It is important to understand the basic rules of qualifying for Medicaid Long Term Care Assistance in order to cope with the financial realities of a relative’s long-term care. The rules below apply in Michigan and have been updated for 2008.

First, you should understand that the rules are different for single people and those who are married. To make things just a little more complicated, if both spouses of a married couple are in the nursing home, they are both subject to the rules of a single person, with each spouse qualifying separately.

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Under previous Medicaid policy, applicants for long term care were given the benefit of a doubt most of the time. In some cases, a demonstrated intent to complete asset conversion, which is the process of converting non-exempt assets into exempt or excluded assets and is the heart of Medicaid planning, would be enough to pass scrutiny.

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The durable power of attorney is an extremely valuable estate plan document. It allows one person to designate an agent to conduct all financial affairs. These documents are typically durable meaning that the power continues through the disability of the principal (the person naming an agent). Alternatively, there can be springing powers of attorney, which only come into effect when the principal is incapacitated. Springing powers of attorney can be attractive in many ways since the principal’s assets remain untouchable while they can still be used and enjoyed by the principal. But many financial institutions will not honor a springing power of attorney. The apparent rationale goes like this: “You didn’t trust him while you were able to watch over your own affairs. Why should we trust him now?”

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Many Elder law attorneys advise loving couples to pursue divorce as a method of asset protection. I have never found the technique necessary and, frankly, find the approach ethically questionable. Alternatives exist for both pre-planning and crisis planning that avoid the murky waters of a consensual divorce between an otherwise happily-wed pair. It is my view that you should not have to pretend to be something that you are not in order to protect assets. Everything is always disclosed in the Medicaid applications I advise clients on and the asset protection plans I create. I have helped dozens of couples protect their estates from the cost of long term care and there has never been a reason to resort to divorce.

This post is continuation of what I expect to be a long series on protecting the homestead of long term care patients.

Before the Deficit Reduction Act was signed in February of 2006, it was relatively easy for an elder law attorney or a well-informed layperson to set aside money to pay for the upkeep of a nursing home patient’s homestead. A simple contract could be created and assets transferred to a responsible relative who would pay for the utilities, taxes, insurance and maintenance of the nursing home patient’s home. It also used to be possible to gift a significant amount of money each month. Therefore one could simply give assets to another to keep up the home. These techniques were necessary because a person in a nursing home can generally have only $2,000.00 in cash or equivalent non-exempt assets and all but a small portion of income will go to the cost of care. Since such a small amount of money is dwarfed by property taxes alone, the policy allowing money to be set aside for homestead maintenance made sense for several reasons.

First of all, some people do return home, even after long stays in a nursing home. Second, there are significant tax benefits to waiting until one’s passing to transfer a homestead to a relative. But with the possibility of tax foreclosure or dissipation through neglect, a sale or significant financial hardship is difficult to avoid with the owner in a nursing home. Moreover, Medicaid policy considers the transfer of a homestead a divestment subject to penalty in most cases. Third, the sale of home in financial distress is a loss to an effected family, particularly in today’s troubled real estate market.

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This article provides some preliminary answers to an important question for today’s retirees and elderly: Is long term care insurance a good idea?

In general, I advise clients to get long term care insurance. The effects of being unprepared for this financial tsunami are too overwhelming to do otherwise. But be careful and be informed.

Among your first questions should be the extent of the coverage and the anticipated premium schedule. It is not uncommon to see nursing home care costs increase 10% or more in a single year. It is therefore important to understand how much coverage is needed and how much adequate coverage will cost.

Once you have that information, consider this: a properly drafted and funded asset protection plan will give you all of the benefits of your assets, but fully protect them from the cost of long term care after five years. When you look at the premiums, the escalation of long term care costs, and the uncertainty of the future, an asset protection estate plan combined with 5 years of long term care insurance makes the most sense for many people.

When President Bush signed the Deficit Reduction Act of 2006, the states began to implement that law through a steady patchwork of regulations. Michigan issued revisions to Medicaid qualification rules on a quarterly basis throughout 2007 and there is no reason to think that this pace will slow down in 2008. I will be posting on a regular basis on the many recent changes that have been introduced here in Michigan, including those with retroactive effect and those pertaining to estate recovery.

