Part 2... (Edelman article as of 1/11/2006)
The solution? Actually, there are three of them. Let’s look closely at each:
Solution #1: Qualify for Medicaid By Transferring Assets
Clearly, Medicaid will pay only if you have few assets. Logically, then, make sure you don’t have assets. Therefore, transfer your assets to your children now. This will make you poor, and by being poor, you’ll qualify for Medicaid.
If you don’t transfer your assets to your children, you’ll just spend everything you own on long-term care costs until you have nothing left anyway. Either way, you’ll be broke. So wouldn’t you rather give your assets to your kids instead of to a nursing home?
Four Problems with Transferring Assets
If you think this sounds reasonable, watch out for these four big problems:
Problem #1: Yeah, Right
You’ll find it very hard to give everything you own to your (spoiled rotten!) kids just as you’ve reached that time in your life when you can start enjoying yourself. In other words, this recommendation, um, usually doesn’t go over very well.
Try convincing your parents to give you all their money.
“No, really, Dad, you need to give me everything you own right now. It’s for your own good!” Yeah, right.
Problem #2: Medicaid Is Aware of This Trick
If you made gifts during the 36 months prior to filing your claim for benefits, Medicaid will deny the claim — 60 months for gifts you make to a trust. This rule is specifically intended to prevent people from asset-shifting. And please note an important change in Medicaid rules: If you file a claim at any time during the 36-month waiting period, Medicaid will restart the clock. Therefore if you plan to use this strategy, assets must be transferred well in advance of the need for long-term care, and be sure you don’t file a claim until you’re sure the 36-month waiting period has expired. Also, be aware that transferring assets to a spouse does not shield the assets from Medicaid.
Have you brought assets into your marriage?
Many people who marry later in life bring assets into the marriage, like Ruth. Her husband died when she was 47, leaving her his 401(k), their home, plus life insurance proceeds. Five years later, Ruth remarried. She kept all her assets in her name and filed a separate tax return. When her second husband needed long-term care, he quickly spent down all his assets. But Medicaid permitted Ruth to keep only $2,000 per month; all her other income had to be spent on her husband’s care before Medicaid would pay benefits. Thus, over the next several years, Ruth was forced to spend down to the poverty level, too.
Regardless of whose money it was or where it came from — inheritances, savings, retirement plans, or insurance proceeds — Medicaid will deny claims until both spouses spend virtually all their money on long-term care. The fact that the money originally belonged to the community spouse does not matter.
Problem #3: Attempts to Asset-Shift Are Stymied by the IRS
Under gift tax rules (see Chapter 63), you may give to any one person only $12,000 per year (you may give unlimited amounts to your spouse, but as shown above, doing so has no effect). So, even if you try to give your money away, the IRS will restrict the speed with which you may proceed.
Problem #4: This Strategy Is Unethical ...
Please remember that Medicaid is funded by taxpayers to help the truly needy of our society— not as a middle-class tax-dodge to protect your assets.
Problem #5: ... and Illegal, Too!
Congress knows that few consumers have the imagination or knowledge to effectively execute an asset-shifting strategy. So, to discourage professional advisors from sharing this information, Congress passed a law that made it a felony for advisors to counsel or assist consumers in their efforts to shift assets. Therefore, don’t bother asking your lawyer, accountant, or financial advisor for help; the smart ones won’t provide it.
Solution #2: Divorce Yourself from Medicaid
For all five reasons noted above, transferring assets is not as simple or as easy as it first appears. This is why some elder-care attorneys suggest strategy number two: Divorce. The institutional spouse leaves all assets under a divorce decree to the community spouse; Medicaid cannot claim assets transferred in such a manner.
Three Problems with Divorce
This isn’t necessarily a great idea, either, because:
The same ethical problem exists as noted above;
If you thought it was tough for Mom and Dad to handle the thought of giving everything to their kids, just try to get them to file for divorce after 45 years of marriage simply because one of them is declining in health. Not only is it unlikely they’ll do it — it’s one heck of a commentary that our laws even encourage such an action; and
Medicaid is aware that many couples are divorcing for economic rather than marital reasons, and the agency is starting to challenge this strategy. Where claimants have recently divorced and decreed all their assets to their ex-spouses, Medicaid has gone to court, arguing that under the divorce decree, the institutionalized spouse did not get his or her fair share of the marital assets. Why argue that position? Because if Medicaid wins, as much as half the marital assets return to the institutional spouse, which Medicaid then can seize.
Solution #3: Long-Term Care Insurance
This is the least-evil solution.
Although buying insurance is never fun, given the alternatives of transferring assets or getting a divorce, it is the least evil choice. For that reason, clients who are not independently wealthy should consider buying a policy — even as early as age 40 or 50.
Here’s why: The cost of coverage is related directly to your age at the time you buy the policy (rates are unisex; there is no cost difference between men and women — not yet, anyway). Since a person age 50 is not likely to file a claim for 20 years or more, the carrier has many years to collect premiums. Thus the cost for that 50-year-old is quite low — about $150 per month in many cases. That’s extremely affordable, especially considering that the cost of policies skyrockets with age. If you don’t buy a policy until age 65, the cost could exceed $3,500 per year, or $7,500 by age 75.
Many feel that buying a policy in their fifties is unnecessary, since it is likely to be years — even decades — before they’ll need the coverage. (But it’s more likely than you might think: 11% of nursing home residents are under age 60. Most of them are accident victims, which can occur at any age.)
Two Reasons to Buy Long Term Care Insurance at Young Ages
Although it’s true that a 50-year-old is unlikely to need the coverage for many years, it nonetheless makes sense to buy it young. Why? Consider Figure 11-6, which compares the cost of a typical long-term care policy for different ages:
Reason #1: It’s Cheaper When You’re Younger
Thus, the 50-year-old pays 30% less in total payments over his lifetime than the 75-year-old and is protected for 35 years instead of just 10. The insurance industry is sending you a clear message: Buy this policy when you’re young, because you’ll save a lot of money in the long run.
Reason #2: You’re More Able to Qualify
And you’re more likely to qualify for it, too — and that’s the second reason you need to protect yourself at younger ages. On the application form, you’ll be presented with a list of medical conditions. If you have any of them, you will be declined or asked to pay a higher premium. But at age 50, when you’re unlikely to have symptoms, you are better able to get the coverage.
Thus, you need to buy a policy when you’re young enough to afford it and healthy enough to qualify.
updated 01/11/06
