Long Term Care Planning
Long term care planning is one of the most challenging parts of my job as a financial planner. None of the solutions I can recommend feel very good, and no one really wants to think about it much. If I had a dollar for every time I heard someone tell me that their long term care plan is a Smith and Wesson, I’d be a rich man.
Let’s cover a few basics. First, long term care doesn’t mean nursing home. In fact, thanks to technology an increasing majority of people are getting the long term medical care they need delivered at home. But this doesn’t come cheap. 24/7 at home care can cost as much as a nursing home stay, in some cases!
Second, Medicare does not pay for long term care. They may pay for a few months of rehab after a hospital stay, but they will not pick up the bill over the long durations of time that most of us worry about. The only government program that helps with long term care costs is Medicaid. And to qualify for Medicaid, you need to essentially be broke. Medicaid for nursing homes is not the same as the Medicaid that low income people use for their general medical care – there is a unique qualification process for “long term care Medicaid”. Essentially, in order to qualify for Medicaid to pay for your long term care, you have to show them that you have less than $2000 in assets, and you need to commit most of your income to paying for your care expenses. Some assets may not be counted – like your primary residence – but generally you need to spend it all down.
So paying for Long term care is up to you. No one is going to pay for you. So one option people consider is insurance. The problem is that insurance has become extremely expensive. Of course, the insurance is expensive in part because people tend to make claims – so many people are “getting what they paid for”. Another problem is that and both life and long term care insurers find it increasingly difficult to make money in this low interest rate environment, and so have been forced to raise their rates. But in any case, insurance has gotten so expensive, that many people just figure that they will insure themselves – that is, make sure they set aside or retain enough assets that they can afford to pay for whatever care they need.
But to take this approach, you will need to accept the possibility that with the extremely high cost of 24/7 home care or nursing home care, a lengthy care need may very well exhaust your assets. And then what happens?
Medicare and the government contribute little to nothing for long term care expenses. Medicaid is the primary source of funding for many people when it comes to long term care. However, for the most part, you need to be broke to qualify for Medicaid. Typically, once your assets are depleted (with a few exceptions) the individual is eligible to apply for Medicaid assistance.
But there is a problem with “spend all of your assets and then rely on Medicaid”. What happens if your spouse is still perfectly healthy? He/she will need money to live on – and may need money for her own long term care. This can be a serious problem because at least in New Jersey, there is no "his and hers" assets when it comes to Medicaid. If you own it, they want you to liquidate it and spend it. That includes most annuities, retirement accounts, vacation homes, rental properties, etc. etc. Medicaid does offer a very modest asset protection allowance for the spouse of the applicant, but it is very modest, and is likely insufficient to provide for that spouse’s financial security. They will also allow the spouse (or patient) to keep their home - but not necessarily enough money to pay for the upkeep of that home!
There are tools and strategies that can protect some assets for a healthy spouse (or your heirs), but the planning is exceptionally complicated, and mistakes can be costly. As an example of how complicated this can get, consider strategies involving a residence.
Equity in a primary residence will not disqualify an individual from receiving Medicaid benefits. On the other hand, money in your investment account (even your retirement account) will. So one strategy might be to pay off a mortgage, essentially shielding money in your home, where Medicaid won’t count it. That makes sense, but there could be some unintended consequences and problems.
First, is that you (or your spouse) may need those investments for income, and you cannot easily spend the money in your home. A reverse mortgage might help solve this liquidity problem.
Second, although you can qualify for Medicaid while your spouse continues to live in your home, the state will likely place a lien on that home to recover the benefits they paid out while you held that asset. Or, if your spouse sells the home while you are on Medicaid, the state will now disqualify you until you spend the money that came from the sale! This may effectively make the spouse a prisoner in the home. Putting the home in an irrevocable trust may solve this problem – but that precludes use of the reverse mortgage to get money out of the home to cover expenses, should the spouse wish to continue living there.
Or consider the strategy of asset transfer. You can give your money away so that you can qualify for Medicaid without spending it all on your care. But you can’t give away money in an IRA or 401k without paying a hefty tax bill when you take it out. Not only that, giving money away will limit your eligibility for benefits for up to five years, so this kind of planning needs to be done well in advance of the need – and most people don’t know they will need care 5 years ahead of time. And who can you trust to handle the money? If Medicaid decides that the gift was a sham, and you still actually control the asset, then they will deep the asset yours and require it be spent on your care. Do it yourself Medicaid planners mess up on this one all the time!
The point is – long term care planning is complicated and messy, and it is not a place for "do it yourself".
Medicaid planning in particular requires the use of an attorney who specializes in the field, working closely with your financial advisor. But in my experience, some of these attorneys are interested primarily in selling and setting up one size fits all solutions involving trusts and annuities, without giving much thought to the clients unique financial planning needs. There are a few who I have seen do good work, customized for the client’s situation, and putting the clients' needs first - but you will want to find an attorney you can trust.
This type of planning isn’t cheap – lawyers aren’t ever cheap, and doing this correctly is going to take some billiable hours. And again (just like the insurance solution) you have to spend the money and do the legwork long before you know if you will ever need it.
If your financial plan indicates you will have a couple million sitting in the bank when you get old, then you may have little to worry about. If you are already just barely squeaking by, then you may have no choice but to just rely on Medicaid. But for everyone in the middle, it is wise to have a plan.