Estate Planning and Administration
The Second Pillar - Long-Term Care Protection
We generally advise clients of the three main options for protecting assets from the high cost of a nursing home stay long-term care insurance, asset transfers to adult children and setting up an Irrevocable Medicaid Trust.
Long-term care insurance is preferred since it is the only option that helps keep clients out of the nursing home by paying for home care. We’ve had many clients over the years who were forced to spend their final days in a facility simply because they ran out of money to pay for home health aides. Additionally, for married couples, the home care option may protect the spouse not requiring the care from compromising their own health and finances with the heavy burden of caregiving in their later years.
Since the main objection to purchasing long-term care insurance is the expense, we advise of six ways to reduce the cost. First, the client should look at a hundred day elimination period since Medicare may pay some or all of the first hundred days (to the extent skilled nursing care is required) and, of course, there may never be a claim on the policy. It is really hedging with a bit of self-insurance. Secondly, the daily benefit purchased can be reduced by income from pensions, Social Security and investments, to the extent these items may not be needed by a spouse. Third, the benefit period might be limited to three to five years since this will encompass the majority of claims and the Medicaid look-back period for transfers to individuals does not exceed that period.
The fourth way to cut the cost of long-term care insurance is to work with an independent agent who can provide three or four premium quotes. Some clients end up paying too much due to transactions with captive agents. Fifth, the cost of the insurance may be reduced forty to fifty percent by choosing a home care only policy an especially attractive option for clients who cannot afford complete protection and for those over age seventy where the expense tends to be prohibitive. Again, this is also a hedge since most claims under long-term care insurance policies today are for home care.
Finally, the sixth way to reduce or even eliminate the premium expense is to reallocate assets from underperforming investments, which today may include stocks, mutual funds, C.D.’s, savings accounts and money market accounts.
When the client is turned down for long-term care insurance, or cannot afford the premium, two other options remain. First of those are asset transfers to children which are effective vis-a-vis Medicaid after the five year look-back period has expired. Note here that making assets joint with adult children does not protect half since Medicaid considers all of the jointly held assets to be available for the care of the ill parent except to the extent the child can prove the amount of their actual contribution (usually none).
Outright transfer of assets to children are generally inadvisable for seniors since those assets then become exposed to the children’s debts and liabilities, divorces, etc. In addition, some children spend the money, refuse to give it back when needed or, unfortunately, die before the parent and pass those assets on to their heirs. One exception to the inadvisability of outright transfers is when nursing facility care is imminent or at least foreseeable. In such a case, the assistance of an elder law attorney is essential since the amounts to be transferred, the order of assets transferred and where to transfer the assets all require the advice of counsel. The object here would be to protect as much of the assets as possible and to qualify for Medicaid benefits at the earliest possible moment. Barring this latter scenario, the preferred option for persons planning ahead who cannot get long-term care insurance is to set up an Irrevocable Medicaid Trust.
Known as an “income only” trust, the Irrevocable Medicaid Trust must name someone other than the Grantor or their spouse as the trustee, usually one or more adult children, and limits the Grantor to the income. The principal must be unavailable to the Grantor in order for it to be protected. These trusts are ideal for the family home as well as assets the client is only taking the income from anyway or is simply reinvesting. The client’s lifestyle is not generally affected since they still receive their pension and Social Security checks directly. The trust can sell and trade assets through the trustee and the Grantor retains some measure of control by reserving the right to change the trustee in the event of dissatisfaction for any reason.
The Medicaid Trust is subject to a look-back period of five years. Medicaid eligibility, however, may occur prior to five years depending upon the amount of assets transferred to the trust and the locale (since the penalty period for transfers is the amount transferred divided by the average monthly cost of local nursing facilities).
An emerging technique, especially for older clients, is the use of the home care only policy combined with the Medicaid Trust. Thus home care is provided, with asset protection if nursing home care is required.
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