If someone needs to live in a nursing home or assisted living facility, the financial obligations for that care can be immense. Depending upon the level of care needed, even in-home care can cost hundreds of dollars per day.
The average duration of stay for people in nursing homes is generally recognized as 835 days. Therefore, for the wealthier people among us who have an extra $250,000 lying around (835 days at $300 per day), it may not be necessary to plan for long-term care expenses. For the rest of us, we can face the eventual need for long-term care and a desire to pass on a financial legacy to our children and grandchildren.
Planning for long-term care expenses is typically planning to become eligible for institutional Medicaid. Although there are many requirements to be eligible for the type of Medicaid that pays for nursing home care, there are two big requirements. First, the person must not have assets worth more than $2,000. Second, the person must not have given anything away in the last five years to become that poor.
There are several tools that people may be able to use to protect assets within five years of needing nursing home care and even if they are already in the nursing home. Those tools will be addressed in a future column.
For those who plan for nursing home care early, there are three primary tools.
First, the easiest way to get poor is to give away assets. Even though there is seldom any gift tax owed for gifts (tax only kicks in after a person has given away $11 million), some gifts given before a person dies can eventually subject the new owners to capital gains tax liability.
For example, parents may give a farm to their kids before death. Then, a farming child may “buy out” non-farming siblings, and those non-farming siblings may face significant capital gains tax liability.
To avoid the capital gains tax trap, some people use a second tool for real estate. They keep a specialized life estate interest. If certain documents with perfect language are recorded in proper sequence, this tool can allow a person to own real estate until death, at which time, the real estate automatically transfers to beneficiaries like kids and grandkids.
This second tool can eliminate most capital gains tax worries. If the owner does not apply for Medicaid until five years after the tool is implemented, the owner can own the real estate and be Medicaid-eligible at the same time. However, unfortunately, under this second tool, Medicaid can place a lien on the real estate after the original owner dies.
The third tool is a specialized trust that is mostly irrevocable. The trust must be irrevocable as to the trust owner’s control while empowering some immediate family members to control assets. These trusts are very precise instruments that must include key language to satisfy Medicaid’s requirements while also ensuring that the IRS does not consider the trust’s assets as being pre-death gifts.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.