Financial advisors are often a point of first contact for caregivers struggling to manage the financial affairs of a disabled loved one. Disabled in this context means that the patient requires permanent assistance with one or more activities of daily living. Once the level of care reaches beyond what the family can provide, paying for care becomes necessary. It is expensive and will deplete a client’s assets quickly. Eventually, the advisor loses the client because there are no more assets to manage. Then, Long-Term Care Medicaid becomes the only source of funds to pay for care. This depletion of assets, and subsequent loss of clients, is avoidable.
Long Term Care Medicaid Basics for Financial Advisors
Most advisors’ knowledge of Medicaid is based on the general financial qualification rules, which is understandable, but has led to faulty assumptions. In this blog series, I will discuss key exceptions to the general rules that advisors need to know concerning the preservation of funds, so their clients don’t outlive their assets.
Common misconceptions and inaccurate information about Medicaid include:
- Medicaid is only for the poor.
- Excess assets must be spent down to almost nothing to qualify.
- The time to file for Medicaid is when there are no more assets available to pay for care.
- The advisor will lose the account if their client goes on Medicaid.
- Referring the client to an elder law attorney will result in the loss of business.
- Medicaid will only pay for substandard care in poor-quality facilities.
- Medicaid is going to take the client’s house.
- None of my clients will ever need Medicaid.
- The five-year look back rule is applied to disqualify the applicant.
- For clients who are uninsured or have less than one million dollars, the only choice the advisor has is to help them spend down to zero and then have them file for Medicaid.
What is Long Term Care Medicaid Anyway?
Delaware has multiple Medicaid programs. Some are for the indigent, some are not. Long Term Care Medicaid (LTC Medicaid herein by reference) is a government benefit for the disabled, not the indigent. The medical qualification is a mandatory prerequisite for starting the application process. If a person is not disabled, disabled meaning that they need assistance with at least one activity of daily living, their application will be denied without exception. If a person does satisfy the medical need, then yes, there are limits on assets and income.
LTC Medicaid picks up where Medicare leaves off (which is usually much sooner than expected, by the way). It covers the cost of care for patients who are no longer independent with activities of daily living on a permanent basis. Delaware Medicaid will pay for up to 80 hours per week of in-home care (though more often we are seeing even 90 or 100 hours per week), 100% assisted living, and 100% skilled nursing. Most other states limit LTC coverage to skilled nursing only. Luckily, Delaware is a great state to grow old.
The Financial Qualification Rules for Long-Term Care Medicaid
Unmarried Applicants
Long Term Care Medicaid (“Medicaid”) places limits on assets and income in order to qualify financially for the benefit. The rules limiting assets differ depending on the marital status of the applicant.
An asset is anything available to the applicant that is convertible to cash to pay for goods and services. The financial qualification rules divide assets into categories of “those that are countable” and “those that are defined as protected” for qualification purposes.
For an unmarried applicant, assets are limited to $2,000 unless they are of a type classified as protected. Unprotected assets above the $2,000 limit must be spent down. Certain types of assets are classified as protected and not subject to the spend-down requirement. These include the house in most instances, all personal property, one car, insurance with a face amount of $15,000 or less, burial plots, and prepaid funeral arrangements.
Unprotected assets over $2,000 in value are countable. Countable assets must be spent down to the required limit. There are only two ways to accomplish this: purchase goods and services or give the assets away. The general rule anticipates that countable assets will be spent down to the $2,000 limit by purchasing goods and services. Then the application is filed and approved.
There are exceptions to this general rule that, when correctly applied, permit the gifting of assets as a means of spending down. So, spending down countable assets on paper to the required limitation is possible using a combination of the general rules and their exceptions. Approximately 60% of the countable assets are gifted to a trusted person. This uncompensated transfer is penalized under the rules. The penalty is expressed as a waiting period during which the applicant must self-pay for care. The remaining 40% of assets are used to pay for care during the waiting period. When the waiting period expires, Medicaid will begin to pay for care. The gifted assets become protected and are available for the trusted person to use for the benefit of the disabled person.
The key to this spend-down strategy is to understand what event triggers the waiting period. It is triggered by filing the application and receiving a written provisional approval. This is a letter from Medicaid stating that the application is approved, but Medicaid payments will not start until a future date because assets were gifted as part of the spend down. The length of the waiting period is based on the total gifts made in the five years leading up to the application date divided by $12,000 (2024 divisor amount).
The Financial Qualification Rules for Long-Term Care Medicaid
Married Applicants
The financial rules treat a married couple as an economic unit of one. All assets are considered regardless of how they are titled: individually or jointly. They are divided into two categories, countable and protected.
Protected assets include the couple’s primary residence, one car, all personal property, burial plots, one insurance policy having a face amount of $15,000 or less, two prepaid funerals up to $15,000 each, the community spouse’s income, community spouse’s IRA/401K, and $132,800 in other assets. All remaining assets (additional real estate, cars, the applicant spouse’s IRA, excess financial assets above the protected $132,800) are considered countable (unprotected), and must be spent down. The general rule anticipates that the couple will purchase goods and services to reach financial compliance.
Fortunately, there are exceptions to the general rule that allow the couple to keep the vast majority of these countable assets and still achieve financial compliance.
The regulations allow for turning countable/unprotected assets into protected assets. This change in categorization is achieved by turning such assets into a stream of income for the community spouse. Any asset treated as the community spouse’s income is not countable and therefore protected. An important example of this is known as the “name of the check” rule, whereby the applicant spouse’s IRA (a countable asset) is annuitized (a change in character) and the resulting monthly income payments are made in the name of the community spouse (protected income).
The reason the Medicaid rules allow the couple to keep their assets is so that the surviving spouse does not become impoverished because their loved one needs expensive care. The couple just needs to work with an Elder Law attorney to achieve this result.
Applicant Income Rules
Regardless of marital status, the applicant’s gross income per month is capped to a certain amount. For 2021, Gross income per applicant is limited to $1,985 (the cap) for all sources of income. The general rule is that the application is denied if gross income exceeds the cap by any amount. The exception to the general rule is that if all sources of income are directed into an irrevocable trust (the “Miller trust”), then the trust is deemed the owner of the income, not the applicant. Thus, gross income no longer exceeds the cap.
Applying for LTC Medicaid When the Medical Need for Care Arises is a Win, Win for Financial Advisors and their Clients
As the aging population grows, a financial advisor is often the first point of contact when a family begins to manage the care of a loved one. This is very true when a loved one is diagnosed with dementia. This is a call to action for the advisor. Can their client afford the cost of care? What are the available options?
The applicable duty of care for the advisor is no longer met by hesitating to mention LTC Medicaid to their client until their assets are already depleted. As shown in this blog series, for clients who are not truly wealthy or who are uninsured, the advisor must get the LTC Medicaid discussion started before the assets are significantly depleted.
This is a win-win situation for advisors and their clients. Instead of losing the client over time due to the loss of assets to manage, LTC Medicaid affords the opportunity to preserve some or all of these assets. The exceptions to the general financial qualification rules allow an individual applicant to preserve up to 60-80% of their assets. A married couple can preserve almost all of their assets. By knowing the basics about qualifying for LTC Medicaid, advisors can give their disabled clients peace of mind. Clients do not have to go broke. They no longer must put off the care that is needed. Family members can avoid becoming burned out as caregivers.
The key is to understand that LTC Medicaid is a benefit for the disabled, not the indigent. The time to refer the client to an elder law attorney is when the medical need for daily care arises. You and the attorney together can model out when and if it makes sense to involve Medicaid planning for the client. It is by completing the application process that assets become protected and available for the advisor to continue to manage.
