The good news is that we are living longer. Life expectancy continues
to increase among Americans. About 40 percent of the people living to
age 65 are projected to live to age 90 by the middle of this century,
compared to 25 percent in 1980.
Unfortunately, the bad news is also that we are living longer. The older
one is, the less likely it is that he or she will be able to live independently.
An AARP study has found that over 80 percent of individuals ages 85 and
older have a chronic condition or disability for which they may need assistance.
Many of those people will require long term care.
Absent advanced planning, the individual's personal financial resources
will be the source of payment for most, if not all, of long term care
One financing option is to consider long term care insurance. If, however,
the individual is either uninsurable or cannot afford the high cost of
long term care insurance, there are other planning options available to
preserve resources and/or income in the event of a catastrophic illness.
The following are 10 common misconceptions relating to planning for the
payment of long term care.
Misconception #1: Medicare or other health insurance will cover
the cost of long term care, either at home or in a nursing home.
Many individuals believe that either Medicare or private health insurance
or a combination of the two will cover the cost of care should the individual
need long term care, either in a nursing home or at home. Unfortunately,
this is not the case.
The most that Medicare will pay for in a nursing home is 20 days in
full and up to 80 days in part for a total of 100 days, and this is
only if the nursing home stay was immediately preceded by at least a
three day hospital stay and only as long as the care in the nursing
home is considered skilled rather than custodial.
Thereafter, unless the individual has previously purchased long term
care insurance, the only source for payment for long term care services
is either private payment or Medicaid.
However, in order to be covered by Medicaid, a recipient can have very
little in the way of resources and income. Therefore, the individual
must either spend down his or her assets and income to the Medicaid
levels, or enter into a plan to preserve some of his or her assets and/or
Misconception #2: Gifts that qualify for the annual exclusion,
or gifts of tuition or medical expenses, are exempt from the Medicaid
transfer penalty rules.
As many people know, individuals may give away up to $13000 per individual
per year to as many people as they want, and may make gifts of tuition
or medical expenses directly to the providers, without such gifts being
included in the total amount of taxable gifts made during that tax year.
Many individuals are under the mistaken belief that, because of this
gift tax exemption, these gifts are also exempt from the transfer penalty
and look back rules as they relate to Medicaid. This is not the case.
Any gift that is made is part of the calculation of gifts for purposes
of the transfer penalty and look back rules for Medicaid purposes. Additionally,
if gifts are made to a 529 Plan and the individual is the custodian
of the 529 Plan, they are not completed gifts for Medicaid purposes
and are included in one's resources when determining Medicaid eligibility
for that individual.
Misconception #3: If I establish and fund a revocable trust, the
assets in the revocable trust will be protected in the event of a catastrophic
Many individuals believe, and are often incorrectly advised, that if
they set up a revocable trust and place all their assets in this revocable
trust, and then need long term nursing home or home care, that these
assets are exempt and not available to pay for that individual's care
in the nursing home or at home.
This could not be further from the truth.
Because the individual retains control of the assets that are in a
revocable trust, these assets continue to be available to the individual
to pay for that individual's cost of long term care, and are considered
resources of that individual for purposes of Medicaid eligibility.
There are certain types of irrevocable trusts that may be established
to protect one's assets from the exorbitant costs of long term care,
but a standard revocable trust to avoid probate does not accomplish
Misconception #4: If I purchase an annuity, the assets invested
in the annuity are protected in the event of a catastrophic illness.
Individuals are often incorrectly advised that if an annuity is purchased,
that annuity is no longer an available resource in the event of a long
term care situation. This is partially true.
An annuity purchased on or after February 8, 2006 is considered an
uncompensated transfer subject to the Medicaid transfer penalty rules
unless it is irrevocable, nonassignable, equal payments are being made
over the actuarial life expectancy of the annuitant, and the beneficiary
on the annuity after certain exempt individuals must be the State to
the extent that Medicaid has been provided to that individual.
Additionally, the income from the annuity that is being paid out to
the individual is available to pay for the cost of long term care.
Misconception #5: All retirement assets will have to be spent
down before qualifying for Medicaid.
Except for certain exempt assets, virtually all assets must be spent
down in order to become eligible for Medicaid institutional or home
However, there are some exceptions to this rule. One of these relates
to retirement plans. When an individual is over age 70 ½ and
required to be withdrawing his or her retirement account over his or
her life expectancy, in determining Medicaid eligibility, the value
of the retirement account is not considered a resource for Medicaid
The income coming out to the individual is considered income for purposes
of Medicaid eligibility.
Therefore, in the Medicaid context, retirement accounts are somewhat
protected from the catastrophic cost of long term care.
Misconception #6: The best way to protect my home in the event
of a long term stay in a nursing home is to transfer the house to my children,
and retain life use.
