I had a Statistics professor fond of saying, “If you torture a number long enough it’ll tell you anything.” Statistics can be used to support any issue if properly framed or manipulated.Here’s one such statistic: the average American will spend three months in a nursing home at a total cost of around $21,000. So, depending on your perspective, that might be good news in that we only need to sock away $21,000 for such an event, or if your glass is half empty it means good grief!

Actually,the true average is far less because the numbers are skewed by the small fraction of Americans who suffer from Alzheimer’s Disease or other long term care (LTC) needs that may require a decade of support. And it’s these rare cases that require us to have a LTC plan in place. At an average nursing home cost of $7,000 per month, a five year stay totals $420,000, ouch.

Once we get past the numbers, the only fact that matters is that we all need a LTC plan, but what are our options? Well, there are four. First, we buy LTC insurance if we can qualify and afford it. Second, we self-insure or pay for LTC costs with our savings. Third, we pay for LTC costs ourselves until our assets are depleted, then rely on Medicaid to cover the rest. Finally, we can create a plan to transfer assets out of our name, allowing us to qualify for Medicaid without having to liquidate our assets.The gist of this fourth option is converting our assets from “countable” assets to exempt assets at least five years prior to applying for Medicaid and then legally protecting those assets from Medicaid recovery after our death.

Medicaid Eligibility and Spend Down Provision

Medicaid is the payer of last resort when it comes to LTC, so the eligibility requirements are strict for both asset levels and monthly income. In Montana, exempt assets may include our home if its value is less than $543,000 for singles, but homes are exempt if there’s a spouse or dependents living in the home. One car,most of our personal belongings and household goods, term life insurance, whole life policies with a cash value less than $1,500, and pre-paid funeral expenses are all exempt as are our pets, though it appalls me they feel the need to even mention our pets.There are also certain types of annuities and notes payable that may be exempt. All other assets are “countable” and for a single person to qualify for Medicaid, those countable assets cannot exceed $2,000.

For married couples, the rules become dizzying. Medicaid labels the spouse in the nursing home the institutionalized spouse and the spouse in the family home as the community spouse. The assets of both spouses are countable even if the assets are titled in the name of the community spouse, or if held jointly with children, with exception to the excluded assets formerly listed. Even a prenuptial agreement doesn’t exclude a community spouse’s assets.Thankfully, there are community spousal protection statutes allowing the community spouse to keep a limited amount of their half of the couple’s countable assets. In Montana, the community spouse may shelter the first $23,448 of the couple’s countable assets and one half of everything thereafter, up to $117,240 at which point it is capped. After $23,448, the institutionalized spouse must spend their one half of the assets down to $2,000 before they will qualify for Medicaid assistance.

The income test depends on whether the Medicaid applicant is single or married. Singles qualify for Medicaid as long as their income is less than the nursing home costs, which is almost always. However, the income received must got towards the nursing home costs, minus any money spent on health insurance, and a preposterous $50 per month living allowance. Veterans may keep an additional $90 per month. Married applicants may allocate a portion of their monthly income to the community spouse capped at $2,931 in 2014, provided the community spouse can demonstrate sufficient need. All income to the community spouse is disregarded.

The 5 Year Look-back Period

In 2005, Congress passed the Deficit Reduction Act, treating assets given away within 5 years prior to a Medicaid application date as countable assets. The purpose was to prevent an aging country from gifting ourselves into poverty for the purpose of qualifying for Medicaid assistance. Assets given away during the 5 year look-back period are presumed to be gifted for the sole purpose of Medicaid qualification. This will trigger a period of ineligibility for Medicaid benefits since those assets could have been used to pay for the individual’s care.

The penalty for gifting within the 5 year look-back is the amount given, divided by the monthly nursing home cost. For example, using $7,000 as the monthly nursing home cost, a $70,000 gift will create a 10 month delay of Medicaid eligibility. If that was everything you had, then you may have 10 months where you lack the assets to pay for nursing home care while also being ineligible for Medicaid assistance, yikes! The penalties for not reporting the gifts are even worse; they’re called insurance fraud and tax evasion.

However, we can make plans today avoiding all of these penalties.You can create an irrevocable trust in which to transfer your assets, but there are complicated rules for the trust to qualify. First, this cannot be a revocable living trust. If you can revoke the trust, then you have access to the assets and accessibility makes the assets countable. A properly drafted irrevocable trust transfers the property out of your name and though you’ll no longer have access to the principal,you may receive the interest and income the trust generates. This income is countable, but we’ve protected the principal entirely. For these reasons, you don’t want to transfer all assets into this trust. Typically, we create a revocable living trust for the assets you need to access and an irrevocable trust for the assets you want to preserve. We also want to convert our countable assets into exempt assets as much as the laws will allow, thus maximizing the money we may access.

So why not just give our assets to our future heirs today and avoid the trust altogether? There are complex tax consequences to gifting, but primarily, we don’t want to transfer assets to our children or grandchildren while we are living because those assets then become targets for other people’s liabilities. If you transfer your home into your daughter’s name and she later goes through a divorce, your future roommate might be your ex-son-in-law. Not our goal here.

A proper Medicaid asset protection plan may involve a period of in-home care prior to moving into a nursing home. We may also purchase LTC insurance to cover only the 5 year look-back period. Either way, we probably want a multi-faceted plan that utilizes stages and different legal and financial tools all working together toward an identifiable goal.

Medicaid Recovery

Montana is required by Federal law to have a program in place to recoup the Medicaid costs upon the death of a Medicaid recipient. I mentioned earlier that our homes are not a countable asset, but that’s strictly for assessing eligibility. Our homes are completely available for Medicaid cost recovery. If a nursing home patient is receiving Medicaid assistance and they own a home or other real estate, the State will file a lien on the property securing their interest in the property. At the death of the patient, the State will file a claim in probate against the decedent’s estate often consuming the remaining assets. If there is a surviving spouse, children under 21, or a child of any age that is blind or disabled, then a hardship waiver may be granted. However, if we’ve properly removed the house from your estate, then the State will have a hard time attaching a claim to property you don’t legally own.

A Long Term Care Plan

A Medicaid asset protection plan serves as a safety net in the event that you’re not individually capable of financing your own LTC. With the proper use of trusts, financial instruments, and foresight, we may preserve your assets for your heirs while still securing sufficient nursing home care. The interesting result that estate planners observe is that when people become aware that they need a LTC plan and begin implementing steps, the majority of these people preserves enough assets or obtains LTC insurance so they never even need Medicaid. And that’s a statistic that doesn’t require torturing to make a positive point!