By: Colin B. May, Esquire
The good news is that we are living longer, healthier lives in this country. Advances in modern medicine and a better overall understanding of health has meant that the average life expectancy for a male is 76.04 and the average life expectancy for a female is 80.99. The bad news is, and I’ll quote myself here, “we are living longer, healthier lives in this country.” What do I mean? Living longer means that as we age the likelihood of needing some form of long-term care increases. In fact, around half of all aging Americans will require some form of long-term care in their lifetime. To be frank, long-term care is expensive: the average cost for assisted living in a facility is $46,485 per year, the cost of a home health aide is $53,768 and a semi-private room in a nursing home amounts to $119,720 per year, equating to $328.00 per day. With the high likelihood and cost of care, the question is not if we should plan for our own long-term care, but how we should go about doing this.
Approaches to Long-Term Care: The Big Three
Anytime I discuss long-term care with my clients, I begin by explaining that there are fundamentally three main approaches to long-term care planning. The first is to self-insure. This means that we pay as we go out of our own assets. If we look at the projected costs of long-term care and our own assets this may be a viable approach for some, but remains the least popular option for obvious reasons. The second approach is to utilize some form of long-term care insurance or some form of hybrid product that combines life insurance with long-term care coverage. The downside to this approach is that true, standalone long-term care insurance can be expensive and difficult to qualify for medically. With regard to hybrid life insurance policies, while these tend to be less expensive than true standalone long-term care insurance, the amount of long-term care coverage is often capped at the policy limit for the plan. Though these strategies have been effective in the past, they are not appropriate or feasible for every situation. The limitations of these first two approaches lead many to explore the third option, which is putting oneself in a better position to qualify for Medicaid to pay for the cost of long-term care while ensuring that some (or many) assets are preserved and protected for their families. However, there are strict rules and regulations that we must adhere to if we plan on utilizing Medicaid to pay for long-term care.
What Exactly is Medicaid?
Medicaid rules are a complicated patchwork of state and federal regulations. In general, Medicaid consists of two types which have similarities but are treated differently at the administrative level: traditional Medicaid and Medicaid long-term care. Traditional Medicaid is a joint federal and state program available to pay the healthcare costs for those who are financially needy. Medicaid long-term care is also needs-based, but is designed to provide care specifically for long-term care costs often associated with aging. Oftentimes with planning, we are utilizing legal strategies to put ourselves into the position to qualify for Medicaid Long-Term Care. Proper and timely Medicaid Long-Term Care planning can mean that we receive the benefit of long-term care coverage while preserving our lifesavings for our family.
As mentioned before, the rules surrounding Medicaid Long-Term Care can be complicated. I will not be exploring all of the particular rules in detail, but I will identify some of the key provisions we have to be sensitive toward in Medicaid Planning.
Asset Limitations: For an applicant, Medicaid Long-Term Care requires that we are both physically qualified, meaning that an applicant has a need for skilled nursing care and that they are financially qualified. In terms of financial qualification, Medicaid allows an applicant to have just $2,400 in non-exempt resources to their name. Fortunately, this limitation does not include specific items like the applicant’s primary residence, one vehicle, and a prepaid burial trust, among other small exclusions. However, while Medicaid will permit an applicant to keep their primary residence, the Medicaid state agency is able to place a lien against the residence at the time the applicant passes away through a process known as Medical Assistance Estate Recovery. There is a common misconception that a nursing home will take an applicant’s house, or require the applicant to sell their home prior to entering into the facility. While some applicants may decide that selling the residence to pay for care is an option, Medicaid does not require this. However, if an applicant retains ownership of the home while they are receiving care, the Pennsylvania Medicaid agency may later place a lien against the home for the cost of care after the applicant (and their surviving spouse) passes away. For many families, the Medicaid Lien placed against a recipient’s prior residence may overwhelm what the can family can pay, or is willing to pay, and instead allow the home to default to be sold by the state agency.
Community Spouse Resource Allowance: If a married applicant applies for Medicaid Long-Term Care, the state agency will allow the healthy spouse (referred to as the “Community Spouse”) to retain assets of approximately $123,000.00. This is known as the “Community Spouse Resource Allowance” or “CSRA.” In addition to the applicant spouse’s resource allowance, this hard and fast limitation is the maximum that Medicaid Long-Term Care will permit a couple to have before they are eligible for Medicaid.
Five-Year Lookback: With these resource limitations in mind, the obvious strategy would be to simply transfer assets during our lifetime to our loved ones to more quickly qualify for Medicaid. However, Medicaid knows that people do this and have placed what is known as a 5-year lookback to uncompensated asset transfers. This 5-year lookback starts from the day of application (when the applicant was otherwise qualified) and looks back a five-year period from that date to determine if any uncompensated transfer of assets has occurred. In the event that assets were transferred within this period of time, Medicaid will apply what is known as a penalty period.
Transfer Penalty and Penalty Period: There is a common misconception to conflate the five-year lookback period with the penalty period to assume that disqualification from Medicaid will be five years. However, the penalty period is calculated by looking at the total value of uncompensated transfers within the past five years leading up to application and dividing this number by the average daily cost of nursing-level care. For example, if we assume that an individual made a gift of $150,000.00 to a child and then sought to apply for Medicaid within a five year period, the penalty period would be $150,000.00/$328.00 [the daily cost of care] to be a disqualification of 457 days – well over a year of disqualification. While disqualified, an applicant must find a way to either stay out of nursing care (not a viable approach for many), to “cure” the gift by having the children give the gift back to the applicant, or to pay out of pocket for these expenses.
The Importance of Timely Medicaid Planning
If we assess that Medicaid planning for long-term care is the right approach for our family, time is of the essence. What we must do in order to maximize the potential benefit is to make transfers that are squarely outside of the 5-year period. In other words, in order to make qualifying transfers, we must be reasonably confident that we will not need nursing level care within a five-year period. How can we know this? The short answer is that we cannot. There will always be the risk that the need for extensive long-term care will arise sooner than we ever expect. Nonetheless, the likelihood of needing long-term care is significantly lower at a younger and healthier age which allows us to hedge against this risk by planning early.
The age to start thinking about Medicaid planning is not when we are in our late 70s, 80s or 90s when the likelihood of needing long-term care within a five-year period is higher, but rather, in our 50s, 60s, and in some cases, early 70s when the likelihood is much lower. In fact, there is no reason that we could not begin exploring long-term care planning at even younger ages when we may be more likely to qualify for long term care insurance or hybrid products.
What Type of Medicaid Planning Approach is Right for Me?
There is no simple answer to this question. If we decide that the most reasonable strategy is to rely on Medicaid and protect assets for our family, the most comprehensive approach is to transfer assets to a qualified Medicaid Trust that ensures that assets transferred are not considered an available resource to the applicant. To be clear, transfers to a Medicaid-compliant Trust does not avoid the five-year lookback period; so timely creation and funding of such a trust is still a key consideration. Other approaches may include strategic transfers of certain assets such as the primary residence or certain accounts, or transfers to a healthy spouse to maximize the CSRA if we plan on later applying for Medicaid. As these rules are indeed complex, what may be right for you and your family will always involve an in-depth exploration of your specific needs and goals with an estate planning attorney.
The element that is within your control is time. The sooner you have the opportunity to explore your options, the better. Keep in mind that likelihood of needing long-term care does not get better with time, it is always in your best interest to start having these discussions sooner rather than later.
. Genworth Cost of Care Survey 2019, https://www.genworth.com/aging-and-you/finances/cost-of-care.html.