My step-mom was nearing the end of her ability to remain at home, and my dad was wearing out being a caretaker. They’d managed, against all odds, to find a good in-home PCA for several days a week, and my sister took one day a week, but Mom had started to do things like get up in the middle of the night to cook a rasher of bacon “for the kids who are visiting” (when there are no houseguests). It was worrying Dad, who isn’t in great health, either. For that matter, his poor health worries him, too, in terms of what would happen to her if he died.
But the cost of care! It’s so much! So what to do?
A really hard question that comes up is how best to pay for long-term care expenses.
First of all, I think it’s good to remind people that the cost of care is really going to be a LOT.
According to Fidelity, the average 65 year old couple needs to expect to spend $300,000 on health care over the course of retirement. That’s just MEDICAL care, it doesn’t include long-term care. The average lifetime cost of long-term care was $172,000 in 2017. Plan on spending at least $45,000 a year for the last four years of life out of pocket.
As a tax accountant, this immediately makes me think about making sure we get as much out of the retirement plans at low brackets as we can, because it’s not at all unlikely that we’ll need to take big bunches of cash out at some point in the future. I’d rather you took $20K/year out for five years than $100K out all at once. Tax brackets are tricky in retirement as you can trigger social security to be taxable, you can trigger IRMAA penalties, and you can lose things like the Economic Impact Payment benefits if you take out too much from an IRA all at once. A round of tax-planning each winter doesn’t need to take very long — I do it in about fifteen minutes for the people I serve — but it can save thousands of dollars.
Medicaid generally requires that the person receiving it be impoverished. They “protect” the spouse from impoverishment somewhat, but it’s still a bitter thing for the healthier spouse to discover that they’re only allowed to have $130,380 in assets over and above their home and other personal belongings.
Most people immediately try to figure out how to maximize the amount they can protect from nursing home expenses and get Medicaid to cover them. There are some options, but not a ton. Unless you get a Medicaid Waiver of some sort, they generally look through your finances going back five years to see if you’ve given away any assets. You’ll get disqualified from receiving Medicaid benefits for some months based on how much you had previously given away.
We still do this sometimes (look up “half a loaf“), but the strategy was gutted in 2005 by changes to Medicaid. Now we can sometimes do a “modified half a loaf” or a “reverse half a loaf”. It works best if you have a clear heir (who would pay for your care if you’ve impoverished yourself and still need help anyway).
A really good idea is to change the beneficiaries of the healthy spouse so that the unwell spouse can’t inherit money. You can make a special needs trust the beneficiary, or name the children as beneficiaries (and then assign them the duty of taking care of their parent’s needs). We also gift assets in the name of the unwell spouse over to the healthy spouse until the unwell spouse has less than around $2K to their own name. To read more about different scenarios, I highly recommend Harry Margolis’ website for great answers to specific questions about long-term care planning.
Another thing to do is to “impoverish” yourself by using your cash to buy some allowed things. Here are some ideas from this Nolo article along with some additions:
- Pay down the mortgage in your house: most states allow you to keep something around $500K in equity in your house. (My tip here is to set up a HECM LOC so you can access that equity if you need to.)
- Pay down any other debts: car loans, etc.
- Prepay your funeral expenses: arrange for funeral services as well as body disposition costs — cremation, burial, headstone, etc.
- Prepay your taxes and other expenses (heating oil for the winter, your year’s worth of car and homeowner’s insurance, etc.)
- Special types of annuities that are payable to the “community” spouse (that is, the one not in care.) Here’s an excellent article about how you might use a Medicaid Annuity.
- Purchase “non-countable assets.” That is, buy stuff you might need for the well spouse: furniture, a new vehicle, etc.
- Purchase Long-Term Care Insurance as a single premium for the community spouse.
- In some cases, purchasing income-producing property (like a rental building) is a protected transfer.
Some other ideas: check out the “frail elder waiver,” that allows Medicaid to cover in-home care, often without a lookback period on how you got your assets down. (Here’s the description of the Michigan one, and here’s the MA description.)
Be careful about giving away houses (google “life estates”) to learn more about that; it’s trickier than you think. You can do irrevocable trusts if you know your heirs want the house, but if you think you might need to tap the equity in old age, consider keeping it and doing a HECM Line of Credit instead.
Also be careful about getting a divorce to qualify for Medicaid. You can try other options first (“spousal refusal“), but Medicaid might step into the divorce proceeding to require half the assets be split.
There’s a lot to process in all of this. A good next step is to find an Elder Law attorney who specializes in this stuff to help you plot your best path. They can draw up the trust documents and update wills and some of your beneficiaries for you. Make a year-end appointment with your tax accountant to do tax planning, too!