Avoiding penalties is a crucial piece of wealth management. Long-Term Care Insurance (LTCI) is no exception. One of the advantages of LTCI is the ability to leave a legacy to loved ones after entering a nursing home, but let’s discuss the situations that create a potential for penalties.
If you transfer some of your assets to your children while your LTCI is paying your nursing home bills, will you be subject to any penalties?
This depends on a number of factors, including the duration of benefits you selected in your LTCI policy.
LTCI can be employed as part of your overall Medicaid planning strategy if your goal is to qualify for Medicaid at some point. If you are very wealthy and have no intention of ever applying for Medicaid, transferring your assets will make no difference.
If you do envision receiving Medicaid assistance with your nursing home bills at some point, however, then transferring your assets within a few years of the time you apply for Medicaid could pose a real problem.
In general, if you transfer certain assets for less than fair market value within what's known as the look-back period, the state presumes that the transfer was made solely to qualify you for Medicaid. Therefore, the state will impose a waiting period or period of ineligibility upon you before you can start to collect Medicaid benefits.
Purchasing an LTCI policy allows you to transfer your assets to your loved ones after you enter a nursing home. If you select the proper duration of benefits provisions in your policy, your LTCI policy should cover your nursing home bills during the ineligibility period caused by the transfer. Thus, you can give your assets away, enjoy paid nursing home bills during the ineligibility period, and qualify for Medicaid when the insurance policy runs out.
Example(s): Marge is a 75-year-old widow who purchased a five-year LTCI policy a few years ago. Marge enters a nursing home, which charges $5,000 per month. At the same time, she transfers all of her assets (worth $250,000) to an irrevocable trust to qualify for Medicaid when the insurance benefits run out.
Example(s): Transferring certain assets into an irrevocable trust within 60 months of applying for Medicaid creates a waiting period or period of ineligibility for Medicaid, based on a formula. In Marge's case, the applicable waiting period would be 50 months (the amount she transferred divided by the cost of care in her area).
Marge has no funds left to pay for her care, and Medicaid won't kick in until the 50 months have elapsed. Fortunately, Marge's LTCI policy will cover her nursing home bills during the ineligibility period. And, when her insurance benefits run out five years from now, she will qualify for Medicaid.
Tip: The Deficit Reduction Act of 2005 gave all states the option of enacting long-term care partnership programs that combine private LTCI with Medicaid coverage. Partnership programs enable individuals to pay for long-term care and preserve some of their wealth.
Although state programs vary, individuals who purchase partnership-approved LTCI policies, then exhaust policy benefits on long-term care services, will generally qualify for Medicaid without having to first spend down all or part of their assets (assuming they meet income and other eligibility requirements). Although partnership programs are currently available in just a few states, it's likely that many more states will offer them in the future.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ¬purpose of ¬avoiding any ¬federal tax penalties. You are encouraged to seek advice from an independent professional ¬advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ¬purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2019 Broadridge Investor Communication Solutions, Inc.