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Planning for long-term care expenses seems to involve a lot of wishful thinking for many. In a survey by The Associated Press-NORC Center for Public Affairs Research, only about a third said they were confident they would be able to pay long-term care expenses. Despite this, 54% of respondents said they had done little or no planning for these needs.
One example of wishful thinking is that government programs like Medicare or Medicaid will pay long-term care expenses.
Medicare pays for healthcare costs related to hospital stays, doctor and other healthcare provider fees, and prescription drugs. This coverage includes medically necessary services and supplies in a skilled nursing facility after a three-day hospital stay. However, Medicare doesn't cover long-term care costs for help with daily activities like dressing, bathing, and using the bathroom. Therefore, Medicare does not cover most long-term care services delivered in-home, in assisted living, at a long-stay skilled nursing facility, or in a memory care setting.
Medicaid Does, But…
Medicaid provides healthcare coverage to 75.9 million Americans. Recipients include qualified low-income adults, children, pregnant women, the disabled, and seniors. Although federal laws govern Medicaid, it is administered by states and funded together by states and the federal government.
Unlike Medicare, Medicaid does cover long-term care expenses but only for those who cannot otherwise pay for such care.
To qualify for Medicaid, potential beneficiaries must prove:
- The need for long-term care
- Income and assets below a specified threshold as determined by each state
Even if income and assets requirements are not initially met, applicants can still qualify for Medicaid through a process called "Spend-Down."
An individual or couple cannot qualify for Medicaid if their monthly income exceeds state limits. Each month, however, potential beneficiaries can spend down excess income by paying medical expenses. These include health insurance premiums, prescription medications, and hospital or doctor fees not covered by insurance. In some states, potential beneficiaries can direct their excess income into a Qualified Income Trust (QIT) from which medical expenses can be paid.
To qualify for Medicaid long-term care services, a potential beneficiary must own limited assets. In most states, the asset limit is around $2,000 per individual. If a married couple applies at the same time, some states consider each partner as an individual. In other states, the couple has a total $3,000 asset limit. (For couples where only one partner is applying for Medicaid, see the next section below.)
However, not all assets are "countable." Examples of non-countable (officially called "exempt") assets that would not be included in total "available" assets are:
- The home a person is living in, plans to return to, or whose spouse lives there
- One vehicle
- Pre-Paid Funeral / Burial Expenses
- Whole Life Insurance Policies with total Cash Value less than $1,500
- Term Life Insurance
- Household and personal items
- Jewelry and family heirlooms
States vary in how they treat funds in IRAs and 401(k)s. Some consider such funds exempt in certain situations. It is important for potential beneficiaries to find out how their state characterizes these assets.
As mentioned above, in a situation where only one partner of a married couple is applying for Medicaid, that applicant can only have $2,000 or less in assets. The other partner (referred to as the "community spouse") can typically keep more assets. This amount is called the community spouse resource allowance (CSRA.) Federal law allows states to set the CRSA asset limit at between $26,076 and $130,380. This is to ensure the healthy partner does not become impoverished.
As noted in another Cantissimo Senior Living blog post, a person's home can be a significant source of funds for long-term care expenses. As long as a person is living in their home, the assets it represents are not available under Medicaid rules. However, when the home is sold, those dollars become available in the eyes of Medicaid. Therefore, a previously qualified Medicaid applicant would need to spend down those funds to again become Medicaid-qualified.
Medicaid Look-Back Period and Penalty Period
The asset spend-down process is intended to ensure those who can afford long-term care expenses will pay from their own resources before relying on Medicaid. However, the temptation exists to transfer or gift assets to family or friends rather than spend them down. To manage this situation, the Medicaid application process involves a review of an applicant's financial transaction history. This is known as the Medicaid look-back period.
In most states, the look-back period in most states covers five years. Suppose the applicant transferred or gifted assets for less than fair market value (FMV) in that period. In that case, the total dollars under FMV determines the length of the delay before the restoration of Medicaid eligibility. This delay is called the penalty period.
The length of the penalty period generally is calculated by dividing the total amount of under-FMV assets by the average monthly long-term care expense for a given state. For example, if state law declares $7,000 per month as the average senior care cost and the total under-FMV assets for an applicant is $19,000, then the applicant must wait 2.7 months before becoming Medicaid eligible.
Under certain conditions, the penalty period can be avoided. Applicants need to be aware of the specific rules in their states.
Home and Community-Based Services (HCBS) Medicaid Waiver
Those who prefer to obtain long-term care in their home or community can still receive Medicaid benefits under the Home and Community-Based Services (HCBS) Medicaid waiver program. The term "waiver" means Medicaid rules are waived so care can be delivered outside a facility like assisted living or skilled nursing. Almost all states allow these waivers if applicants meet specific requirements. In general, the care at home must be equivalent to an "institutional level of care."
Cash and Counseling
Many state Medicaid programs offer "cash and counseling" options under which family caregivers can be paid. This can be a great benefit. Most family members providing in-home care are not paid. They also give up time from work and other family responsibilities. In-home services can be structured to meet the requirements of an authorized Medicaid care plan so the state will pay benefits. As a result, friends or non-spouse relatives can be paid for the care they provide.
Medicaid Asset Protection Trust
One way more assets can be protected from spend-down is Medicaid Asset Protection Trust (MAPT).
Assets moved into a MAPT are no longer owned by the Medicaid applicant and therefore exempt from Medicaid asset calculations.
There are three roles in a MAPT:
- The grantor (the Medicaid applicant) creates the MAPT.
- The trustee controls the trust assets.
- The beneficiary benefits from the trust when the grantor dies.
There can be multiple trustees or beneficiaries.
Persons in these roles must adhere to strict rules:
- Neither the grantor nor the grantor's spouse can be a trustee, but adult offspring or other relatives can be trustees.
- Neither the grantor nor the trustees can be named as a beneficiary.
- The trust must be irrevocable, meaning it cannot be changed or canceled.
A MAPT allows assets to be passed on to beneficiaries because the money is protected from Medicaid estate recovery. The estate recovery process enables Medicaid to recoup dollars from the grantor's estate that were paid for that person's long-term care benefits.
The primary disadvantage of a MAPT is that the grantor loses control of the money since the trust is irrevocable. Also, if the creation of the trust falls into the Medicaid five-year look-back period, it triggers a penalty period. Finally, MAPTs cost between $2,000 to $12,000 to set up, making them unaffordable for many applicants.
Qualifying for Medicaid long-term care benefits can be complicated. Most applicants would benefit from professional advice in crafting a long-term care plan that includes careful consideration of Medicaid options. Elder law attorneys and other Medicaid planning specialists can help guide seniors and their families to solutions designed for the best outcomes.