Divestment, long-term care and Medicaid involve complex decisions

For many individuals and couples, the prospect of long-term care is financially daunting. With the average room cost in Wisconsin currently close to $5,100 per month, even healthy nest eggs can't last long at that rate.

That's why many look to Medicaid to help. A federal program run by individual states, Medicaid reimburses facilities and physicians for providing care to qualifying people who cannot finance their own medical expenses.

In Wisconsin, eligibility rules depend on whether you're single or married. To qualify for Medicaid as a single person, you can have cash assets of up to $2,000 in a bank account, a life insurance policy with a face value of no more than $1,500 and prepaid funeral and burial expenses.

If you own a home, you may keep it only if your doctor says you'll likely be able to return there. You can also keep your car only if it's needed to obtain medical care, though most people in long-term care facilities find it difficult to justify.

The limits are different for married couples in order to prevent spouses from becoming impoverished while their partner receives long-term care.

With these couples, the institutional spouse (the one receiving long-term care) is limited to the same allowances as single individuals, but the couple's joint assets are considered in determining what the community spouse (the one remaining at home) may retain.

For example, community spouses can keep one home, regardless of value, one vehicle, regardless of value, household goods, anything set aside for burial, and individual retirement accounts. They are also entitled to retain between $50,000 to $95,100 in assets, depending on how much they have jointly with their spouses.

Community spouses may also keep a minimum income of $2,081 per month, but that amount can increase (to a maximum of $2,377) if you can demonstrate you need more than $624.50 per month to maintain your home. Institutional spouses can keep income of $40 per month.

Any income exceeding those amounts must be paid to the long-term care provider. Medicaid then picks up the difference.

An individual can still qualify for Medicaid even if certain assets are transferred. For example, transferring ownership of a home to a community spouse is permissible. It's also legitimate to transfer a house to a child under the age of 21, a child who is blind or disabled or a child who has lived in your home at least two years and thereby delayed a parent's need for long-term care.

Although many people want to pay for their own care so long as they have sufficient assets to do so, divestment is another method people are using to qualify for Medicaid, although it carries a number of risks and ethical considerations. Divestment is a transfer of an asset by a person in long-term care or their spouse for less than fair market value with the intent of qualifying for medical assistance.

Divestment creates a period of time when you're ineligible to receive Medicaid. For example, if an individual makes a gift to a child within three years of the date the individual applies for Medicaid for long-term care, then that gift must be disclosed and the person is not eligible to receive Medicaid for a period of time equal to the number of months the gift would have paid for the individual's care at the current rate of $5,096 per month. A gift of $50,960 then would mean an individual must wait ten months before Medicaid will begin picking up the cost. If the gift to an individual occurred more than three years earlier, it does not need to be disclosed and has no effect on eligibility.

People without many assets but who feel they want to leave their homes to their children frequently use life estates. Life estates enable them to gift their homes to their children but retain rights to the property for the rest of their lives. If at least three years passes before applying for Medicaid, the life estate does not affect eligibility unless the home is sold; at that point, a portion of the cash received from the sale of the home (calculated by IRS tables estimating life expectancy) must be used toward paying for care.

People who have a lot of assets will sometimes gift all assets up-front except what is needed for three years worth of care. They then apply for Medicaid at the end of the three-year period and can indicate they have not gifted anything in the past three years. Some purchase long-term care insurance to cover the expenses for that three-year period.

This is only a brief summary of some of the issues involved in an otherwise very complicated area of the law. Planning for long-term care involves many difficult decisions that carry complex property and tax law implications, as well as ethical dilemmas. The rules and regulations also change frequently.

With all the potential risks and pitfalls, your best strategy with long-term care planning is to work with experienced legal and financial advisers. Doing so can help you maximize your options and your peace of mind.

Reprinted with permission from Holmen Courier and Onalaska Community Life, October 2005.