Today I am republishing an article that originally appeared in the Metrowest Daily News. I am allowed to do that by the terms of my agreement with the newspaper. I have changed a few words, especially in the last paragraph, to make my meaning clear. But basically, this remains a clear statement of my view and philosophy on medicaid asset protection planning. The original article, if you are curious, can be found on the website of the Metrowest Daily News at: http://www.metrowestdailynews.com/opinion/x978987763/Deland-Nursing-home-costs-force-choice-between-welfare-and-impoverishment.
So, here we go:
Suppose you are living the American Dream: you own a house; and you have saved enough for a comfortable retirement. You have children and your children have children. Then a bad thing happens: you have a heart attack, and die suddenly. Your children are the beneficiaries of your will. They and their children will benefit from your hard work and careful saving. Your grandchildren will be able to attend better schools. That is as it should be; part of the American Dream is being able to leave your children better off than you were.
Now, let’s consider another scenario – instead of dying from that heart attack, you recover and go on to live a long time. The accumulation of the ills of old age make life harder and harder for you. Your bones become more fragile, your memory more fickle. You come to need help just to get out of bed, dress, even eat. Your children, much as they love you, have their own lives to lead. They cannot give you the full time nursing care you need. Reluctantly, you and your family decide you must go into a nursing home.
Up until this point in your retirement, your medical care was provided by Medicare, a federal program that provides health insurance to people over the age of 65. Medicare will pay for nursing home care, but only if you enter the nursing home from a hospital and only for a short period of time. If you need long-term care in a nursing home, you must pay for it on your own.
There is a safety net. Called “Medicaid,” it is a federal program, administered by the states. In Massachusetts, it is administered by the Division of Medical Assistance, under the name "Masshealth."
MedicAid is not insurance. Insurance pays if something happens that you insured against. If your house burns down, your insurance company can’t get out of paying by claiming that you have plenty of money, you don’t need the benefit. You paid for the insurance; the hazard you insured against happened; therefore, the insurance company has to pay. Health insurance works the same way. It doesn’t matter whether you can afford to pay for care or not. If you need medical care, and you have medical insurance, the insurer has to pay.
MediCare, unlike MedicAid, is health insurance. All working people pay for it, along with Social Security, through payroll deductions. It is insurance that we are required to pay for. Fire insurance on your house (if you have a mortgage), car insurance, and, now in Massachusetts, health insurance, are all required. But we are not required to pay for long-term care insurance.
Instead, most of us will rely upon MedicAid if we ever come to need long-term nursing home care. Unlike Medicare, MediAid is not insurance; it is welfare. It only pays the bills of the needy. What does it mean to be needy? Long-term care can run close to $100,000 a year. If your investments, retirement, and social security, combined, yield that kind of income, you obviously don’t need Medicaid.
But what if you have income of “only” $50,000 a year? Will Medicaid pay the difference? It will not. Medicaid will pay nothing until you have spent your assets. A single person is allowed to keep $2000. You don’t have to sell your house until it becomes really clear that you are not coming back to it. But, when that happens, the house must be sold and the money used for nursing care. If you die still owning it, the house must be sold and the proceeds used to reimburse the state for the money that has been spent to care for you. There may be nothing left for your children or your grandchildren.
To many, this seems an unfair result. If you can afford to pay for nursing home care out of your income, you can pass on all your assets to your children. If you are not wealthy enough to pay a nursing home out of your income, you must liquidate your assets in order to pay. So the children of the rich stand to inherit more of their parents’ assets then the children of the middle class or the poor. This is a mechanism for increasing the gap between the rich and the rest of us.
The truly poor have nothing to worry about. They are taken care of, as they should be, by this system. But, if you have something put away, whether or not you can leave the benefits of your hard work and careful saving to your family depends on how you die. If you die suddenly, your family benefits. If you stay alive for a long time, you will have to spend your children’s inheritance.
A decision has been made in this country, that nursing home care, unlike most other kinds of medical care, should be a “pay as you go” proposition. We have decided not to require people to insure against it. At the same time, we have decided that we cannot let helpless elders be thrown into the street because they cannot pay for care. These decisions have had some odd results.
One of these odd results is a niche market for lawyers. By placing your savings and your house in an irrevocable trust, you can avoid having the property in your own name when you die. Because the state can only recover the cost of your care from the property that was in your own name when you died, you can use a trust to pass assets on to your children. There is one catch, however: the state will refuse to pay for the period of time that the property in the trust would have served to pay for your care if it had been available. However, if you manage to stay out of the nursing home for five years after setting up the trust, the transfer to the trust will be ignored, regardless of the property’s value. The use of such a trust is perfectly legitimate. However, setting one up does require forethought and cost money. So, among the “not-so-rich,” people who plan ahead, by insuring against the need for long-term care or by taking legal steps to protect their property, will leave their families better off.
But what about someone who is struck by unforeseeable illness or accident and has had no time to plan? What about someone who owns a house but has low income, who feels that they cannot afford either insurance or legal fees? What about those who are too proud to plan to take advantage of a form of welfare, and choose to simply hope that they will die quickly?
The reason that Medicare does not cover long-term care insurance is that it was thought to be too expensive. However, the question is not, should we have long-term care. Some people need to be cared for long term. The question is, who should pay? Should individuals and their families have to pay? As things now stand, the cost of long-term care falls heavily on a certain group of people: those who have worked hard and saved carefully all their working lives and who live a long time. These people, the virtuous elders, don't deserve to be "living the American Nightmare."