Helping an elderly parent or grandparent through their final years can be a difficult season. The personal and emotional toll alone is enough for one person, then add the financial complexities on top. One of the major questions that comes up when elderly people consider moving into an assisted living or nursing home is whether they will lose all their money. Planning ahead of time could help make these transitions easier, but it is important to understand all the options.
Key Takeaways
- There are several ways to fund elder care: retirement savings, Medicaid, and long-term care insurance. Understanding the intricacies of each will help avoid issues, and this is where professional financial advisors and elder law experts are valuable.
- Focusing on using Medicaid to fund a nursing home is a viable strategy, but requires planning to spend down assets within the 5 year lookback guidelines.
- Using Irrevocable Trusts to remove funds from parents’ estate so that they are Medicaid eligible is an option that can ease financial strain, but carries risk, as it limits financial flexibility.
The Fear of Long-Term Care
There is little wonder why long-term care has become a fear for many people. Over the last few years, the costs have skyrocketed. According to The Federal Long-Term Care Insurance Program, the average nursing home room costs $308/day, or roughly $112,000 per year. For those who need long-term care for a few years, that could easily add up. On top of that, the level of service between each facility has been wildly different. There are anecdotal experiences of people who have had great or poor service across all facilities, so there are additional worries about your parent being “mistreated” or “neglected.”
As a result, there is an impossible balance between long-term care costs and the level of service. Especially for adult children aiding in this process, how can you determine which route through long-term care provides the best service while minimizing the financial hit to the family? I don’t think there are right and wrong answers here. Instead, I think awareness and education are the strongest tools you have to make informed decisions in the moment, and quite literally live with those decisions in peace.
Who’s Paying For It?
It is rather obvious that the goal for most people would be to minimize their out-of-pocket expenses for long-term care. However, inevitably, the family (including the adult children) incurs expenses to help make it through this stage. At the outset, it is worth thinking about long-term care as a life expense worth paying for. I’d argue most people want to pass on their assets to the next generation, but very much would also prefer using their money for their own end-of-life care as well. In other words, don’t be afraid to spend their money to improve their quality of life.
Outside of the family, perhaps the largest payer of long-term care is Medicaid. Medicaid itself is one of the most complex issues when it comes to paying for long-term care. While it’s a federally funded program, each state administers its own eligibility and benefit criteria. Which means there are different rules around what assets, income, etc., could be included or exempt from eligibility. For example, in Kentucky, retirement assets like an IRA are excluded from Medicaid eligibility (though the income from those IRAs could be included).
This naturally creates a question of what to do with all the income and assets that are included, if indeed your situation makes you ineligible. This is where understanding eligibility criteria is important, namely because you run into issues like the 5-year lookback window on assets. If they find that you gifted or transferred assets to a trust within the past 5 years, there could be penalty periods and further complications. This “spend down” of assets is a common tool for people to get to eligibility. However, it clearly comes with some risks and should be done with professional help along the way.
The final piece to the puzzle is long-term care insurance. For those with existing policies, there will be many more intricacies as to how much your insurance will cover. There are thousands of different long-term care insurance policies, so it is extremely important to understand the terms of your specific policy.
Simply relying on the insurance policy to cover everything, without digging into it, can lead to serious miscalculations. At the basic level, almost all these policies have a “deductible” of sorts, where the first 30, 60, or 90 days of long-term care could be your responsibility to cover. Paying $308/day for the first few months alone is worth planning around.
General Planning Approaches
So what’s the plan? There are a million options and approaches, and they will range widely, whether you talk to an Elder Law Attorney, Medicaid Specialists, Financial Advisor, or a friend who went through it. Here are three very basic approaches to help orient you in the right direction.
The first approach is a wait-and-see strategy. Admittedly, that does not seem like much of a planning strategy at all, but the fact is that not everyone will need long-term care. For those who never enter an assisted living facility or nursing home, it would not make much sense to go down the road of Long-Term Care Insurance, Irrevocable trusts, or Spending Down assets to qualify for Medicaid. The wait-and-see approach naturally maximizes the flexibility that you have with your money.
The next approach is to focus on Medicaid. Depending on your level of assets, it could make sense for a Medicaid application to help cover the extraordinary costs of long-term care. Spending down assets, especially while staying within the 5-year lookback guidelines, can be a daunting endeavor. Make sure you understand the application requirements for your state, and understand which incomes and assets are excluded.
The final approach, an extension of Medicaid Planning, is to create Irrevocable Trusts and “beef up” your estate planning. This strategy attempts to maximize inheritances by removing the funds from the parents’ estate before it is counted against them. While there are certainly viable ways to do this, by definition, the word “irrevocable” means this cannot be undone. The flexibility and/or ease of use of the funds is significantly reduced. It is very important in the creation stage of these trusts and related documents to spell out all the required language needed. If an unexpected event arises later that the trust doesn’t account for, it could create serious financial issues. Alternatively, if everything goes to plan, the trusts could be a good way to help ease the financial situation.
Long-Term Care
There is usually no single decision when it comes to long-term care. Instead, thousands of smaller decisions must be balanced. Understanding all the major players and payers in this space can help make things clearer. Working with professionals to give you sound guidance for your specific situation is critical. Find a strategy that works for your family and just focus on the next best step. At the end of the day, it’s just money; living life is much more important.
TC Falkner 