It isn't every day that an older client might consult experts to help him become impoverished as he prepares for long-term care.
Enter Medicaid planning, a corner of personal finance that brings together elder law attorneys, accountants and financial advisors to help seniors pay for nursing home care while protecting their family members.
Think of it as a backstop for individuals who are unable to purchase long-term care insurance, which has grown increasingly expensive.
Medicaid covers a range of long-term services for applicants who can pass its means test: States generally require that individual applicants have no more than $2,000 in assets ($3,000 to $6,000 for couples).
States also subject applicants to income requirements, which vary by jurisdiction.
Those who participate in Medicaid planning work with attorneys, accountants and advisors to shift their wealth to trusts or annuities in order to qualify.
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Consider that the national median cost of a private room in a nursing home is $97,455 annually, according to Genworth Financial.
"The people who really need to be thinking about this are folks who aren't insurable for some reason," said Tom McCarthy, founder of McCarthy & Cox in Marysville, Ohio.
"They have some assets, but if they needed care in a nursing home, they would be quickly wiped out," he said.
Here's how to integrate Medicaid into your long-term financial plan.
Time is an ally
Time is the most valuable asset for individuals preparing for elder care.
That's because in order to qualify for Medicaid and pass the means test, older individuals must transfer their wealth at least five years before they apply for the program.
Asset transfers made during this so-called "five-year lookback" may be subject to penalties, making the applicant ineligible for Medicaid services for a period of time and requiring them to pay out of pocket.
See below for details on assisted living expenses across the country.
The right transfers
This transfer of assets is one of the riskiest parts of Medicaid planning.
An outright gift of assets to a relative could mean that the recipient doesn't get a step-up in basis. That means they could be on the hook for steep capital gains taxes if they try to sell the asset right away.
"Giving the money outright is fraught with complications," said Bernard A. Krooks, founding partner of Littman Krooks LLP in New York.
"Say you leave your daughter the money and she gets divorced; it's now part of the marital settlement," he said. "If she gets sued, some creditor gets the money."
That's when an irrevocable trust may be the answer. Assets that go here are no longer under the control of the older person, and they are subject to protection from creditors.
A single-premium income annuity is another way to help someone qualify for Medicaid. The applicant would use some assets to buy an annuity that will begin distributing income to that person's spouse.
Tread carefully when purchasing the annuity: If you liquidated some investments in order to come up with the proceeds, you could face tax consequences.
Further, once you've given a lump sum to an insurance company for an annuity, you can't get your money back.
"We're not big fans of annuities, but they're a way to set the surviving spouse up for a stream of income and qualify for Medicaid," said Stein Olavsrud, executive vice president and portfolio manager with FBB Capital Partners in Bethesda, Maryland.
A team approach
Given all the elements of elder-care planning — taxes, trusts and asset management — expect to work with a team of professionals in order to come up with a strategy.
Financial advisors should expect to collaborate with an elder law attorney who is well versed in the Medicaid laws in the client's state, plus an accountant.
They have some assets, but if they needed care in a nursing home, they would be quickly wiped out.Tom McCarthyMcCarthy & Cox
"I find that the attorneys are really good at crafting different documents, but the problem a lot of them have is that they can't quantify for the client the tax cost if they do this sort of planning," said McCarthy of McCarthy & Cox.
Clients should also already have handled their estate plans, particularly their medical directives, powers of attorney and any additional details on how they would like to be cared for once they are infirm.
Other potential shakeups loom ahead for Medicaid planning.
Legislative upheaval
Elder law attorneys are keeping a close eye on any legislation coming out of Congress, and they are watching the White House for any sign that a pullback on Medicaid is coming.
Recently, President Donald Trump's budget called for a rollback of Medicaid expansion. Prior to the expansion, states were able to deny coverage to people who didn't have children or who failed to meet very low income limits.
Some states are making tweaks to their programs, changing eligibility requirements and other details.
For instance, last year Iowa called to eliminate Medicaid's guarantee of retroactive coverage for many beneficiaries in that state.
On Nov. 28, 2017, Sen. Ron Wyden and Rep. Frank Pallone Jr. wrote a letter to the Centers for Medicare & Medicaid Services in November, expressing concerns that this change could affect the finances of seniors who may need care while they apply for the program.
This is also why, once a client has established a Medicaid plan, he will still need to review it over time.
"These aren't pleasant topics to talk about, but you have some control over how it will affect you and your family," said Krooks of Littman Krooks. "Work with a competent individual and revisit your plan every few years."
