Medicare, the federal health insurance program primarily for men and women 65 and over, pays doctor and hospital bills for many older Americans. But it doesn’t cover everything. For example, long-term custodial care for help with the “activities of daily living,” such as bathing, dressing and eating, isn’t covered.

Many older people will eventually need such care, as a result of physical or mental impairment, and they and their families will have to find a way to pay for it. Unfortunately, it is rarely cheap. In fact, it can quickly wipe out a person’s life savings.

The average nursing home costs more than $220 a day, or over $6,600 a month, according to a 2012 survey by the insurer MetLife. (In some metropolitan areas, researchers have found that costs can exceed $15,000 a month.) The MetLife survey found that a month in an assisted living community – for people who don’t need the level of care a nursing home provides – ran $3,550 a month on average. Home health aides charged roughly $20 an hour. For more on this topic, see Alternatives to Nursing Homes and Long-Term Care: More Than Just A Nursing Home.

Privately purchased long-term care insurance is one way to handle some of these costs, though it can be expensive and is not for everyone. It's also generally most cost effective when purchased before age 60. See What's The Best Time To Get Long-Term Care Insurance? and Long-Term Care Insurance: Who Needs It?

Another solution is applying for Medicaid, a joint federal and state program. Though the specifics vary by state, Medicaid generally covers nursing home services, as well as home and community-based services for people who need assistance, but not skilled nursing care. In most states, Medicaid will also cover services that can help people remain in their homes, such as personal care, according to the U.S. Department of Health and Human Services. Read more by clicking on Medicaid Vs. Medicare and Medicaid Vs. Long-Term Care Insurance.

In order to qualify, an elderly person must have total “countable assets” under a certain amount, typically $2,000 for an individual and $3,000 for couples, although the amount varies widely by state. In New York, for example, the 2014 Medicaid eligibility level is $14,550. Countable assets include bank accounts, stocks and bonds, cash value of life insurance polices, and, in some cases, retirement assets. A home, if the person owns one, may be excluded, though home equity over a certain level can affect eligibility. Note, however, that once the home is no longer the person’s principal residence, it can become subject to a Medicaid claim for reimbursement.

Traditionally, people often reached the eligibility threshold either by giving money to family members or through a spend down—essentially paying for their own care until enough of their assets had been depleted, which was often quickly.

However, there are legal strategies that can help older people qualify for Medicaid without impoverishing themselves or their spouse. Though the rules are complex, some of the specifics will vary by state, and the services of a knowledgeable lawyer are essential, here are five key options to investigate.

1. Asset protection trusts.

A properly established irrevocable trust can be one way to shelter assets where they will not affect Medicare eligibility. An irrevocable trust, which transfers assets to a trustee, effectively removes them from the older person’s control. This is in contrast to a revocable trust, in which the person retains the right to change the arrangement. Revocable trusts, which are also referred to as revocable living trusts, have their uses, but qualifying for Medicaid isn’t one of them.

Another option, of course, would simply be to give the money to a responsible child or other relative. But David A. Cutner, an elder law attorney with Lamson & Cutner, P.C., in New York City, says that can be far riskier. Once the money is transferred, it legally belongs to the other person. So even if the person is totally trustworthy, events in his or her own life – a divorce, a business failure, a lawsuit – could put that money in jeopardy. Creating a trust instead can avoid that risk.

Medicaid currently has a five-year “look back” period, so if someone transfers assets into a trust and enters a nursing home more than five years later, the money in the trust will not be counted toward Medicaid eligibility. However, if the money was transferred within the five-year look back period, that will affect eligibility for a period of time.

Attorney Cutner offers this simplified example, using his state’s rules: Suppose a person transfers $100,000 to an irrevocable trust and soon thereafter enters a nursing home and applies for Medicaid. If nursing home care averages $10,000 a month in that area, Medicaid will look at how many months of care that $100,000 would have paid for and consider the person ineligible for 10 months, during which time someone will have to pay the nursing home bill. After that, however, if the person applies for Medicaid, he or she should be eligible. (Note that in New York, the look back period applies only to nursing homes and not to assisted living or home care; in other states it may apply to all three.)

