By Peter Mastrantuono
One common misunderstanding many Americans have is that Medicare will help pay for long-term care. It does not. In fact, the only government assistance available for long-term care expenses is through Medicaid.
In an earlier article, we discussed how long-term care may be one of the most overlooked risks in retirement. For financially unprepared retirees, Medicaid may be a viable alternative for meeting long-term care expenses, but it’s not without its disadvantages.
Unlike Medicare, Medicaid is available only to individuals or families that meet certain financial criteria.
For illustrative purposes, consider the requirements to qualify for Medicaid in New Jersey. A married senior couple (with one spouse applying) must have no more than $2,382 per month in income for the applicant and have assets of $2,000 or less for the applicant and $130,380 or less for the non-applicant. (Individual state qualification requirements vary.)
Transferring Assets to Qualify for Medicaid
The high cost of long-term care can very quickly deplete retirement savings, which not only leads to financial insecurity late into retirement, but may deprive a retiree of being able to leave an inheritance to his or her children and grandchildren.
To preserve the inheritance for the next generation, individuals may contemplate a strategy of transferring assets to their heirs in advance of needing long-term care so that they may qualify for Medicaid.
Such a strategy must overcome a key public policy obstacle, however.
Most taxpayers would agree that a policy that allows individuals to shift the financial burden of long-term care to the government so that some can preserve their children’s inheritance is problematic.
To avoid this potential abuse Medicaid has a “look-back period.” This means that, from the date of the application for Medicaid, assets transferred within a 60-month period (30 months for California) will have violated this rule, the consequences of which are a “penalty period” that differs from state to state.
While many individuals think they have an idea of what transferring property means (e.g., gifting stocks, buying a grandchild a car), the government has a more expansive definition that includes a high school graduation gift, irrevocable trusts (including so-called Medicaid Qualifying Trusts) and even payments to family members for caregiver services.
There are ways to spend down assets without violating the look-back period, including:
- Creating a life care agreement between a senior and a family member or friend that articulates, among other things, services and compensation.
- Purchasing a Medicaid exempt annuity, which lowers the countable assets for Medicaid eligibility.
- Paying off debt.
- Home modifications.
- Establishing and funding an irrevocable funeral trust to pay for funeral and burial costs.
There are limited instances in which asset transfers do not violate the look-back rule, including:
- A portion of joint assets of a married couple is allocated to the non-applicant spouse to prevent spousal impoverishment.
- Assets transferred to minor children who are disabled or legally blind.
- A home, which can be transferred to a sibling or child under certain circumstances.
Ideally, long-term care costs should be incorporated into retirement planning long before retirement. An experienced financial advisor can be an invaluable resource in achieving the sort of financial security that avoids these difficult choices.
However, for those individuals considering how to best balance asset preservation and qualify for Medicaid, they should consider working with a competent Medicaid planner.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.