Nursing homes provide a valuable service for elderly and disabled individuals who cannot adequately care for themselves. The cost of this care can be steep, however. The American Association of Retired Persons reports that the typical nursing home stay costs an average of $50,000 a year.
Many elderly individuals mistakenly believe that Medicare will cover their nursing home stay. Unfortunately, Medicare is not structured to pay for long-term care. Medicaid, a federal insurance program for low-income individuals, will cover nursing home care, but you may not be able to qualify for that care until you have exhausted your existing assets. Unfortunately, this leaves you without the financial security you previously enjoyed if you decide to return home. It also absorbs money you might prefer that your loved ones inherit after you pass away. While hiding assets from the government is a criminal offense, you can legally shelter certain assets and avoid using them to pay for the high cost of a nursing home stay.
Read More: How Does a Living Trust Avoid Nursing Home Costs?
Give monetary gifts to your loved ones before you get sick. Of course, there’s no way to know with certainty if or when you will need nursing home care, but giving gifts to your family members well ahead of time helps protect the money from creditors seeking to collect after your death.
In the case of Medicaid, any assets you transfer within the five years prior to entering a care facility are subject to seizure after your death. Transferring funds before you fall ill shelters your money and ensures your family members can legally keep the gifts they receive.
Hire an attorney to draft a “life estate” for your real estate, naming you as the life tenant and a loved one you trust as the remainderman, with future ownership interest in the property. As a life tenant, you retain the right to continue living in your home until your death. After your death, ownership in the property is transferred to your loved one, which prevents the state from making a claim against it.
If you create a life estate and transfer real estate, you’ll incur no penalty if you enter a nursing home, provided the transfer occurred at least five years before your illness. If you enter a nursing home within that five-year window, however, you may incur a financial penalty for transferring property that would otherwise have been available for estate recovery.
Place liquid assets into an annuity. Some states, such as Colorado, do not count periodic payouts from annuities when determining Medicaid eligibility. Thus, you can transfer your assets into an annuity and qualify for Medicaid-covered nursing home care without having to spend down your assets.
If your state does consider annuity payouts when determining Medicaid eligibility, you can still safely transfer assets into an annuity, but you cannot use Medicaid's services for a specific period of time following the transfer.
Transfer a portion of your monthly income to your spouse. The Federal Spousal Impoverishment Act protects the spouses of nursing home patients by permitting them to exclude their own income when paying for a spouse's nursing home care. If your spouse's income is less than the amount your state exempts, you can direct a portion of your income to your spouse to bridge the gap. The income you transfer to your spouse for monthly maintenance is exempt income and sheltered under federal law.
Shelter your money through an irrevocable trust. Unlike a living trust, an irrevocable trust is exempt from nursing home costs. You cannot receive principal from the irrevocable trust, but the periodic interest and dividends you receive from the trust are safe from seizure.
Place your assets and your spouse’s assets into a “pour-over” trust. This type of trust protects the assets from seizure while still allowing you access to the money. Create or modify your wills to include a testamentary trust providing for the welfare of the surviving spouse. Although a portion of the funds from the original trust “pour over” into the deceased spouse's estate, the testamentary trust included in his will protects that money from being seized to pay nursing home expenses. This provides financial protection for both you and your spouse regardless of which of you dies first.
The Omnibus Budget Reconciliation Act of 1993 gives state Medicaid officials the right to recoup any funds spent on your nursing home care from your estate after your death. Thus, your heirs could stand to lose any assets you did not properly shelter before entering the nursing home.
You may be responsible for paying a gift tax on any monetary gifts you make to family members above the annual maximum. As of 2012, the maximum amount of money you may give to a loved one tax-free is $13,000. This amount changes periodically. You can verify the current tax-free gift limits on the IRS website.
Spousal maintenance cutoff amounts vary by state; however, you can increase the monthly amount you allocate to your spouse by one-third for each dependent adult child or minor child living in your home.
- American Association of Retired Persons: Nursing Homes – Cost and Coverage
- USA Today: To Protect an Aging Parent's Assets, Plan Ahead
- Okura & Associates: Protect Your Home From Medicaid Liens
- Law Offices of John J. Campbell, P.C.: Use of Annuities as a Medicaid Estate Planning Tool in Colorado
- Georgetown University: Medicaid's Spousal Impoverishment Protections (p.1)
- Beasely & Ferber, PA: A Brief Introduction to Sheltering Assets From a Long-Term Nursing Home Stay
- U.S. Department of Health and Human Services: Medicaid Estate Recovery
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.