Protect Your Parents’ Assets While Seeking Long-Term Care

While we hope our parents remain robust and healthy for years to come, the reality is that at some point they may be unable to adequately care for themselves. While some are able to afford quality care at an assisted living or nursing home facility or are able to receive home care services, many others need economic assistance for medical services.

If your parents can afford nursing home or regular home care services, then you may think you have little to worry about other than making sure they have an estate plan in place for distributing their assets after they pass away. But nursing homes can cost upwards of $120,000 per year, and your parents’ assets can quickly diminish unless they have long-term care insurance, a very high and reliable source of income, or are otherwise well-situated. Another option is determining if your parent or parents may qualify for medical assistance under Title XIX. Title XIX, is an economic assistance program which pays for custodial (nursing home) care for individuals who own limited resources as determined by eligibility guidelines.

This requires that your parents qualify under specified asset limits. The Department of Social Services, or DSS, determines eligibility for Title XIX assistance by examining your parents’ assets and what counts towards eligibility. If only one of your parents is to be receiving nursing care, then the other parent is deemed the “community spouse” since he or she is remaining in the household or community at large.

Certain resources generally called exempt resources, are not counted in Title XIX eligibility determinations for noninstitutionalized persons.  What is or is not counted as an available or countable asset depends partly on whether both parents are living and married to each other. For example, if married, one vehicle is exempt.  If a single person or a married couple owns more than one vehicle, only one vehicle can be exempt. Additional vehicles are counted toward the resource limit using their equity value. If the community spouse (or a disabled child) lives in the home, then the home is exempt, at least until the parent is deceased.  

The community spouse is allowed to retain a percentage of the joint assets based on certain limits:

  • If the joint assets are at or greater than $238,440, the community spouse may keep a maximum of $119,220.
  • If assets are more than $100,000 but less than $238,440, the community spouse retains 50% of the assets.
  • If under $100,000 but more than $50,000, he or she can retain $50,000.
  • If under $50,000, the community spouse keeps all of the assets.
The community spouse has an allowable monthly income of $2,655.00. If the community spouse’s income exceeds this amount, then all of the nursing home spouse’s income goes to the nursing home. If below this amount, then any of the nursing home spouse’s income goes to the community spouse to bring that spouse’s income to the allowable limit.

Through “Estate Recovery”, any unpaid costs from nursing home care under Title XIX can be recovered from the deceased person’s estate, which includes assets in which the decedent had any interest whatsoever. Under current state law, the assets of a trust could also be counted as available assets for determining medical assistance eligibility. Governor Walker’s 2013-2014 budget bill extensively revised the Estate Recovery Program for medical assistance under Title XIX. Even if planning is done for Title XIX eligibility purposes, the estate recovery laws will allow the state to seize the property or the proceeds from the sale of the property after the death of the Title XIX recipient.To qualify, some individuals look to make gifts to hasten their ability to qualify for medical assistance.  This is called “divestment”.  Careful planning is critical, and divestment must be done with extreme caution. Divestment should be done with extreme caution for multiple reasons.  Gifts will reduce your parents’ estate, and they must be able to support themselves on the balance of funds remaining after any gifts are made.  After gifts are made, the recipients are under no legal obligation to return the property that was gifted.  Additionally, once the transfer is made, your parents would not be eligible to obtain a reverse mortgage, if they ever needed one.

Some parents wish to gift their residence to their children.  One of the biggest concerns with this idea is that the residence could be affected by unforeseen circumstances, such as the death of a child, or a divorce or judgment against a child. Any interest transferred to a child would be subject to his or her creditors.  If he or she should have a judgment entered against him or her, the creditor could seek to recover the house to satisfy the judgment.  Some situations where a creditor could become a problem include if a child should file for Bankruptcy, if he or she should fail to pay any bills (such as taxes or credit cards), personal injury claims, or divorce.  If he or she dies before his or her parents, his or her assets would pass to his or her heirs.  Consequently, a parent’s home could end up in the control of a son-in-law or daughter-in-law, a grandchild, or some other unknown individual.

Another drawback of gifting of property during lifetime, rather than through a Living Trust or Will, is that there will be no step-up in basis upon your parents’ death on the asset.

In addition, Title XIX has a look-back rule of 5-years whereby any transfer of assets deemed below market value is scrutinized. The 5-year look-back period begins from the date your parent becomes eligible for medical assistance. Divesting becomes complicated since your parent or parents will have to have enough resources to pay for institutionalized care for a minimum of 5-years after any gifts are made.

One vital lesson from this is to plan now for your parents’ possible need for nursing home care and to carefully structure any trusts intended to shield funds from recovery by the state for medical assistance. Be cautious about their transferring assets to you or your siblings because of the 5-year look back rule. If gifts are to be made, be sure that your parents still have adequate funds to pay for nursing home care for 5-years.Another option is to set up an irrevocable trust.  Your parents must carefully weigh the benefits and costs of this plan because this is an “irrevocable act.”

An Irrevocable Trust for Title XIX purposes involves an individual, the “Settlor”, transferring assets to an Irrevocable Trust and retaining an income interest only in the assets transferred to the Trust.  “Irrevocable” means the Settlor cannot amend or revoke (i.e., undo) the Trust.

The Settlor gives up all right to the principal, meaning he or she cannot withdraw or receive the principal. This is a gift of the principal as a remainder interest in the assets. Typically, the children will be the beneficiaries of the remainder interests and will receive the principal after the death of their parents.  As a gift, this will trigger the divestment rules, meaning the Settlor will be ineligible for Title XIX for 5 years under current rules.

The Settlor cannot be the Trustee. A remainder beneficiary (i.e., a child) may be the Trustee, or an independent trustee may be selected.

Under the operation of the Trust, the income is distributed to the Settlor each year. The Settlor must report the income for income tax purposes. The income is available to pay for long-term health care, which includes assisted living or nursing home costs.

An irrevocable trust has a preferred status in the Estate Recovery program, and it is excluded from the property in which the decedent had an interest for the estate recovery program.

An irrevocable trust requires additional annual administration.The Trust will need to obtain an Employer Identification Number (EIN) and file a trust income tax return. There may be additional documentation and filings necessary to move assets into the Trust and to keep the assets in the Trust.

Talk to your estate planning attorney about Title XIX and if there are ways to protect your parents’ assets. Delaying matters can only bring on complications that could have been avoided by receiving timely legal counsel.