Long Term Care Planning


Protect Your Family from the Cost of Long Term Care

People in the developed world are living longer and longer. This is welcome news. But it comes with a downside: the longer people live, on average, the more likely it is that they will experience a period of incapacity toward the end of their lives.

Elderly and incapacitated people need care, whether home care or nursing home care. This care is expensive. For example, a good nursing home can cost ten to fifteen thousand dollars a month. At that rate, a three-year nursing home stay – which is not at all unusual -– can cost well over half a million dollars. A seven-year stay – which is far from unheard of – can cost nearly $1.3 million.

How is the middle-class family to pay for this?

One solution – the worst solution – is to pay out of pocket. A better solution is to have Medicaid pick up the cost.

Medicare and Medicaid are different. Medicare is basically an insurance scheme. You pay into the system during your working years, and then you receive the benefit of subsidized health insurance when you turn sixty-five. However, Medicare does not pay for long term care.

Medicaid does pay for long term care. However, unlike Medicare, Medicaid is means-tested. To receive it, not only must you qualify medically; you must also qualify financially. The financial limits are very low: about $14,500 in assets and $850 a month in income. (Double these figures for a couple.)

How can a middle-class family meet these low limits?

One way is to spend down everything you have on long term care until you are poor enough to qualify. This is a worst-case scenario, but it happens to families every day.

The better way is to protect your assets from Medicaid. This is a complex subject. Basically, under Medicaid rules, some transfers are exempt, and some assets are exempt. Obviously, it is to your benefit to make exempt transfers, or to put assets into exempt investments.

However, there is a catch. Medicaid presumes that most asset transfers made within five years of applying for Medicaid were transferred for the purpose of becoming Medicaid-eligible. (This applies only to nursing home Medicare, not “community” (i.e., home care) Medicaid.) Therefore, Medicaid will penalize you for such transfers. The penalty takes the form of a period of time during which Medicaid will not pay. The length of this penalty period depends on the amount transferred.

For this reason, it is best to plan at least five years ahead. (Last-minute planning can also be done, but at the cost of preserving less of your assets.) Of course, no one knows when incapacity may strike. In my opinion, anyone in their fifties, sixties, seventies, or beyond should talk to an expert about long term care planning.

There are many ways to protect assets from the cost of long term care. Gifts, loans, retirement accounts, annuities, and revocable and irrevocable trusts may all be used for this purpose.


If assets are ready to be transferred to the next generation, it may make sense to do so early. If transferred at least five years before applying for nursing home Medicaid, those assets will be protected. Of course, whether this strategy makes sense depends on whether you are ready to give up those assets, and whether the next generation is ready to receive them.

There are some gifts that are exempt from the five year look back period. For example, a gift to a sole benefit trust for a disabled child is exempt. So is a gift to a caretaker child, i.e., a child who has lived with you and cared for you for at least two years. These and a few other types of gifts do not result in a penalty period.

Retirement Accounts

Assets in a qualified retirement account, such as an IRA or a 401(k), are exempt. That is, they are not counted by Medicaid. For this reason it is good planning to contribute as much as possible to these accounts.

Irrevocable Trusts

Assets can also be transferred to a Medicaid Asset Protection Trust (MAPT). This is a form of irrevocable trust. As the term implies, principal transferred to such a trust cannot be taken back. However, you retain some control. You receive the interest for life. You can reserve the right to remove and replace trustees. You can also designate individuals who are eligible to receive distributions of principal during your lifetime, and those individuals may use these distributions for your benefit.

This is an excellent planning tool – again, if used at least five years before you apply for nursing home Medicaid.

Revocable Trusts

A revocable trust, also known as a lifetime trust, can be useful in protecting the family home. Medicaid cannot take your home as long as you or your spouse or your minor or disabled child lives there, or as long as you intend to return. However, Medicaid can place a lien on the home, and can also try to recover its value from your heirs (up to the amount Medicaid has spent on your care). A revocable trust can prevent these scenarios, while also preserving your property tax exemptions.


Loans are a planning tool that are used when the need for nursing home care is imminent. Half the assets to be preserved are transferred to a MAPT (see above). The other half are loaned to a trusted family member or other individual, using an instrument called a note and gift. The borrower then repays the loan at a rate slightly less than the nursing home Medicaid rate in your county of residence, preserving eligibility.

If you apply for nursing home Medicaid within five years of the transfer into trust, Medicaid will impose a penalty period. The purpose of the loan is to provide a stream of income that can be applied to the cost of nursing home care during the penalty period. This is a form of emergency planning, used when the need for nursing home care may be imminent. With this strategy, at least half your assets can be preserved for the next generation.


Qualified annuities are also exempt. However, most annuities are not qualified. In order to be exempt, an annuity must be actuarially sound. That is, it must pay out over the calculated life expectancy of the annuitant, not for the rest of the annuitant’s actual life. Such an annuity can be a good planning tool, if it fits in with the rest of your plan.

In Conclusion

The above strategies are only some of those available. The Medicaid rules are complex. To protect your assets from the cost of long term care, consult an experienced estate planning attorney.