Using Insurance to Plan for Long-Term Health Care

The CPA Journal, July 1991 | Go to article overview

Using Insurance to Plan for Long-Term Health Care


Long-term health care is an important area of personal financial planning, particularly for retirement age clients. With the astronomical costs of today's long-term health care, a plan is not complete if it covers only estate taxes and probate. With the cost of nursing homes averaging $55,000 or more annually, long-term health care can devour the client's assets very quickly and leave the healthy spouse virtually destitute. The potentially devastating financial effects of long-term health care must be part of any plan. (For a more complete discussion of the issues in protecting the assets of the elderly, see The CPA Journal, May 1991.)

What Term of Insurance is Appropriate?

According to the law, if a transfer of an individual's assets is made by gift or at below market value, there is a 30-month waiting period, subsequent to the transfer, before Medicaid coverage begins. Because of the 30-month below fair market value transfer law, insurance coverage for the first 36 months is usually recommended. This gives the client adequate time before acting to determine if asset transfers are appropriate. If the care is expected to last fewer than three years, the client has purchased insurance coverage and need not go through the process of asset transfer. Transfer of assets means loss of control, and loss of stepped up tax basis benefits available at death. It should be avoided, if possible.

When transfer is indicated, a "Medicaid Trust" should be considered. The Trust must be irrevocable and unchangeable, and the client must give up control and any interest in the principal transferred into the Trust. Neither grantor nor spouse can serve as a Trustee. They can, however be the income beneficiaries of the Trust and may leave the assets to a named beneficiary of their choice. The New York State Supreme Court, for example, in January 1990 held in Titino, that EPTL Sec. 7-1.6(b) allows a court in its sole discretion to make an allowance from the principal to an income beneficiary whose support or education is not sufficiently provided for, regardless of beneficiary consent.

A Medicaid Trust would be more desirable than outright transfer of assets in the case of a grantor who is reasonably assured of ultimately leaving the nursing home or no longer needing continuous care. The income generated from the trust will first be applied to medical treatment before going to the grantor. Any shortage in expenses will then be paid by Medicaid. A qualified transfer might save income spent for medical expenses that would be covered by Medicare, but the transferor could not recover control of income upon recovery.

A Medicaid recipient/or the "at home" spouse, must use almost all joint assets to pay for care before Medicaid coverage begins.

Rules for eligibility for Medicaid are established by each state. For example, in one state, married senior citizens can protect the greater of $12,000 or 1/2 of their combined life savings (not to exceed $60,000). If there is an "at home" spouse, there are exempt assets. In addition to the cash balance mentioned above, exempt assets include the family residence if the spouse or dependent relative lives there, household goods, personal effects and up to $3,000 to $5,000 for funeral expenses. Single Medicaid applicants may protect only $3,000 of their life savings. The eligibility rules are complex.

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