Do not allow nursing home expenses to exhaust your savings. Discover how to protect your assets from nursing home costs and ensure the stability of your financial well-being.
Introduction
As we get older, the need for long-term care, including nursing home services, becomes a pressing concern. The cost of nursing homes can present significant financial difficulties and may even exhaust a lifetime of savings and assets. In fact, according to the Office of the Assistant Secretary for Planning and Evaluation (ASPE), approximately 25% of individuals who initially enter nursing homes as self-paying residents end up staying for a year or longer. Those with moderate incomes, typically earning between $12,000 and $25,000 per year, find it challenging to cover the high expenses of nursing home care solely from their income. As a result, they must tap into their savings and assets to meet the monthly costs. Some individuals who require extended stays in nursing homes, end up exhausting their entire financial resources and have to seek Medicaid assistance for coverage.
In this article, we will explore effective methods and key considerations to help you protect your assets from nursing home costs. This involves understanding the cost of nursing home services, exploring different options to fund your care, and providing strategies to efficiently manage your assets, all while ensuring you qualify for Medicaid when needed. With the right nursing home financial planning, you can preserve your hard-earned wealth and secure your financial future.
Understanding Nursing Home Costs
Have you ever wondered how much it costs to stay in a nursing home? Are nursing homes expensive? Well, addressing the question of cost isn’t simple. The cost of living in a nursing home is influenced by various factors such as the location, the duration of your stay, and the specific care services you need.
In Genworth’s latest annual report, they’ve conducted a study on the median costs of nursing homes across the United States. The term “median” refers to the middle value, with half of the prices being higher and the other half being lower.
Here is an overview of the average nursing home cost:
- The monthly cost for a semi-private room in a nursing home is $7,908, with a median annual cost of $94,896.
- The cost of a nursing home per month for a private room is $9,034, with a median annual cost of $108,408.
For an old age home (also known as a retirement home), the monthly cost of a semi-private room has increased by 3% year-over-year since 2019. The average monthly nursing home cost for a private room has also shown a 3% increase.
The report suggests that nursing home expenses are likely to continue rising due to the fact that roughly 10,000 baby boomers are turning 65 every day until 2030. These expenses could rise to a point where they become challenging to handle.
How Would You Like to Pay for Your Care?
Financial planning for nursing home care is crucial, especially regarding how you would like to pay for your care. This plan will help you decide which assets you need to allocate to pay for your care and which assets you need to protect. Without proper planning, the expenses can significantly drain your financial resources. Therefore, exploring your payment options for nursing home care should be on your list to develop an effective strategy for safeguarding your assets.
Here are a few alternatives to explore:
1. Utilize Your Own Wealth
If you have sufficient financial resources, you can use your own funds to pay for private in-home services or nursing home care. In this case, it’s unlikely that you would be willing to spend down your assets just to meet Medicaid’s eligibility requirements.
However, if you intend to use your own nursing home budget to pay for your care, it’s a good idea to set aside those assets or funds in advance. This way, you can execute your nursing home cost management efficiently and ensure that your financial resources are utilized wisely and sustainably.
2. Count on Your Family for Support
In 2015, around 65 million individuals took on informal caregiving roles for those who were sick, elderly, or disabled. This caregiving support from family and friends helped people to remain in their own homes for longer periods, avoiding the need for nursing home care.
If you need help with certain tasks, you can consider requesting the support of a family member during the week. Alternatively, you can consider hiring someone to provide care in your home. These nursing home cost reduction strategies could potentially reduce the overall expenses of nursing home care, making it a more sustainable and affordable option for many families.
3. Utilize Private Insurance or Medicare to Pay for Nursing Home Care
It is important to thoroughly review your private insurance policy since most insurers do not cover extended nursing home care. In most cases, insurance plans, such as Medicare, place a cap of 100 days on nursing home care as a component of the recovery process following a hospitalization.
- In most cases, such policies solely provide coverage for brief stays at nursing homes in situations where skilled care is necessary.
- While your insurance policy may help lower copay costs or cover short-term skilled care, it’s unlikely to provide extended care coverage for essential daily activities like dressing, eating, or bathing.
4. Obtaining Long-Term Care Insurance
Long-term care insurance can be a helpful option, as it can reimburse some of the costs associated with long-term health care, including assistance with ADLs. If you have plans to obtain long-term care insurance, it is important to keep in mind that the cost of this insurance is determined by factors such as age and health, so it is advisable to apply for it when you reach your mid-40s. If you wait too long to acquire this insurance, you may not qualify for it or be able to afford it.
Insurers consider the following factors when calculating the price of long-term health insurance policies:
- The age when the policy was acquired
- The maximum daily payout amount of the policy
- The policy’s maximum payout period, which can be expressed in days or years
- The selection of add-ons, such as inflation protection
Get Qualified for Medicaid: Spend Down Your Assets
Even if you’ve set aside assets to cover your care expenses, the cost of nursing home care can still be quite high. Depending on how long you require care, your assets could be depleted quickly. Hence, it’s crucial to ensure you qualify for Medicaid to help cover long-term care expenses over time.
