With the passage of the Deficit Reduction Act of 2005, asset-protection planning in the event of a nursing-home stay has become more complicated and more important than ever. As an advisor, you must help your clients deal with the consequences of suffering from a long-term disability.
There are three primary ways to pay for a nursing-home stay: private pay, long-term care insurance (LTCI) and Medicaid. This article will address each of these but will focus on some of the recent changes to the Medicaid rules as a result of the enactment of the Deficit Reduction Act in February 2006.
One of the most significant changes is a change to the look-back/penalty period.
As a planning tool for seniors, LTCI is a familiar option for many advisors. Because it reduces reliance on Medicaid, the government is very much in favor of its use in financial planning. Under Section 6021 of the Deficit Reduction Act, there is an expansion of the opportunity for states to enter into partnership programs with LTCI providers.
Under the partnership plan, a state would disregard assets equal to the benefit payments stated in a client’s LTCI policy. For example, if your client purchased $219,000 of LTCI benefits and went into a nursing home, and the policy paid out its full benefits, an additional $219,000 of the client’s assets would be protected from the spend-down process. This option is currently available in a few states, although many others are thinking of adopting it. However, the partnership plan does not address how to protect those who cannot qualify for insurance.
Private payment is a common method of funding the costs of long-term care because very few people own LTCI. Most who enter a nursing home pay for their stay privately. The major problem with this approach is its expense, with costs reaching as high as $10,000 per month. Very few people can afford to make such payments without quickly exhausting their life’s savings. When the money runs out, nursing-home residents are forced to the next level of payment, which is Medicaid.
Medicaid is a government program that is administered by the states pursuant to federal requirements. It pays for medical treatment and room and board at a nursing home when someone runs out of funds. There are numerous techniques available to spend down assets without impoverishing the husband and wife in the process. Under the new laws, however, the methods of protecting assets are more challenging than ever.
Several changes have occurred recently that may affect the financial stability of your clients. One of the most significant is a change to the look-back/penalty period. Currently, there is a 36-month look-back period for gifts to individuals and a 60-month look-back period for gifts to irrevocable trusts. If a gift is made during the relevant look-back period, the donor becomes ineligible for Medicaid for the number of months that the gifted assets would have paid for nursing-home care, based on the average nursing-home cost in the state. This is known as the penalty period.
For example, suppose the state’s average nursing-home cost is $7,000 per month. To spend down assets, a client made a gift of $70,000 to someone on Jan. 1, 2006. Because the gift was made under the old law, the period of Medicaid disqualification would be over in 10 months, or by Nov. 1, 2006. Under the new law, the look-back for all types of gifts, whether to a trust or to an individual, is 60 months. More significantly, the penalty period does not start when the asset is transferred, as is the case under the old law. Instead, it begins when the person is actually in the nursing home, and would, had it not been for the gift, qualify for Medicaid benefits.
In this example, say the person goes into the nursing home on Jan. 1, 2010. Since he has no other assets, he would be eligible for Medicaid. Under the new law, the penalty period will not even commence until Jan. 1, 2010, when he goes into a nursing home, and will be over on Nov. 1, 2010. How the nursing home will be paid during the disqualification period is anyone’s guess. Therefore, persons of moderate means who might go into a nursing home need to think very carefully before making even a modest gift.
Impact on annuities
The second major change concerns the treatment of annuities. If an institutionalized person buys an annuity to achieve Medicaid eligibility, the state must be named as the beneficiary. If there is a spouse or a minor or disabled child, those parties can be named as the primary beneficiary, but the state must be named as the secondary beneficiary. The annuity must also be irrevocable, nonassignable, actuarially sound as determined by tables published by the Office of Actuary of the Social Security Administration, and provide for equal payments during the life of the annuity, with no deferral and no balloon payments. The state is required to notify the issuer of the annuity of the state’s right as a preferred remainder beneficiary, and the issuer of the annuity may, but is not required to, notify any other beneficiaries of the state’s preferred claim. The state has the option of requiring the annuity issuer to notify the state when there is a change in the amount of income or principal being withdrawn from the annuity.
Effect on home equity
The law also contains an absolute prohibition on Medicaid eligibility for applicants who have a home equity of $500,000 or more. Each state has the option to raise this amount to $750,000. This rule does not apply if there is a spouse or minor, or a blind or disabled child residing in the home.
Since Medicaid is a state-administered program, each state will have to change its own rules to comply with the federal law. The deadline for states to do so is the first day of the first calendar quarter, beginning after the end of the next full legislative session. Therefore, many states will have a grace period before the law goes into effect.
If you are working with healthy senior clients, make sure you emphasize the importance of leveraging LTCI as part of their portfolio to protect against the asset-draining effects caused by a nursing-home stay. Understand what options your clients have based on their circumstances and help them build a contingency plan, and you will create clients for life.
Gregory B. Gagne, ChFC, is the owner of Affinity Investment Group, LLC, past president of NAIFA-New Hampshire and a member of MDRT. For additional information, contact him at firstname.lastname@example.org.
David H. Ferber, J.D., is partner in Beasley & Ferber, P.A., and a nationally published author of articles on estate and Medicaid planning. Contact him at email@example.com.