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Long-term care costs like nursing home care can quickly drain retirement savings. Medicare provides little help paying these bills, but Medicaid can cover nursing home costs for those who meet strict financial eligibility rules. Certain strategies like special trusts, home equity transfers and annuities can help meet those eligibility rules and protect assets like your home and retirement accounts from Medicaid spend-down requirements. But most of these tools require planning years in advance. A financial advisor can help you plan for long-term care and other needs that you’ll have later in life.
Nursing homes provide round-the-clock care for seniors who can no longer live independently. But they come at a steep price, with the national average cost for a semi-private room exceeding $94,000 per year, according to Genworth.
Medicare is a federal health insurance program for people age 65 and older. However, Medicare typically only covers limited short-term nursing home stays for rehabilitation after a hospitalization.
For ongoing long-term care costs, Medicaid can serve as a primary payer. Unlike Medicare, Medicaid is a means-tested program, so eligibility depends on meeting strict income and asset limits. Rules vary by state, but most limit individuals to no more than $2,000 in countable assets. For married couples, the at-home spouse who will not receive nursing care often can keep up to $148,620 in assets in 2023.
If you need help planning for these potential expenses in the future, consider working with a financial advisor.
Medicaid can cover the costs of a nursing home for people who meet strict means testing.
If someone has too many assets to qualify for Medicaid, they may be required to spend their own assets to pay for care. Once they have spent enough of their money to pay for their care, they may be able to qualify for Medicaid.
Another strategy is to transfer assets to another person or entity, such as a trust. However, here Medicaid imposes a five-year lookback period when assessing eligibility. That means any asset transfers made in the five years before applying are scrutinized and may delay Medicaid enrollment.
Still, with proper planning, there are ways to shelter assets from Medicaid spend-down rules. Special trusts, home equity transfers and annuities can help protect savings and property.
Keep in mind that state Medicaid programs may seek to recover the costs of certain services. In fact, for enrollees 55 and older, state Medicaid programs “are required to seek recovery of payments from the individual’s estate for nursing facility services,” according to Medicaid.gov. That’s why asset protection is so important. And if you need help with a long-term care plan, consider working with a financial advisor.
One method is to place assets in an irrevocable trust at least five years before needing Medicaid coverage. A trust is a legal document that creates a legal entity. Trusts come in two main varieties, revocable and irrevocable. Unlike revocable trusts, irrevocable trusts mean forfeiting control of the assets permanently. While that is a significant downside, assets transferred to an irrevocable trust before the five-year lookback period won’t count toward Medicaid eligibility.
A properly structured irrevocable income-only trust can also shelter retirement accounts like IRAs from Medicaid spend-down requirements. The IRA owner transfers the account to the trust, then withdraws only the annual required minimum distributions (RMDs) as income. This converts countable assets into non-countable income and the trust principal remains intact. Trusts also offer other estate planning advantages, including avoiding probate.
Consider a hypothetical married couple with a $250,000 IRA they want to protect from Medicaid’s five-year lookback rules. To shelter the IRA, the account owner could transfer it into an irrevocable income-only trust at least five years before applying for Medicaid.
The trustee would then only withdraw the RMDs as income each year, avoiding large lump-sum withdrawals. This converts the IRA into non-countable income while preserving the trust assets. Medicaid would not count the $250,000 IRA toward eligibility.
Consider finding a financial advisor with estate planning experience to help you through the process of establishing a trust. This free tool can help you potentially match with one.
A couple reviews the costs of nursing home and long-term care insurance.
Besides special trusts, options like long-term care insurance, home equity lines of credit, Medicaid annuities and gifts to family can also help reduce countable assets and/or pay for long-term care outright. Each approach has pros and cons to weigh. There is no one-size-fits-all solution.
Married couples can also use a life estate to protect home equity from Medicaid. This deed transfers ownership of the home to the healthy spouse, while retaining a “life tenancy” for the spouse needing care. The at-home spouse then inherits the home.
Similarly, Medicaid-compliant annuities offer a way to ensure assets don’t count toward Medicaid asset limits. They generate non-countable income through monthly payouts. The lump-sum purchase price is considered an exempt transfer if certain rules are met. And if you need help purchasing an annuity, think about speaking with a financial advisor about these types of products first.
While shelters like trusts and annuities can help protect savings, they come with major limitations. Once you transfer assets to an irrevocable trust, they are permanently inaccessible. Gifting money reduces your own net worth.
And if you fail to meet all Medicaid requirements it can result in a penalty period of ineligibility. Considering costs, uncertainties and ethics, asset protection strategies may not be right for everyone.
Advanced planning with special trusts, annuities and equity transfers can help shield assets from Medicaid spend-down requirements for nursing home care. But these tools require foresight and irreversible actions. Their costs and trade-offs merit careful thought, too. Some tools won’t be helpful for some people, and all of them have varying combinations of limitations and risks.
Personalized guidance from a financial advisor can be invaluable when planning for potential long-term care costs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re interested in long-term care insurance, it’s important to research available coverages and find an option that’s suitable for your needs. Luckily, SmartAsset has done some of the work for you with this comprehensive list of the top long-term care providers.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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