A common, simple practice is for individuals to transfer their home
to their children and retain life use under the mistaken belief that
once this is done the home will be protected for that individual's children
should that individual require long term care.
The problem with this technique, penalty period and look back period
Medicaid rules aside, is that if the individual does require long term
care and does become eligible for Medicaid, if the house is sold during
the lifetime of that individual, not only are there income tax problems,
the value of the life use comes back to the individual on Medicaid and
must be spent on that individual's care before re-entering the Medicaid
That life estate value is based on tables that the Department of Social
Services uses, which is much higher than what the IRS indicates as to
the value of a life use.
Therefore the better practice in preserving the home is to place the
house in a special type of irrevocable grantor trust so that if the
house is sold during the lifetime of the individual, the full capital
gains exclusion is available and the entire value of the home is protected.
Misconception #7: Making gifts to my children is simpler, and
therefore preferable, to gifting to a trust to protect my assets.
Very often, individuals make gifts to their children for many reasons,
one of which may be to make sure that in the event they need to enter
a nursing home, that the assets given away are not required to be spent
for the exorbitant cost of a nursing home stay. Again penalty period
and look back period rules aside, this is true.
The problem is, once those assets are given away to the children, they
are almost never retrievable. If one or more of the children has a legal
problem of their own, whether it be bankruptcy, creditor problems, tax
problems, divorce or anything else, the assets that have been given
away to that child or children are subject to those legal problems.
A better practice would be, instead of giving these assets outright
to the children, establishing a Medicaid qualifying trust so that the
assets do not pass to the children until the death of the individual
who is establishing the trust.
Additionally, the individual establishing the trust is assured of receiving
income generated by those assets placed in the trust for the rest of
his or her life.
Misconception #8: I have already completed a comprehensive estate
plan with an attorney. Therefore, I am sure that that plan provided for
protection of assets in the event of a long term stay in a nursing home.
Many individuals already have comprehensive estate plans in place,
including wills, powers of attorney, health care proxies and possibly
trusts. Many individuals believe that by putting together this plan,
they have also provided for asset protection in the event of a catastrophic
illness requiring long term care. In many cases, this is not true.
Estate planning and long term care planning are completely different.
Many estate planners specialize strictly in estate planning and do not
address the issue of long term care planning.
Therefore, if an estate plan has been done, and long term care planning
is desired, the planning documents should be reviewed to determine if
long term planning has been done, and if not, whether it is appropriate.
Misconception #9: I am married. Therefore my spouse may act on
my behalf should I become incapacitated.
One of the elements of long term care planning is to plan for the potential
that one or both spouses in a married couple situation may become incapacitated.
Very often married couples think that because they are married, they
do not need to have powers of attorney or health care proxies to each
other because they have the authority as the spouse of the individual
to act on that spouse's behalf. This is not the case.
If one spouse becomes incapacitated, the other spouse is not able to
act on that incapacitated spouse's behalf for any legal or financial
matters, without a power of attorney. Additionally, the spouse who is
competent does not have the authority to make health care decisions
on behalf of the incapacitated spouse without a health care proxy in
Therefore, it is important, even in a married couple situation, to
have health care proxies and powers of attorney to each other, and it
is probably also a good idea to have an additional power of attorney
to someone else, possibly an adult child, and to have a successor health
care agent to the surviving spouse.
Misconception #10: My mother is already sick and either in a nursing
home or entering one. Therefore, no asset preservation planning is available.
Many people are aware of fairly recent changes in the law as they relate
to gifting and the impact of gifting on Medicaid eligibility.
As of February 8, 2006 the law was changed so that the look back period
(the period of time for which Medicaid looks at for determining gifts
made) was increased from three years to five years for outright gifts
(the look back period on transfers to trusts was already 5 years and
did not change).
The law also changed so that the penalty period on a gift, whether
outright or to a trust, does not begin to run until the individual is
in the nursing home, that individual's resources are down to the level
for Medicaid eligibility, and the person is actually applying for Medicaid.
Because of these changes, many people believe (including many lawyers)
that no asset preservation planning is available if an individual is
either in a nursing home or about to enter a nursing home (the so-called
"rule of halves" planning previously employed).
While it has become much more complicated, there is planning that can
be done "at the nursing home door." Consultation with an expert
in the area of Elder Law is necessary if this type of crisis planning
is to be successful.
Today, many middle class individuals have been ravaged by disease and
other sicknesses that leave them in the unfortunate situation where the
only alternative is a long term stay in a nursing home.
They are not wealthy enough to be able to afford the exorbitant costs
of long term care, which averages over $100,000 per year in central New
York, but are not poor enough to qualify for Medicaid to cover the cost
of their care. For these individuals, planning for a potential catastrophic
illness is essential and should be done as early as possible.