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One of the greatest fears of older Americans is that they may end up in a nursing home. This not only means a great loss of personal autonomy, but also a tremendous financial price. Depending on location and level of care, nursing homes cost between $35,000 and $150,000 a year.
Most people end up paying for nursing home care out of their savings until they run
out. Then they can qualify for Medicaid to pick up the cost. The advantages of paying
privately are that you are more likely to gain entrance to a better quality facility
and doing so eliminates or postpones dealing with your state's welfare bureaucracy-
Careful planning, whether in advance or in response to an unanticipated need for
care, can help protect your estate, whether for your spouse or for your children.
This can be done by purchasing long-
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Medicare Part A covers up to 100 days of "skilled nursing" care per spell of illness. However, the definition of "skilled nursing" and the other conditions for obtaining this coverage are quite stringent, meaning that few nursing home residents receive the full 100 days of coverage. As a result, Medicare pays for only about 9 percent of nursing home care in the United States. Check out the Medicare section of this site for tips on making sure you receive the nursing care benefits to which you are entitled.
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For all practical purposes, in the United States the only "insurance" plan for long-
Also, unlike Medicare, which is totally federal, Medicaid is a joint federal-
This complicates matters, since the Medicaid eligibility rules are somewhat different
from state to state, and they keep changing. (The states also sometimes have their
own names for the program, such as "MediCal" in California and "MassHealth" in Massachusetts.)
Both the federal government and most state governments seem to be continually tinkering
with the eligibility requirements and restrictions. This has most recently occurred
with the passage of the Deficit Reduction Act of 2005 (the DRA) which significantly
changed rules governing the treatment of asset transfers and homes of nursing home
residents. The implementation of these changes will proceed state-
Those who are not in immediate need of long-
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As explained in the Medicaid section of this site (see The Transfer Penalty), Congress
has established a period of ineligibility for Medicaid for those who transfer assets.
The DRA significantly changed rules governing the treatment of asset transfers. For
transfers made prior to enactment of the DRA on February 8, 2006, state Medicaid
officials will look only at transfers made within the 36 months prior to the Medicaid
application (or 60 months if the transfer was made to or from certain kinds of trusts).
But for transfers made after passage of the DRA the so-
While the look back period determines what transfers will be penalties, the length of the penalty depends on the amount transferred. The penalty period is determined by dividing the amount transferred by the average monthly cost of nursing home care in the state. For instance, if the nursing home resident transferred $100,00 in a state where the average monthly cost of care was $5,000, the penalty period would be 20 months ($100,000/$5,000 = 20).
Another significant change in the treatment of transfers made by the DRA has to do
with when the penalty period created by the transfer begins. Under the prior law,
For instance, if an individual transfers $100,000 on April 1, 2006, moves to a nursing
home on April 1, 2007, and spends down to Medicaid eligibility on April 1, 2008,
that is when the 20-
Transfers should be made carefully, with an understanding of all the consequences.
People who make transfers must be careful not to apply for Medicaid before the five-
One of the prime planning techniques used prior to the enactment of the DRA, often referred to as "half a loaf," was for the Medicaid applicant to give away approximately half of his or her assets. It worked this way: before applying for Medicaid, the prospective applicant would transfer half of his or her resources, thus creating a Medicaid penalty period. The applicant, who was often already in a nursing home, then used the other half of his or her resources to pay for care while waiting out the ensuing penalty period. After the penalty period had expired, the individual could apply for Medicaid coverage.
Example: Mrs. Jones had savings of $72,000. The average private-
While you could generally give away approximately half your assets, the exact amount depended on a variety of factors, including the cost of care, the transfer penalty in your state, income, and possible other expenses. One of the main goals of the DRA was to eliminate this kind of planning. To determine whether it is still an available strategy in your state as it implements the DRA, you will have to consult with a local elder law attorney.
Any transfer strategy must take into account the nursing home resident's income and
all of her expenses, including the cost of the nursing home. Also, be very, very
careful before making transfers. Also, bear in mind that if you give money to your
children, it belongs to them and you should not rely on them to hold the money for
your benefit. However well-
In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren's eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.
Transfers should be made carefully, with an understanding of all the consequences. In any case, as a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid; and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.
