When a family member has a health event that requires them to enter a nursing home or need full-time home health care, it can be an extremely stressful financial event for their spouse, children, grandchildren, or caretaker. The monthly cost of a nursing home is typically between $10,000 - $15,000 per month and without advanced planning it often requires a family to spend through almost all of their assets before they qualify for Medicaid.
As we all live longer, we become more frail in our 80’s and 90’s, which increases the probability of a long term care event occurring. Many individuals that we meet with have already experienced a long term care event with their parent or grandparents and they have seen first hand the painful process of watching them spend through all of their assets. For couples that are married, it can leave the spouse that is not in need of care in a very difficult financial situation as pensions, social security, and martial assets have to be pledged toward the cost of the care for their spouse. For individuals and widows, the burden is placed on their family or friends to scramble to liquidate assets, access personal financial records, and watch the inheritance for their heirs be depleted in a very short period of time.
I often ask my clients this simple question, “Would you rather your house and assets go to your kids or go to the nursing home?” As you would guess, most people say “my kids”. With enough advanced planning you have that choice and today I’m going to walk you through some of the strategies that we use with our clients to protect assets from long term care events.
Strategies Vary State By State
Since the Medicaid rules vary from state to state, the strategies that I'm presenting in this article can be used by New York State residents. However, if you are resident of another state, this article will still help you to understand asset protection strategies that are commonly used but you should consult with an elder law expert in your state to determine the appropriate application of these strategies.
Long Term Care Insurance
While having a long term care insurance policy in place is ideal because if a long term event occurs it pays out and covers the cost, there are a number of challenges associated with long-term care insurance including:
Insurance companies will rarely issue policies after you reach age 70
If you have any issues within your health history, they may not issue you a policy
The cost of the policies can be expensive
It’s not uncommon for a good long-term care insurance policy to cost an individual between $4,000 and $6,000 per year. The reason why the insurance is more expensive than other types of insurance is there is a high likelihood that if you live past age 65, at some point you will experience a long term care event. Insurance companies don’t like that. Insurance companies like issuing policies for events that have a low probability of occurring, similar to life insurance. In addition, when these long term care policies pay out, they pay out big dollar amounts because the costs are so high. For these reasons, long-term care insurance policies have become more of a luxury item instead of a common solution that is used by individuals and family to protect their assets from a long term care event.
So if you don’t have a long-term care insurance policy, what can you do to protect your assets from a long-term event?
Establish A Medicaid Trust
If an individual does not have a long term care insurance policy to help protect against the cost of a long term care event, the next strategy to consider is setting up a Medicaid Trust to own their non-retirement assets. Non-retirement assets can include a house, investment account, stocks, non-qualified annuities, permanent life insurance policies, and other assets not held within a Traditional IRA or other type of pre-tax retirement account. This is how the strategy works:
Establish a Medicaid Trust
Transfer assets from the individual’s name into the name of the trust
Assets are held in the trust for at least 5 years
The individual experiences a long term care event requiring them to enter a nursing home
Since the trust has owned the assets for more than 5 years, they are no longer countable assets, the individual can automatically qualify for Medicaid as long as their assets outside of the trust are below the asset allowance threshold; Medicaid pays the nursing home for their care, and the trust assets are preserved for the spouse and their heirs.
Medicaid 5 Year Look Back Period
In New York, Medicaid has a 5 year look back period. The 5 year look back period was put into place to prevent individuals from gifting away all of their assets right before or after they experience a long term care event in an effort to qualify for Medicaid. In 2020, New York requires residents to spend down all of their countable assets until they are below the $15,750 asset allowance threshold. Once below that level, the individual qualifies for Medicaid, and Medicaid will pay the nursing home costs. When an individual submits a Medicaid application, they request 5 years worth of financial records. If that individual gave any asset away within the last five years, whether it’s to a person or a trust, those asset will be brought back in as “countable assets” required to be spent down before the individual will qualify for Medicaid.
Example: Jim is 88 years old and has $100,000 in his savings account. His health is beginning to deteriorate and he gifts $90,000 to his kids in an effort to reduce his assets to qualify for Medicaid. Two years later Jim has a stroke requiring him to enter a nursing home, and only has $10,000 in his savings account. When he applies for Medicaid, they will request 5 years worth of his bank records and discover that he gifted $90,000 away to his kids two years ago. That $90,000 is a countable asset subject to spend down even though he no longer has it. But it gets worse, his kids spent the $90,000, so they are unable to return the $90,000 to Jim. Jim is not eligible for Medicaid and there is no cash available to pay for his care.
Medicaid Trust Strategy
For the Medicaid Trust strategy to work, the assets have to be put into the trust 5 years prior to submission of the Medicaid application. Once the assets are owned by the trust for more than 5 years, regardless of the dollar value in the trust, it’s no longer a countable asset, and the individual can automatically qualify for Medicaid.
