Long Term Care and the Tricky New Medicaid Rules

The new law makes it much more difficult to protect a family's wealth while having the government pay long-term nursing home costs for a family member through Medicaid. What you need to know...

THE TRUTH ABOUT MEDICARE

Surveys show that most people greatly underestimate their risk of needing nursing home care someday. The cost of such care already is extremely high, close to or exceeding $100,000 per year in many parts of the country and rising steadily. Over a period of years, it can consume a family's lifetime of savings and leave it deeply in debt.

Big mistake: Thinking that after the age of 65, Medicare pays for nursing home care.

Reality: Medicare pays the full cost for only 20 days of "rehabilitative" nursing home care, which must occur after a hospital stay. After that, it covers another 80 days with the patient paying the first $124 (in 2007) of daily costs (about $3,700 per month). After these 100 days, coverage ends.

WILL MEDICAID PAY?

Long-term nursing home care could be covered by Medicaid, a government program that provides health care to low-income, low-wealth individuals.

To be eligible: One must own few assets (usually less than $2,000 worth, with some exceptions noted below) and have only nominal annual income. The amount depends on where you reside - for instance, in New York you can retain income of only $692 per month. If the care recipient is married, his/her spouse generally can't have assets exceeding approximately $99,000, and can have only a modest income, with exact amounts varying by state.

Until recently, many seniors had planned to use Medicaid to cover their long-term care by transferring their personal wealth to other family members. They made gifts of assets to other family members and/or paid expenses (such as college tuition costs) for them.

Snag: The new rules make this strategy much more difficult.

TOUGH NEW RULES

To restrict the rapid growth in Medicaid costs, Congress enacted tough new eligibility rules effective in 2006, with the exact date varying by state. Rule changes...

*Tougher "look-back" computation. The look-back period has now been increased from three years to five years.

Plus, the ineligibility period that results from transfers made during the look-back period now begins only when the individual would become eligible for Medicaid benefits but for the transfers - that is, after his assets would have been exhausted - instead of on the earlier date when the transfers were made.

Situation: An older individual gives wealth preserving gifts totaling $320,000 to several of his family members. Two-and-a-half years later, he needs long-term nursing home care. The cost of care in his area is $8,000 per month.

Under old law, if the individual had retained $48,000, he could use it to pay for his own care for six months. This period added to the time since the gifts were made equals three years, so he would then be eligible for Medicaid and his $320,000 of gifts would be secured.

Under new law, the five-year look-back period "catches" the $320,000 of gifts. This makes the individual ineligible for Medicaid benefits for 40 months ($320,000 divided by $8,000 per month equals 40 months).

Worse, this ineligibility period now starts only after the individual has spent down on his own care whatever wealth he's kept. He then is left with the need to finance 40 months of nursing home care on his own, while having no wealth to pay for it!

Other family members may be called on to return gifts received from the individual to pay for his care. If they have spent the funds (such as on college costs), this may not be an option.

Recommended: Know the law in your state. Medicaid laws vary greatly by state and are very complex, with many special rules and exceptions. Examine the laws of your state with a legal expert to find special rules that may help in your situation.

MORE CHANGES

Other restrictions in the new law...

*Home ownership. Persons with more than $500,000 of equity in a home now are ineligible for Medicaid benefits. (Individual states may increase this limit to $750,000.)

Thankfully, individuals who have a spouse, children under age 21 or adult children with disabilities living in the home are exempt from this ruling. Previously, there was no such restriction (although states might try to recover the cost of care later through a lien placed on a home or a claim made against it in probate).

*Annuities. When an individual, who is receiving Medicaid benefits, or the spouse of such an individual, owns an annuity, the state must be the remainder beneficiary of the annuity. In this manner, the state's cost of Medicaid benefits (up to the amount provided) is repaid.

*Spouses not receiving care. When the spouse who receives most of a couple's income (such as from a pension) is institutionalized, applying all of that income toward Medicaid costs can result in great hardship to the other spouse (the "community spouse").

As a result, some states have enacted rules that allow shifting of assets to the community spouse free of Medicaid claims.

The new law sharply restricts such actions, increasing hardship on many community spouses in such states.

SELF-DEFENSE

To protect wealth now...

*Purchase long-term-care insurance. This will pay for future nursing home care. It is the safest way of providing for future care needs while protecting family wealth.

If you don't already own long-term-care insurance, consider buying it now. The earlier in life you buy, the lower the cost of the premium.

Beware of an early disability. During working years, you are more likely to be disabled, potentially requiring long-term care, than to die.

Check whether your employer provides long-term-care insurance - if it does not, purchase your own.

*Make wealth-shifting gifts early. For gifts to other family members to be effective at protecting family wealth, they now must be made a full five years before a need for Medicaid assistance arises.

*Purchase items exempt from the wealth test. Items not counted among assets when qualifying for Medicaid include clothing, jewelry, books and an auto needed for work or to travel to obtain medical care. Reduce cash balances by buying things that retain value, such as rare books and fine jewelry.

*Purchase a single-life annuity. This can reduce wealth by converting it to income that ends with your life (and so does not have the state as a secondary beneficiary).

*Take out a home-equity loan. Reduce the equity in your home to below the $500,000 (or $750,000) limit. Borrowing can be used for living expenses, to fund gifts, buy exempt assets or buy a single-life income annuity.

*Take out a reverse mortgage. This, too, can be used to decrease home equity - but fees are higher than the home-equity loan, and a reverse mortgage generally provides less flexibility than home-equity borrowing. Only use this strategy as a last resort.

*Deed a home to children while retaining a life estate in it. This gives you the right to use the home while you live while removing its value from your assets.

Snags: You expose the home to children's creditors ... if future conflicts arise between you and your children, this arrangement could become uncomfortable.

*Set up an irrevocable "Medicaid trust". By irrevocably transferring your assets to the trust, you reduce your wealth to qualify for Medicaid. The trust administers the assets for your family as you direct, and pays you a set amount of income for life at an amount that preserves Medicaid eligibility.

Snag: The income you receive is fixed, so you must be sure it will be sufficient.