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Can a nursing home seize your savings? What if your money is in a trust or a Roth IRA? These are important questions with nuanced answers for both married and single retirees.
First for the good news: A nursing home cannot simply take your retirement accounts or savings. Barring legal action over an unpaid bill, you can distribute your assets if you wish. However, you will need to plan ahead to optimize your end-of-life finances, especially since in some cases the government may be able to seize assets after death to pay for nursing home costs.
Long-term care, especially stays in nursing homes, can be expensive. Options to cover these costs include paying out of pocket, private insurance, and Medicaid. Your assets, even if they are in a Roth IRA or certain types of trusts, could potentially affect your eligibility for the latter. If you need help planning your long-term care needs, consider working with a financial advisor.
Long-term care, which can include everything from homemaker services and home health aide assistance to nursing home care, is expensive. According to GenWorth, an insurance company that provides long-term care coverage, the average monthly cost of a private room in a U.S. nursing home in 2023 is estimated at $9,584. Those costs are expected to rise to nearly $13,000 per month by 2033.
That’s well beyond what most people can afford on their retirement income, and often what Social Security pays. That’s why it’s important to plan ahead, says Alec F. Root, a chartered financial analyst (CFA) with DBR & Co.
“As with estate planning in general, it’s helpful to have these conversations sooner rather than later, especially before a person’s health changes that may impact their ability to properly insure themselves,” he told SmartAsset. “Five to 10 years prior to retirement is generally a good time to discuss this topic. A strong estate plan will detail the terms of care later in life, while a good financial plan will take into account nursing home care and final costs.”
Medicare does not cover the cost of a nursing home or other facilities. Instead, the best way to pay for long-term care can usually be special long-term care insurance. The sooner you purchase this coverage, the cheaper it will be. For a healthy 55-year-old, you can pay between $950 and $1,500 per year for this coverage, according to the American Association of Long-Term Care Planning. At age 65, these averages increase to between $1,700 and $2,700 per year. So prepare in advance.
Keep in mind that a financial advisor can guide you through your options for paying for long-term care and may even help you get an insurance policy.
A Medicaid recipient is driven through a nursing home.
If you can’t afford long-term care insurance, the next most common option is Medicaid: the government program that provides medical care to low-income households. While coverage is typically limited, it also pays for nursing homes. However, it is important to be aware that through the Medicaid Estate Recovery Program (MERP), it is possible for a person’s assets to be recovered by the government to reimburse nursing home costs.
Medicaid also has strict income and asset limits, and each state has its own eligibility requirements and coverage range. For example, in New York, your income cannot exceed $1,677 per month and your total assets cannot exceed $30,182. However, the state does not count your IRA or Roth IRA toward those total assets.
Note: Medicare, the health care program for all Americans over 65, does not pay for long-term care facilities.
On the other hand, in Massachusetts, your income cannot exceed $1,215 per month and your total assets cannot exceed $2,000. There, the state includes your IRA among those total assets.
Keep in mind that if you have an IRA, you will be required to take required minimum distributions (RMDs) at age 73. These withdrawals count towards your annual income limit. Roth IRAs, on the other hand, are not subject to RMDs, but states can count the portfolio among your total assets, as Massachusetts does. But if you need help calculating your RMDs or managing your Roth assets, consider talking to a financial advisor.
If your assets exceed these limits, you may have to spend almost all of your assets to qualify for coverage. On the other hand, there are ways to keep your assets if you need Medicaid to cover your nursing home costs.
“Traditional investments can be vulnerable to these financial threats, which is exactly why we need to explore alternative avenues,” said Dutch Mendenhall, CEO of RAD Diversified and author of Money Shackles.
You can move your money into assets that your state’s Medicaid program doesn’t count toward eligibility limits. In addition to a Roth IRA that may protect your assets from Medicaid, many households want to put their money in trusts. Doing so may reduce your on-paper assets, which may make you eligible for Medicaid coverage.
“Using a trust, such as an irrevocable trust, is a formidable weapon in your arsenal to protect your assets from the voracious appetite of long-term care costs,” Mendenhall said.
“Placing your assets in an irrevocable trust effectively removes them from your property, making them less susceptible to being counted as part of your financial assets when determining your Medicaid eligibility,” he added. “This divorce could be a game-changer, potentially preserving your wealth.”
But only an irrevocable trust will work for Medicaid qualification. Assets in a revocable trust, which means you can change or withdraw while you’re still alive, still count toward your overall household wealth.
The typical vehicle for this is a form of irrevocable trust known as a Medicaid Asset Protection Trust.
Keep in mind that there is usually a lookback period during which Medicaid considers your financial transactions leading up to your long-term care application. The assets you transfer to a trust may be subject to this scrutiny, so advance planning is critical. Most, if not all, states look back five years.
And if you need help setting up a trust or deciding what type of trust to set up, seek out a financial advisor with estate planning expertise.
Long-term care insurance is one way to pay for potentially expensive nursing home stays.
This is a complicated answer to the complicated question of whether a nursing home can handle your savings. Although nursing homes cannot seize your assets, the costs of this care are high and can quickly drain your savings. Experts recommend preparing for these costs with diversified investments, income-producing assets and long-term care insurance. If that’s not an option, using a trust to qualify for Medicaid may be a possible way to get coverage. But the details vary greatly depending on your personal situation, your assets and the state in which you live.
While we didn’t have time to fully explore the topic here, some other options for protecting your assets from Medicaid include annuities, life insurance, and even your own home.
A financial advisor can help you determine if you may qualify for Medicaid. 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.
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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