By David A. Cutner
Too few older adults know and understand their rights and options regarding health care, particularly long-term care, which, to quote the New York Court of Appeals, is "ruinously expensive."
Many people simply do not want to face this issue, or somehow have faith that they will avoid needing long-term care. Some will dodge the need for ongoing care, of course, but most will not. According to the U.S. Department of Health and Human Services, "Someone turning age 65 today has almost a 70 percent chance of needing some type of long-term care services and supports in their remaining years." About 35 percent of aging individuals will need nursing facility care.
Paying for long-term care
It's also important to understand that the sources of payment for long-term care are limited to the patient's own money, long-term care insurance (if they purchased any) and Medicaid. Essentially, if they can't afford (or don't want to pay for) long-term care, and don't have insurance, then they should be interested in learning about Medicaid.
Here are some basic facts about Medicaid, which will help you understand the strategies discussed in this article. Unlike Medicare (which does not cover long-term care), Medicaid is a means-tested program. In other words, you can only own a small amount of money or property, have a low income, or both, in order to qualify.
For example, in New York, which is more generous that most states, if you are 65 years of age or older, you can currently have no more than $14,550 in assets. In some other states, eligibility is limited to those who have $2,000 or less in assets. Depending on where you live, income might be a factor as well, and permitted amounts are low.
With this background, let's turn to the top five strategies that elder law attorneys use to help older adults and their families when long-term care is needed:
Strategy #1: An Asset Protection Trust
As its name suggests, an asset protection trust is designed to protect your assets. But, if designed correctly, this legal tool can serve other purposes as well. Typically, we think of creating an asset protection trust when someone is planning to apply for Medicaid. As noted above, an applicant can have very little money or property in his or her own name.
While assets can be transferred to family members or friends, there are often risks and disadvantages to doing so. In addition to the obvious issue of the trustworthiness of the individuals involved, there are risks that cannot be calculated. For example, will any of the individuals incur a debt or liability that exposes the transferred assets to collection by a creditor? Will any of the individuals get divorced, or pre-decease you? Also, low-basis assets (e.g., a house that was purchased many years ago for a price that is much less than its current fair market value) have the same low basis in the hands of the persons to whom they were transferred.
With a trust, upon your death, the same assets can be distributed to the same individuals, but now with a "step up" in basis to fair market value, resulting in your beneficiaries avoiding capital gains tax on the increase in value that accrued during your lifetime.
When a trust is properly designed to provide asset protection, the assets transferred to it no longer belong to you. As a result, they are beyond the reach of Medicaid or any other future creditor. For this reason, the trust is often called a "Medicaid Trust." Be aware, however, that transfers to a trust—just like transfers to individuals—are subject to Medicaid's five-year "look back" period.
In New York, transfers during the look back period are subject to penalty only in connection with Medicaid nursing home applications, not for home care. However, additional penalties may apply in other states.
If your home is transferred to the trust, you can reserve the right to live in it for the rest of your life. If income-producing assets are transferred to the trust, you can still receive the income.Note, however, that you will have no right to withdraw or demand access to the principal.
Strategy #2: A Pooled Income Trust
When an individual applies for Community Medicaid, which can include Home Care or Assisted Living, Medicaid enforces an income limit.
In New York, the current limit for an individual is $829 per month. Income above this amount is considered "excess" and must go towards the cost of care. If the individual is "disabled," he can participate in a Pooled Income Trust, which is designed to protect his excess income.The trust, which is managed by a non-profit organization, holds the excess funds and will disburse them on behalf of the person for whom the trust was created.
For example, if the individual has $1,829 in monthly income, he would keep $829 in his own bank account, and deposit $1,000 in his Pooled Income Trust account. He could then instruct the trustee to use those funds to pay his rent, utilities, food, etc. Without the trust, he would be deprived of $1,000 in income every month, and would likely be unable to pay his living expenses.
Note that the Pooled Income Trust is not an investment or estate planning vehicle. Unused funds will remain with the trust for charitable purposes.
Strategy #3: Private Annuities and Promissory Notes
All too often, people find themselves in a problematic situation of needing nursing home care when their assets are trapped by Medicaid's five-year "look back." In other words, they made a recent transfer of assets, or they are still holding substantial assets.
