Long-term care costs like nursing home care can quickly deplete your retirement savings. Medicare provides little help with paying these bills, but Medicaid can cover nursing home costs for people who meet strict financial eligibility rules. Certain strategies such as special trusts, home equity transfers and annuities can help meet these eligibility rules and protect assets like home and retirement accounts from Medicaid spending requirements. But most of these tools require years of planning in advance. A financial advisor can help you plan for your long-term care and other needs you may have later.
Understanding Nursing Home Costs and Medicaid Eligibility
Nursing homes provide around-the-clock care to elderly people who cannot live independently. But they come at a steep price, with the national average cost for a semi-private room exceeding $94,000 per year, according to Genworth.
Medicare is a federal health insurance program for people age 65 and older. However, Medicare usually only covers limited short-term nursing homes for rehabilitation after hospitalization.
For long-term care costs, Medicaid can be the primary payer. Unlike Medicare, Medicaid is a means-tested program, so eligibility depends on strict income and asset limits. Rules vary by state, but generally limit individuals to no more than $2,000 in countable assets. For married couples, a stay-at-home partner who will not receive nursing care can often save up to $148,620 in assets by 2023.
If you need help planning for these potential expenses in the future, consider working with a financial advisor.
Qualify for Medicaid
If a person has too many assets to qualify for Medicaid, they may have to spend their own assets to pay for care. If they have spent enough money to pay for their care, they may qualify for Medicaid.
Another strategy is to transfer assets to another person or entity, such as a trust. However, here Medicaid imposes a five-year lookback period when determining eligibility. That means any asset transfers made in the five years before applying will be scrutinized and could delay Medicaid enrollment.
However, with proper planning, there are ways to protect your assets from the Medicaid spending rules. Special trusts, home equity transfers and annuities can help protect your savings and property.
Note that state Medicaid programs may seek reimbursement for certain services. In fact, for enrollees 55 and older, the state Medicaid program “is required to request recovery of payments from the individual’s estate for nursing facility services,” according to Medicaid.gov. This is why asset protection is so important. And if you need help with long-term care planning, consider working with a financial advisor.
Protecting Assets From Medicaid With Trusts
One way is to place assets in an irrevocable trust for at least five years before needing Medicaid coverage. A trust is a legal document that creates a legal entity. Trusts come in two main types, revocable and irrevocable. Unlike a revocable trust, an irrevocable trust means that you permanently relinquish control of the assets. While that is a significant loss, assets transferred to an irrevocable trust before the five-year lookback period will not be considered eligible for Medicaid.
Irrevocable income-only trusts can also protect retirement accounts like IRAs from Medicaid spending requirements. The IRA owner transfers the account into a trust, then withdraws only required minimum distributions (RMDs) as income. This converts countable assets into noncountable income and the principal of the trust remains intact. Trusts also offer other estate planning advantages, including avoiding probate.
Consider a hypothetical married couple with a $250,000 IRA that they want to protect from Medicaid’s five-year lookback rule. To protect the IRA, account owners can transfer to an irrevocable income-only trust at least five years before applying for Medicaid.
The trustee will only withdraw RMDs as income each year, avoiding large lump-sum withdrawals. This turns your IRA into non-countable income while preserving trust assets. Medicaid will not count the $250,000 IRA towards eligibility.
Consider finding a financial advisor with estate planning experience to help you complete the trust creation process. This free tool can help you match one.
Other Ways to Protect Your Assets or Pay for a Nursing Home
Besides special trusts, options like long-term care insurance, home equity lines of credit, Medicaid annuities and gifts to families can also help reduce countable assets and/or pay for long-term care. Each approach has pros and cons to consider. There is no one-size-fits-all solution.
Married couples can also use real estate to protect their home equity from Medicaid. This deed transfers ownership of the home to the healthy spouse, while maintaining a “living tenancy” for the spouse in need of care. The wife in the house then inherits the house.
In addition, Medicaid-qualified annuities offer a way to ensure that assets do not count toward Medicaid asset limits. They generate non-countable income through monthly payouts. A lump-sum purchase price is considered an exempt transfer if certain rules are met. And if you need help buying an annuity, think first with a financial advisor about the type of product.
Limitations of Asset Protection Strategies
While shelters like trusts and annuities can help protect your savings, they have major limitations. Once you transfer assets into an irrevocable trust, they are permanently inaccessible. Gifting money reduces your own net worth.
And if you fail to meet all Medicaid requirements, it can result in a penalty period of ineligibility. Considering the cost, uncertainty and ethics involved, asset protection strategies may not be right for everyone.
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Advanced planning with special trusts, annuities and equity transfers can help protect assets from Medicaid spending requirements for nursing home care. But these tools require insight and irreversible action. Costs and trade-offs should also be carefully considered. Some tools won’t be useful for some people, and all tools have different combinations of limitations and risks.
Long Term Care Planning Tips
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Personal guidance from a financial advisor can be overlooked when planning for long-term care expenses. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three designated financial advisors serving your area, and you can have a free introductory call with your advisor to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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If you’re interested in long-term care insurance, it’s important to research the coverage available and find an option that fits your needs. Luckily, SmartAsset has done some of the work for you with our comprehensive list of long-term care providers.
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Keep an emergency fund in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuations like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But high interest accounts allow you to earn compound interest. Compare savings accounts from these banks.
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