June 2009

Combating the Rising Costs of Long-Term Care

• Questions? Contact attorney Ronald P. Adams

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One of the greatest challenges many Americans face is how to protect their families from the rising costs of long-term care (or nursing home care), both for their elderly parents and for themselves when they reach retirement age.

For example, the average cost of staying in a nursing home is between $5,000 to $6,500 per month, or about $60,000 to $78,000 per year. Since the average length of stay in a nursing home is three years, this quickly totals nearly a quarter of a million dollars. A family with a loved one in a nursing home would need about $3 million in income-producing assets to avoid drawing on the principal.

That's why it's important to start strategizing now to determine how you plan to pay for long-term care.

Three Ways to Pay

Typically, there are three ways to pay for long-term care:

1. Self Pay: Under this method, you pay for long-term care expenses out of pocket.

2. Long-Term Care Insurance: This is essentially a wager between you and an insurance company. In paying the premiums, you are betting that you will eventually need nursing home care. The insurance company is betting that you won't need the coverage and that it can keep all the premiums.

3. Medicaid: This government entitlement program assists low-income seniors who need nursing care. However, medical costs have risen so dramatically that even middle-class patients can't afford to pay. About 7 out of 10 nursing home patients receive Medicaid benefits.

Consider an Asset Protection Trust

If you choose Option 1 or 2, you should be working with a financial planner or other investment professional to maximize the growth in value of your investments and to insulate your assets from creditors and lawsuits through trusts or other pre-planning tools.

You can place assets into a customized trust that works as an asset protection trust. This type of trust can be used in many situations to help pre-qualify you for Medicaid and, at the same time, protect what you own. You can receive income from assets in the trust and also have a legal "back door" to the principal if you ever need it.

Not Poor, Not Rich

If you are more likely to choose Option 3, then you should understand how Medicaid eligibility works. The rules are strict, but they are not impossible to meet.

Income is an issue. This varies from state to state, but typically the limit is about $2,000 per month. In addition, Medicaid reviews an applicant's financial records for the five years prior to their application. The government searches for uncompensated transfers, such as money or assets given away for free.

What if you earn $2,500 per month or $3,500 or $4,500? These amounts are not enough to pay for care, but they will generally disqualify you from eligibility.

There are strategies that can help persons who earn "too much income" to qualify for Medicaid. Those strategies include a Qualified Income Trust or a Miller Trust.

There are a variety of tools available for pre-planning to cover the costs of long-term care. To start the process of exploring your options, contact your financial planner or estate planning attorney.

Adapted from the Daily Plan-It newsletter

Hoopes & Adams, PLC, is a Chandler, Arizona, law firm offering services to Phoenix-area clients in the areas of estate planning, entity formation, commercial and real estate transactions, and civil litigation.