medical science have greatly increased the likelihood that we will live beyond the point that we are able to care for ourselves.

You may not be able to rely on your children, whose own personal obligations may make them unable or unwilling to provide for your care. As the old saying goes, “One parent can take care of ten children, but ten children cannot care for one parent.” The statistics on aging and long term care are compelling.

One in five Americans older than 65, and nearly half of those older than 85, will need assistance with everyday activities. Fifty percent of women and 30% of men over age 65 will require long-term care during their life. Despite these statistics, nearly 60% of Americans have given “very little thought” or “no thought at all” as to whether and when they will need long term care.

The greatest concern for older Americans is that their entire wealth accumulation will be dissipated if they experience an extended stay in a skilled nursing care facility. According to a recent report, the average cost of a year in a nursing home is approximately $45,000 a year, roughly equating to $125 per day. Since 1990, the cost of long-term care has increased at an annual average rate of 3% above the overall rate of inflation. Further, according to the New England Journal of Medicine, more than 50% of those who require 24-hour care will need such care for more than 2 ½ years.

Long-term care for the elderly has evolved to include various forms of home care and long term nursing home care, all of which are very expensive. Long-term care (LTC) ranges from help with day-to-day activities in the home (such as bathing, dressing, preparing meals, etc.) to more sophisticated services such as skilled nursing care.

While typical health care services are cure oriented, long-term care involves treatment of chronic conditions and thus is said to be care oriented. Long term care can be provided in one’s own home, an adult day care setting, in an assisted living/residential care facility, or a skilled nursing care facility.

The high cost of skilled nursing care is of special concern to “community spouses,” that is, the non-institutionalized spouse of a skilled nursing care patient. Community spouses need assurance that their dependent spouse’s care won’t wipe them out financially.

Whether or not you are married, the balance of this chapter will help you establish a plan to pay for long-term care without leaving you or your heirs penniless.

The primary sources of funding for the payment of LTC are:

1. Medicare;
2. private pay (including long term care insurance);
3. Medicaid.

Medicare covers Long Term Care (LTC) only under limited circumstances, and only for a limited period of time. Medicare will reimburse the cost of a stay in an approved skilled nursing facility which immediately follows a three-day or more hospital stay.

Further, to be eligible, you must enter the skilled nursing facility within 30 days of your discharge from the hospital, and the skilled nursing facility stay must be for the same reason as the hospitalization.

Medicare only covers the first 100 days of the skilled nursing care stay, covering 100% percent of the cost of the first 20 days, and only the cost of the remaining 80 days to the extent that the cost exceeds $99.00.

Slightly augmented coverage may be provided under private “medigap” coverage during the 100 day period, but medigap coverage does not otherwise cover LTC (see “Medigap” discussion in Chapter Three and Chapter Four).

The cost of LTC, after Medicare benefits are exhausted (if eligible at all), falls to the patient. The likelihood that you will private-pay is high, considering that Medicare paid only 10.6% of skilled nursing home cost in 1994.

The patient will continue to be required to pay the cost of his or her own LTC until his or her assets are sufficiently exhausted to be eligible for Medicaid. Individuals with adequate means and who enjoy reasonably good health may insure against this potentiality by purchasing long term care insurance (see “Long Term Care” in Chapter Four).

PRIVATE PAY

Ultimately, you are responsible for the cost of your own long-term care. Medicare will cover a portion of the first 100 days after you leave the hospital, and Medicaid will cover the cost after you have depleted your personal assets.

You are liable for the interim period. Depending on your assets, you entire net worth could be lost in the process. Do you have sufficient assets to cover the cost of your long-term care?

You shouldn’t rely on the government, since it only pays for subsistence level care through Medicaid. Nor should you rely on your children.

If you are worried that you do not have sufficient assets, you should consider long-term care insurance discussed in Chapter Four. Even if you have sufficient assets for your care, you might nonetheless consider long term care insurance if you wish to preserve an estate for your children.

Certain non-economic factors may also be at play. Were your parents or grandparents in a nursing home? Does Alzheimer’s, dementia, or extreme longevity run in your family? These are questions you need to answer with the aid of your professional team.

Medicaid is a federally funded, state-administered welfare program restricted to the financially indigent. To qualify for Medicaid you must have exhausted substantially all of your non-exempt assets.

You are eligible for long-term care coverage under Medicaid if you are at least age 65, demonstrate financial need, and follow the Medicaid application procedures.

With respect to financial need, you may have assets of no more than $2,000 and limited income.

The following assets (sometimes referred to as “excluded assets”) are not considered for purposes of the $2,000 limit:

1. Your automobile;
2. Your principal residence (“homestead”);
3. Household goods, furniture and personal affects, including clothing and jewelry;
4. Up to $2,000 in a prepaid irrevocable funeral contract;
5. Cemetery plot;
6. Cash value of life insurance up to $1,500;
7. Income producing real property where the income derived from rents is at least 6% of the person’s equity in the rented property;
8. An actuarially sound annuity ; and
9. Miscellaneous other exemptions not relevant here.

With respect to income, there are two basic approaches depending on the state of your residence. In some states, if medical expenses exceed income, then the income test is met. Other states have strict income caps. In such states, if your income exceeds the limit set by the state, irrespective of your medical expenses, you are ineligible.

Income is defined as both earned and unearned income and thus includes interest, dividends, rents, social security benefits and retirement benefits.

