Close Close

Life Health > Long-Term Care Planning

For the Long Term

Your article was successfully shared with the contacts you provided.

The Deficit Reduction Act (DRA) signed February 8, 2006 revised Medicaid’s “look-back period” and set up a nationwide long-term care insurance partnership program. As an advisor, you can help your clients plan by communicating these changes.

While Medicaid was designed to finance health care for the poor, the unscrupulous used Medicaid planning (spending down assets through gifting) to avoid purchasing private insurance. Prior law required a look-back period of gift transfers for the 36 months leading up to an application for nursing home care (and 60 months for transfers made to certain trusts). Under the Deficit Reduction Act, the 60-month period now applies to all transfers.

Thus, if someone has become eligible for Medicaid as a result of gifting, Medicaid will only pay benefits if the person either makes an upfront contribution towards their nursing home care or waits for the new look-back period to elapse. Let’s say a widow gifted $200,000 to her children in January of 2003 and applies for nursing care coverage under Medicaid 48 months later. If the $200,000 reduction in assets had qualified her for Medicaid, she will now need to come up with out-of-pocket compensation or endure an imposed period of ineligibility determined by dividing the uncompensated (gift) value by the average monthly cost of care in a nursing home. Out-of-pocket costs would also be calculated based on the gift value (i.e., our widow would pay the first $200,000 before Medicaid benefits would commence). Thus, if the average cost of care was $5,000 and the gifted asset was valued at $50,000, an applicant would be subject to 10 months of ineligibility.

These new rules are more restrictive, but are hardly unprecedented — in actuality, they bring the United States in line with other nations’ public-assistance policy. Germany, for example, mandates a look-back period of 10 years.

Allowable Assets

Another common Medicaid estate planning strategy used the home to shelter the estate. Prior law did not include the value of the individual’s home when determining Medicaid eligibility, as a spouse or dependent relative continued to live there. While this seems reasonable at face value, some people invested large amounts of money in home improvements or even traded up. Since few states have successful estate recovery programs, home equity often passed as an exempt asset to the next generation.

Effective January 1, 2006, Medicaid coverage is denied to nursing home applicants with home equity in excess of around $500,000 ($750,000 in some states). Starting in 2011, the caps will rise with the Consumer Price Index. As with prior law, the exclusion does not apply if a spouse (or child who is under 21, blind or disabled) resides in the house.

This effectively means that a Medicaid applicant with a large home must sell it and spend the proceeds on care before benefits can commence or use a reverse mortgage to reduce their equity interest; as a result, issuers of reverse mortgages may significantly benefit from the DRA.

Again, while these new rules may seem restrictive, the United States is still more generous than other socialized health care systems in this regard. For instance, the United Kingdom allows a home exemption of a little under $40,000 in order for a citizen to qualify for publicly financed long-term care. Furthermore, we are already seeing signs that the current U.S. home equity limit will drop; last year, the National Governors Association recommended that the cap be lowered to $50,000.

Allowable Income

Medicaid law does contain some safeguards designed to financially protect couples when one spouse enters an institution. These “spousal impoverishment” provisions are in place to help the “community” (or non-institutionalized) spouse remain independent and thus avoid resorting to institutional care as well. The community spouse’s income (e.g., his or her own Social Security) is not considered “available” to the institutionalized spouse. Beyond this, Medicaid’s minimum monthly needs allowance (MMNA) ensures the community spouse has enough resources to meet monthly living costs.

Income from community property is subject to a more complicated process. States must first attribute income to each spouse according to his or her ownership interest and then compare the community spouse’s monthly income to the MMNA. If the community spouse’s attributable income is less than the MMNA, she can (1) appeal for the state to decide whether to allocate more of the institutionalized spouse’s income or assets to her in order to raise her income to the MMNA level, or (2) ask the institutionalized spouse to transfer an amount of his income or assets to make up the shortfall. Either way, unless the transferred income is insufficient to raise the community spouse’s income to the agreed-upon MMNA, the assets of the institutionalized spouse (e.g., an annuity or other income-producing asset) cannot be transferred to her to raise her income. This means that a couple must generally deplete a larger share of their assets, because the share that the institutionalized spouse retains must be spent on his own care before Medicaid begins to pay.

As a result of the DRA, ownership of annuities must be initially disclosed by the Medicaid applicant, at which point the state must be named as remainder beneficiary for all annuities held by the Medicaid applicant or spouse. Unless the state is listed as remainder beneficiary, the purchase of an annuity can be considered a gifting technique and is thus a punishable transfer of assets.

Partnership Plans

One of the most exciting ramifications of the DRA is the institution of National Long-Term Care Partnership programs. Each state will have the opportunity to implement such a program, which combines private long-term care insurance (as the primary payer) with Medicaid as a secondary payer once the private policy’s benefits have been exhausted.

The new partnership programs will provide benefits and protections to consumers and state budgets alike. Individuals are now allowed to protect a portion of their assets (dollar-for-dollar) instead of spending them down to qualify for Medicaid coverage. This will ensure that more of the funds accumulated for retirement will be protected.

For example, let’s take our widow and give her a policy that provides up to a maximum of $200,000 in benefits. She goes on claim in January 2007 by retaining a home health aide who comes in eight hours per day at the cost of $180 per day. Over time, the policy will pay out $200,000 in benefits to fund this in-home care, which means that private policy benefits will be depleted in about three years. Because of the dollar-for-dollar asset protection provided by the partnership program, a full $200,000 in assets are protected from Medicaid spend down, matching the $200,000 in benefits paid from the private policy.

Therefore, thanks to the partnership policy, our widow could apply for Medicaid and be allowed to keep $200,000 of her countable assets. The beauty of such a program is twofold: Individuals are rewarded for planning ahead and purchasing long-term care policies, while state budgets are preserved by requiring that the benefits of those qualifying insurance policies be paid before Medicaid benefits can be accessed.


The DRA further restricts Medicaid eligibility by scrutinizing asset transfers and limiting home values. But the expanded Long-Term Care Partnership program provides planners with new opportunities to protect their clients’ assets. Don’t miss this chance to share your knowledge and demonstrate your value to your clients.