Planning to Protect Property from Nursing Home Costs

A major question in planning for seniors today is, “How can I protect my property from nursing home costs?” Statistically, the chance that a senior will enter a skilled nursing facility, i.e. a nursing home, is reportedly 1 in 3 (via The American Elder Care Research Organization).

What are the costs associated with such care?

A 2017 Genworth Insurance study indicates the following:

The annual nursing home care cost for a private room in the Boston area is $155,125 (up from about $146,000 in 2015). By comparison, it is $136,875 in Naples, Florida and $104,025 in Rhode Island.

The annual assisted living cost (not a nursing home and not paid for under government programs) is $67,188 in Massachusetts, $37,200 in Florida and $61,860 in Rhode Island.

And growth rates are 3-6%. Note that at home care rates vary by skill level from $21-70/hr. depending on the state and the care needed.

The Massachusetts Executive Office of Health and Human Services published a report showing that in 2008, 46% of nursing home stays were of one year or less, while 33% were between 1-4 years, and 21% were more than 4 years.

These costs are expensive. What can be done?

Qualify for Medicaid run by the state

To oversimplify, assets are categorized into what is “countable” versus what is “non-countable.” What is countable varies by state. Massachusetts lets residents keep homes with a higher value ($858,000 in 2018) than states like Rhode Island and Florida (both $525,000, last I checked). In Massachusetts, retirement assets (IRAs, 401k, 403b accounts) are countable and must be spent down.

Other assets are non-countable to some extent such as an automobile, minimal amounts of life insurance, personal property, and prepaid burial plans, among others.

Of assets that are categorized as countable, how much can be kept?

For single persons, $2,000 each in Massachusetts and Florida, and $4,000 in Rhode Island.

For married couples, when one spouse is sick, the well spouse is allowed to keep a “community spouse resource allowance”, or CSRA.

Massachusetts and Florida allow the well spouse to keep roughly the first $123,000 of countable assets; whereas Rhode Island allows the well spouse to keep one-half (1/2) of the countable assets up to roughly the same figure.

What can be done to spend down countable assets within the 5- year lookback period?

When clients have not planned in advance, planning usually focuses on determining to what extent assets can be protected for the spouse and children.

If a couple has too much in countable assets, then assets must be spent down, or converted to non-countable assets. An example of this would be a Massachusetts couple with a house worth $300,000 (but subject to a $39,000 mortgage), and cash in the bank worth $180,000. The house is non-countable; the cash is countable.

At first blush it might seem that this couple has “too much” in the way of assets to qualify for Medicaid. The proper answer for this couple is that they are eligible, immediately, for nursing home care. How?

Prepay funeral expenses, pay off a mortgage or purchase an annuity

This couple could prepay for funerals ($16,000) and pay off the mortgage ($39,000). This leaves them with $125,000, or precisely $2,000 for the sick spouse and $123,000 for the well spouse.

What if this couple had cash in the bank of $280,000 instead of $180,000? What would we do with this “excess” $100,000 ($280,000 cash minus $55,000 to pay off the mortgage and prepay for funerals minus $125,000 exempt = $100,000)?

Again, this couple is not without options. At this point, this excess cash could be converted into an income stream for the well spouse. This would be done by moving assets into the well spouse’s name, and having him or her purchase an annuity (a special type of annuity based actuarially on the well spouse’s life expectancy).

The purchase of the annuity would change the character of the cash asset from a countable cash asset into an exempt income stream for the well spouse. This planning is incredibly powerful and important for the well spouse, who can then receive the assets back (in the form of an annuity stream). Furthermore, when this asset is returned to the well spouse and is reinvested, the fact that it pushes assets above the initial threshold of about $125,000 for 2018 is irrelevant.

Clients must have, at that time, estate planning documents in place that allow last-minute transfers (to the well spouse), and planning to take place. If one does not have appropriate documents in place when the sick spouse dies, the probate court becomes a necessary party to the process, with its accompanying delays and cost.

Continuing with our previous example, what happens if the well spouse subsequently needs nursing home care? At that point, options become very limited. Unless the couple has certain exempt persons to transfer assets to (for instance, a disabled child or a “caretaker” child), then assets must be spent on nursing care, and disappear fast. For many clients, this risk is unacceptable, and they will want to take steps to protect assets ahead of time. There are times though when clients put off spending the money for planning until they are sick and realize they need it, and then it’s too late.

Interested in learning how another family spent down their assets within the 5-year look back? Read their Case Study.

What can be done in advance of the 5- year look back period to spend down countable assets?

Purchase insurance or make a gift into an irrevocable trust

Planning in advance usually involves insurance or some form of gifting. For clients who do not purchase insurance, because they medically do not qualify, or because they do not have the money or want to spend that kind of money, gifting can be an option. However, rarely if ever do we recommend outright gifts.

Instead, the preferred method to make gifts of assets to prevent the assets from having to be sold and spent on long term care is an irrevocable trust. Borchers Trust Law refers to this as the LAST Trust™ (“Legacy Asset Savings Trust™”) which many clients have adopted.

With this trust in place, at the end of the 5 years under current law, the nursing home resident should not have to “count” the assets in the LAST Trust to spend on their care. This is how your legacy can be saved with the LAST Trust in place.

There is no substitute for a work-up applying the law to each person’s unique circumstances, but this article gives an idea of the issues and planning strategies that may be available.

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