Be Prepared: Protect Your Estate from the High Cost of Nursing Home Care

Odds are high that someone in your family will need a nursing home at some point. A majority of people over age 65 will require some type of long term care services during their lifetime, and for many, nursing home care is unavoidable. With the cost of private nursing home care now exceeding $100,000 per year, that’s an expense very few of us can afford. But there are steps you can take with careful estate planning to protect your estate and minimize the financial burden.

Medicaid, known as MassHealth in Massachusetts, is a joint federal/state need-based health insurance program for those with low income. As such, qualifying for MassHealth benefits requires applicants to meet stringent income guidelines. Currently in 2015,
a couple seeking MassHealth benefits for one spouse may have only $119,220 in assets and a single applicant is allowed only $2,000. Virtually all assets are counted against these limits except for the home and personal belongings. Estate plan clients often ask me how to qualify for Medicaid to cover the cost of a nursing home. With advance planning, there are several legal strategies that can be utilized to protect the family home and avoid losing your life’s savings to qualify for MassHealth, while still having assets to passon to loved ones.

One of these strategies is setting up an irrevocable trust. Irrevocable MassHealth trusts are generally recommended for people over the age of 60, who are primarily concerned about needing long term or nursing home care in the future. However, to be effective for MassHealth purposes, the irrevocable trust must be created and funded at least five years before such long term care is needed because MassHealth uses a five year look back period and will assess a disqualification period for any transfer to a trust within the five year period. When you apply for MassHealth, the state is entitled to review all of the financial transactions made during the previous five years to determine if a “disqualifying transfer” has been made. A disqualifying transfer occurs when an asset is transferred for an amount less than its fair market value, which includes transfers of assets into a trust and gifts.

The irrevocable trust is set up as an income-only trust, whereby the grantor, the person who creates the trust, receives only the income and has no access to the principal. In order to protect the trust assets from the cost of long term care, and to qualify for MassHealth, the trustee must be prohibited from distributing principal directly to the grantor. Without access to the trust principal, the assets in the trust should not be those needed for day to day living. For daily living expenses, it’s better to rely on other assets such as retirement, and social security which cannot be transferred into an irrevocable MassHealth trust without adverse income tax consequences. A primary residence or vacation property can be transferred into the trust, as well as an investment portfolio, or at least a portion of it, without any adverse tax consequences.

For a single person, or a married couple with assets below $1 million, only one irrevocable trust is necessary but for a married couple with assets exceeding $1 million or that may exceed $1 million over their lifetime, two separate irrevocable trusts are recommended. Using two trusts enables a married couple to protect their assets from the cost of long term care and utilize both federal and state tax exemptions, to ultimately reduce their estate tax liability.

Planning for MassHealth eligibility not only requires an experienced practitioner to thoroughly review your estate and healthcare needs, but also to draft documents that conform to current and frequently changing laws. As a cautionary note, income-only irrevocable trusts have come under attack from MassHealth despite being permitted under state and federal law. Although such challenges are not always successful, they underscore the need for carefully drafted documents. You do not have to go broke or lose your home to qualify for MassHealth. Setting up an irrevocable trust well in advance of needing long term care can be an effective and relatively low cost estate planning strategy to protect your assets.

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