If assets were or will be transferred within the look back period, Medicaid will impose a "penalty period"—a period of time during which the person is not eligible for benefits paid by Medicaid. The penalty period is calculated by dividing the value or amount transferred by Medicaid's regional monthly rate for nursing home care, yielding a period of time in months that the person is not eligible.
The challenge for the elder law attorney is to try to preserve at least some of the client's assets. Fortunately, a federal law enacted in 2006 provides the answer: a properly-worded and structured private annuity or promissory note. The idea is create a cash flow from the individual's assets that can be used to pay the nursing home during a reduced penalty period.
Here is an illustration that will explain the strategy:
Assume that Mom has $200,000 in the bank, and she needs nursing home care. She would like to apply for Medicaid and protect at least some of her assets at the same time, but she does not think it is possible. She is resigned to "spending down" her assets to the Medicaid level.
The problem is that, if she transfers the $200,000 to her son or daughter, then she will be subject to a Medicaid penalty of 20 months. However, if she transfers $100,000 to her son or daughter, she will be subject to a Medicaid penalty of only ten months. Then, with the other $100,000, she purchases a private annuity or promissory note that provides her with a monthly income of $10,000 for period of ten months.She uses this monthly income, together with her Social Security and pension, to pay the nursing home during the penalty period. After ten months, she goes on Medicaid and her son or daughter keeps the original $100,000 that caused the penalty.
Of course, the result is not as good as what could have been achieved if Mom had planned five years in advance, but, as a "last minute" strategy, it worked very well to save a good portion of Mom's assets.
Strategy #4: A Caregiver Agreement
A Caregiver Agreement is an excellent strategy in many cases where extra services are needed or desired that would not be covered by Medicaid, and are outside the scope of what a nursing facility or home care attendants would provide.
The caregiver can be a son, a daughter or other family member, a friend, a geriatric care manager or a home care agency. The services can be paid for in advance, and the payment will then reduce countable resources, helping the person in need of care gain Medicaid eligibility. A family member can render these services, providing income for that person (who may have given up a job or taken time off from work), and reducing conflict with other family members who are unable or unwilling to help out.
If the caregiver is to be paid in advance, the keys to creating an agreement that will be accepted by Medicaid are:
- The contract must specifically define the services provided and hours to be worked by the caregiver.
- The lump sum payment must be calculated using a reasonable life expectancy and legitimate market rates for the services.
- A daily log of actual services rendered and hours worked must be maintained, along with written invoices.
- Upon the death of the patient, any unearned amounts must be paid to Medicaid, up to the amount that Medicaid paid on behalf of the patient.
Strategy #5: Spousal Transfers and Spousal Refusal
An important feature of the Medicaid laws is that transfers between spouses are permitted, are not subject to the "look back," and thus do not result in any penalty. In the case of a married couple, one of the basic strategies is to transfer any assets that are in the name of the spouse who needs care to the name of the well spouse (also called the "community spouse" where the spouse who needs care is in a nursing home).
New York and some other states permit something called "spousal refusal." In these scenarios, the well (or community) spouse will refuse to provide support for the spouse who needs care.As a result, the spouse who needs care will be immediately eligible for Medicaid, and will receive services.
Once Medicaid provides services, it has the right to seek contribution from the well spouse. In some cases, however, Medicaid does not pursue its rights, and in other cases it is willing to settle at a discount. At a minimum, the well spouse will receive a significant benefit because any reimbursement to Medicaid will be at Medicaid's discounted rates, rather than at the private pay rates that the providers would have charged.
Unfortunately, the majority of states are "spousal share" states that do not permit spousal refusal. In these states, the resources of both spouses are counted towards the Medicaid eligibility amount, and the above strategy is therefore ineffective.
Elder Law attorneys are able to work within the Medicaid laws to produce favorable outcomes for their clients. Bear in mind that every case has its unique facts, and these strategies might or might not be the top five for you, given your circumstances. In any case, it's hardly ever too late to develop an effective strategy to obtain benefits, and protect at least some of your assets or income at the same time.
David Cutner is a former family caregiver and co-founder of Lamson & Cutner, a boutique elder law firm in Manhattan, known for its successful strategic planning and insights into the issues of today's elder law maze.