When your parent enters a nursing home, your first question never will be—”How can we qualify for Medicaid?” Rather, you will focus appropriately on ensuring that your parent receives the necessary care. Yet, with nursing home costs running from to $3,000 to $10,000 per month, financial concerns must be considered fairly quickly. And, unless your parents have the vast resources necessary to pay for a nursing home stay or long-term care insurance (LTCI), you may find yourself with plenty of questions about Medicaid.
With roots in the Welfare Reform Act of 1968, Medicaid is a needs-based state and federally funded program that pays for medical treatment, room and board at a nursing home. To qualify for Medicaid, individuals needing long-term care typically must “spend down” their assets to $2,000. However, a “community spouse” who remains at home generally is permitted to keep about $100,000 in resources. While Medicaid rules vary by state, the Deficit Reduction Act (DRA) of 2005 implemented several changes that while intended to curb Medicaid expenditures, failed to address fundamental problems with the program and made asset-protection planning more complicated than ever.
Most significantly, the DRA extends Medicaid’s “look back period,” from three to five years. Currently, if your mother has given money or assets to churches, charities or family members within five years of the time when she applies for Medicaid, she will be disqualified from receiving Medicaid for the number of months that her gifted assets could have paid for nursing home care, based on the average nursing home cost in her state. Significantly, the penalty period now begins not as it once did on the date of your mom’s gifts, but on the date she applies for Medicaid benefits.
For example, let’s say that this year your mother gives $30,000 to each of your three children for college, as well as $10,000 to her church. Fast forward four years into the future when two years in a nursing home at $5,000 a month has depleted her savings. When she applies for Medicaid, she’ll need to wait 20 months before her benefits kick in because the $100,000 she gave away could have funded 20 months of nursing home care. The “Catch 22” is that her savings are exhausted, but she must wait 20 months for Medicaid to begin.
Accordingly, if your parents have moderate wealth and no LTCI, they need to think very carefully before making even modest gifts. Note, too, that the change in the law requires someone who purchased a three-year LTCI policy (with the idea that it could fill in the gap between the date they gifted money and when they might qualify for Medicare) to do some additional planning.
The DRA also made a technical change to the so-called “spousal impoverishment” rules. Let’s say your father can no longer care for your mother who has Alzheimer’s disease and decides to move her to a nursing home that costs $4,000 a month. In addition to their home, worth approximately $450,000, they have an Oldsmobile and approximately $80,000 in cash assets. They each receive $900 in monthly Social Security.
Before the DRA, many states allowed couples in your parent’s situation to use the “Resource First” rule in order to escape impoverishment. Under this rule, your father would be permitted to keep all of their assets, all of his income and most of your mother’s income; Medicaid would help pay for most of your mom’s nursing home expenses. However, the DRA now requires states to use the “Income First” rule. Under this rule, your father keeps the house and car, along with his income. However, he will only be allowed to keep half of their cash assets. He will have to spend $40,000 on your mom’s care before she will be eligible for Medicaid.
The National Academy of Elder Law Attorneys (NAELA) argues that the “Income First” approach has unintended consequences. That is, if your mother dies after Medicaid eligibility is established, your father will no longer be able to receive her Social Security and his income will drop to $900 per month. With his income cut in half, he likely will start to deplete his $40,000 in savings to pay his bills. If he needs nursing home care in the future, he will run through his money and be dependent upon Medicaid more quickly. However, under the old Resource First rule, he would have had $80,000 to supplement his income after the death of your mother. Also, if he outlives his wife, the DRA stipulates that any remaining assets at his death will first have to be used to repay the state for what Medicaid paid to care for her.
According to the NAELA, divorce could become another unintended consequence of Medicaid reform. For example, if your parents divorced, your dad most likely would be able to keep most of their joint assets and all of his income. Further, his estate would not have to repay the state for the Medicaid assistance received by your mom.
Additional DRA reforms stipulate that if an individual buys an annuity to achieve Medicaid eligibility, the state must be named as the beneficiary. If there is a spouse or a minor or disabled child, those parties can be named as the primary beneficiary, but the state must be named as the secondary beneficiary. The annuity must also be irrevocable, non-assignable, and actuarially sound (as determined by tables published by the Office of Actuary of the Social Security Administration) and must provide for equal payments during the life of the annuity, with no deferral and no balloon payments.
In another important change, although the home formerly was considered an exempt asset for Medicaid purposes, the DRA requires states to consider an applicant’s home equity in excess of $500,000. Note, however, that states are permitted to raise that threshold to $750,000. (This rule does not apply if there is a spouse or minor, or a blind or disabled child residing in the home.)
If you think all this sounds complicated, you’re correct. Medicaid asset protection should be approached very carefully. For instance, although your parents may decide that they want to put their checking account or home in the names of you and your siblings, those steps involve risks for them and implications for you. There are numerous Medicaid asset protection strategies, from establishing and funding an income trust to converting countable to non-countable assets, but whatever you consider, don’t rely on what you think is accurate or suggestions from your neighbors or co-workers. Medicaid laws and the nuances of their application require the expertise and guidance of an elder affairs or estate planning attorney—and, with our professional network, we’re happy to point your family in the right direction to ensure the best guidance for your situation.