Ensuring our Long-Term Care

Statistics are telling us that approximately 25% of us will need some sort of extended long-term nursing care during our lives – and as our life spans increase with improvements in medical care, this number is likely to go up.

Most of us have had situations with family or friends where we’ve witnessed this firsthand – and since Medicare doesn’t really provide much in the way of long-term care benefits, the individual is left with three possible sources to pay for long-term care:

1.private payments from your savings and other sources
2.long-term care insurance coverage (LTCI)

Given the tremendous costs for long-term care, many individuals are faced with the distinct possibility that any savings that they have amassed over their lifetimes (and that they hoped to pass along to their heirs) could be quickly wiped out or drastically reduced with a stint in a skilled-care facility. Then who will take care of the sheep?

Briefly, Medicaid was originally introduced in 1965 as a “safety net” for healthcare, directed to poverty-stricken people. Along in the late ’80’s, it became clear that this safety net could be quite beneficial to people of modest means, and so the laws were changed to allow for additional beneficiaries of the program through some simple planning. Later during the early ’90’s, some of the eligibility requirements were tightened up a bit, but there is still benefits to be had for folks who need them.

Eligibility for Medicaid is based upon the amount of assets available – only about $2,000 is allowed to remain in savings vehicles. Community (joint) accounts are subject to special rules, and depending upon how your state chooses to administer the program, half of these jointly-held accounts could be used as eligible assets. Other assets, including primary residences, annuities, and life estates, receive special treatment under Medicaid eligibility rules as well.

Retirement Accounts and Medicaid Eligibility:
So how are your IRA, 401(k), and other accounts viewed with regard to Medicaid eligibility? As a general rule, retirement accounts are included as available assets when considering Medicaid eligibility – even if the individual is under age 59½ and otherwise ineligible for distributions without penalty. This account must be liquidated before the individual would be eligible for Medicaid coverage.

One way to protect assets from liquidation is if the account is in periodic payment status – such as subject to Required Minimum Distribution (RMD) either due to age 70½ requirement or if the IRA is inherited and subject to RMD. In some states the account in periodic payment status is considered an income source rather than an asset, and so the circumstances might help to protect the account’s assets from being included as a whole for Medicaid eligibility.

For example, if an individual was in RMD status due to being over age 70½, his account would be considered in payment status. If the account was worth $200,000, this amount would not be counted against him for Medicaid eligility, but the periodic income stream would be. If he were age 72, his annual required payment from the account would be roughly $7,812, which would be considered for his income budget, approximately $651 per month. If this was his only income, that amount would be reduced by $60 for personal needs allowances, and the remainder would be paid to the nursing home – with the balance of the cost of the nursing care paid by Medicaid.

If the individual is married and the other spouse is not subject to long-term care, there are allowances made for monthly minimum maintenance needs as well (this varies by state – see the link below for additional information on a state-by-state basis).

What About a Roth IRA?
So, if you’re thinking ahead you’re wondering how this impacts a Roth IRA… since a Roth IRA is not subject to minimum distribution rules. Rightly so – the Roth IRA is never in a payment status as long as the original owner is living, and as such, Roth IRA assets are counted toward Medicaid eligibility status. These assets would have to be spent down before the individual could become eligible for Medicaid.

Bottom line…
So the bottom line is that you need to consider lots of things as you think about Medicaid eligibility. If you have significant assets available, you could be better off to consider a Long-Term Care Insurance strategy, as otherwise your assets might have to be spent down and quite possibly depleted. Unfortunately there isn’t a “rule of thumb” to use in determining whether LTCI makes sense – each individual’s situation will be a little different, taking into account medical history, family medical history, asset base, age, etc.. This is the sort of analysis that you should do as you near retirement age in order to consider whether or not LTCI or Medicaid could be a part of your future healthcare plans.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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