To qualify for Medicaid, you’ll need to spend down your assets to meet specific income and assets criteria. This federal program is administered by each state for its residents and the main purpose of Medicaid is to assist individuals with low income by covering their costs for long-term care needs.
1. Know Your Community Property Limit
Understanding how Medicaid assesses your financial resources is critical when applying for the program. When you and your spouse (commonly referred to as the community spouse) submit a Medicaid application, your assets will be pooled to calculate your total community property. Exceeding the maximum threshold of total assets can make you ineligible to receive Medicaid coverage. It’s worth noting that this maximum threshold varies by state, and some states set it as high as $119,200.
- To be eligible for Medicaid, your assets must fall within certain limits set by most states. For example, you can have assets up to $2,000 if you’re an individual, and a couple can have assets up to $3,000. If one spouse needs nursing home care, the person who enters nursing home can only have $2,000 in non-exempt assets, while you, the spouse staying at home, can keep half of the total assets. The remaining half of the assets must be spent down to meet Medicaid eligibility. This regulation is commonly known as the rule of spousal impoverishment.
- Each state imposes monthly income limits that differ across states. For instance, in Nebraska, an individual living alone must have a maximum monthly income of $934, while a couple must have a monthly income of no more than $1,391 to qualify for Medicaid.
2. The Five-Year Lookback Rule
Medicaid reviews all asset transfers during the five-year period preceding your Medicaid application. This is commonly known as the “lookback” period. Any transfer that Medicaid deems non-exempt may result in a penalty and disqualification from Medicaid for a specified duration.
- To determine whether any of your transfers were made at less than market value, Medicaid will review all asset transfers you made in the last five years leading up to your Medicaid application. The program’s objective is to ensure that you do not give away your assets to evade paying for your own medical care. Each state has different rules regarding when to commence the “lookback” period, and some states may even require adult children to shoulder their parents’ healthcare expenses.
- Medicaid computes the penalty period by taking the value of the transferred asset and dividing it by the mean cost of a private nursing home in the same vicinity. Your restriction period is determined by the number of days for which your transferred assets would have been paid for care.
- Get an Elder Law Attorney
The Medicaid program is subject to complex rules and violating them can result in disqualification from the program. It is important to seek the services of an experienced elder law attorney to ensure compliance with the rules, protect your assets, and obtain valuable financial planning advice.
- A good place to begin your search for an elder law attorney is by seeking recommendations from a family member or a friend who has previously engaged in their services. Another option is to seek out the National Academy of Elder Law Attorneys for assistance in finding lawyers near you.
- It’s vital to communicate all your questions, worries, and desired outcomes during your initial consultation with the attorney. This will allow the attorney to create a better financial strategy that accommodates your needs and secures your assets if you or your spouse need nursing home care.
4. Pay Off Your Debts to Decrease Your Assets
In the event that your assets exceed the maximum amount set by Medicaid, you need to consider reducing your assets to meet the program’s eligibility requirements. Although Medicaid excludes some assets such as your primary residence or vehicle from the calculation of your asset limit, you still need to reduce your total assets to help you and/or your spouse qualify for Medicaid.
There are several ways to reduce your total assets and meet Medicaid eligibility requirements, such as:
- Paying for household bills, which may include making payments for real estate taxes in advance.
- Making advanced payment for funeral or burial services.
- Settling outstanding debts, which may include mortgage payments, credit card bills, or student loans.
5. Purchase Items That Are Medicaid-Exempt to Reduce Your Assets
There are certain items that Medicaid excludes from the calculation of your total assets, and by acquiring these items, you may reduce your assets to qualify for Medicaid.
Here are some examples of assets that are exempt under Medicaid:
- Essential household items like furniture and appliances
- One motor vehicle, at minimum
- The primary residence provided it is occupied by at least one of the following individuals: the Medicaid applicant’s partner, a disabled child regardless of age, a child who is under 21, a child who has provided in-home care to the Medicaid applicant for a minimum of two years, or a sibling who co-owns the property
- Term life insurance policies
6. Get a Medicaid-Compliant Annuity
Annuities can serve a dual purpose when it comes to nursing home care. They can help cover your care expenses and can also serve as protection from nursing home costs.
A Medicaid-compliant annuity can help you convert some of your assets, such as savings or investments, into an income stream that is exempt from Medicaid’s asset calculations. This means that the monthly income you receive from the annuity won’t be counted towards your assets and won’t affect your eligibility for Medicaid benefits.
To be considered Medicaid-compliant, the annuity must meet certain requirements set by federal and state Medicaid regulations. For example, the annuity must be irrevocable, meaning you can’t change your mind and get your money back, and it must provide equal payments over a set period of time.
To determine whether a Medicaid-compliant annuity is suitable for your specific situation, a consultation with a financial consultant or an elder law attorney may be necessary.
