Protecting Assets from Nursing Home Costs

June 20, 2019  |  

Protecting Assets from Nursing Home Costs

Key Takeaways

  • Changes in Medicaid law that took effect in 2006 have significantly reduced last-minute asset protection opportunities.
  • Contrary to popular belief, nursing home care is not paid for by Medicare or Medicare supplemental insurance.
  • Nursing home residents and their families will pay on average $13,000 a month over a typical 30-month stay.
  • The only surefire way to maximize the assets protected for your family is to begin planning at least five years prior to a nursing home admission.

Long-term care costs can deplete your and your parents’ assets at an alarming rate. When your parent or a close relative enters a nursing home, they will incur a mean monthly cost of $13,000 for an average stay of two and a half years. To make matters worse, they have spent the majority of their lives working and building assets so that their retirement will be well-funded. But, retirement comes at a time when the possibility of catastrophic illness is more likely. Planning ahead will mean the difference between spending family assets to finance any needed care and preserving family assets for one’s family.

Contrary to popular belief, nursing home care is not paid for by Medicare or Medicare supplemental insurance. While Medicare may provide benefits for rehabilitation for a short time, once Medicare benefits end, another source of payment must be found if the person is not able to go home and must remain in the nursing home as a resident. Medicaid benefits are available to help pay for nursing home care, but they are available only once eligibility requirements, which include strict asset limits, have been met.

The power of advanced planning

Changes in Medicaid law that took effect in 2006 have significantly reduced last-minute asset protection opportunities. While there are still a few beneficial options available if you fail to plan ahead, they apply only in very specific situations. The only surefire way to maximize the assets protected for your family is to begin the planning process at least five years prior to a nursing home admission.

Assuming that five years will pass before a parent or close relative is admitted to a nursing home, you may want to introduce your family to a gifting plan. When applying for Medicaid benefits, the Medicaid provider will look at the five-year period immediately preceding the application to determine if your parent made any gifts. If gifts are found within this time period, a penalty period will be set, during which no Medicaid benefits will be paid on your parent’s behalf.

If at least five years and one day have passed since the date of the gift, under the current rules, the gift will not need to be reported when applying for benefits. Hence, no penalty period will be set. A gifting plan may consist of outright gifting, usually to children, or gifting to an irrevocable trust that can continue to provide your parent(s) with income until they pass away. There is danger involved in gifting, since your parent may be admitted to a nursing home prior to the expiration of the five-year period. You and your parent(s) must plan for this possibility before beginning any gifting. Gifting may also have serious tax consequences that should be discussed before proceeding.

Your parent(s) might also consider purchasing assets that will not count toward the asset limit on Medicaid benefits. Examples of exempt assets include an irrevocably prepaid funeral, a burial account of no more than $1,500, a car, term life insurance and, in some cases, a home. The payment of outstanding debts, such as a mortgage or credit card balances, can also be beneficial in some cases.

Paid care agreements and long-term care


If a parent is presently being cared for by you or one of your adult siblings, you might consider having your parent establish a paid care agreement for you or your sibling. Your parent would then pay you or your sibling for the care provided according to the terms of the agreement. As your parent “pays” for care, he or she would in effect be “purchasing” the care services from you or your sibling instead of “gifting” to him or her. Your parent would also be benefiting that child by providing that child with additional income. These agreements must be reasonable and fair to your parent and to you or your sibling who is providing the care.

Aside from a plan to obtain Medicaid benefits, long-term care insurance can alleviate the draining of assets and provide increased financial stability. Long-term care insurance will pay for nursing home care according to the benefits purchased. A wide range of policies is available, including unique combinations of benefits and pricing structures. It is possible to buy a policy that will also pay for assisted living, home health care expenses and geriatric care management. Some policies even have a provision that if the long-term care benefits are not used, then the premium may be refunded or a death benefit may be paid.

In addition, life insurance policies with long-term care riders have become more popular recently. These policies allow the death benefit to be converted into a pool of money to pay for long-term care if needed. And if not needed, then the death benefit will pay out at the time of the insured’s passing. Underwriting for these life insurance policies can be less stringent than for a long-term care policy alone. In order to purchase long-term care insurance, parents must be insurable, which means not having a health condition that would prevent the insurance company from insuring them.

NOTE: The planning strategies mentioned in this article can be extremely complex. This article is intended to raise awareness of possible planning opportunities, but a full discussion of the pros and cons of each possibility has not been provided. You and your advisors should seek the advice of an elder-law attorney before proceeding. Do so now to avoid paying later.

Note: This article was originally written for a Massachusetts audience. Please check rules and regulations in your own state carefully.


About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.
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