by Rich O'Boyle, Publisher
More About Rich
What happens to your hard-earned savings when you need long-term care? How are you going
to protect your house, your doll collection, and your heirlooms when you or your spouse
has to move into a costly nursing home? People of modest means find out, sometimes
painfully, that they are required to foot the bill for long-term healthcare. Medicare only
pays a very limited amount of nursing home expenses. And Medicaid is difficult to qualify
for since you have to already have spent away your hard-earned savings.
Most people assume that either they will not have to enter a nursing facility, or that
once they do, "The Government" (i.e., Medicare or Medicaid) will pick up the
tab. The first assumption is a form of denial, and the second assumption is only true in
the worst scenarios. The fact is, as people age, they have a greater and greater
probability of requiring some form of skilled care. Fortunately, more and more skilled
care can be provided in the home, but nursing homes are still a reality for millions of
especially those with dementia. The Government helps to pay for short-term care through
Medicare, but only pays for people with very limited finances through Medicaid.
In some states, nursing home costs can exceed $8,000 per month (not a typo!). That means
that if you are paying for it yourself, it can run to almost $100,000 per year out of your
own savings. If you have even modest assets of about $4,000 in the bank, you will NOT be
able to receive Medicaid. There are some exceptions, but the vast majority of people are
not eligible for Medicaid due to existing assets (such as bank accounts and property) and
monthly income (such as pensions and Social Security benefits).
"Estate planning" includes techniques and considerations that individuals and
families use to make sure that their assets are disposed of in the way they desire near
and at the time of their death. Proper estate planning uses legal methods to assess the
value of one's estate, acquire insurance (such as life insurance and long-term care
insurance), prepare the appropriate legal documents (such as wills, healthcare proxies and
powers of attorney), provide gifts to family members and charities, and minimize taxes.
The proper coordination and execution of all of these matters should be conducted with the
guidance of a qualified (and specialized) elder law attorney and other financial and care
Options for Financing Long-Term Care
So what is the vast Middle Class to do about paying for long-term care expenses? Our
health insurance system in the US is a patchwork of private, federal and state programs.
But as with any "patchwork," there are areas where the stitching has come apart,
or where the seams were never sewn properly. We have serious gaps that often turn into
gaping holes for many people.
This article provides a very brief overview of the primary options for paying for
long-term care. More detailed articles and resources are available at the end of this
This is generally the first line of defense for healthcare expenses. People pay out of
pocket for prescription drugs, co-payments, deductibles, additional services, and
non-healthcare expenses (such as respite, housekeeping, care management, and companion
services). Most caregivers become acutely aware of how expensive many services are once
they start paying for them out of their own checkbook. When faced with the prospect of
these expenses for years on end, then the awareness turns to fear and loathing.
Increasingly, people are purchasing healthcare benefit cards that provide discounts for
prescription drugs, some services, eyeglasses, and some other eldercare expenses, but
these provide some modest savings, not the kind of relief that most are seeking.
Medicare is the federal government-run health insurance program for those over age 65. It
covers hospital and doctor expenses, as well as some preventive procedures such as
mammograms. Medicare also covers home healthcare and hospice services when ordered by a
doctor. Individuals may purchase private "Medigap" insurance to help pay for
those services that Medicare does not cover. Medicare will only pay for short-term skilled
nursing such as when you are recovering after a hospital stay or surgery.
Medicaid is a federal-state program that is run a little bit differently by each county in
the country. It is designed to provide healthcare to the medically and financially needy.
It is not politically correct to call it a program for "poor" people, but the
key eligibility requirement is that you have very limited financial resources and income.
It is primarily for women with children and the elderly in nursing homes. Unlike Medicare
(which everyone over 65 gets), Medicaid requires that you apply for benefits.
