Coping with the potential expense of nursing home care is a concern of the elderly and their families. Because of differences in age, marital status, general health, financial circumstances, and guiding philosophy, each case must be treated individually. However, we have found that coverage for this expense generally falls into three broad categories: . : (1) the self-insured; (2) those covered by insurance; and (3) those covered by medicaid.
Self-insurance. Not everyone ends up in a nursing home; those that do are not always there for an extended period of time. Well-to-do individuals in good health may wish to accept the risk that at some time in the future they may incur nursing home expenses.
The statewide average for nursing home expenses in Washington is currently about $4,400 per month. (This article was updated in August 2000.) Assume a couple in their early retirement years has a net worth of $1,800,000 consisting of investments, a family-run business that has been turned over to their children, and miscellaneous tangible property. Assume an average income of $120,000 per year in discretionary income from the business, investments, and social security. This couple can afford nursing home insurance. On the other hand, they also can afford to pay nursing home costs out of current income. It might make sense for this couple to invest the funds that would otherwise be used to pay nursing home insurance premiums because of their ability to self-insure. As a matter of estate tax planning, this couple should also consider using these "saved" funds as part of a gift program to the children.
Long-Term Care Insurance. Insurance should be acquired when the risk of loss is unacceptable as compared to the cost of insurance. When the risk of loss is "unacceptable" is obviously a subjective question, but consider a couple in their early retirement years with a net worth of $600,000 consisting of a family home, a lake cabin, retirement investments, and miscellaneous tangible property. Assume this couple has $46,000 per year in discretionary income from their investments and social security. While they are not wealthy, they are comfortable and are enjoying life. They are not ready to divest themselves of their assets, as they are needed for their current lifestyle. However, they are apprehensive that if either of them should need an extended stay in a nursing home this would have a devastating impact on the income and lifestyle of the non-institutionalized spouse. They are secondarily concerned about the depletion of the estate they want to leave to their children. While premiums can vary greatly depending on age, health, and the provisions of the insurance contract, for this couple, the cost of nursing home insurance may be justified. While the premium cost will reduce their discretionary income, it should not do so in a devastating way. The more drastic alternative of divesting themselves of the majority of their assets in order to qualify for Medicaid probably has no appeal given their current ages and general good health. For this couple, nursing home insurance may be the right choice.
Medicaid. Medicaid is a federal program administered by the states. For qualified individuals, the Medicaid program will pay the difference between the person's income and the "Medicaid rate" for nursing home care. Certain aspects of the program will vary from state to state. This discussion assumes Washington State residency.
To qualify for Medicaid, a person must be both "medically needy" and meet certain financial eligibility standards. Financial eligibility has two components: income eligibility and resource eligibility. The rules are different depending upon whether a person is single or married. A detailed discussion of them is beyond the scope of this comment, but the governing principle behind the law is that an individual in need of nursing home care should use his own resources first.
Generally, the things a person owns or has a right to use for his own benefit are considered "resources." They include such things as real estate, bank accounts, and most investments. Generally "income" includes such things as dividends, interest from investments, and social security benefits.
Certain "resources" are considered exempt, that is to say, a person can own these resources and still be eligible for Medicaid. They include a personal residence, household goods and personal effects, and with income limitations, a family automobile. In addition, a Medicaid recipient can have $2,000 in nonexempt resources.
Before a married person can qualify for Medicaid, the resources of his or her spouse (called the community spouse) are also counted. Generally the community spouse can keep all of the exempt resources described above, plus approximately $84,000 in nonexempt resources and certain kinds of annuities. If the community spouse has nonexempt resources in excess of this amount, the nursing home spouse will not qualify for Medicaid.
To qualify for Medicaid, a person's income must be less than the state Medicaid rate for his specific nursing home, plus his regular monthly medical bills. If a person meets this test, what income he has will be applied to payment of his health insurance premiums and his nursing home expenses; he will be allowed approximately $42.00 per month for his personal needs.
If the nursing home resident has a spouse (or a dependent family member), the spouse may be allowed a portion of his income. Even though the resources both spouses may have are limited, the community spouse can have the greater of (1) all income paid in his or her own name, no matter how large, or (2) all income paid in his or her own name, plus as much of the income of the nursing home spouse as is needed to bring the community spouse's income up to approximately $1,400 per month.
Let's illustrate these rules with a couple of simple examples: (Both examples assume the person in the nursing home meets the medical needs test.)
Example 1: Assume a single person has a home with a fair market value of $125,000, cash in the bank of $25,000, an automobile with a value of less than $5,000. She receives $1,200 a month from her retirement pension, and $800 per month in social security benefits. The Medicaid rate for "her" nursing home is currently $3,600 per month.
Her personal residence is an exempt resource so long as she intends to return there. (This intention does not have to be realistic. However, the home will be subject to a lien on her estate following her death in the amount of the Medicaid benefits paid.) The $25,000 cash is a nonexempt resource exceeding the $2,000 of non-exempt resources allowed to a single person so this amount will have to be "spent down" before she qualifies for Medicaid. The automobile is an exempt resource since it has a value of less than $5,000. (An automobile of a single person can be worth more than $5,000 only if it has been specifically modified for his or her medical needs and is needed for access to medical care.)
