Ami Setright Longstreet, an elder law attorney at Mackenzie Hughes LLP, recommends long-term care insurance to help cover the cost of a catastrophic illness. Not everyone is insurable, however; in that case, here are 10 misconceptions about how to cover long-term care.

  1. Medicare will cover the cost of long-term care. Nope. Medicare will pay for up to 20 days in full, and cover part of the cost for the next 80 days of care. After that period, your clients’ will need private insurance to pay for the remaining costs; or, if they’re in dire financial straits, they can turn to Medicaid.
  2. Gifts that qualify for the annual exclusion are exempt from the Medicaid transfer penalty rules. While it’s true that your clients can make a gift of up to $13,000 per year without paying taxes on the amount of the gift, they still have to include it in when calculating the transfer penalty for Medicaid.
  3. Assets in a revocable trust will be protected in the event of a catastrophic illness. If your client retains control of the assets in a revocable trust, they can still use them to pay for long-term care, and they will be considered as part of your client’s resources for Medicaid purposes.
  4. Annuities are also protected from use for a long-term care event. Well, sort of. If the annuity was purchased after Feb. 8, 2006 it is considered an uncompensated transfer and subject to Medicaid transfer penalty rules unless it’s irrevocable or nonassignable; equal payments are being made over your client’s life expectancy; and the beneficiary is the state, after certain exempt individuals.
  5. Retirement assets would have to be spent down before clients can qualify for Medicaid. Generally, this is true. Retirement plans, however, are exempt. If your client is over 70 1/2 and is taking his required distribution, the value of the account is not considered when determining eligibility. The distribution he receives from the account, however, is.
  6. Transferring your client’s house to his children will protect it should he need to enter a nursing home. Nuh-uh, says Longstreet. If your client needs long-term care and becomes eligible for Medicaid, then the house is sold during his lifetime, “the value of the life use comes back to the individual on Medicaid and must be spent on that individual’s care before re-entering the Medicaid program.” It’s better to place the house in an irrevocable grantor trust; if it’s sold during your client’s lifetime, you can take advantage of the full capital gains exclusion and the entire value is protected.
  7. Making gifts to children is better than setting up a trust. Once you give away assets, Longstreet warns, they are almost never retrievable. Instead of handing assets to the children, it may be preferable to set up a Medicaid qualifying trust so they beneficiaries won’t receive the assets until after your client’s death.
  8. An estate plan will serve the same purpose as a long-term care plan. As you probably already know, this isn’t always true. While comprehensive estate plans can include wills, health care proxies, powers of attorney, and trusts, that doesn’t necessarily mean long-term care is covered. Go over your client’s estate plan to ensure that long-term care is covered and appropriate.
  9. Married clients can depend on their spouse to care for them should they become incapacitated. Your client needs a power of attorney or health care proxy to begin making legal, financial and health care decisions for his spouse, according to Longstreet.
  10. Clients who are already sick don’t have any options for long-term care planning. Luckily, this isn’t true. It may be a little late for the “planning” part, but your client still has options. An expert in elder law can help ensure success.