Remember: You do not have to save your estate for your children. The bumper sticker that reads "I'm spending my children's inheritance" is a perfectly appropriate approach to estate and Medicaid planning.
Even though a nursing home resident may receive Medicaid while owning a home (the DRA has restricted Medicaid eligibility for some homes;), if she is married she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows him or her to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at his or her death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.
While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:
In addition, you may transfer your home to the following individuals (as well as to those listed above):
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The problem with transferring assets is that you have given them away. You no longer
control them, and even a trusted child or other relative may lose them. A safer approach
is to put them in an irrevocable trust. A trust is a legal entity under which one
A "revocable" trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
An "irrevocable" trust, on the other hand, is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be applied to benefit your or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.
You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.
You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.
One advantage of these trusts is that if they contain property that has increased
in value, such as real estate or stock, you (the grantor) can retain a "special testamentary
power of appointment" so that the beneficiaries receive the property with a step-
Remember, funding an irrevocable trust can cause you to be ineligible for Medicaid for the following five years.
Testamentary trusts are trusts created under a will. The Medicaid rules provide a special "safe harbor" for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant's support. If payments are solely at the trustee's discretion, they are considered unavailable.
Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.
Supplemental Needs Trusts
The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called "special needs trusts") is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.
For more on trusts in general, see the Estate Planning section of this site.
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As explained in the Medicaid section of this site, after a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient's care. This is called "estate recovery."
For many people, setting up a "life estate" is the most simple and appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period of up to five years.
Example: Jane gives a remainder interest in her house to her children, George and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of George and Mary, the remainder interest holders.
When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane's probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state's estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a "step up" in the property's basis.
Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. In many states, once the house passes to George and Mary, the state cannot recover against it for any Medicaid expenses Jane may have incurred.
Another method of protecting the home from estate recovery is to transfer it to an
irrevocable trust. Trusts provide more flexibility than life estates but are somewhat
more complicated. Once the house is in the irrevocable trust, it cannot be taken
out again. Although it can be sold, the proceeds must remain in the trust. This can
protect more of the value of the house if it is sold. Further, if properly drafted,
the later sale of the home while in this trust might allow the settlor, if he or
she had met the residency requirements, to exclude up to $250,000 in taxable gain,
an exclusion that would not be available if the owner had transferred the home outside
of trust to a non-
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Applicants for Medicaid and their spouses may protect savings by spending them on noncountable assets. These expenditures may include:
In the case of married couples, it is often important that any spend-
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Immediate annuities can be ideal planning tools for spouses of nursing home residents.
For single individuals, they are usually less useful. An immediate annuity, in its
simplest form, is a contract with an insurance company under which the consumer pays
a certain amount of money to the company and the company sends the consumer a monthly
check for the rest of his or her life. In most states the purchase of an annuity
is not considered to be a transfer for purposes of eligibility for Medicaid, but
is instead the purchase of an investment. It transforms otherwise countable assets
into a non-
In order for the annuity purchase not to be considered a transfer, it must meet three
basic requirements: (1) It must be irrevocable-
Example: Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $109,560 (in 2010). However, Mrs. Jones has $219,560 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.
In most instances, the purchase of an annuity should wait until the unhealthy spouse
moves to a nursing home. In addition, if the annuity has a term certain -
Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home.
In short, immediate annuities are a very powerful tool in the right circumstances. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose.
(The use of immediate annuities as a Medicaid planning tool is under attack in some states. Be sure to consult with a qualified elder law attorney in your state before pursuing the strategy described above.)
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Before passage of the Deficit Reduction Act of 2005 (DRA) community spouses in some states whose own income was less than their MMMNA (see discussion under Medicaid section of site) had an alternative to receiving the shortfall from the income of the nursing home spouse. These community spouses could petition the state Medicaid agency for an increase in their standard resource allowances (called the community spouse resource allowance, or CSRA) so that the additional funds could be invested in order to generate income to make up the shortfall in the MMMNA. The DRA will put an end to this practice.
Under the new law, an increased resource allowance may only be granted to community spouses whose income is still not enough to reach the MMMNA after first receiving the income of the nursing home spouse.
