A nursing home employee helps a resident put on a sweater in her room.
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As we age, many of us will need some form of long-term care, either at home or in a facility. With nursing home costs averaging more than $90,000 per year, long-term care costs can quickly add up.
While Medicaid can help you cover these costs, there are strict eligibility requirements that may require you to spend your assets first. If Medicaid pays out money to recipients who later become ineligible, Medicaid may place a lien on a primary residence or attempt to recover money from your estate after your death.
Talk to a financial advisor to ensure your long-term care needs are met.
Fortunately, some legal tools, including trusts, can protect your assets from Medicare and nursing home costs. However, these tools come with limitations, costs, and risks that they must understand before moving forward.
Long-term care is a crucial service for anyone who is sick or simply needs help as they age. However, this care can be expensive. For example, the average annual cost of a semi-private nursing home room was more than $93,000 in 2021 and is expected to rise to about $135,000 by 2033, according to Genworth. At that rate, paying for long-term care could pose a challenge to many people’s financial security.
While Medicaid can foot the bill, access is strictly limited to those with limited financial resources. To qualify, you must have a low income and limited assets. The precise amounts are determined by state law and vary considerably, but some allow you to have as little as $2,000 in countable funds. If you have more than the limit, you generally have to use your own money to pay for care until your assets have shrunk enough to meet the limit.
Medicaid also has a five-year lookback rule. This means that you will be disqualified if you attempt to meet the financial limits by transferring assets to another person or entity in the five years before you apply for Medicaid.
Medicaid can cover nursing home costs, but to qualify you may need to spend or transfer your assets to a trust.
A number of techniques can help people with assets that exceed Medicaid limits shield them from the program’s eligibility rules so they can enjoy the benefits without having to spend their own funds first. Strategies such as annuities, home equity exemptions, and trusts can potentially help protect assets.
For example, suppose you and your spouse have $1 million in an IRA that you transferred to a trust. Doing so may protect you from Medicaid, but you must create the right kind of trust. For example, an irrevocable Medicaid asset protection trust would protect your IRA. However, you must transfer the assets to the trust for at least five years before you need Medicaid.
If you did this correctly and outside the five-year lookback period, the IRA will not count toward your Medicaid eligibility. Keep in mind that you will permanently lose control of the $1 million IRA assets.
If you transfer the IRA to a revocable living trust, you retain control of your assets, but they still count toward Medicaid eligibility limits.
Talk to a financial advisor about using trusts and other tools.
In addition to irrevocable trusts, other options can help protect assets from Medicaid spending requirements and/or cover long-term care costs. They include:
Financial gifts to family members, friends and other people can reduce your assets. But gifts of more than $17,000 per year per recipient count toward your lifetime gift and estate tax exemption, which is $12.92 million in 2023.
A nursing home employee helps a resident walk with the help of a cane.
While several strategies can protect assets from Medicaid, they are not perfect solutions. Here are some disadvantages:
It’s also worth considering that having less wealth on paper may mean you receive lower quality care. It may not be a valuable transaction for all people in all situations. Consider talking to a financial advisor about ways you can pay for long-term care.
Protecting your $1 million IRA from potential nursing home costs comes with tradeoffs. In order for Medicaid to help pay the costs of long-term care, you must meet strict financial tests. If you have too many assets, you may have to spend your savings on care until you can meet Medicaid guidelines. Irrevocable trusts, life insurance policies, and Medicaid-compliant annuities can potentially protect assets from Medicaid eligibility requirements.
Working with a financial advisor can help you coordinate Medicaid planning with your overall retirement income plan. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keeping track of your savings is an important part of your retirement planning. Fortunately, you can quickly find out whether you are saving approximately enough for your retirement using SmartAsset’s pension calculator.
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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