Protecting Your Parents’ Assets from Nursing Home Costs

As the U.S. population ages, more people will need nursing home care, while the cost of that care continues to rise.

With the exorbitant cost of nursing home care, many families worry about depleting their loved ones’ life savings to pay for the care they need.

Private health insurance does not cover nursing home care, and long-term care insurance can be expensive and may not fully cover extended stays.

This leaves millions of Americans reliant on Medicaid to pay for nursing home care — a far from perfect solution that usually involves spending down assets to qualify. With proactive Medicaid planning, though, it is possible for someone to qualify for Medicaid and still retain some of their assets. The sooner you start planning, the more options you’ll have for protecting your parents’ assets from nursing home costs.

Odds of Needing Long-Term Care

About 70 percent of people who turn 65 today will eventually need some type of long-term care, including nursing home care.

In 2020, around 6 million Medicaid enrollees used the program to pay for long-term support and services. Around one in five enrollees received institutional care, such as care provided at a nursing facility.

After age 65, more than a quarter of adults receive at least 90 days of nursing home care. Thirteen percent of them receive long-term Medicaid-financed nursing home care.

Medicaid typically pays for 100 percent of nursing home costs and may be the only insurance option available for long-term stays. Long-term care insurance can be purchased, but most policies have limits on the maximum daily or monthly benefit amount and the total lifetime benefit, as well as terms and health requirements that may exclude coverage.

A nursing home stay isn’t necessarily permanent. About 15 percent to 20 percent of admissions are for short-term rehabilitation. Among current residents, the average stay is one year and four months. More than half of residents stay for at least 100 days, while 15 percent of older adults spend over two years in a nursing home.

With nursing home costs running $250 to $300 per day in some states, costs can add up quickly. The average nursing home stay of little over a year, or about 485 days, could end up costing upwards of $150,000.

Over multiple years, these costs become unsustainable for many families.

Medicaid Planning Strategies

Whether a nursing home stay lasts months, years, or is permanent, you may have crunched the numbers and determined that Medicaid is the only feasible payment option for a parent’s nursing home care.

The good news is that Medicaid allows applicants to spend down excess assets to qualify. The bad news is that these limits are generally only $2,000, which requires significant planning, which requires significant planning because many families exceed Medicaid’s asset limits.

Another upside is that not all a person’s assets count against the limit. A home, for example, is typically exempt. Someone can also own one car without exceeding Medicaid’s asset limits.

Many Medicaid spend down strategies take advantage of workarounds that allow nonexempt assets to be converted to exempt assets, thereby excluding them from Medicaid calculations. But these strategies often involve navigating a tricky five-year “lookback period” where past asset transfers are scrutinized to ensure applicants don’t give away assets to qualify for Medicaid.

Keeping these considerations in mind, there are financial planning strategies that can help to protect a parent’s assets from nursing home costs and a Medicaid spend down.

Medicaid-Compliant Annuities (MCAs)

MCAs, a type of single premium immediate annuity, allow countable assets (like cash or investments) to be converted into a stream of income that doesn’t count toward the Medicaid asset limit. The payout structure must be based on life expectancy. Once purchased, the annuity generally cannot be changed or accessed as an asset.

Annuity income may affect your parents’ eligibility for other needs-based government programs, such as Supplemental Security Income (SSI). In addition, the state Medicaid agency must be the primary beneficiary in case of the annuitant’s death during the annuity period.

Medicaid Asset Protection Trusts (MAPTs)

Medicaid-compliant trusts, like MAPTs, hold assets for a set period, after which they transfer to beneficiaries (usually children or other family members).

Assets in the MAPT are no longer considered part of your parents’ estate for Medicaid purposes. They are legally owned by the trust, not your parents, although they may be able to benefit from these assets, such as remaining in a home transferred to a MAPT.

Creating a MAPT triggers a penalty period of Medicaid ineligibility under the lookback period that’s based on the value of assets transferred. A MAPT is therefore most effective when implemented well in advance of potential Medicaid need, often in conjunction with a parent’s estate plan.

Promissory Notes

A promissory note is a legal agreement that allows your parents to lend money to someone (e.g., a family member) who agrees to repay the money with interest over time. This converts a lump-sum asset into a stream of income.

Not all states recognize promissory notes for Medicaid planning. In states that do allow them, they may be subject to scrutiny by state Medicaid agencies. The note must clearly outline the repayment terms and the interest rate must be at or above the applicable federal rate (the minimum interest rate the IRS allows for private loans).

Life Estates

A life estate lets your parents transfer ownership of their home to a child or other family member while retaining the right to live there for the rest of their lives. It removes the home’s value from their countable assets for Medicaid purposes and may protect the family home from Medicaid estate recovery, which allows states to recover certain Medicaid costs from a beneficiary’s estate.

Medicaid’s lookback policy applies to life estates, so the transfer must be done well in advance of needing care. Your parents may also lose some control over the property, and there could be tax implications.

Other Spend Down Strategies

A spend down strategy might additionally include a parent spending on needs or wants that can both enhance their quality of life and help them qualify for Medicaid.

• Paying off debt, making home repairs, purchasing a vehicle, or prepaying funeral expenses are ways to spend down assets and derive an instant benefit.
• Gifting assets to loved ones outside of the lookback period can reduce countable assets and fit into a gifting while living strategy, but annual and lifetime gift tax exemptions apply.
• If only one spouse needs nursing home care, Medicaid allows the other spouse (the “community spouse”) to retain a certain amount of income and assets.

Because Medicaid rules vary by state, consult an experienced elder law attorney to develop a strategy that protects assets while preserving eligibility.

If you would like to speak with an experienced elder law attorney regarding your situation or have questions about something you have read, please do not hesitate to contact our office at 1 (800) 680-1717. We look forward to the opportunity to work with you.

Disclaimer: The information provided above is for general informational purposes only and is not legal advice.