Protecting assets from Medicaid while maintaining eligibility for long-term care benefits requires strategic planning. Medicaid has strict income and asset limits, but options like irrevocable trusts, life estates, annuities and asset transfers within permissible timeframes can help shield wealth. Since Medicaid has a five-year look-back period, early planning helps avoid penalties, protect assets, and maximize available options.
If you need help planning and saving for long-term care, consider talking to a financial advisor.
What Is Long-Term Care?
First, what is long-term care? The term encompasses a range of services necessary for people who can’t perform everyday tasks due to debilitating health conditions or disabilities. Long-term care is distinct from traditional healthcare like doctor’s visits and medicine, so it isn’t covered by health insurance.
Rather, this type of care often covers custodial services like helping people with bathing, using the bathroom, eating and more. Long-term care may refer to any of the following facilities and services:
- Skilled nursing facilities
- Nursing homes
- Assisted living
- Adult daycare
- Homemaker services
- Home health aides
How to Pay for Long-Term Care
Paying for long-term care can potentially be a significant financial challenge. For example, the median annual bill for a semi-private room in a skilled nursing home was $104,028 in 2023, according to the Genworth Cost of Care Survey.
There are four ways to pay for long-term care:
- Paying for it with your own assets
- Purchasing long-term care insurance
- Medicare (in some instances)
- Medicaid
Paying for skilled nursing home care out-of-pocket can rapidly deplete even a sizable estate, leading many individuals to explore alternative funding options. If purchased in advance and the premiums are regularly paid, long-term care insurance can cover some or all long-term care costs. Medicare, the federal old-age health insurance program, can pay for up to 100 days of nursing home or rehabilitative care, but basic Medicare is not set up to cover long-term care.
Qualifying for Long-Term Care through Medicaid
That leaves Medicaid, a federal-state program designed to help older or disabled people of limited financial means pay for healthcare and other services, including long-term care. In many states, Medicaid may cover the cost of living in a skilled nursing facility indefinitely.
To get benefits, however, you have to meet Medicaid’s means-testing requirements. These vary from state to state but generally require recipients to have no more than $2,000 in assets and income amounting to no more than twice the federal poverty level. Anyone with more substantial assets may not qualify for benefits.
Additionally, Medicaid may look to recover the cost of long-term care that it paid for. For example, Medicaid can place a lien on the property or recover costs after the recipient’s death. Medicaid’s estate recovery program allows states to seek repayment from the estates of deceased beneficiaries who received long-term care benefits.
But one way people with more resources can qualify for Medicaid assistance is to “spend down” their assets – pay for care with their own money until their assets and income have declined enough to satisfy the program’s requirements.
Another tactic is to gift assets to someone else, such as a family member, so the long-term care patient can pass the means test. However, Medicaid has a five-year look-back provision that says any asset transfers must be completed at least five years before applying for Medicaid assistance.
For asset transfers made within the look-back period, Medicaid imposes a penalty. The penalty is calculated by dividing the transferred amount by the average monthly cost of nursing home care in the applicant’s area. For example, transferring $200,000 in an area with $10,000 monthly costs would require the patient to pay out of pocket for their care for 20 months.
How to Protect Assets from Medicaid
There are other ways to protect assets from Medicaid while still receiving long-term care benefits. These can involve costs of their own and all have some limitations to consider, but they may be preferable to a spending down strategy:
1. Medicaid Asset Protection Trust
By setting up an irrevocable Medicaid asset protection trust and transferring excess assets into it, you can shield those assets from Medicaid’s asset limits and potential penalties. Once assets are transferred into the trust, they cannot be withdrawn, meaning the original owner loses control permanently. Also, the look-back period applies. And trusts can be expensive to set up, so they are less useful for smaller estates.
2. Life Estate
A life estate allows you to retain ownership of real estate during your lifetime while ensuring it automatically transfers to a designated individual, such as a spouse, upon your death. This can exclude the value of the family home from Medicaid’s means test. Like Medicaid trusts, life estates are irrevocable, so you can’t change your mind and regain control of the real estate. Medicaid’s five-year look-back rules also apply, so it’s necessary to plan ahead.
3. Medicaid Annuity
An annuity designed to comply with local Medicaid rules can be excluded from your assets for means testing. Someone who needs long-term care unexpectedly may transfer assets to a relative, but this would likely trigger the look-back period and delay Medicaid eligibility. They can then use the remainder of their assets to purchase a Medicaid annuity that generates enough monthly income to cover their long-term care costs until the penalty period expires. Annuities are expensive, however, and some states limit their use for this purpose.
4. Strategic Gifting
Strategic gifting allows individuals to reduce their countable assets to qualify for Medicaid, but timing is crucial due to the five-year look-back rule. Gifts made within this period trigger a penalty, delaying eligibility. To avoid complications, some use a staggered gifting approach, gradually transferring assets over time to minimize potential penalties.
Additionally, some states allow exemptions for caregiver children who provide in-home care for a specified period. Proper planning ensures that gifting strategies align with Medicaid rules while preserving financial security for beneficiaries.
Bottom Line
Medicaid can cover long-term care, but asset protection strategies may be necessary to meet eligibility requirements. Medicaid asset protection trusts, life estates, Medicaid-compliant annuities and strategic gifting are ways people who otherwise may not qualify for Medicaid can receive benefits for long-term care.
Long-Term Care Planning Tips
- A financial advisor can help you design a strategy to pay for long-term care that will suit your own financial objectives. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A qualified income trust is specifically designed to help people whose income is too large to qualify for local Medicaid means tests. A qualified income trust creates an account to which a high-earner can divert enough of their monthly income to meet Medicaid income restrictions.
Photo credit: ©iStock.com/supersizer, ©iStock.com/G Trade, ©iStock.com/DGLimages