The aging U.S. population means that more people will likely need nursing home care in the coming decades. Meanwhile, the cost of nursing home care is increasing — and expected to keep increasing.
With the exorbitant cost of nursing home care, many families worry about depleting their loved ones’ life savings to pay for the care they need. Private health insurance does not cover nursing home care, and while long-term care insurance is available to cover nursing home costs, these plans are also expensive and may come up short for long-term stays.
This leaves millions of Americans reliant on Medicaid to pay for nursing home care — a far from perfect solution that usually involves spending down assets to qualify. With proactive Medicaid planning, though, it is possible for someone to qualify for Medicaid and still retain some of their assets. The sooner you start planning, the more options you’ll have for protecting your parents’ assets from nursing home costs.
Medicaid Planning Strategies
Whether a nursing home stay lasts months, years, or is permanent, you may have crunched the numbers and determined that Medicaid is the only feasible payment option for a parent’s nursing home care.
This is a “good news, bad news” scenario. The good news is that it’s possible for somebody who doesn’t currently meet Medicaid’s income and asset limits to “spend down” their excess assets to meet limits. The bad news is that the limit in Illinois is $17,500 for a single person.
An upside is that not all a person’s assets count against the limit. Many Medicaid spend down strategies take advantage of workarounds that allow nonexempt assets to be converted to exempt assets, thereby excluding them from Medicaid calculations. But these strategies often involve navigating a tricky five-year “lookback period” where past asset transfers are scrutinized to ensure applicants don’t give away assets to qualify for Medicaid.
Keeping these considerations in mind, there are financial planning strategies that can help to protect a parent’s assets from nursing home costs and a Medicaid spend down.
Medicaid-Compliant Annuities (MCAs)
MCAs, a type of single premium immediate annuity, allow countable assets (like cash or investments) to be converted into a stream of income that doesn’t count toward the Medicaid asset limit. The payout structure must be based on life expectancy, and once purchased, the annuity cannot be cashed out or changed; funds in the annuity are no longer accessible as assets.
Medicaid Asset Protection Trusts (MAPTs)
Medicaid-compliant trusts, like MAPTs, hold assets for a set period, after which they transfer to beneficiaries (usually children or other family members).
Assets in the MAPT are no longer considered part of your parents’ estate for Medicaid purposes. They are legally owned by the trust, not your parents, although they may be able to benefit from these assets, such as remaining in a home transferred to a MAPT.
Creating a MAPT triggers a penalty period of Medicaid ineligibility under the lookback period that’s based on the value of assets transferred. A MAPT is therefore most effective when implemented well in advance of potential Medicaid need, often in conjunction with a parent’s estate plan.
Promissory Notes
A promissory note is a legal agreement that allows your parents to lend money to someone (e.g., a family member) who agrees to repay the money with interest over time. This converts a lump-sum asset into a stream of income. For the Medicaid applicant, however, the effectiveness of a promissory note is largely dependent on the borrower’s ability and willingness to repay the loan.
Other Spend Down Strategies
A spend down strategy might additionally include a parent spending on needs or wants that can both enhance their quality of life and help them qualify for Medicaid.
- Paying off debts, making necessary home repairs, purchasing a new car, prepaying funeral expenses, or taking a family vacation are ways to spend down assets and derive an instant benefit.
- Gifting assets to loved ones outside of the lookback period can reduce countable assets and fit into a gifting while living strategy, but annual and lifetime gift tax exemptions apply.
- If only one spouse needs nursing home care, Medicaid allows the other spouse (the “community spouse”) to retain a certain amount of income and assets.
There is no “one-size-fits-all” strategy for protecting a parent’s assets from nursing home costs and a Medicaid spend down. Be sure to schedule a meeting with one of our attorneys to discuss a personalized plan that avoids penalties or disqualification from Medicaid and maximizes asset protection.