Clients often ask “How does the state know what we have?” The simple answer to this question is that you must file an Asset Declaration Form with the state and provide independent verification of the ownership and value of each asset and source of income.

Two of the most misunderstood and complicated aspects of Medicaid eligibility are the Divestment Rules and Spousal Impoverishment Rules.

DIVESTMENT

Gifting assets in order to qualify for Medicaid is called “divestment,” and can be perilous. Recent legislation imposes sanctions on individuals (and their advisors) who divest assets in order to qualify for Medicaid. If you divest, you will be ineligible for Medicaid for a period of time illustrated in the example below.

You may also make yourself unattractive to the very nursing homes to which you hope to gain entry. The more desirable facilities are either entirely private-pay, or allow a limited number of Medicaid patients.

The Medicaid patients that are admitted typically start out as private-pay patients who have lived in the facility and have run out of money.

In light of the national shortage of skilled nursing care facilities and beds, patients attempting entry as Medicaid patients from day one may only gain entry at the most undesirable facilities.

Divestment is the transfer of countable (i.e., non-excluded) assets for less than fair market value within (36) months of applying for Medicaid nursing home benefits.

For transfers to or from a trust, a sixty (60) month look-back applies. It is important to understand that divestment does not occur if countable assets are converted to exempt assets of equal value.

For example, paying off the mortgage on your home, buying a new car or purchasing an irrevocable funeral arrangement does not constitute divestment.

The period of disqualification on account of divestment is measured by dividing the “uncompensated value” of the transferred assets by the average monthly private paid nursing home costs of the particular nursing home facility applied for.

Example: If on the eve of entering a nursing home and applying for Medicaid, you give your son $120,000, you will be ineligible for Medicaid for thirty-two months ($120,000 divided by the average monthly cost of long-term care in your state ($3,750 is the national average in 2000)). There is no limit on the length of disqualification resulting from divestment.

Finally, a rule that appears to have no logical basis is that the transfer of one’s homestead within the look-back period (unless the transfer is to a spouse or a disabled child), is considered a divestment. Transfer of exempted assets other than a homestead within the thirty-six (36) month period is not considered to be a divestment. Transfer of the one’s homestead to a revocable Trust is also considered a divestment.

SPOUSAL PROTECTION

In order to prevent the economic devastation of the community spouse, the Medicare Catastrophic Coverage Act enacted in 1988 treats the assets and income of a husband and wife as part of a common pot with the community spouse entitled to a guaranteed share.

With respect to income, the community spouse’s income may be supplemented from income of the resident spouse up to a minimum of $1,452 and a maximum of $2,175 per month in 2001. The community spouse is also entitled to one-half (1/2) of the countable assets (in addition to the excluded assets) not to exceed $87,000 but with a guaranteed minimum of $17,400. These values are indexed for inflation.

After the death of the patient, states are required to seek reimbursement for their outlay of long term care (Medicaid) benefits from the estate of the deceased Medicaid recipient. Some states define “estate” to include only the decedent’s probate estate.

Other states interpret the term estate more broadly to include jointly held property or even assets owned by the decedent’s revocable trust. As of the date of this writing, only Michigan and Texas do not attempt to recover long-term Medicaid benefits from the estates of deceased recipients.

There are several steps you can take to preserve your estate in the event you need long term nursing home care:

1. Purchase long term care insurance to cover the exigency of long term care. See Chapter Four.
2. Hold on to your exempt assets, especially your home.
3. Convert counted assets into excluded assets. Examples include paying down the mortgage on your home, improving your home or acquiring a more expensive home.
4. Since the 6% income rule does not apply to homesteads, if you go into an nursing home, your home could be rented to family members for a very modest amount. Your family could in turn re-rent the property at the current fair market value rent. This arrangement would prevent all of the rental income from being treated as income eligible for nursing home care payment.
5. Investment real estate could be acquired (even a common tenancy in a family member’s residence would qualify) as long as the 6% income to equity ratio is met.
6. Outright gifts and gifts to an Irrevocable or Testamentary Trust provide the greatest planning opportunity. Outright transfers more than thirty-six (36) months from the month in which application for Medicaid is made, or trusts more than sixty (60) months prior to such date are not counted for purposes of Medicaid eligibility. Use of trusts avoids an outright transfer of assets to family members who may dispose of the assets in a fashion unacceptable to you.
7. Consider monthly gifts in what has come to be known as “serial divestment.” This technique involves monthly gifts in an amount that is less than the average monthly nursing home cost, as determined by state authorities. For example:, if the average monthly nursing home cost is $3,750 (the current national average), a gift of $3,749 results in no disqualification. A gift of $3,750 would result in one month of disqualification. Since each month is a new time period for computing gifts, $3,749 could be gifted each month with no disqualification. Serial divestment depends on two quirks in the law: first, that each month must be treated as a new gifting period, and second, that there be no partial period disqualification for gifts of less than the average monthly nursing home cost. You should consult with an attorney familiar in such matters to determine if serial divestment is available in your state.
8. Purchase an actuarially sound annuity (“ASA”). An ASA is a commercially available or private annuity that does not guarantee period longer than the life expectancy of the applicant.

The Medicaid rules change frequently and vary from state to state. Therefore, any planning strategy must be reviewed in light of current and future law changes. Your strategy will depend on the nature and extent of your assets and your family situation.