The aging U.S. population means that more people will likely need nursing home care in the coming decades. Meanwhile, the cost of nursing home care is increasing — and expected to keep increasing.
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 while long-term care insurance is available to cover nursing home costs, these plans are also expensive and may come up short for long-term stays.
This leaves millions of Americans reliant on Medicaid (called MassHealth in Massachusetts) to pay for nursing home care — a far from perfect solution that usually involves spending down assets to qualify. With proactive MassHealth planning, though, it is possible for someone to qualify for MassHealth 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 Are High
The lifetime likelihood of needing nursing home care is relatively high. About 70 percent of people who turn 65 today will eventually need some type of long-term care, including nursing home care.
About 1.3 million Americans aged 65 and older currently live in nursing homes, and about 40 percent of today’s 65-year-olds will spend some time in a nursing home before the end of their lives.
Medicaid and Long-Term Care
Women are more likely than men to need long-term care, and the older a person gets, the more likely they are to need it. At the same time, there has been a growing trend of younger adults (those under the age of 65) living in nursing homes, in part due to Medicaid eligibility expansion under the Affordable Care Act. Research shows that this group increased from 10.6 percent of total nursing home residents in 2000 to 16.2 percent in 2017.
Medicaid expansion has led to more people of all ages qualifying for the joint federal and state health insurance program. Intended as the “payer of last resort” when it comes to long-term care, Medicaid has become the primary nursing home insurance for millions of Americans due to the absence of any other public program covering long-term 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.
Typical Nursing Home Stays and Costs
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.
Extrapolate these costs over multiple years, and they are unsustainable for many families.
MassHealth Planning Strategies
Whether a nursing home stay lasts months, years, or is permanent, you may have crunched the numbers and determined that MassHealth is the only feasible payment option for a parent’s nursing home care.
This is a “good news, bad news” scenario. The good news is that it’s possible for somebody who doesn’t currently meet MassHealth’s asset limits to “spend down” their excess assets to meet limits. The bad news is that these limits are generally only $2,000, which requires significant planning, since the average net worth of Americans is more than $1 million, including nearly $1.8 million for those 65 to 74.
Another upside is that not all a person’s assets count against the limit. A home, for example, is typically exempt as long as the equity does not exceed the current equity limits. Someone can also own one car without exceeding MassHealth’s asset limits.
Many MassHealth spend down strategies take advantage of workarounds that allow nonexempt assets to be converted to exempt assets, thereby excluding them from MassHealth 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 MassHealth.
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 MassHealth spend down.
MassHealth-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 MassHealth asset limit. The payout structure must be based on life expectancy, and once purchased, the annuity cannot be cashed out or changed; funds in the annuity are no longer accessible as assets.
Annuity income may affect your parents’ eligibility for other needs-based government programs, such as Supplemental Security Income (SSI). In addition, the state MassHealth agency must be the primary beneficiary in case of the annuitant’s death during the annuity period.
MassHealth Asset Protection Trusts (MAPTs), A Type Of Irrevocable Trust
MassHealth-compliant trusts, a type of irrevocable trust, 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 MassHealth purposes. They are legally owned by the irrevocable trust, not your parents, although they may be able to benefit from these assets, such as remaining in a home transferred to a MAPT.
It’s important to note that a revocable trust provides no protection from MassHealth liens as the parents have retained the right to revoke the trust during their lifetime. This can be a frequent area of concerns and if you are not sure if you have an irrevocable trust or revocable trust it is best to consult with an elder law attorney.
Creating a MAPT triggers a penalty period of MassHealth 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 MassHealth need, often in conjunction with a parent’s estate plan.
Life Estates
Once commonly used, we now rarely utilize life estates except in the most unique of circumstances. 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 ability of MassHealth to exercise a lien against the property after the parents have passed away. The main reasons we no longer use these frequently is that it gives a present ownership interest (although non-possessory) to children, and therefore, if the property is to be sold during the parents’ lifetime the children would all need to participate. And, the second reason we don’t use these is that a lifetime sale such as this can saddle children with a capital gains tax (as the parent’s primary residence exclusion would not cover that portion of the gain allocated to a child).
MassHealth’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 Medicaid 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 MassHealth.
- Paying off debts, making necessary home repairs, purchasing a new car, prepaying funeral expenses, or taking a family vacation 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, MassHealth allows the other spouse (the “community spouse”) to retain a certain amount of income and assets.
Because state MassHealth laws and individual nursing home care needs vary, there is no “one-size-fits-all” strategy for protecting a parent’s assets from nursing home costs and a MassHealth spend down. To develop a personalized plan that avoids penalties or disqualification from MassHealth also maximizes asset protection. Contact us for an initial consultation.