BRATTLEBORO — The biggest threat now in old age to the savings of most people is nursing home costs, which start at more than $100,000 per year. Long-term care can easily wipe out a lifetime of careful savings.
The good news is that, with some careful legal planning, much can be done in Vermont to protect your savings for your spouse and heirs.
There is much misinformation, even among legal and financial professionals, about what options are available to protect your savings. I would encourage individuals interested in learning more about their legal options in this area to work with an attorney well-versed in the intricacies of the Medicaid rules, tax laws, and other facets of elder law.
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So first, a simplified overview of the basic rules.
The federal Medicaid program, administered by Vermont, is the payer of last resort for long-term care if you qualify. (Medicare only covers a portion of the first 100 days in a nursing home.)
If one spouse is in a nursing home and the other is at home, Medicaid in Vermont will pay the nursing home costs only if the couple together has less than $121,220 in non-exempt resources.
Some assets, such as a vehicle for each person, a $10,000 burial fund for each, and a house and adjoining land up to $552,000 in value, are exempt and do not count against the $121,220 limit.
It does not matter which spouse owns which assets, so there is no benefit to transferring assets from the institutionalized spouse to the other. A single person applying for Medicaid, however, may have only $2,000 in non-exempt resources.
IRAs and similar retirement accounts are exempt to a certain degree. So long as both spouses are drawing down their IRAs each year in equal monthly installments based on their life expectancy, the rest of the funds in their IRA are exempt resources that year for purposes of the Medicaid limits.
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If you qualify medically and financially, most of the income of the spouse in the facility must likely be paid to the nursing home, and Medicaid will pay for the rest of the costs.
Medicaid will alternatively pay for only a few hours a day of care at home, because home-based care is typically more expensive. But home-based-care Medicaid can be an option if family members or others are willing to care for the individual the rest of the day. Note that in order to qualify for Medicaid, either in a nursing home or at home, you must require skilled nursing-home-level care. Medicaid does not generally pay for assisted living.
The Medicaid rules have a “five-year lookback” period to prevent you from qualifying financially merely by giving away your money to your children or other beneficiaries. Any gifts you give to anyone during the five-year period before you apply for Medicaid can create a penalty period, and a large gift might mean several years of ineligibility. (Note that while the IRS allows you to gift $14,000 per year to someone in a given year without any tax implications, Medicaid rules do not allow any gifts.)
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The single best asset protection in Vermont is a so-called Ladybird deed. (Nobody really knows how it got that name.)
You may execute a deed for your home, conveying it to your children or others who should receive it at your death, but reserving for yourself a life estate and all rights of ownership and control.
The deed effectively keeps you as the owner of the house, with your children (or others) as beneficiaries, not co-owners, on the deed. You give up no ownership or control during your lifetime, and you can sell the property and keep all the money.
If you've received long-term-care Medicaid during your lifetime, after your death the house and land will pass to your children free of any liens by Medicaid. Without this deed, Medicaid would have a claim against your property for the cost of all services it covered.
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Other approaches may further protect savings in the event that you apply for long-term-care Medicaid.
For example, family members who have been caring for the person applying for Medicaid can enter into a retroactive personal-care services agreement and can be paid that way.
For a married individual applying for long-term-care Medicaid, where the married couple has more than $121,220 in non-exempt assets, a certain kind of Medicaid-exempt promissory note or annuity may allow the home-based spouse to keep all of the couple's non-exempt funds.
And for a married couple, it's also important to consider naming children or others as beneficiaries on all of the accounts of the spouse who is not in the nursing home. Funds in the name of the spouse who dies first can pass to the children rather than to the surviving spouse on Medicaid, who would then need to spend those funds down on the nursing home before again receiving Medicaid.
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Finally, a word about the propriety of this type of planning.
Some insist that you are morally obligated to spend down everything on your care, leaving nothing for your heirs, and then apply for Medicaid when you're broke. But as an attorney and advocate for my clients, I believe I have an obligation to inform my clients of their lawful options. If the government wants to disallow any of these approaches, it may.
Further, I would note that the government, through Medicare, will happily pay for expensive cancer treatments (even for lifelong smokers), surgery, and other care for those 65 and older. Who is to say that you are morally required to bankrupt yourself if you have the misfortune instead of getting dementia, or have other medical needs, and need to be in a nursing home?
I can, and do, help well-to-do families save millions of dollars from going to the government in estate taxes. But why is a middle-class couple who played by the rules, paid their taxes, and saved diligently morally obligated to lose their hard-earned savings when the law doesn't require it?
In sum, I feel very good about helping such clients.