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Federal Medicaid law states that the community spouse can keep all of his or her assets by simply refusing to support the institutionalized spouse. This portion of the law, known as "just say no" or "spousal refusal," is generally not used extensively except in New York. Under the law, if a spouse refuses to contribute his or her income or resources toward the cost of care of a Medicaid applicant, the Medicaid agency is required to determine the eligibility of the nursing home spouse based solely on his income and resources, as if the community spouse did not exist. In addition, in 2005 a federal appeals court upheld the right of the wife of a Connecticut nursing home resident to refuse to support her husband. The husband was able to qualify for Medicaid coverage, and assets that he had transferred to his wife were not counted in determining his eligibility.
After awarding Medicaid benefits to the institutionalized spouse, the Medicaid agency then has the option of beginning a legal proceeding to force the community spouse to support the institutionalized spouse. However, this is not always done, and when such cases do go to court, courts in New York generally allow the community spouse to keep enough resources to maintain her former standard of living. If the Medicaid agency chooses not to sue the community spouse for support, it can file a claim for reimbursement against the community spouse's estate following his or her death.
The "just say no" strategy sometimes is used in states other than New York in second-
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Do you need an attorney for even "simple" Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be "yes." The social worker at your mother's nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you're applying for Medicaid, you may have missed out on significant planning opportunities.
The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. As described above, this may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.
If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets.
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Under our "system" of paying for long-
If you own a home and are at least 62 years old, you may be able to quickly get money
to pay for long-
In a reverse mortgage, the homeowner receives a sum of money from the lender, usually
a bank, based largely on the value of the house, the age of the borrower, and current
interest rates. For example, a 70-
Homeowners can get the money in one of three ways (or in any combination of the three): in a lump sum, as a line of credit that can be drawn on at the borrower's option, or in a series of regular payments, called a "reverse annuity mortgage." The most popular choice is the line of credit because it allows a borrower to decide when he or she needs the money and how much. Moreover, no interest is charged on the untapped balance of the loan.
Although it is often assumed that an elderly person would want to use the funds from
a reverse mortgage loan for health care, there are no restrictions-
Borrowers who take out a reverse mortgage still own their home. What is owed to the
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Reverse mortgages are somewhat underutilized now, but financial institutions, sensing an opportunity as the population ages and people live longer lives, are expanding their reverse mortgage programs.
The most widely available reverse mortgage product -
Is a Reverse Mortgage Right for You?
While reverse mortgages look like no-
Reverse mortgage payments also may affect your eligibility for government benefits, including Medicaid. Generally, these payments will not be counted as income as long as they are spent within the same month that they are received. If the funds are not spent, however, they could accumulate and push your resources over the allowable limits for Medicaid or SSI eligibility. In addition, payments from reverse annuity mortgages may be counted as income for purposes of Medicaid and SSI whether or not they are spent within the month they are received. This shouldn't be treated as income, since it simply involves withdrawing equity from one's home, but the state may view it differently since the funds come in a regular monthly check. In any case, you should consult with an elder lawyer in your state if you have any concern about how a reverse mortgage will affect your eligibility for federal benefits.
Also, bear in mind that if your major objective is to safeguard an inheritance for
your children, a reverse mortgage may not be a good idea. As soon as the elderly
person (or the survivor of an elderly couple) dies, it will be necessary to sell
the home and much -
Reverse mortgages are complex products and borrowers are advised to acquaint themselves with the different options available and then carefully compare competing loan offerings. Following are two outstanding Web sites to get you started in that process:
You can learn the basics about reverse mortgages from the AARP's excellent reverse mortgage Web site. The site includes a calculator for estimating the loan for which a borrower would be eligible. Go to: www.aarp.org/revmort
For more details, background information, and supplementary materials, visit the National Center for Home Equity Conversion's site at www.reverse.org
In addition, the names of FHA-
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DISCLAIMER: This information was originally obtained from www.elderlawanswers.com and has been updated. The updated information is based on new and/or revised federal, state, or local laws, with some of the updated information applicable to citizens with residence in the state of Tennessee. The effective date of all changes and/or revisions to the information contained on this site: TUESDAY, JANUARY 1, 2013.
The information on this web site is a public resource of general information, which
is intended, but not promised or guaranteed, to be correct, complete and up-