Example: At age 84, Jim sets up an Medicaid trust, and moves $90,000 of his $100,000 in cash into the trust. At age 90, Jim has a stroke requiring him to enter a nursing home, but now since the assets were in the trust for more than 5 years, he is no longer required to spend down the $90,000, and he qualifies for Medicaid. That $90,000 is now reserved for his kids who are the beneficiaries of the trust.
Establishing a trust instead of gifting assets away to family members can help to preserve those assets against the situation where the individual does not make it past the 5 year look back period and the money gifted has already been spent by the beneficiaries.
How Do Medicaid Trusts Work?
Medicaid trusts are considered “irrevocable trusts” which means when you move assets into the trust you technically do not own them anymore. By setting up a trust, you are essentially establishing an entity, with it’s own Tax ID, to own your assets. The thought of giving away assets often scares individuals away for setting up these trusts but it shouldn’t. Estate attorneys often include language in the trust documents to offer some flexibility. Before I go into some examples, I first want to define some trust terms:
Grantor: The grantor is the person that currently owns the assets and is now gifting it (or transferring it) into their trust. If for example, you are doing this planning for your parents, they would be the “grantors” of the trust.
Trustee: The trustee is the individual or individual(s) that are responsible for managing the assets owned by the trust. This is typically not the grantor. The reason being is if you gift your assets to a trust but you still have full control of it, the question arises, have you really given it away? In most cases, the grantor will designate one or more of their children as trustees. The trustees are responsible for carrying out the terms of the trust
Beneficiaries: The beneficiaries of the trust are the individuals that are entitled to receive the assets typically after the grantor or grantors have passed away. It’s common for the beneficiaries of the trust to be the same as the beneficiaries listed in a person’s will.
Access to Income
When you gift assets to a Medicaid trust, you technically no longer have access to the principle, but grantors still have access to any “income” generated by the trust assets. This is most easily explained as an example.
Mark & Sarah have traditional IRA’s, their primary residence, and an investment account with a value of $200,000. They do not anticipate needing to access the $200,000 to supplement their income and want to protect that asset from a long term care event so they know that their kids will inherit it. They establish a Medicaid trust with their two children designated a co-trustees and they move the ownership of the house and the $200,000 investment account into the name of the trust. If the holdings in the $200,000 investment account are producing dividend and interest income, Mark & Sarah are allowed to receive that income each year because they always have access to the income generated by the trust, they just can’t access the principal portion of the trust assets.
Revoke Part Of The Trust
Estate attorneys may also build in a feature which allows the trustees to “revoke“ all or a portion of the trust assets. Let’s build on the Mark & Sarah example above:
Mark and Sarah gift their house and the $200,000 investment account to their Medicaid trust but two years later Sarah incurs an unforeseen medical event and they need access to $50,000. Since the trustee was given the power to revoke all or a portion of the trust asset, the trustee works with the estate attorney to revoke $50,000 of the trust assets in the investment account and send it to the grantors (Mark & Sarah). The $150,000 remaining in the investment account continues to work toward that 5 year look back period, and Mark & Sarah have the money they need for the medical expenses.
Gifts To The Beneficiaries
An alternative solution to the same scenario listed above is that the trustees can be given the power to gift assets to the beneficiaries while the grantors are still alive. Essentially the trustees, who are often also the beneficiaries of the trust, gift themselves assets from the trust, and then turn around and gift those assets back to the grantors. In the Mark & Sarah example above, instead of revoking part of the trust assets, their children, who are the trustees, gift $50,000 to themselves, and then turn around and gift $50,000 to their parents (Mark & Sarah) to pay their medical bills. But with gifting powers, you really have to trust the individuals that are serving as trustees of your Medicaid trust because they cannot be required to gift the money back to the grantor.
Putting Your House In The Trust
It's common for individuals to think: “Well all I have is my house, I don’t have any investment accounts, so there is no point in setting up a trust because my house is always protected.” That's incorrect. If you own your house and you experience a long term care event:
Your primary residence is not a countable assets for Medicaid eligibility and you can qualify for Medicaid while still owning your house
Medicaid cannot force you to sell your house while you or your spouse are still alive and then spend down those assets for your care
However, and this is super important, even though your primary residence is not a countable asset and they can't force you to sell it while you or your spouse are still alive, Medicaid can put a LIEN against your house for the amount that they pay the nursing home for your care. So when you or your spouse pass away, the value of your house is included in your estate, Medicaid will force the estate to sell the house and they will recapture the amount that they paid for your care.
Example: Linda’s husband Tim passed away three years ago and she is the surviving spouse. Her only asset is the primary residence that she lives in worth $250,000 with no mortgage. Linda has a stroke and is required to enter a nursing home. Because she has no other assets besides her primary residence, she qualifies for Medicaid, and Medicaid pays for the cost of her care at the nursing home. Linda passes away 2 year later. During that two year period in the nursing home, Medicaid paid $260,000 for her care. Linda's children, who were expecting to inherit the house when she passed away, now find out that Medicaid has a lien against the house for $260,000; meaning when they sell the house, the full $250,000 goes directly to Medicaid, and the kids receive nothing.