This article highlights the reality that more changes in Medicaid law are forthcoming.

CMS has proposed new rules that would give states more latitude in designing their Medicaid programs. The rules, which address provisions of the Deficit Reduction Act of 2005 and the Tax Relief and Health Care Act of 2006, would give states the ability to build Medicaid programs that work more like their local private health plans. CMS also has issued proposed regs, based on DRA provisions that will allow states to change premiums and cost-sharing rules.

CMS (The Center for Medicare and Medicaid Services) is a federal agency that oversees the states’ implementation of Medicare and Medicaid. For instance, Michigan has submitted its recently passed estate recovery program to CMS for approval. Whether Michigan will be allowed to use the comparatively mild form of estate recovery will depend on the opinion of CMS.

Medicare and Medicaid are hugely expensive programs and with the average cost of care in a nursing home at about $6,500.00 month in Michigan, long term care Medicaid is a particularly expensive program. It is generally encouraging that CMS is allowing states to develop programs more tailored to their particular circumstances. This may allow some states to stretch their already strained budgets a bit further. But eligibility rules for long term care Medicaid will become ever more restrictive in the near future, and, I would suggest, that if the Deficit Reduction Act is not enough to limit access to Medicaid, that further reform will be coming. This highlights the need for both pre-planning and long term care insurance.

States have begun to encourage all citizens to obtain long term care insurance as part of the Deficit Reduction Act. No one likes paying premiums on insurance, but for those of modest means, the premiums are especially burdensome and the benefits, considering that Medicaid is available when the assets run out, negligible. According to this article from the Wall Street Journal, “States Draw Fire for Pitching Citizens on Long Term Care Insurance,” the broad encouragement to obtain long term care insurance is generating profits for the insurance industry at the expense of people who cannot afford it:

The state endorsements are “the single best thing that has happened to the long-term care industry,” says Jesse Slome, executive director of the American Association of Long-Term Care Insurance. Total premiums collected for long-term care, or LTC, policies were $10 billion in 2007, up 21% from $8.2 billion in 2004.

Critics are sounding alarm bells. They argue that the financial benefits of LTC insurance for many target customers are negligible to nonexistent. Their income and assets are so low that they would quickly qualify for free care under Medicaid.

I have seen people with long term care insurance who had little to gain from having it, and I did not ask how much the premiums were–money that had been squandered. It is certainly common to see premiums of more than $3,000.00 per year.

My view is that long term care insurance can certainly be a good idea, but that decision cannot be made without the a thorough consultation with an elder law attorney. Why? Qualification for Medicaid is a specialty in of itself. The law is nuanced and subject to change. Whether one should have long term care insurance is a fact sensitive determination that should be made in the context of an overall estate plan with clearly defined goals. I can tell a client how soon they can qualify for Medicaid (which will be sooner than you think) and what value long term care insurance will have. A one hour consultation can easily save tens of thousands of dollars–by protecting assets or avoiding unnecessary insurance.

The key is to match estate planning goals with the best means available to achieve those goals. Frequently, a combination of long term care insurance along with an asset protection plan will make the most sense for people who are pre-planning their long term care needs. But if one cannot afford or cannot obtain long term care insurance, an asset protection plan is an excellent substitute and generally, a comparative bargain.

When a single person goes to the nursing home for long term care, there are several obstacles to overcome in order to preserve the homestead. First of all, the patient will be limited to just $2,000.00 in non-exempt assets. Secondly, the homestead will be at risk for estate recovery–a program by which the state can seek repayment of Medicaid benefits against the estate of a Medicaid recipient.

But perhaps the most dangerous aspect of this scenario is that the qualification rules will not allow any money beyond the $2,000.00 limit to be set aside for maintenance of the homestead without some fairly complex asset protection techniques. Gifting assets will result in a period of ineligibility that will not be served until the applicant is otherwise out of money and in the nursing home. Under previous law, it would have been an option to enter into a personal care contract in order to shelter some money. Personal care contracts are now reviewed by such exacting standards that few will pass muster. Current law requires at least some asset protection planning if the homestead is going to be preserved without imposing a hardship on other family members.