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Assisted living and nursing home costs are on the minds of many pre-retirees and retirees. In a study administered by the Associated Press and the NORC Center for Public Research, about 70% of survey respondents (1,019 in total respondents) stated they were worried about having to pay for these services. With the growing costs of these services, no wonder why. The average annual cost of skilled nursing care for a semi-private room here in Massachusetts is over $135,000 and projected to climb over $180,000 by the year 20261. Add to the fact that the Department of Health and Human Services state that 7 out of 10 people over age 65 will experience a long-term care event at some point during the rest of their lifetime, no wonder people are uneasy. Most individuals and families wonder how to protect assets from nursing home costs. Do you share the same feelings?
When Will Medicaid Pay For Nursing Home Costs?
Many people think Medicare or their health insurance carrier will pay for nursing home or assisted living services. Unfortunately, that is not true. These programs will not pay for these services – known as custodial or skilled nursing care. Medicaid has been the payer of most skilled nursing and custodial care2. It will pay these costs when a certain monetary, personal asset threshold is met. This threshold is different for each state.
Generally speaking, your total, personal asset value will determine if you qualify for Medicaid and the threshold met. What you may not realize is that nearly all assets that you have control over, or in your name, can be used to pay for nursing home costs until you meet this threshold. That means the retirement savings you worked hard for, your social security payments, life insurance with cash value, and other assets could be used to pay for nursing home costs before Medicaid will pay.
These assets are countable towards your ability to pay for nursing home care on your own. You will qualify for Medicaid once you have spent down these assets to your state’s Medicaid asset limit. An easy example, let’s say you have $300,000 of countable assets and the state Medicaid threshold is $50,000. You will need to spend down $250,000 before Medicaid will pay for nursing home services.
Check With Your State
As we mentioned earlier, every state has different Medicaid qualifications, so it is best to check with your state to determine yours. In some states, your home equity may even be considered an asset to pay for nursing home care. There are additional rules when another spouse – the non-custodial spouse – is living in the home and using assets. For example, some states allow the non-custodial spouse to keep joint assets, up to a certain limit. It is our advice for you to speak to a qualified attorney in your state specializing in this process.
If you are worried about the assets you worked so hard for being used to pay for nursing home costs, don’t fret. There are several ways to legally protect your assets from these costs. In other words, you won’t need to spend down your assets to meet Medicaid eligibility.
Options To Protect Assets From Nursing Home Costs
What most of you may not realize is that you have many options to protect assets from nursing home costs. The most common is purchasing a traditional long-term care insurance policy. There are many advantages and disadvantages, and we will discuss a few here. The first advantage is that with the appropriate coverage, you should have a robust policy that will cover these nursing home services and therefore avoid any spending down of your assets. The premiums are also tax deductible. The disadvantage is that premiums can be expensive, underwriting can be stringent, and most people question spending that level of money for a service they may not use. Additionally, only a few, large carriers remain in the traditional long-term care insurance market. Nevertheless, if an individual or couple could qualify at a reasonable premium, a long-term care insurance policy can make sense.
Alternatively, one could invest in an annuity or life insurance policy with a long-term care (LTC) rider. These can be more palatable to individuals compared to a traditional long-term care insurance policy. They are a welcomed remedy to the “use it or lose it” nature of a traditional long-term care policy. If the owner of the annuity or life insurance policy does not exercise the LTC rider, the value of the annuity or life insurance is still intact (less the cost of the LTC rider). These policies can be less stringent with underwriting, provide a good base for LTC needs, and provide shared resources between spouses. However, benefits may not be as robust as a traditional policy.
Using An Irrevocable Trust To Protect Assets
Another option is to utilize an irrevocable trust. Back up a bit: do you know the difference between a revocable trust and an irrevocable trust? The simple, and major distinguishing factor is control: you still have control over a revocable trust compared to an irrevocable one. You can make changes to a revocable trust; however, the terms of an irrevocable trust are essentially set in stone.
What does this have to do with asset protection? If you set up a revocable trust, and enter a nursing home, those assets within the trust will still be counted before Medicaid will pay for nursing home services. The reason, as we have mentioned, is because you still have control. With an irrevocable trust, the trust becomes a separate entity from you. Assets within the trust are owned by the trust. As outlined in the terms of the trust, you do not have control over them. Therefore, if you would need nursing home services, the assets within the trust are not included in any Medicaid eligibility computations.
