Long-Term Care: Should You Count On Uncle Sam’s Help?

There’s no doubt about it:  long-term care planning is stressful and costly, causing many people to simply ignore it and hope for the best. But it’s to their detriment. Some private nursing homes can cost over $12,000 per month these days, and the cost of nursing care rises faster than inflation. When I speak to prospective clients and existing clients, I get a lot of anxious questions about long-term care and nursing homes, but my answers invariably inspire little desire in them to plan for this possibility. Why? Long-term care insurance is expensive, and many of my clients do not have ideal assets to establish a “Medicaid Trust”.

So let’s look for a minute at Medicare vs. Medicaid. There is a lot of confusion out there about the difference between these two programs. A recent poll by AP-NORC Center found that 56% of adults over 40+ years of age think that Medicare will or should cover their long-term care costs. Speaking to clients and prospective clients, I can confirm anecdotally that the misconception that Medicare will pay for long-term care is widespread. Medicare only pays for up to 100 days of rehabilitative care. The average stay in a nursing home is almost 3 years (over 1,000 days). The bottom line: Never expect Medicare to pay for nursing homes. Medicaid is the program that will pick up the nursing home tab, but only when you “spend down” your estate to Medicaid-defined levels. The common misconception about Medicaid is that it is only a safety-net welfare program for the poor which is how it was originally intended. As it is structured today, Medicaid is essentially a health-benefits program and does pay for long-term care for many seniors.

Because of Medicaid’s strict financial limitations on a person or family, a common planning technique is to gift some of your assets to your children or other beneficiaries while you’re still healthy.  But you must do this well ahead of when you expect to need Medicaid. The reason being is Medicaid’s “five-year lookback”, where Medicaid officials review your asset dispersions for five years from the time you need the government to pay for your nursing home care. This is an attempt to keep Medicaid from becoming a full-on entitlement program (whether it already is or isn’t is your call…). The thinking is that, without this lookback period, people from all economic levels would dump their assets to immediately claim Medicaid benefits.

The idea behind early asset planning is to make sure you leave something for your family while also ensuring you receive affordable care. Most clients using this planning technique will establish a “Medicaid Trust” to ensure the gifted asset is protected for you and your beneficiaries during your lifetime and after you pass.

President Trump and the administration have proposed changing how Medicaid works, chiefly under the American Health Care Act (AHCA). Under the new proposed law, states will receive less Medicaid money and will either have to reduce enrollment or find funds in the state budgets to offset the reduction of federal funds.

What else could states do to balance their budgets? Back in 2005 under the Deficit Reduction Act, the gifting lookback period was changed from three years to five years to make Medicaid planning and gifting more difficult. If the federal government imposes even stricter Medicaid dollar limits on states, will the lookback period be extended again? Will it be a ten-year lookback period? There is no indication of what will actually happen yet, and the AHCA has not passed the U.S. Senate as of publishing.

Regardless of what Congress or the administration does, the big picture remains: the trend of people living longer is only rising—and rising quickly. Costs for long-term care continue to rise and, coupled with an aging population, big problems are ahead for these programs.

On a macro level, there is no easy answer to this problem. If the Medicaid laws become even more stringent in the future, you may be limited in what strategies are available to preserve a portion of your estate for your heirs. My advice is to plan early. Plan when you’re healthy. Plan when nursing homes or long-term care doesn’t seem like a real possibility. If you wait until you are in your 80s and may need care in the next year or two, your planning options become limited.