This is Strategy #3 from Lamson & Cutner’s publication, “25 Strategies to Prevent Financial Ruin from Long-Term Health Care Costs.”  Click here to see the other strategies.

Even if your health is good right now, you’ll do yourself and your loved ones a big financial favor by planning for both home care and nursing home care.  Also, if you need medical care and assistance in the future, you’ll gain the benefit of reducing your expenses by having Medicaid cover whatever your Medicare or other insurance doesn’t cover.

By planning for home care now, even if you don’t need it yet, you could eventually save 100% of your money, income and assets, which Medicaid would otherwise require you to pay towards your own long-term care. If you require nursing home services, advance planning will have saved your assets, although in most cases you will not be able to protect your income.

Good advance planning calls for consideration of different possible scenarios and contingencies.  It’s best to anticipate the need for home care and for nursing home care simultaneously, even if you insist you’ll never go into a nursing home.  Again, hope for the best, plan for the worst.  If you don’t wind up in a nursing home, the planning you did will not cause any harm and will still be useful for other reasons.  However, if you do need nursing home care, you and your family will be very glad you were financially prepared.

The reason that advance planning for nursing home care is crucial is that the Medicaid Nursing Home application requires a five-year “look back” that applies to uncompensated transfers made by the Medicaid applicant.[Note:  A 2.5 year look back for community-based Medicaid services was voted in during the April 2020 budget season – but the implementation date has been pushed back for years, and at this point there is some question about whether it will ever be implemented.]

As an example, here’s how the “look back” works: you must disclose all of your financial information and financial transactions going back five (5) years from the month in which your application is filed.  If there has been any transfer of money or assets to someone other than your spouse (or minor, blind, or disabled child) within the look back period, Medicaid will impose a “penalty period” during which no benefits will be paid.

Medicaid calculates the length of the penalty period by dividing the total amount of all the transfers made during the look-back period by what Medicaid calls the “regional rate” for nursing home care in your geographic area.   While the “regional rate” supposedly represents the monthly cost of nursing home care, in most cases it will be less than the actual cost of care.

Here is an example of how the look-back and penalty periods work:   let’s suppose that you live in New York City, and gave your daughter a gift of $130,000, and at this time, let’s say that the regional rate for New York City is $13,000.  A short time later you went into a nursing home for long-term care.  Medicaid calculates the penalty period by dividing the amount of the transfer ($130,000) by the regional rate ($13,000), to arrive at the number of months that you are ineligible for Nursing Home Medicaid (10).  [The regional rate changes slightly each year – see the accompanying “Quick Reference Chart” for current levels.].

The penalty period does not start until you are in the nursing home, are “otherwise eligible” (i.e., your countable resources are less than the Medicaid eligibility level and have applied for Medicaid benefits.  During the penalty period, the nursing home’s bills will have to be covered on a private pay basis.

Using the above example, if the nursing home’s private pay rate is $15,000 (many facilities currently cost this much or more), the Medicaid penalty would cost you $150,000 – or $20,000 more than you gave away.  If you were in the nursing home prior to the time the penalty period actually began, your care would cost you an even greater amount. A financial disaster like this can be avoided with good planning, yet most people don’t do it. Don’t make that mistake yourself.

If you transfer cash and assets out of your name during the look back period, it will be too late to save 100% of your assets. In most instances, you will sacrifice at least 50% of what you have, even with Elder Law planning.

Consequently, even if you are healthy now, you’ll benefit by planning ahead.  It may feel unpleasant to contemplate needing long-term care, but doing this type of planning can give you tremendous peace of mind for the future.  The alternative – possibly losing half or all of your net worth to long-term care expenses, and ending up in poverty – would be far more painful for you and your family.

As you can see, the most powerful use of asset protection strategies is with advance planning before you need home care or nursing home care.

A good example is a case in which we helped a healthy client who is getting older, but who does not currently need assistance. We transferred his house to a trust, so that in the event he does require Medicaid benefits, his home will not be subject to a Medicaid lien.

Also, by planning early, we increased his chances of moving past the look back period. If he eventually needs nursing home care after the look back period has expired, his transfer will be exempt. That means the equity in his home will not eventually have to be used to reimburse Medicaid for the cost of his care. Instead, it will be fully available to his heirs after he passes on.

Take steps to preserve your finances and dignity while you’re still healthy, and not in need of professional care to help with your day-to-day living needs. Having the financial ability to maintain the lifestyle you’re used to, and your self-respect, is a kind of “medicine” that might be as vital to your well-being as anything you receive from doctors.