If Linda had put the house into a Medicaid trust 5 years prior to her stroke, she would have immediately qualified for Medicaid, but Medicaid would not be entitled to put a lien against her primary residence. When she passes away, since the house is owned by the trust, there is no probate, and her children receive the full value of the house.
Again, the way I phrase this to my clients is, would you rather your kids inherit your house or would you rather it go to the nursing home? With some advance planning you have a choice.
The Cost of Setting Up A Trust
The other factor that has scared some people away from setting up a Medicaid trust is the setup cost. It’s not uncommon for an estate attorney to charge between $3,000 - $8,000 to setup a Medicaid trust. But in the example that we just looked at above with Linda, you are spending $5,000 today to setup a trust, that is going to potentially protect an asset worth $250,000.
The next objection, “well what if I spend the money setting up the trust and I don’t make it past the 5 year look back period?” If that’s the case, the $5,000 that you spent on setting up the trust is just $5,000 less that nursing home is going to receive for your care. To qualify for Medicaid, you have to spend down your assets below the $15,750 threshold so if you have countable assets above that amount, you would have lost the money to nursing home anyway.
Countable Assets
I have mentioned the term “countable assets” a few times throughout this article; countable assets are the assets that are subject to that Medicaid spend down. Instead of going through the long list of assets that are countable it's easier to explain which assets are NOT countable. The value of your primary residence is not a countable asset even though it's subject to the lien. Pre-tax retirement accounts such as Traditional IRA’s and 401(k) plans are not countable assets. Pre-paid funeral expenses up to a specific dollar threshold are also not a countable asset. Outside of those three assets, almost everything else is a countable asset.
Retirement Accounts
As I just mentioned above, pre-tax retirement accounts are not subject to the Medicaid spend down, however, Medicaid does require you to take required minimum distributions (RMD’s) from those pre-tax retirement accounts each year and contribute those directly to the cost of your care. Notice that I keep saying “pre-tax”, that’s because Roth IRA’s are countable assets subject to spend down. If you have $100,000 in a Roth IRA, Medicaid will require you to spend down that account until you reach the $15,750 in total countable assets qualifying you for Medicaid.
Pensions & Social Security
You can use Medicaid trusts to protect assets but they cannot be used to protect “income”. Monthly pension payments and Social Security income are subject to the Medicaid income threshold. For individuals that are single or widowed, your income has to below $875 per month in 2020 to qualify for Community Medicaid and below $50 per month for Chronic Care Medicaid. If an individual is receiving social security, pensions, or other income sources above that threshold, all of that income automatically goes toward their care.
If you are married and your spouse is the one that has entered the nursing home, you are considered the “community spouse”. As the community spouse you are allowed to keep $3,216 per month in income.
Example: Rob and Tracey are married, Rob just entered the nursing home, but Tracey is still living in their primary residence. Their monthly income is as follows:
Rob Social Security: $2,000
Tracy Social Security: $2,000
Rob Pension: $3,000
Total Monthly Income: $7,000
Of the $7,000 in total monthly income that Tracey is used to receiving, once Rob qualifies for Medicaid, she will only be receiving $3,216 per month. The rest of the monthly income would go toward Rob’s care at the nursing home.
Community Spouse Asset Allowance
If you are married and your spouse has a long term care event requiring them to go into a nursing home and you plan to apply for Medicaid, you as the community spouse are allowed to keep countable assets up to the greater of:
$74,820; or
One-half of the couple’s total combined assets up to $128,640 (in 2020)
Take Action
Unless you have a long term care insurance policy or enough assets set aside to offset the financial risk of a long term care event occurring in the future, setting up a Medicaid trust may make sense. But I also want to provide you with a quick list of considerations when establishing a Medicaid trust:
You should only transfer assets to the trust that you know you are not going to need to supplement your income in retirement.
Step up in basis: By establishing a Medicaid trust as opposed to gifting assets directly to individuals, the estate attorney can include language that will allow the assets of the trust to receive a step up in basis when the grantor passes away which can mitigate a huge tax hit for the beneficiaries.
For these strategies to work it takes advanced planning so start the process now. Each asset that is transferred into the trust has its own 5 year look back period. The sooner you get the assets transferred into the trust, the sooner that clock starts.
If you are doing this planning for a parent, grandparent, or other family member, it's important to consult with professionals that are familiar with the elder law and Medicaid rules for the state that the individual resides in. These rules, limits, and trust strategies vary from state to state.
Contact Us For Help If you are a New York resident doing this type of planning for yourself or for a family member that is a resident of New York, please feel free to reach out to us with questions. We can help you to better understand how to protect assets from a long term care events and connect you with an estate attorney that can assist you with the establishment of Medicaid trust if the trust route is the most appropriate strategy for asset protection. Disclosure: This article is for educational purposes only. It does not contain legal, Medicaid, or tax advice. You should consult with a professional for advice tailored to your personal financial situation.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