Long-Term Care Insurance
While long-term care insurance is gaining popularity, the rules and fine print can often
be confusing, the policies prohibitively expensive, and/or your pre-existing conditions
limiting. However, for many people, this form of insurance can provide the financial means
to stay at home when illness leaves them debilitated or in need of skilled nursing care.
When shopping for long-term care insurance, it is best for you to speak with an impartial
third-party (such as a lawyer) to help explain things not because insurance
salespeople are dishonest, but because you should see how the policy fits in with your
other plans and what some of the fine print really means.
Issues and Techniques in Estate Planning
Individuals and families wishing to plan for possible long-term care expenses and the
dissolution of their estates at death should understand and explore several areas with
qualified legal and financial professionals. Estate planning is not just for "The
Rich" people with a lot of property, warring children (a la Dynasty),
mansions, and yachts. The Middle Class should consider many of these techniques and use
the appropriate ones that help them achieve their goals of minimizing taxes and leaving an
inheritance to their family.
Families should always consult with trusted legal advisors. It's no secret that many
unscrupulous people are out there, waiting to prey on concerned Baby Boomers and seniors.
Use your best judgment and NEVER allow someone to pressure you into buying anything (be it
insurance, legal assistance or management services). You are well-advised to get a second
opinion when making your estate plan. A few hours with another lawyer (helping you
understand some documents or legal issues) may cost a few hundred dollars, but when you
are dealing with tens or hundreds of thousands of dollars, that will be money well spent.
A trust is a legal device that gives a person (or group of people) the right to hold and
manage specific financial assets. This is a very simple definition that avoids a lot of
legal language. Be aware that trusts are usually quite complicated. Some trusts can be
thought of as a new legal entity (much like a corporation or another person) that is
required to spend its assets for specific purposes that the creator spells out ahead of
time. People often establish trusts to avoid the costs and delays that can be associated
with probate, to minimize or avoid taxation, to provide resources for individuals
determined to be incompetent, to control how and when assets are distributed, as well as
many other uses.
There are several different types of trusts that people use for estate planning. While
most fall into specific categories, it is important to understand that trusts are highly
individual creations one size does not fit all. Be wary of firms who offer a cookie
cutter approach or a "kit" to create your own. Any trust (indeed all estate
planning activities) should be designed with careful consideration and thoughtful legal
consultation. Be aware that when establishing some trusts, you may limit your options in
A "revocable trust" may be established
to set aside certain assets in the event that the individual becomes incapacitated. These
assets never technically leave the person's ownership, so the assets are still considered
part of one's estate when one applies to Medicaid for benefits. The value of a revocable
trust is that you can designate a professional to manage your finances, receive income
from the trust, and potentially reduce expenses associated with settling your estate at
death. With a revocable trust the individual can change the terms of the trust at any
An "irrevocable trust" is also referred to as a "Medicaid Trust."
Assets are transferred into a new legal entity that then owns those assets. These assets
are then no longer considered part of your taxable estate. By shifting assets into the
trust, you may now be eligible for Medicaid benefits, but subject to the specific
"look-back" rules of your county (see below). When setting up the trust, you
determine who will receive the assets, regular payments, and income from the assets.
Irrevocable trusts may also be used as an entity to own one's life insurance policy.
This is a simplification of the process, so keep in mind that estate planning involves a
lot of "moving parts" that should all be considered. Some types of transfers may
result in tax liabilities and future financial limitations. Irrevocable trusts require
that the individual give up some degree of flexibility with the assets and may be
expensive to prepare. Once the trust is established, the individual gives up all rights to
the assets that are included in the trust. You can not change the terms once it is
A "credit shelter trust" is used to help an individual and her spouse maximize
the federal tax credits they have when they die. This type of trust is also called a
"bypass trust," "A-B trust," or "credit shelter trust plan."
Each individual is permitted to transfer a large (but limited) amount of assets to his/her
heirs free of taxation. For a married couple, the tax credit is essentially doubled (since
it is the credits of two people). When the first spouse dies, the estate passes to the
other, but when the second spouse dies, only one credit is remaining. This trust allows
the two tax credits to be used instead of just one. Be aware that the U.S. Congress may
make changes to the estate tax laws, raising the credit, or eliminating it all together.
