Asset and Income Preservation: Long Term Care Insurance and Medicaid Planning

An Article by Brenda McElnea, Esq.

According to the New England Journal of Medicine(February 28, 1991), about 43% of the U.S. population will need nursing home care at some point in their lives. While most nursing home stays are for less than one year, 24% of people now age 65 will remain for a longer period. Nationwide, annual nursing home costs average $40,000 annually, and in New Jersey are presently between $46,000 and $70,000. Full-time home care can cost even more.

Public concern over payment of these costs has increased as the need for and the cost of long-term care for the elderly and disabled has risen. Medicare may pay for a maximum of 100 days in a nursing home following a hospital stay, but only if the patient’s condition warrants such coverage. In fact, few patients actually receive 100 days of Medicare coverage. Currently, Medicaid, not Medicare, is the government program paying the lion’s share of the costs of the individuals receiving institutional long-term care. Medicaid in New Jersey provides little home care.

Under Medicaid law, an individual must meet income and asset eligibility tests. In New Jersey, a Medicaid recipient’s income must be less than the amount that Medicaid pays to the particular nursing home for a recipient’s care. With regard to assets, an unmarried applicant may have no more than $2,000. If the applicant is married, and has done no planning, the well spouse may keep the marital residence, a car of any value, and one-half of the couple’s total combined assets, provided that that one-half does not exceed $76,740. An applicant cannot simply transfer assets to children or others to meet these standards. Such transfers can be made at any time (including the three year period prior to a Medicaid application), but they do result in a sliding scale “penalty period” during which the applicant is ineligible for Medicaid. An important exception to the transfer rules, authorized by the Omnibus Revenue Reconciliation Act of 1993 and only recently implemented in New Jersey, is the transfer of a couple’s assets (his, her or theirs) to a trust for the sole benefit of the well spouse who is living at home. With such a trust, the well spouse can presently protect virtually all of their assets and still qualify the ill spouse for Medicaid.

Elder law attorneys assist older clients, especially middle and upper middle income individuals, to qualify for Medicaid. A well developed plan allows a nursing home patient to receive such government benefits without exhausting lifetime savings. A careful strategy, developed with an attorney knowledgeable in Medicaid law, will preserve assets while assuring that the nursing home patient receives the quality of care s/he needs. While Medicaid planning is effective, it is time consuming, often done during crisis, requires a divesting of assets for unmarried individuals, and is subject to changes in Federal and State law. Consequently, it is most useful for individuals who may require nursing home care in the near, rather than the distant, future. Even the best planning does not entirely eliminate the need to privately pay for long-term care. Admisssions directors at most nursing homes in New Jersey are often seeking a guarantee of one year of private pay. Further, if very significan assets have been transferred according to a plan of divestment, a patient (and particularly an unmarried patient) may have to privately pay a facility for 3 to 5 years before qualifying for Medicaid. Frequently, a component of Medicaid planning includes the suggestion of purchasing some long-term care insurance to cover the cost of a nursing home for the period of Medicaid ineligibility associated with the plan’s proposed asset transfers. The purchase of insurance should always be explored for an individual who is not married as well as for the healthier and younger spouse, in the case of a couple.

As the public is aware, state and federal governments continue to tighten eligibility requirements for Medicaid qualification. In the future, it may well become more difficult to qualify for Medicaid using the types of gifts and trusts now available to the elderly and disabled. Future changes in Medicaid will undoubtedly have their greatest impact on those with more difficult assets, like businesses, to preserve. An increasing number of people between ages 55 and 60 are purchasing long-term care insurance policies in order to assure they will be able to afford long-term care while simultaneously preserving their life savings and their businesses.

Generally speaking, as we age it is advisable to consider allocating a larger percentage of insurance dollars to long-term care insurance rather than to non-business related life insurance. In general, the younger the applicant for long-term care insurance is, the lower the premium. Rates increase substantially first at age 60, and again after age 65. After purchase, premiums remain the same. As with any insurance, the amount of coverage an individual needs depends on the individual situation. For example, as business owner with no dependents and a monthly retirement income of $2,500 may be more concerned with protecting his or her assets than with protecting income. In that case, the insurance coverage should be sufficient to cover the $3,000 difference between a nursing home costing $5,500 monthly and monthly retirement income. An inflation rider can be purchased as well. As another example, individuals with others dependent on their income, such as a spouse or a disabled child, should purchase enough insurance coverage to rotect both income and assets. As with disability insurance, premium costs can be manipulated through such mechanisms as the deductible amount chosen and whether to purchase inflation protection. If premiums exceed the ability to pay of an elderly person, elder law attorneys frequently suggest that the adult child or children pay the premiums in whole or in part as “inheritance” protection.