Be Aware Of Benefit Disqualification
That is the benefit of the irrevocable trust. A disadvantage is that you release control of those assets. It is rigid. There are also state-specific rules governing the receipt of income from these trusts. While the asset value may be shielded from Medicaid eligibility computations, the income received, most likely, will have to pay for nursing home care. Moreover, nearly all states have instituted a 5 year look-back provision. If you enter a nursing home or utilize another type of custodial care within 5 years of transferring assets to a trust (or any other transfer, such as a $10,000 gift to your children), you will disqualify yourself for Medicaid purposes. The length of disqualification depends upon the average monthly cost of custodial care in your state along with the asset value transferred.
How To Set Up An Irrevocable Trust
Setting up an irrevocable trust requires the assistance of a competent lawyer and financial team specializing with Medicaid eligibility. It is important that the team understands your goals and wishes in order to devise the best plan. Moreover, it is important that you and your spouse understand the advantages and disadvantages of each alternative. Finally, it is also important your children, family members, or other important beneficiaries are present or in the loop as to the plan. In our experience, bringing family, children, and other trusted loved ones into the conversation made the conversation and discussion much easier.
What is a Funeral Trust?
Setting up a pure irrevocable trust takes time and money. However, if this is something you feel like you need, there is a way to get started sooner. You may have never heard of a funeral trust. This is an irrevocable trust designed to keep money intended for your funeral and burial protected from nursing home costs. The amount of money that can be contributed to a funeral trust is up to $15,000 per person depending on the state you live in. While that may not seem like a lot to you, in our experience, it becomes a lot when a family is facing payment of nursing home services and want to protect something for the remaining family members.
A funeral trust is simply a life insurance policy contained within an irrevocable trust. Even if you have a life insurance policy now intended for funeral or burial expenses, chances are the cash value of the policy may be subject to Medicaid eligibility computations. The reason: the policy is not contained within an irrevocable trust. That means if you enter a nursing home, the cash value could be used to pay for the nursing home care.
Setting Up A Funeral Trust
Setting up a funeral trust is rather simple. These trusts generally contain a short application for the life insurance policy and a short application for the irrevocable trust. The life insurance policy is guaranteed issue. A single premium payment is usually required; however, most carriers will allow payment over 10 years. Within 30 to 60 days of the life insurance application, the irrevocable trust will be in force. The money you placed in this trust, via the life insurance policy, will now be protected from Medicaid eligibility computations. It is a rather simple process.
Benefits Of A Funeral Trust
In addition to the benefits above, a funeral trust has the following advantages (dependent upon carrier):
- no cost to set up the irrevocable trust
- funds are available immediately for funeral payments upon death of the grantor (i.e. you)
- the funeral home receives the money directly; your family is out of the payment picture (thankfully)
- guaranteed issue life insurance. An applicant can’t be denied insurance or the funeral trust, even in crisis situations
- the trust is portable from state to state
- funds used for the funeral home avoid probate
- trust proceeds are income tax free
- The money within the trust avoids Medicaid eligibility computations
- no 5 year look-back provision. Assets are protected immediately. (As Medicaid rules vary by state, it is best to check if your state has differing laws)
- most importantly, family members don’t need to pay the funeral home or pay out of their own pockets. They have peace of mind
While we believe the advantages are plentiful, we would be remiss and negligent if we did not point out some disadvantages:
- it is irrevocable – like all irrevocable trusts, you can’t access the money or change your mind later
- funds not used to pay the funeral home are brought back into your estate. They don’t go to a beneficiary like a typical trust. However, to mitigate this scenario, ensure the appropriate amount is included in the trust. You can look up the average cost of a funeral to get an idea.
How To Fund The Funeral Trust?
Remember that any money in CDs, money market accounts, savings accounts, annuities, cash value in life insurance policies, non-qualified brokerage accounts – are all subject to Medicaid eligibility computations. These can easily be used to fund the life insurance policy. As a result, the money goes from a non-protected asset to a protected asset. Why is this important? These assets will have to be used to pay for nursing home care. By transferring them to a funeral trust, you can be certain the money will be there when your family needs it the most. The trust can easily protect assets from nursing home costs.
How To Find Out More
We believe a funeral trust can be a solid foundation to protect assets from nursing home costs. If you would like to learn more, or any of the other alternatives such as a traditional long-term care insurance policy or a hybrid policy, feel free to reach out to us. We can also facilitate a discussion with a qualified attorney who can speak to you in more detail about Medicaid and irrevocable trusts. What are we saying: simply, we, at My Family Life Insurance, are here for you and your family. We know how important money and protection is. We work in your best interest always and have helped many families develop and establish the protection they need to have peace of mind. Feel free to contact us to request a quote or find out more information. We are happy to help you with your specific situation.