Many of us think it won’t happen to us, but the statistics say otherwise. 52% of Americans turning 65 will need some type of long-term care services during their lifetimes. The costs quickly climb financially, as do the physical and emotional stresses. The questions that often follow are: how to pay for it all, and what, if anything, can be done to prepare ahead of time. The answers are not easy, but remember, failure to plan is a plan itself.
Who pays for long-term care costs?
The first answer that comes to mind for many is Medicare or associated Medicap or Medicare Advantage plans. While Medicare will pay for skilled nursing care either in a facility or through home care, it very explicitly will not cover custodial care or assistance with activities of daily living (often referred to as ADLs). On top of that, the skilled nursing care coverage that Medicare does typically cover is limited to 100 days and must result from a ‘qualifying’ hospital stay of at least 3 days among other requirements. For more about Medicare, click here.
With Medicare out of the picture, the remaining options are: long term care insurance policies, personal savings, or Medicaid. Long term care insurance can be a great resource to have in your toolkit, though there are different types of policies to consider along with other factors (stay tuned for a future post!). Spending down assets in a matter of years when they took decades to accumulate is not an ideal scenario for anyone, but unfortunately one that is all too common with the median cost of a private nursing home coming to $97,455 per year.
The remaining option is Medicaid: a jointly run Federal and State program that covers medical costs, including long term care services, for people with limited income and resources. Medicaid has very strict rules concerning who is eligible for its home care and nursing home care services. In addition, since it is administered by individual states, unlike Medicare which is administered by the federal government, each state can put its own additional requirements on items like eligibility criteria and asset and income limits. For the purposes of this blog post we will discuss Medicaid rules as applicable in the state of New York.
Medicaid rules illustrated
Consider Robert and Lucy Smith, a retired couple living in the New York City metro area. They recently turned 78 and 76, respectively and have a net worth just over $2.5 million, consisting of their home worth $1 million, $750,000 in taxable brokerage accounts, and $750,000 in tax-deferred IRA accounts. Robert’s health has been declining recently and the couple is worried he might soon require more assistance to perform normal, daily activities. They do not have long-term care insurance so must cover the increasing costs out-of-pocket. The prospect of spending down all their assets to pay for his care concerns them, as they have several children and grandchildren they would like to leave a legacy to.
What are their options?
The reality is that there are no magic bullet solution here. To qualify for Medicaid in New York, there are strict income and resource eligibility requirements:
- In 2018, the applicant can have non-exempt assets up to $15,150, as well as life insurance coverage with a face value of up to $1,500. One automobile is also exempt for purposes of Medicaid eligibility.
- In 2018, a primary residence with equity of $858,000 is an exempt asset, meaning that equity more than that amount would jeopardize Medicaid eligibility.
- In 2018, the applicant is entitled to retain income of $842 per month for “home based” Medicaid (plus $20 if he or she is 65 or older). For comprehensive ‘nursing home care’ through Medicaid, the applicant can only retain $50 per month.
- In New York, the non-applicant spouse can retain a certain level of resources and monthly income. In 2018, the non-applicant spouse (aka the “community spouse”) may keep up to $123,600 in resources (the “Community Spouse Resource Allowance” or “CSRA”) and a maximum monthly income allowance of $3,090. If the community spouse exceeds either of these limits, Medicaid may require the community spouse to contribute to the applicant’s long term care costs.
- Joint accounts, revocable trusts of the applicant or applicant’s spouse, and certain irrevocable trusts will be considered available resources subject to the $15,150 limit.
- For nursing home Medicaid, gifts or transfers of assets to any third party, including an irrevocable trust, are subject to a sixty (60) month look-back and potentially penalty transfer rules.
Let’s see how these rules apply to Robert and Lucy’s situation. The $750,000 in taxable brokerage accounts would be over the resource limit set by Medicaid. Similarly, the equity in their primary residence is over $858,000 and would complicate eligibility. Their IRA accounts would be exempt assets (not counted in determining financial eligibility), so long as required minimum distributions (RMDs) are being paid from each account. The distributions themselves, along with Social Security, pension, or any other income sources, however, would be included in determining if Mr. Smith’s income exceeds the applicable limit.
The Smiths could transfer all assets currently in Robert’s name or jointly held to Lucy, as Medicaid does not penalize transfers between spouses. This could involve transferring and retitling their taxable brokerage accounts as well as the home. The idea behind doing so would be to qualify Robert for Medicaid care.
There are, however, several risks and considerations with this approach. First, Robert will no longer have legal control over his assets once they are transferred out of his name. For some couples, this is worth a deeper conversation. In addition, since Medicaid is the “payor of last resort”, all of Robert’s income exceeding the limits mentioned above would likely need to be spent towards his long term care. Finally, since Lucy would be over the CSRA, Medicaid may require Lucy to spend down the assets more than the CSRA for the care it has provided.
To avoid this, Lucy could transfer the assets out of her name to get under the CSRA limit, i.e. to a family member or an irrevocable trust, but doing so poses additional risks. Is Lucy comfortable with retaining just the CSRA amount? Further, proceeding this way would also subject Lucy to the 60 month look-back rule should she find herself needing help from Medicaid in the future.
In the end, there are options for couples who find themselves in these situations, but each must be carefully considered. Planning before any long term care need arises is usually the best course of action. Understanding these options will allow couples to plan for their long term care needs without jeopardizing the legacy for their children. In that light, it is highly advisable that you also consult with a qualified attorney who specializes in the Medicaid rules of your state.
 If Lucy’s own monthly income is under the $3,090 allowance, Lucy may keep as much of Robert’s monthly income as needed to get her up to that $3,090 monthly income allowance.