You should consult with legal and financial advisors who have
up-to-date knowledge of federal and state tax laws.
Since most people are concerned about spending down all of their assets to pay for
long-term care, they will establish certain types of entities like trusts, give cash gifts
to children, spend money on exempt assets, or engage in other legal financial maneuvers.
You should make sure that your financial activities are legal as well as the smartest use
of your assets. Even with perfectly legal activities, you may compromise or delay some of
your potential benefits from Medicaid.
Look-back periods. The application required to collect Medicaid benefits includes
extensive questions about financial assets going back from three to five years. Medicaid
will "look back" to see whether assets had been illegally sheltered to qualify a
person for coverage. Moving assets through legal means is permitted. (All of the general
approaches discussed in this article are legal at the time of writing 6/2001). However,
transfers within the look-back period will be scrutinized, and even if they are legal, may
incur some penalties. For example, if the person applying for Medicaid made an asset
transfer (a gift, transfer into a trust, or other large transaction) within the look-back
period, it does not
necessarily disqualify them from receiving benefits, but it may delay the date when
nursing home benefits begin. Currently, homecare benefits are not affected by the
look-back period. There are many strategies for legally moving assets and timing the
submission of a Medicaid application. A person skilled in the rules of your particular
county, with knowledge of your larger estate plan, and with an understanding of your loved
one's health condition can assist you in managing the process of applying for Medicaid.
Spousal refusal. Married people have a legal obligation to pay for the healthcare costs
incurred by their spouse if they are admitted into a nursing home (with some exceptions).
If your spouse has been admitted to a nursing home, you may file a form with Medicaid and
state that you refuse to pay for your spouse's care. This does not mean that you are
getting a divorce! It is a legal bureaucratic loophole that allows individuals to retain
additional resources than they normally would be able to. The county Medicaid office has
the right to seek reimbursement from the spouse who is not in the nursing home (referred
to as the "community spouse"), but such lawsuits are rare. It is unwise to
assume that the
county never will decide to sue you for the funds it has spent on your spouse's nursing
home bills. In some cases, when individuals were sued, the county has settled for less
than the full dollar amount spent on the care.
Final Things to Remember
Nothing is as simple as it sounds when it comes to "The Law." This article is
not intended to be legal advice, nor does it cover all issues associated with estate
planning. It provides an educational and informational background to the issues and
documents involved in basic estate planning. We hope that you will use this article to
give yourself a foundation with which to have intelligent discussions with your legal,
financial, and care management advisors. As with all sensitive matters, you should consult
your legal, financial and medical advisors whenever you make important decisions. Some of
the concepts have been simplified and stripped of extensive legalese in the interest of
readability and length. Furthermore, we have limited specific information on eligibility
criteria, tax rules, and asset amounts since they vary considerably from state to state
and county to county. We hope that this does not limit the value of the article, but
recognize that it is a limitation. Laws and rules vary from state to state (and from
county to county) and change constantly, so you should consult with advisors before making
and firm decisions.
- Elder Law: The Basics
- Medicaid Eligibility
- Medicaid Benefits
- Medicare Overview
- Discrimination Against Medicaid Recipients
- Tips for Choosing a Financial Planner
- Life Insurance Trusts
- Long-Term Care Analyzer
Long-Term Care Services (US federal government website)
- ElderCare Online Insurance Coverage Channel
- ElderCare Online's Legal &
Financial Matters Channel
- Health Care Without Medicare by Joseph Jackson
the Nursing Home Trap: A Consumer's Guide to Assited Living and Long-Term Care by
Online's Legal & Financial Matters Bookshelf
- Crash Course in Wills
- National Academy of Elder
- Pierro & Associates
Law Firm (New York)