Financing long-term care: a guide to Medicare, Medicaid, and asset preservation

As the population ages, many Americans find themselves in need of long-term care services. The cost of this care can be a significant burden for seniors and their families. With the average annual cost of a nursing home stay falling between $94,900 and $108,405 (based on 2021 data), many families must explore all available options to help cover these expenses. Government programs like Medicare and Medicaid offer some assistance in paying for long-term care, but navigating their complexities and understanding their potential risks can be challenging. 

In this article, we will provide an overview of these government programs in relation to long-term care and discuss various strategies and planning considerations to help you afford necessary care while preserving your assets.

Medicare and Nursing Home Coverage

Medicare is a federal health insurance program designed for seniors aged 65 and older, certain younger individuals with disabilities, and people with end-stage renal disease. While Medicare does not cover long-term nursing home care, it does provide coverage for short-term stays in skilled nursing facilities (SNFs) following a qualifying hospital stay. 

This coverage typically lasts up to 100 days per benefit period, with certain conditions and limitations. During the first 20 days of one’s stay, Medicare will cover 100% of the cost. For days 21 through 100, Medicare continues to pay a portion of the cost, but the nursing home resident will have a copayment of $200 per day in 2023. 

However, when Medicare’s coverage for SNF care is exhausted or does not apply, seniors and their families must explore other options for paying nursing home fees. One of the most common alternatives is Medicaid.

Medicaid and Nursing Home Coverage

Medicaid is a jointly funded federal and state medical assistance program designed to provide health coverage for low-income Americans with limited assets. Unlike Medicare, Medicaid covers various long-term care services for elderly and disabled individuals, including nursing home care. Medicaid pays for 100% of qualifying individuals’ nursing home costs in a certified facility, but applicants must meet specific income, asset, and level of care requirements to be eligible for this support.

Each state has its own eligibility criteria for Medicaid, including financial and functional requirements. Generally, states assess an individual’s need for nursing home care based on their ability to function and their need for assistance with activities of daily living (ADLs), such as toileting, bathing, and dressing. When a senior qualifies for both Medicare and Medicaid, known as “dual eligibility,” Medicare will cover medical services beyond nursing care, while Medicaid will cover remaining expenses, such as copayments, coinsurances, and deductibles.

Qualifying for Medicaid to Cover Nursing Home Costs

Since Medicare does not cover the full cost of nursing home care, many families struggle to pay for long-term care out-of-pocket. For this reason, many seniors try to qualify for Medicaid to afford the care they need. 

While qualifying for Medicaid may seem like an attractive option, it comes with its own set of challenges and burdens.

Spend-down Requirements

In most states, Medicaid applicants must spend-down their income and assets to qualify for coverage. This means that they must use their own resources to pay for their care until they reach the Medicaid eligibility threshold. This can be a difficult and time-consuming process, as applicants must carefully track and report their spending to ensure they meet the eligibility requirements.

Income limitations

Medicaid is a needs-based program, which means that applicants must meet strict income limits set by their state’s Medicaid program. While income limits vary by state, they are often tied to the Federal Poverty Level (FPL), which is adjusted annually. Eligibility criteria can also differ based on factors such as age, disability status, and household size. 

For older adults, some states set income limits at 100% of the FPL, while others might allow for higher income thresholds. In 2023, 100% of the FPL is $14,580 for an individual, which equates to $1,215 per month. 

According to Census data from 2020, the median household retirement income for those aged 65-69 was $57,992 (or $4,832 per month). Using those average figures, a person may need to spend down over $3,600 per month to meet the Medicaid income requirements.

Asset limits

Generally, applicants must have assets valued under a specific limit to qualify for Medicaid coverage. In 2021, the asset limit for an individual was typically around $2,000.

Some assets may exempt from these limits, such as a primary residence (although equity may need to be below a certain threshold), personal belongings, and one vehicle. However, other assets, such as bank accounts, stocks, bonds, and secondary properties, are counted toward the limit. This may force seniors to liquidate or transfer assets to become eligible for Medicaid coverage. 

Look-back Period

Medicaid has a look-back period, which means that any assets transferred or gifted within a certain timeframe before applying for Medicaid (often 5 years) can incur penalties, such as a period of ineligibility for benefits. This means that Medicaid will review any asset transfers made within five years before the application date. If assets were transferred for less than fair market value during this period, a penalty may be imposed, resulting in a delay in Medicaid eligibility.

Estate Recovery

Medicaid estate recovery is a process through which states can recoup some of the costs spent on Medicaid beneficiaries’ long-term care services. States may not recover from the estate of a deceased Medicaid enrollee who is survived by a spouse, child under age 21, or blind or disabled child of any age. However, other estate recovery rules vary by state. 