In this case, it might appear that the older person will be out $100,000 either way. That is where the next strategy comes in.

2. Private annuities or promissory notes.

If a person needs to apply for Medicaid before the five-year look-back period is up, it still may be possible to preserve a significant portion of his or her assets using a properly drafted private annuity or promissory note that complies with federal law, Cutner says.

Suppose the person in the example above transferred $50,000 into a trust and used the remaining $50,000 to purchase a private annuity prepared by an elder law firm. The monthly annuity payments, along with the person’s Social Security and any other income, could be used to pay the nursing home bill for the five months that the person was now ineligible for Medicaid ($50,000 divided by $10,000). There would be no transfer penalty for the money used to purchase the annuity, under Medicaid’s current rules, so it wouldn’t affect the person’s eligibility. Plus, the $50,000 in the trust would now be preserved.

The person could also have transferred that same remaining $50,000 to someone in return for a promissory note, with a similar $10,000 monthly payback period. Like a private annuity, such an agreement would need to be structured by an elder law attorney to make sure it met Medicaid requirements.

Using the annuity or promissory-note strategy, many people can protect from 40% to 50% of their assets, Cutner says. High net-worth individuals, with, say, $1 million or more in assets, are unlikely to benefit. Someone transferring $500,000 to a trust in a locale where nursing homes cost an average of $10,000 per month would be ineligible for 50 months, a period that could far exceed his or her nursing home stay.

3. Pooled trusts.

States differ in how they treat income for Medicaid purposes. In general, a Medicaid recipient who is in a nursing home must turn over all of his or her income, except for a small monthly allowance, in order to defray the cost of care. If the person needs home care or lives in a continuing care retirement community, the state may consider any income over a certain limit to be excess or surplus and require that it go toward the cost of care. In those instances, a pooled trust can be a way to protect some of that income.

With a pooled trust, the older person arranges for his or her excess income to be paid to a charitable organization. The person no longer has control over the money but can submit bills to the charity for payment. Someone who is still living at home might use it for food and utilities, for example. This allows the person to defray everyday living costs that might exceed Medicaid’s relatively low limits. Note that only about a limited number of states permit such trusts.

4. Personal care agreements.

A lump sum paid to a caregiver for future services may not be considered a penalized transfer if it is structured correctly. That can serve a number of purposes. One is to reduce the size of the estate so the person will be eligible for Medicaid. Another is to buy the older person some care beyond what Medicaid provides.

This kind of personal care agreement can also help ease the financial strain on a child or other relative who has given up work and sacrificed income in order to provide care. Often, Cutner says, it can help prevent family rifts when the burden of caregiving falls disproportionately on a particular child. Such an agreement can also be used with an agency that provides home care services.

5. Spousal transfers and spousal refusal.

A transfer of assets from one spouse to the other is not penalized under Medicaid, so a common move is for a spouse who needs to go into a nursing home to turn over his or her assets to the well spouse. Even so, the well spouse is still legally obligated to provide for the other spouse’s care, and their collective assets will be considered for Medicaid eligibility purposes. By signing a spousal refusal, however, the well spouse may be able to renounce that responsibility, making the other spouse immediately eligible for Medicaid.

Later, Medicaid can attempt to collect reimbursement from the well spouse, though Cutner says that strategies are available that may lessen the impact. Even if Medicaid does collect, the couple is likely to benefit because Medicaid’s reimbursement will be based on the discounted rate it pays nursing homes rather than the private-payer rate the couple would otherwise have had to pay. This option may not be available in your state.

The Bottom Line

If seniors lack the funds to pay for the care they need when they become mentally or physically frail, investigate these ways to help pay the bills without impoverishing the individual or their spouse. Healthy seniors should use this information to plan ahead for care they might need in the future. Also see Power Of Attorney: Do You Need One?

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