Paul Ferraresi

Long-Term Care Planning, Not Just for the Elderly

Comments by Paul Ferraresi:

The Medicaid program was introduced in 1965. President Johnson predicted the costs would never exceed $9 billion. Presently, the costs are running close to $200 billion per year and rising.

The system is broken so the government is finding ways to inhibit citizens from using the program. You may be thinking that this article is just for your parents, but, if you are over 30 years old you better start your own Long-Term Care/Medicaid program now.

Nursing home care costs are running an average of $100,000 per year in the U.S. and rising 14% per year. If you lack Long-Term Care insurance and are planning to use Medicaid… watch out! The rules are changing and will continue to change. The largest population growth in the U.S. are those over 85. At 85 years old, 50% of the people have, not will get, Alzheimer’s. With the population longevity expected to increase to 100 years, everyone will be affected. I see clients in their 40s and 50s having to come up with long-term care money for their parents, and it’s ruining their retirement plans. It’s time to have a family meeting.

Let’s look at some of the changes that have gone into effect from the Deficit Reduction Act of 2005…

• Some older couples may turn to divorce as an unintended consequence of the new laws. To qualify for Medicaid, one needs to “spend down” all their assets to $2,000. The community spouse (versus the institutionalized spouse) is permitted to keep $100,000 in resources. (Medicaid follows federal rules, but each state varies widely). Now the community spouses will end up with fewer assets.

• The penalty period has changed, during which a person is ineligible for Medicaid dues to gifts and transfers valued at less than fair market value. This will leave patients confined to a nursing home with funds exhausted, but, ineligible for Medicaid. The new rules extend the “look back” period for gifts or transfers from the old 3 years to 5 years now. The clock begins ticking on the penalty period from the date the nursing home resident is eligible to receive Medicaid instead of from the date of transfer.

Here is an example… In the old days, if you transferred an asset, say, 40 months before entering a nursing home then you were okay since the look back rule was 36 months. Now, if Joe gave a family member $20,000 4 ½ years ago, and subsequently went into a nursing home, spent down his life savings over 2 years, and applied for Medicaid in January, these are clouds in the horizon. Even though he is out of money, the earlier gift would trigger another 4 month waiting period. That is figured by dividing $20,000 by the $5,000 monthly costs level of Florida. REMEMBER: each state has its own cost level.

Here are some strategies used to preserve family assets by getting them out of potential Medicaid recipient’s ownership and the impact of the new rules:

Annuities: Under the new rules, an annuity will not be a countable asset if the state is named as a remainder beneficiary. That way, the state is reimbursed for Medicaid assistance, long-term care and community services.

Loans, Mortgages, and Promissory Notes: Under the new rules, the loan’s repayment must be sound and made in equal payments during the loan payment term with no deferral of payments and no balloon payments. Cancelation of the loan balance upon death of the lender is not allowed. So, if your parents have lent you money, then you must follow the above rules so this asset will not be countable.

Life Estates; The right to live in a property until death: Under the new rules, this is a transfer of assets unless the buyer of a life estate, in another person’s home, lives there for at least one year after the purchase.

Houses: In the past, these were considered exempt for Medicaid purposes. States must now consider an applicant’s home equity in excess of $500,000 up to $750,000 as monies that applicant must use.

As stated many times in past articles- this is another reason to ALWAYS keep your home mortgaged to the maximum (see all previous Missed Fortune articles).

Investment Grade Equity Indexed Universal Life: The accumulated value is off limits to Medicaid. This is a great way to accumulate monies tax free, have access to the money tax free, and, upon death the money blossoms and transfers tax free. The withdrawals are NOT considered income for Medicaid and it does NOT affect the taxation of Social Security income. This is a layup with a ladder, or, a stolen base on a passed ball. Hmmm…

Medicaid planning is complicated and needs the services of a professional. I implore you to work with your family members now. Although some family members in their seventies may be fine now, in 5 years they may need assistance. So make decisions now to avoid the 5 year look back.

Note by Paul Ferraresi:

Everyone over 40 should have Long-Term Care insurance and invest in those items that are exempt.

Discipline or Regret?