When a person (or couple) needs nursing home care, there are three ways to pay for it:
- Long-term care insurance (which few people have)
- Pay out of pocket (a great plan if you have sufficient assets)
- Medicaid which covers nursing home care for people with limited means.
Notice that we're talking about Medicaid, not Medicare. Medicare will pay for nursing home care for up to 90 days only if those 90 days follow a hospital stay of at least three days.
Medicaid coverage is only available to people who meet strict maximum income and asset tests.
To obtain Medicaid nursing home coverage, the "ill spouse" or single person has to have fewer than $2,000 in countable assets. Their home, car, and personal possessions are not countable so they can have those and still qualify. (Home equity - fair market value minus mortgages - must not exceed $1,033,000.) The "well spouse" can have almost $150,000 in countable assets. It works this way whether the assets are in an living trust or not. Income must not exceed $2,742 per month (in 2023). If the applicant is married and has excess income, they can transfer income to their spouse until they're spouse's income equals $2,288.75 (2023); additional factors (like housing cost) can push that as high as $3,715.50. That's Medicaid Eligibility.
So what do you do if you have too many assets or too much income?
First let me explain the second prong of Medicaid's asset limitations.
After a nursing home resident dies, Medicaid tallies up everything they have spent on that person's care. Medicaid collects from their estate (including that house they let you keep for life) the total Medicaid has spent on that person's nursing home care. That's called Medicaid Recovery.
If the Medicaid recipient was married and their spouse is still alive, Medicaid will hold that bill and wait until both spouses are gone. When both spouses are gone, Medicaid collects what they have spent on either or both spouses from the assets of the second spouse's estate, which include the home, car, and personal property.
Some clients think, "I'll just give my assets to my child(ren), then I will avoid Medicaid Recovery."
If a person gives away any assets of any kind in the five years before they enter a nursing home ("the five-year look-back period"), Medicaid imposes a Penalty. The Medicaid Penalty is a period of months during which Medicaid will not pay for the applicant's care. The Penalty is roughly equal to one month for every $10,000 gifted. So if parents gave away a $500,000 home, their penalty period would be 50 months (roughly). Penalty periods have no limit. So if the penalty period would be longer than five years, then the ill person mustn't apply until that five-year look-back period has expired.
We have tools to address our clients' desires to pass on what they've earned to their children even if they need Medicaid's help to pay for nursing home care. The first-choice strategy is the Medicaid Asset Protection Trust. Properly drafted, clients will retain the right to live in their home for life. Then at their death their home and other assets pass to their beneficiary(ies) without Medicaid Recovery. But this strategy depends on our clients outlasting the five-year look-back period before they apply for Medicaid.
For clients who need a nursing home soon, even very soon, we can help them pass on about half of their assets now with the strategy known as Half-a-Loaf, as in the old saying "half a loaf is better than none." Then there is nothing for Medicaid to recover.
Finally, if your income is too high, we pass on as much as possible to your spouse then partition the remainder so that you keep the maximum amount. This involves transferring income-producing assets. Medicaid gets the income we cannot transfer and that is above what you get to keep.
These are sophisticated and delicate strategies that should be entered into only after clients have had a full conversation with a knowledgeable attorney who will explain the downsides as well as the benefits.