Thanks to the advent of technology and healthcare, people are living longer than ever. Supply and demand for long-term care facilities have increased costs exponentially, to the point that they are threatening assets at an unprecedented level. There's a direct correlation between higher healthcare costs and lower estate values.
The more nursing homes cost, the less of a legacy you'll be able to leave to loved ones. Fortunately, planning and forward-thinking can help protect assets from nursing home costs. This guide will tell you everything you need to know about asset protection for elders, including:
Why are nursing home costs a threat to your assets?
The cost of long-term care via nursing home facilities is more than most people want to acknowledge. According to Genworth Financial, the annual median expense of long-term care in a nursing home facility in 2021 was:
Semi-Private Room: $94,900 (+1.96%)
Private Room: $108,405 (+2.41%)
Accounting for 3.0% annual inflation, semi-private rooms may cost upwards of $171,400 per year in 20 years. Their private room counterparts may be just shy of $200,000 a year. To be fair, these future costs are only forecasts and aren't guaranteed to come to fruition, but there's a chance rates will continue to increase.
Each year you spend in a nursing home detracts from the value of your estate, effectively diminishing the legacy you intended to leave to loved ones. That said, asset protection for elders may be easier than you think. You can take steps to preserve assets and limit the impact of nursing home costs.
5 ways to protect assets from nursing home costs
Instead of letting costly nursing home expenses threaten your financial security, explore these options to protect your legacy:
Apply for long-term care insurance
Turn assets into income with a Medicaid-compliant annuity
Transfer assets to an irrevocable Trust
Create a life estate to transfer property to someone else
Give financial gifts
Apply for long-term care insurance
Qualifying for long-term care insurance is a great way to protect your assets from nursing home expenses. If for nothing else, a long-term insurance plan can provide an additional source of funding for the care provided by the nursing home. Like most insurance policies, long-term care insurance can cover nursing home costs (up to a predetermined limit). In return, policyholders will need to pay monthly premiums.
With the help of long-term care insurance, policyholders are less reliant on their assets to cover nursing home care costs. Not having to account for expenses out of your pocket can preserve savings for priorities, like paying medical bills or leaving a financial legacy for loved ones. In other words, the money you save can be allocated toward more important things. Of course, premiums will eat into the savings, but less than direct nursing home expenses.
Qualifying for long-term care insurance also awards policyholders more financial independence than Medicaid. While Medicaid provides health coverage to millions of Americans, it is meant to assist low-income individuals. That means some people may need to spend down their assets to qualify for Medicaid. Those with long-term care insurance may keep their assets and still receive help with exorbitant nursing home costs.
Turn assets into income with a Medicaid-compliant annuity
One of the best ways to protect your assets from nursing home costs is to turn them into income by buying a Medicaid-compliant annuity. In doing so, you may be able to reduce the value of your assets and qualify for Medicaid without sacrificing your hard-earned cash.
Typically, Medicaid is for low-income individuals — one's assets can't exceed a certain amount. People who want to qualify for Medicaid may spend down their assets, sacrificing their cash for assistance. However, those who use their current assets to buy a Medicaid-compliant annuity may turn their assets into income and qualify for Medicaid.
When you buy a qualifying annuity, you agree to deposit a lump sum of cash with the provider. The money is invested and returned to you through a series of predictable payments. Due to the initial deposit, you may be able to decrease the value of your assets enough to qualify for Medicaid. However, the cash will be returned as income.
Transfer assets to an Irrevocable Trust
If you want to protect assets from nursing home costs, consider establishing an irrevocable Trust. Setting up a Trust will transfer ownership of the cash to the Trust account, which is managed by a trustee. As a result, the money is no longer considered part of your estate, but rather a property of the Trust.
Placing assets in an irrevocable Trust ultimately reduces the value of your estate. Suppose enough money is placed in the Trust. In that case, the new value of the estate may allow you to qualify for Medicaid, all while leaving a legacy for loved ones.
Medicaid's review of your financial transactions may date back five years. If you want the money to be subtracted from your estate's value in time to qualify for Medicaid, you must be proactive and act sooner rather than later.
Create a life estate to transfer property to someone else
Not unlike the other options on this list, creating a life estate allows you to decrease your estate's value so that you may qualify for Medicaid. Instead of simply spending down your assets, however, creating a life estate allows you to transfer ownership of your property to someone else while retaining the right to live in the property for the rest of your life.
Creating a life estate allows you to transfer ownership of your property to someone else. Typically, life estate transfers ownership to family members, loved ones, and close friends — someone who can be trusted. The recipient of the property becomes what's known as a "remainderman." You retain the right to use and occupy the property for the rest of your life. When you pass away, the remainderman becomes the full owner of the property.
When applying for Medicaid, the property held in the life estate will not be counted in your estate's total value. Consequently, the property will be left to those chosen to inherit it. The depressed value of the estate may help you qualify for Medicaid without any spending down.
Give financial gifts
Giving loved ones financial gifts can protect your assets from nursing home expenses. More specifically, gifting assets to those you care about the most can reduce the value of your estate and qualify you for Medicaid. The value of the gifted assets may not be subject to Medicaid's asset and income eligibility requirements.
One important rule to be aware of is the Medicaid "look-back" period, which reviews financial transactions made within the last five years before applying for Medicaid. If you make gifts during this period, it could affect your Medicaid eligibility, and you may be subject to a penalty period during which you are not eligible for Medicaid benefits.
Trust & Will can help protect assets from nursing home costs
To protect assets from nursing home costs, you need a complex and multifaceted solution. Fortunately, there's more than one way to protect the legacy you have managed to build. Long-term care insurance, Medicaid-compliant annuities, irrevocable Trusts, life estates, and financial gifting each offer their unique way of protecting assets and ensuring eligibility for Medicaid benefits.
Understanding the potential consequences and limitations of each strategy listed above is essential. It's always a good idea to consult with a professional specializing in elder law and Medicaid planning when developing a plan that meets your specific needs.
If you want to protect assets from nursing home costs, please contact a qualified professional. Here at Trust & Will, we’ll help keep your assets safe. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our other estate planning and settlement options today!
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