Securing Medicaid Eligibility: Transfer Your Assets
Apart from spending down your assets, there are strategies to reduce your overall net worth to secure your Medicaid eligibility. Here are five ways to transfer your assets:
1. Medicaid Asset Protection Trust (MAPT)
A Medicaid Asset Protection Trust (MAPT) is one way you can protect your assets from being considered part of your financial resources when you apply for Medicaid.
Here’s how a MAPT generally works:
- Creation of an Irrevocable Trust: You create an irrevocable trust and transfer your assets into it. Once you transfer assets into the trust, they are no longer considered your property, which means they won’t be counted for Medicaid eligibility purposes.
- Selection of a Trustee: You appoint a trustee to manage the trust and its assets. Typically, you cannot serve as the trustee, as retaining control over the trust assets could affect your Medicaid eligibility.
- Waiting Period: There is a waiting period, usually five years after you transfer the assets into the trust, after which the trust is considered exempt from Medicaid asset calculations. This means that if you apply for Medicaid after the five-year period, the assets in the trust will not be counted against you.
- Use of Income: You may typically receive income generated by the trust, which can be used for certain expenses. However, the principal assets in the trust are protected.
- Medicaid Eligibility: After the waiting period has passed, the assets held in the trust are generally protected from being counted for Medicaid eligibility purposes. This allows you to qualify for Medicaid benefits while preserving assets for your heirs or beneficiaries.
2. Gift Your Assets to Family Members
One strategy to potentially increase your eligibility for Medicaid assistance is to transfer financial assets to your family, which can decrease your overall net worth. It is important to remember that there are limitations as to how much you can gift without facing gift tax consequences. In 2022, it is required to file a gift tax return with the IRS if you provide cash or assets worth over $16,000 to a relative.
While it is possible to transfer other assets to your family outside of the five-year look-back period, this approach carries significant risks. For one, a sudden illness or injury could require you to seek care earlier than anticipated. If your assets, like a house or financial account, are transferred to your family member, they will gain legal ownership and they can use them at their discretion, even if you had previously agreed that the assets would only serve to your benefit. Although you might trust your child or grandchild to respect your wishes, there is no guarantee that they will not sell your property or deplete your funds in unanticipated ways.
Apart from that, even if your family member does not intend to misuse the asset, there are still several ways that things could go wrong. They might become seriously ill and incur substantial hospital bills, causing “their” asset to be seized to pay them. Alternatively, if they get divorced, “their” asset could be treated as marital property and split up. In some instances, a creditor could obtain a court order against your family member, which could enable them to seize the asset you transferred to repay any outstanding debts.
It’s important to approach this process with caution and careful planning. Open communication with your family members is necessary. Talk to them about your intentions to manage expectations and reduce the risk of misunderstandings or disputes.
3. Exempt Asset Transfers: Medicaid Penalty-Free
There are several exemptions to Medicaid’s lookback provision that enable you to transfer specific assets and qualify for Medicaid without being penalized for your nursing home care expenses.
These exemptions are as follows:
- Transferring money to your spouse for their benefit
- Transferring assets to your visually impaired or disabled child
- Creating a trust for your visually impaired or disabled child
- A trust can be established for an individual who is below 65 years of age and has a disability, regardless of whether the trust is intended for Medicaid application.
- As previously mentioned, you may also transfer your home to particular individuals without incurring a penalty, including your partner, children under the age of 21 or those who have a visual impairment or disability, siblings who possess a share in the property, and a child who has lived in the residence for two years to provide parental care.
4. Protect Your Assets and Your Spouse’s Assets with a “Pour-Over” Trust
A pour-over trust provides a safeguard for your finances in the event that you or your partner requires nursing home care. This trust permits you to maintain control over your funds and access them when necessary, while simultaneously protecting them from being seized by nursing homes. You can establish this trust by incorporating it into your will, where it will become effective after the passing of either you or your spouse.
5. Consider a Life Estate Plan
You may choose to transfer your real estate using a life estate, which allows you to give or sell your home while retaining the right to live in it until you or your spouse passes away. This method serves as a prevalent strategy for protecting your home as an asset from Medicaid and nursing home costs while avoiding the probate procedure.
It’s important to note that in some states, homes may not be considered part of your assets unless they exceed a certain value. However, in other states, Medicaid will perform a “look back,” which may include your home as an asset. If within the past five years, you decide to transfer ownership through a life estate and fail to meet any of the exceptions that have been previously mentioned, there is a possibility of being subjected to a penalty by Medicaid.
CONCLUSION
Planning for long-term care and implementing asset protection strategies are crucial steps to take before nursing home costs become a concern. There are various tactics and options available, including long-term care insurance, Medicaid planning, and setting up trusts. Seeking the advice of a qualified attorney or financial advisor is crucial in making informed decisions about which options are best suited for your situation. Taking proactive steps to protect your assets can provide financial security and peace of mind for you and your loved ones in the future.