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Long-term care costs, such as nursing home care, can quickly drain retirement savings. Medicare offers little help paying these bills, but Medicaid can cover nursing home costs for those who meet strict financial eligibility rules. Certain strategies, such as special trusts, equity transfers, and annuities, can help meet these eligibility rules and protect assets such as your home and retirement accounts from Medicaid spending requirements. But most of these tools require planning years in advance. A financial advisor can help you plan for long-term care and other needs you will have later in life.
Nursing homes provide 24-hour care to seniors who can no longer live independently. But they come at a high price: According to Genworth, the national average cost for a semi-private room is more than $94,000 per year.
Medicare is a federal health insurance program for people age 65 and older. However, Medicare typically only covers a limited short-term stay in a nursing home for rehabilitation after a hospital stay.
For ongoing long-term care costs, Medicaid can serve as the primary payer. Unlike Medicare, Medicaid is a means-tested program, so eligibility depends on meeting strict income and asset limits. Rules vary by state, but most limit individuals to no more than $2,000 in countable assets. For married couples, the stay-at-home spouse who often does not receive nursing care can hold up to $148,620 in assets in 2023.
If you need help planning for these potential expenses in the future, consider working with a financial advisor.
Medicaid can reimburse nursing home costs for people who meet a strict income test.
If someone has too many assets to qualify for Medicaid, they may be required to spend their own assets to pay for care. Once they have spent enough of their money to pay for their care, they may be able to qualify for Medicaid.
Another strategy is to transfer assets to another person or entity, such as a trust. Here, however, Medicaid imposes a five-year lookback period when assessing eligibility. That means any asset transfers made in the five years prior to application will be scrutinized and could delay Medicaid enrollment.
Still, with proper planning, there are ways to protect assets from Medicaid spending rules. Special trusts, equity transfers and annuities can help protect savings and property.
Please note that state Medicaid programs may attempt to recoup the costs of certain services. For enrollees age 55 and older, state Medicaid programs are “required to recover payments from the individual’s estate for nursing benefits,” according to Medicaid.gov. That’s why asset protection is so important. And if you need help with a long-term care plan, consider working with a financial advisor.
One method is to place assets in an irrevocable trust for at least five years before Medicaid coverage is needed. A trust is a legal document that creates a legal entity. Trusts come in two main varieties: revocable and irrevocable. Unlike revocable trusts, irrevocable trusts mean that control of the assets is permanently forfeited. While that is a significant disadvantage, assets transferred to an irrevocable trust before the five-year lookback period do not count toward Medicaid eligibility.
A properly structured irrevocable income trust can also protect retirement accounts such as IRAs from Medicaid spending requirements. The IRA owner transfers the account to the trust and then takes only the annual required minimum distributions (RMDs) as income. This converts countable assets into non-countable income and leaves the trust principal intact. Trusts also offer other estate planning benefits, including avoiding probate.
Consider a hypothetical couple with a $250,000 IRA that they want to protect from Medicaid’s five-year lookback rules. To protect the IRA, the account owner could transfer it to an irrevocable income trust at least five years before applying for Medicaid.
The trustee would then only recognize the RMDs as income each year, avoiding large lump sum withdrawals. This converts the IRA into non-countable income while retaining the trust assets. Medicaid would not count the $250,000 IRA toward eligibility.
Consider finding a financial advisor with wealth planning experience who can help you set up a trust. You may be able to make a match with this free tool.
A couple is looking at the cost of nursing home and long-term care insurance.
In addition to special trusts, options such as long-term care insurance, home equity lines of credit, Medicaid annuities, and family gifts can also help reduce countable assets and/or pay directly for long-term care. Each approach has pros and cons that must be weighed. There is no one-size-fits-all solution.
Couples can also use a living estate to protect the equity in their home from Medicaid. This deed transfers ownership of the home to the healthy spouse, while preserving the lifetime lease for the spouse in need of care. The spouse living at home then inherits the home.
Likewise, Medicaid-compliant annuities provide a way to ensure that assets do not count toward Medicaid asset limits. They generate non-countable income through monthly payouts. The lump sum purchase price is considered an exempt transfer if certain rules are met. And if you need help purchasing an annuity, consider talking to a financial advisor about these types of products first.
While shelters such as trusts and annuities can help protect savings, they come with major limitations. Once you transfer assets to an irrevocable trust, they are permanently inaccessible. Donating money reduces your equity.
And failure to meet all Medicaid requirements could result in a penalty period of ineligibility. Given the costs, uncertainties and ethics involved, asset protection strategies may not be suitable for everyone.
Advanced planning with special trusts, annuities, and stock transfers can help protect assets from Medicaid spending requirements for nursing home care. But these instruments require foresight and irreversible actions. Their costs and tradeoffs also deserve careful consideration. Some tools won’t be useful for some people, and they all have different combinations of limitations and risks.
Personalized guidance from a financial advisor can be invaluable when planning for potential long-term care costs. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you are interested in long-term care insurance, it is important to research the coverage available and find an option that is right for your needs. Fortunately, SmartAsset has done some of the work for you with this comprehensive list of the best long-term care providers.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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