Planning for Long-Term Care
Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Dolly Donnelly, Director of Wealth Strategies for Wilmington Trust’s Emerald Family Office and Advisory and your host for today’s podcast. In today’s GEM I’m going to answer the question: What are some options when it comes to planning for long-term care as I or my family members age?
Specifically, I’ll talk about a few different potential strategies to explore when thinking about how to plan for the costs of long-term care, whether they be for yourself, aging parents, or other family members. These strategies include: qualifying for Medicaid, self-funding the costs of care, and purchasing long-term care insurance or life insurance with a long-term care rider.
First, let’s talk about why it’s important to figure out how to pay for the costs of long-term care. It’s simple, most people will need these services and they are expensive. Even high-net-worth individuals stand to benefit from thinking about how to optimize their plans for covering the costs of future care for themselves or family members, both from the perspective of minimizing out-of-pockets costs and employing the most tax-efficient strategies. After engaging in planning, high-net-worth individuals may find that they are able to help ensure that they, or their parents and other family members, receive the level of care they need, while funding the costs in a more tax- and cost-efficient manner.
According to the AARP and US Census Bureau estimates released in 2019, “[b]y 2030, one of every five people in the United States—or 20 percent of the nation’s population—will be age 65 or older” (see https://www.aarp.org/livable-communities/livable-in-action/info-2019/us-census-and-aging.html). Additionally, according to the U.S. Department of Health and Human Services, “[a]t some point in our lives, about 60 percent of [the population] will need assistance with things like getting dressed, driving to appointments, or making meals” (see https://acl.gov/ltc).
These statistics suggest that an increasing number of people will need long-term care, and it comes with a hefty price tag. Data from 2019 indicates that long-term care costs continue to rise and that such costs often exceed $100,000 a year (see https://www.ltcg.com/?news=ltcg-releases-new-cost-of-care-study) and may exceed $200,000 a year in major metropolitan areas.
While it’s common to think that these expenses are covered by traditional health insurance plans or Medicare, that is not the case. Traditional health insurance normally provides no long-term care coverage and Medicare does not cover long-term care except in very narrow circumstances and for a very limited duration.
As an overview, upon a qualifying admission to a nursing home, Medicare will pay in full for 20 days of long-term care expenses, and an additional 80 days of Medicare coverage may be available with co-insurance. It’s worth noting, however, that few people receive the full 100 days of Medicare long-term care coverage in part due to the fact that, at some point within that period, many people will plateau, and their condition will no longer be considered improving. As Medicare coverage generally is considered to be subject to an “improvement” standard, this means that those who find themselves plateauing may find Medicare coverage unavailable prior to the end of full 100 days.
In contrast to Medicare, Medicaid does cover long-term care costs. Medicaid is a federally funded, state-run program, meaning that while the Federal Government sets some baseline standards, each state has a good amount of latitude to vary their own eligibility requirements, so if Medicaid planning is being considered, it is important to know the applicable state requirements.
In general, for a single individual to qualify for Medicaid, usually the applicant’s income can’t exceed a couple thousand dollars a month and non-exempt resources can’t exceed $16,000. However, several types of resources, such as a primary residence, qualified retirement accounts in payout status, and certain trusts are considered “exempt” and do not count towards the resource limit. Due to those requirements, Medicaid planning typically focuses on “impoverishing” the applicant by giving away non-exempt assets so that the applicant has non-exempt resources below the applicable resource limit.
While strategies are available to qualify individuals for Medicaid, Medicaid planning needs to be done thoughtfully as a penalty period may be imposed based on the fair market value of uncompensated transfers made during the 60 months prior to the month of an application being made for Medicaid coverage. It also is important that the provisions of any trust used for Medicaid planning be structured appropriately, because if trust principal may be paid to the Medicaid applicant, the trust corpus may be countable as a resource. Additionally, if the Medicaid applicant’s intended beneficiaries already have exposure to estate tax, Medicaid planning should be coordinated so as not to increase such exposure and also structured to take advantage of the generation-skipping transfer tax exemption when possible.
Due to the need to “impoverish yourself,” high-net-worth individuals frequently find Medicaid planning unappealing both due to the limited direct access to funds that such planning would result in and due to the potential gift tax consequences that may result from giving away the level of wealth necessary to qualify. Moreover, as a practical matter, individuals with a preference for admission to specific long-term care institutions or continuing care communities may find that preferred facilities do not accept residents without proof of resources to pay for the costs of care privately for at least several months, making Medicaid a less useful option.
In such cases, other options still may be available to plan for the costs of care. One such alternative is self-insurance or paying for care costs through the income earned by your investible assets. Engaging in financial planning to determine if your investible assets are capable of meeting the costs of care for yourself or family members is a good first step and also will help you assess the impact of this option on your broader financial plans. Specifically, you may want to work with your Wilmington Trust advisor to model out how the increased costs of such care could impact your cash flow needs and identify opportunities to increase future liquidity in portfolios to cover such costs while mitigating any associated tax impacts.
As part of that review, attention also should be paid to how such increased costs may impact the remainder of your estate plan and tax situation. Individuals with estate and gift tax exposure may find that an unexpected benefit of self-paying the qualified long-term care cost for family members is the ability to remove assets from their estates on a gift-tax-free basis. Specifically, under Section 2503(e) of the Internal Revenue Code, payments for a person’s medical care made directly to the provider are not treated as taxable gifts. For purposes of Section 2503(e), the costs of nursing homes and assisted living facilities, if provided by a licensed health care provider, fall within the scope of that section. Additionally, transfers falling under Section 2503(e) are not limited to the annual gift tax exclusion, making such transfers a potentially useful estate tax mitigation strategy to incorporate as part of your greater estate and gift tax mitigation planning.
Another option to consider for covering the costs of long-term care separate from your investible assets is the purchase of long-term care insurance. While the availability of such policies has become increasingly limited, long-term care insurance is a type of policy that provides coverage specifically for the costs of long-term care, with varying benefit periods and benefit amounts depending upon the policy selected.
As a more available alternative to a traditional long-term care policy, the purchase of a life insurance policy with a long-term care rider is an increasingly popular option. This type of coverage can be more appealing than traditional long-term care insurance because it is not a “use it or lose it” benefit. Instead, long-term care riders on a life insurance policy can be structured to pay a death benefit if unused on the costs of care during the insured’s life.
With any strategy for funding the costs of long-term care, there are a few additional things to keep in mind. Any admissions agreement should be carefully reviewed prior to signing, and, as has been addressed in prior Emerald GEMs, having in place a durable power of attorney is a key component for ensuring that a long-term care plan can be implemented if you or a loved one lacks capacity to do so.
Finally, it may be worth reviewing your existing estate plan to see if you have provisions in place to protect assets that you intend to leave to a beneficiary who may become disabled or in need of long-term care. The use of third-party special needs trusts is a popular way to provide supplemental resources for such a beneficiary without necessarily requiring all such assets be made available for the costs of such beneficiary’s care if governmental benefits otherwise would be available.
Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about your options when it comes to planning for long-term care as you or your family members age. We would be glad to help you. See you next time!