This person's pension and social security benefits total $2,000 per month. If the Medicaid rate for her nursing home does not exceed this amount, once the excess resources are spent down, she should be eligible for Medicaid. Note, however, that any income in excess of her $42 per month personal allowance will either be applied against her nursing home care or her medical expenses.
Example 2: Assume a married couple has a family home with a fair market value of $175,000, investments of $150,000, an automobile with a fair market value of $18,000, and miscellaneous household goods. Assume their investment income averages $12,000 a year, the husband is receiving social security benefits of $1,200 a month, and the wife is still working with earnings of $2,500 per month. The wife plans to retire in three years when her pension will then begin paying her $800 per month.
Assume the husband is in need of nursing home care. He will not qualify for Medicaid because both he and his wife have nonexempt resources exceeding the $2,000 limit he is allowed and the $84,000 she is allowed. However, it can be seen that an extended nursing home stay by the husband will deplete the family's resources. Insurance may not be a viable option because the husband may not qualify due to his medical condition and if he does, the premiums may be prohibitive.
This couple should consider a transfer of all assets to the wife (excepting the $2,000 the husband can keep in his own name). The wife will now have the following exempt resources: the family home, the automobile (an automobile of any value can be owned by the community spouse), and excess nonexempt resources of approximately $66,000 ($150,000 less $84,000). She will also have income of approximately $3,500 per month. The wife can then convert the $66,000 in nonexempt resources to exempt resources. She could do this by remodeling or adding on to the existing house or purchasing a more expensive house or automobile. Perhaps a better choice would be for her to purchase a Medicaid qualifying annuity or create a certain type of special trust that is exempt because it is treated the same as a Medicaid qualifying annuity. With the wife's conversion of her nonexempt resources to exempt resources, the husband should qualify for Medicaid. Note in this example the wife's separate income exceeds the $1,400 spousal allowance, so, while she can keep all of her income, she does not qualify for receiving any of her husband's social security income. This will continue to be the case after she retires because her investment income plus her own social security income will still exceed $1,400 a month.
A person can qualify for Medicaid by reducing or depleting his assets. However, certain rules must be kept in mind and the effort should be approached with great caution. The law imposes a "look-back" period of 36 months from the date a person applies for Medicaid to determine if any gifts have been by him or his spouse during the 36-month period. Gifts to a spouse are exempt from this rule, which is why it is possible in the above example for the transfers from the husband and to the wife to occur without creating a period of ineligibility. Generally other gifts within the 36-month look-back period have the potential of creating a "period of ineligibility," determined by dividing the value of all gifts made in each month by the average monthly nursing home care cost in the applicant's state of residence. In the state of Washington, this figure was approximately $4,400 per month as of August 2000. This calculation results in a period of ineligibility commencing with the month of the gift during which time the applicant will not qualify for Medicaid. To illustrate this rule, assume on July 1, 1997, a single individual with assets of $400,000 transferred $300,000 to his nephew by gift. Twenty-five months later, on August 1, 1999, he applies for nursing home care. Since the gift occurred within the 36-month look-back period, a period of ineligibility is determined by dividing $300,000 by $4,400, which results in 68 months of ineligibility. However, if the same person had waited until August 1, 2000, to apply for Medicaid, he would have no period of ineligibility since the $300,000 gift would have occurred prior to the 36-month look-back period. (Note that whatever part of the remaining $100,000 that had not used up by the time the person applies for Medicaid would be an available resource, which he would have to spend down before Medicaid would pay for his nursing home care.)
If the same individual were married and transferred $300,000 in nonexempt resources to his wife and if the wife then transferred the $300,000 to the couple's children, the same problem would exist. Gifts by either spouse, except to each other, are counted for purposes of the look-back rule. However, if the assets were converted to exempt assets in the hands of the community spouse (either categorically exempt as in the case of the family home, a family automobile, a qualifying annuity, or part of the $84,000 noncatagorical exemptions), after the nursing home spouse qualifies for Medicaid, the community spouse thereafter could transfer assets to the children without affecting the nursing house spouse's eligibility. She would, however, be subject to a 36-month look-back period in her own case if she were then to apply for Medicaid.
Attempting to qualify for Medicaid should be approached with caution. A person who gives away all his property may find he is not able to adequately support himself long before he actually needs nursing home care. Even worse, he may find he has done so under circumstances that actually undermine his eligibility when he does become medically needy.
This discussion is only intended to present a broad overview of some of the Medicaid rules and how they apply using some fairly simple illustrations. There are many aspects to the Medicaid law that are not mentioned that should be considered in any real life situation.
It is our approach to caution family members from bringing undue pressure to bear in this matter. Some seniors are highly motivated to pass on as much as possible to their families and are comfortable with Medicaid planning. Others do not want to give up their financial independence or may feel that the government should not have to pay for their care as long as they can pay for it themselves. Both as a legal and ethical matter, these concerns must be respected and addressed.
We hope these brief comments will provide some sense of the issues involved in nursing home care planning. However, they are not intended as a substitute for individual counsel from an attorney knowledgeable in these matters.
