How the millionaire next door plans for long-term care
Planning for old age and the intense healthcare needs that often accompany it is enough to overwhelm almost anyone. It’s hard enough for working people to balance the expenses or building a life, raising a family, and saving for retirement. Unfortunately, even those that manage this balancing act with grace and approach their senior years with a feeling of relative security can be blindsided by a simple fact; Medicare won’t really pay for their nursing home.
When discussing this reality with clients, CPAs are often confronted with completely disbelieving stares. Clients say, “That can’t be! My great aunt so-and-so was in a nursing home before she died, and I’m sure my cousins didn’t pay for any of it!” Of course, this was probably true for Aunt So-And-So, but as with anything related to the US healthcare system, the devil’s in the details.
Medicare will almost certainly pay for your hospice care. Medicare may cover your visit to a nursing home for rehab in certain circumstances. Medicare may even cover home care nursing for a few days a week for a limited time. What Medicare will not do is pay for long-term custodial care, which is what most Americans are really thinking of when they imagine a nursing home.
So how do people pay for nursing home care?
If Medicare isn’t paying for nursing home coverage, the next logical question might be, “Just who is paying?” According to a 2020 cost of care study conducted by Genworth, the median annual cost of nursing home care is $93,072 for a semi-private room or $105,852 for a private room. Who’s footing the bill for that astronomical cost?
According to the American Association of Long-Term Care Insurance, in 2020 the cost of long-term care services was borne by:
- 5% was paid by long-term care insurance
- 12% was paid directly by Elders and their families
- 84% was paid by Medicaid and other Government Sources
Remarkably, Medicaid alone paid for fully 57% of long-term care services in the US in 2020.
If Medicaid has me covered, why do I need to plan?
Most working Americans are somewhat familiar with Social Security and Medicare. They have seen the amounts withheld from their pay to fund the programs. They know relatives that have claimed and enjoyed benefits for many years. They hear about these programs on the evening news, in political debates, and at the dinner table. Americans understand these programs as benefits they’ve earned and paid for during their working years.
Medicaid is a different sort of program altogether. Medicaid eligibility is not based on how many years one worked or how much was paid into the system. Medicaid exists to help those who do not have the financial resources to pay for healthcare.
To protect taxpayers from abuse of such a system, the government has implemented strict means-testing, to insure only those than need help are able to get it. There are strict limits on the amount of income one can receive and assets one can own while on the program.
What is means testing?
Getting Medicaid coverage can be a frustrating and confusing process. Among the many requirements to qualify are the following means-testing rules:
- Assets test – Do you have enough assets to pay for your own care?
- Income test – Does your income fall below the poverty line?
The assets test generally requires that Americans exhaust all their own resources on healthcare before Medicaid steps in to help them. There are a handful of exemptions from the so-called “spend-down” requirements, including a small amount of cash, most retirement funds, a principal residence, income-producing real estate, and some vehicles. There may also be ways to shelter assets owned with a spouse. Unless all your assets fall into these exempt categories, you should consider planning to protect them.
The income test generally requires that your income fall below the poverty line, which is $12,880 for individuals or $17,420 for couples in 2021. Keep in mind that income here means Modified Adjusted Gross Income (MAGI). Your CPA can help you determine what this number is for you. If your income falls above the poverty line, your tax advisor may be able to help you plan for this on an annual basis.
How do I plan for the assets test?
If you don’t plan for the assets test, you can still qualify for Medicare. Unfortunately, you will have to spend-down all your non-exempt assets before you start receiving benefits. If you’d rather hang on to your savings or pass it to your loved ones, there are a few established ways to accomplish that.
The simplest way to spend down assets for those without much in the way of non-exempt items is to convert the funds to exempt assets. You could make improvements and repairs to the home your spouse will continue to occupy while you’re in the nursing home. You could choose to buy a nice new car, so your spouse won’t have to worry about transportation in the near future. You could also consider paying down debts.
For those hoping to live at home and lean on family for care as long as possible before transitioning to a nursing home, non-exempt assets could be paid to the family members providing care as wages. While the added social security cost of paying wages this makes it a very tax-inefficient way to transfer wealth, many retirees would still prefer to see money in the pockets of their kids than in the pockets of a large hospital corporation. Because Medicare scrutinizes all payments to family members, it’s critical to speak with legal counsel before making any payments to ensure fair market value wages are paid and properly documented.
For those with significant non-exempt assets, the previous two strategies may simply not allow them to move enough funds. If you fall into this category, transferring legal title and control of the assets into a trust might protect them from Medicare’s rules. Because Medicare looks very closely at all transfers of wealth for up to five years before you file for benefits, it is critical to sit down with Medicaid trust experts as early as possible to avoid having the government “claw-back” these transferred assets despite your efforts.
How do I plan for the income test?
If you don’t plan for the income test, you may still qualify for Medicare, but it could mean spending down your annual income above the poverty level on medical care before benefits kick in.
A common approach to solving this problem is for the spouse expecting to need care to purchase an annuity with assets which pays income to the spouse expecting to remain in the family home. This has the additional benefit of reducing assets for purposes of the asset test. Not all annuities achieve both goals, so be sure your investment advisor understands what you’re trying to accomplish before moving forward.
Another approach is to setup a trust to hold the assets and only pays out a minimal amount of income to the spouse expecting to need care. This can accomplish the same goals as an annuity, with more flexibility regarding the terms. Because Medicare looks critically at all transfers of wealth up to 5 years before claiming benefits, you should speak to a trust expert before pursuing this route as well.
Planning for old age can be difficult and overwhelming, but it doesn’t have to be. If you’ve taken more than a few steps down the road to financial independence, you probably already know the value that a trusted advisor brings to the table. At Centennial Tax & Accounting we’re ready to be your trusted advisor. We have the expertise to walk you through the options in detail, and the resources to put you in connect you with the investment and trust experts who can finish the job.