Your state’s probate laws generally define what an estate includes, but for the most part, it includes all of the real and personal property in your name when you die.

Medicaid Planning and Asset Protection Strategies 

Many seniors require long-term care services as they age, and the high costs associated with these services often necessitate qualifying for Medicaid to help cover the expenses. However, Medicaid’s strict income and asset limits, as well as the potential for estate recovery after the beneficiary’s death, can make it challenging for individuals and families to preserve their hard-earned assets while obtaining necessary care. Consequently, it is essential for families to explore creative strategies to qualify for Medicaid while protecting their assets.

1. Establish a Medicaid Asset Protection Trust (MAPT)

A MAPT is a type of irrevocable trust designed to help individuals qualify for Medicaid while preserving their assets. By transferring assets into an MAPT, the person establishing the trust (the grantor) can reduce their countable assets for Medicaid eligibility purposes. This allows them to meet Medicaid’s strict income and asset limits while ensuring that the assets in the trust are available for their loved ones. 

It’s crucial to establish an MAPT well in advance of applying for Medicaid, as transfers into the trust are subject to the five-year look-back period. Under certain circumstances, assets held in an MAPT may be subject to estate recovery claims. However, the trust’s structure can be designed to minimize the risk of estate recovery by ensuring that assets are distributed to the designated beneficiaries, rather than going into the beneficiary’s estate. 

It is important to note that MAPT rules and regulations vary by state, so it’s essential to consult with a qualified attorney who is well-versed in Medicaid planning to ensure your MAPT works as intended.

2. Purchase a Medicaid-Compliant Annuity

A Medicaid-compliant annuity is a financial product that converts a lump sum of your assets into a stream of income, which can be excluded from Medicaid’s asset limits. By purchasing a Medicaid-compliant annuity, you can effectively reduce your countable assets while ensuring a steady income source to cover your long-term care expenses. 

Medicaid-compliant annuities are generally not subject to the five-year look-back period if the annuity meets the criteria to be considered Medicaid-compliant. However, the income generated by the annuity is considered when determining Medicaid eligibility and may be subject to estate recovery.

3. Engage in Strategic Gifting

Transferring assets to loved ones can help reduce your countable assets for Medicaid eligibility. However, you must carefully plan these gifts to avoid the five-year look-back period. The estate recovery rules generally do not apply to assets that have been gifted away, as they are no longer considered part of your estate. 

It’s worth noting that there are several risks and drawbacks associated with strategic gifting that should be taken into consideration. One risk is that transferring assets may have tax and financial implications for the recipient. For instance, if you transfer real estate to a child, they will be responsible for real estate taxes and, potentially, capital gains taxes. Moreover, once assets are gifted, you will lose control over the asset. This can be problematic if the recipient mismanages the assets, experiences financial hardship, or faces legal issues such as divorce or bankruptcy.

4. Leverage Exempt Resources

This strategy involves converting countable assets into exempt (or non-countable) assets to help an individual qualify for Medicaid. Exempt assets are generally not considered when determining Medicaid eligibility and are not subject to estate recovery. 

Examples of exempt assets may include: 

  • Primary residence. In most states, an individual’s primary residence is not considered a countable asset, up to a certain equity limit. 

  • One vehicle. A single vehicle used for transportation is often exempt. 

  • Household goods and personal effects. Furniture, clothing, and other personal belongings are generally not counted as assets for Medicaid purposes. 

  • Burial plots or prepaid funeral arrangements. These are typically exempt within limits. 

It must be emphasized that this strategy is highly dependent on state law and Medicaid rules, as each state defines countable and non-countable assets differently. What may be considered exempt in one state might not be in another. Additionally, states may have specific rules and limitations regarding the conversion of assets and the value of exempt resources.

5. Consider Long-term Care Insurance

Long-term care (LTC) insurance is a type of policy specifically designed to cover the costs of various long-term care services, including nursing home care, assisted living facilities, and in-home care. This insurance can serve as a valuable supplement or alternative to Medicaid coverage. 

One advantage of LTC insurance is the flexibility it provides, as policies often cover a broader range of care options than Medicaid, allowing policyholders to have more choices in terms of care providers, settings, and services. It also may be simpler than some of the more advanced Medicaid planning strategies discussed in this article. 

This article is intended to provide a brief overview of Medicare and Medicaid coverage for long-term care, and strategies to potentially qualify for Medicaid while preserving assets. It is not to be construed as legal advice, nor is it a substitute for speaking with an expert advisor. For more information, please contact our office.

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