As difficult as it may be to think about, there is a decent likelihood that you may someday need care in a long-term care facility, as about forty percent of Americans who live to age 65 do. If you have ever had a close relative in a nursing home, you know that nursing home costs are already high and steadily rising. In Michigan, the average daily cost of a nursing home is $249 per day, which translates into $90,885 per year—and that’s only the average. The cost could be much higher, especially for a private room in a modern facility.
For most people, a year or two in a nursing home could wipe out a lifetime of savings. Even for the fortunate few with a bigger nest egg, a stint in a long-term care facility could take a major bite out of assets they had planned to leave to their family.
Because skilled nursing care in a facility is so expensive, most people can’t afford to pay out of pocket for an extended period. Medicaid assistance is available to help with nursing home care, but in order to be eligible, you must do one of two things: “spend down” your assets to a minimal amount, or plan ahead before you need care to keep your assets from being “countable” for Medicaid purposes.
Given this, it might seem that the perfect solution is to give the assets you have accumulated for your family to them now, rather than as an inheritance later. The assets go to the people you intend them to have, and they no longer belong to you to be counted for Medicaid eligibility. Unfortunately, if you are trying to protect assets from nursing home costs, there are several reasons why gifting assets to your loved ones to avoid paying them to the nursing home is a bad idea.
If you think you can get around the Medicaid “spend down” requirement by giving away your property to your family before going into a nursing home, you should know that Medicaid is way ahead of you. There is a five-year “look-back” period for asset transfers when you are applying for Medicaid. If, within the five previous years, you have transferred an asset for less than its fair market value, your eligibility for Medicaid benefits could be delayed or denied when you need it most.
If the prospect of needing a nursing home is in the distant future, you may be able to get around the look-back period by making your gifts outside of that five-year window. But that is a very risky proposition. An illness or injury could cause you to need care sooner than you expect, for one thing. But there are other reasons as well.
If you transfer an asset, such as a house or financial account, to a family member, it becomes theirs to legally do with as they please, even if you have a verbal agreement that they will use the asset only for your benefit. You may think your child or grandchild would never sell your house out from under you or drain your bank account—and you might be right. If you are wrong though, there is little you can do about it.
But even if your family member doesn’t intend to waste the asset you give them, it could happen. They could become seriously ill, incur a huge hospital bill, and have “their” asset seized to pay it. They could get divorced and “their” asset could be divided as marital property. A creditor could take a judgment against them and the asset you gave them could be taken to satisfy the debt. Even if none of those things happen, making a substantial gift could cause you to incur a gift tax bill that could have been avoided had your family member inherited the asset at your death.
In short, there are a number of ways that giving away your assets to avoid paying them to the nursing home can go wrong. Fortunately, you have other options if you are trying to protect assets from nursing home costs.
Long-term care insurance may be available to cover or defray the expense of nursing home care. However, very few older adults—less than 10%—have long-term care insurance. The premiums can be expensive, and grow even more so the later you wait to obtain the insurance. Some people are in denial that they would need it, and are reluctant to pay high premiums for a benefit they may never receive. Others, unfortunately, wait too long and become ineligible.
The industry has responded to these problems by now offering life insurance and annuity based “hybrids.” These hybrids offer the benefits of traditional long term care insurance, while avoiding rate increases and preserving a death benefit if the coverage is never needed. It is definitely worthwhile to explore long-term care insurance options.
Another, more accessible Medicaid planning option is a Medicaid trust. A Medicaid trust is specially designed to contain assets in a way that makes them not countable for purposes of Medicaid eligibility; most trusts are not structured in such a way to protect assets from nursing home costs, so don’t assume that a trust you already have will do the job.
Here’s how a Medicaid trust works: The trust must be irrevocable, meaning that once you place assets in it, you cannot terminate the trust or take the assets back. Neither you nor your spouse may serve as trustee of the trust and you cannot have access to the trust principal. (However, your adult children can act as trustee.) Giving up control of the assets in the trust in this way is what makes the assets uncountable for Medicaid.
The transfer of assets into a Medicaid trust is subject to the five-year look-back rule, so it’s unwise to wait until the last minute to create a trust, although there are circumstances where a Medicaid trust can shield assets even within the five-year look back period. Plan ahead so transfers to the trust will not run afoul of Medicaid rules. A properly-drafted Medicaid trust can preserve your hard-earned assets for your spouse, children, or grandchildren after your death and can allow you to receive the Medicaid benefits and care you need during your lifetime.
A Medicaid trust is only one of many Medicaid planning options that are allowed under our state’s Medicaid rules.