Many aging adults need help with daily personal tasks—things like bathing, dressing, eating, using the toilet, or taking medications. Medicare doesn’t cover this type of so-called custodial care, also known as long-term care. Medicaid is often another place people turn; it’s the largest public payer of long-term care services, and it also pays for 6 in 10 nursing home residents. But many seniors find that they’re not eligible for Medicaid, because their income and/or assets are too high.
Enter the Medicaid “spend down” strategy, a legal way for those 65 and older, and certain others in need of Medicaid’s financial assistance, to reduce their income and assets to the needs-based level in their state. Sometimes this happens naturally, as a nest egg dwindles with each month’s payment for care. But it doesn’t have to. A strategic divestiture of assets can help you qualify for Medicaid sooner.
Strict restrictions apply, however, and the spend-down strategy does not involve blowing one’s savings on lavish gifts or luxury homes. Before you make any moves, contact an elder law attorney or financial planner who specializes in long-term care planning. Medicaid regulations differ significantly by state (including qualifying income levels and asset limits) so you’ll want to consult someone familiar with the local laws and experienced with Medicaid spend down strategies.
Caveat: All scenarios and numbers used in the example below are hypothetical, and all limits, dollar amounts, and eligibility requirements may vary by state.
Medicaid benefits are off-limits to any individual or married couple who has more money coming in each month than the state’s Medicaid income limit allows. This money can include pensions, Social Security, alimony, wages, interest, dividends, and veterans benefits, but generally doesn’t include nutritional assistance (such as food stamps) or federal housing assistance.
In 33 states, though, you can still qualify for Medicaid if you have high medical expenses. Any medical expenses—such as prescriptions, insurance premiums, doctor visits, and outstanding medical bills—that you incur are subtracted from your income. If the remaining income isn’t more than your state’s income limit, then you can be eligible as “medically needy.”
Example: John lives in a state that caps a Medicaid recipient’s monthly income at $1,000. John’s social security payment is $800 and he earns $500 from his pension. If John has regularly occurring medical bills of $300 or more every month, he will be able to qualify for Medicaid.
In states that do not have a medically needy program, you may be able to use a Qualified Income Trust (QIT), into which income over the Medicaid limit is deposited. Funds in this trust can be spent on the individual or couple’s long-term care or medical expenses. Many restrictions may apply to QITs: For example, income must be deposited the month it is received and a trustee must be appointed to manage the trust’s expenditures.
Some Medicaid seekers will get even more creative. “I’ve known some people who have even chosen to get divorced to qualify for different aspects of Medicaid,” says Ralph Barringer, CFP, a certified long-term care consultant and financial planner at Northwestern Mutual in Louisville, Kentucky. If one spouse needs Medicaid to help fund his skilled nursing care while the other spouse continues to live at home, this dramatic step could move the needle on eligibility.
Strategy 2: Spending down “countable” assets
In most states, applicants—regardless of income—will not qualify for Medicaid if they have more than $2,000 in “countable” assets ($3,000 for married couples). This class of assets includes, but is not necessarily limited to, cash, savings accounts, property beyond a primary residence, retirement accounts (including IRAs), and investment vehicles such as stocks, bonds, and mutual funds.
But there is a “non-countable” list of assets that don’t count toward the eligibility limit. Seniors can leverage these assets as part of a spend-down strategy: in other words, converting countable assets to non-countable ones whenever possible.
Non-countable assets may include:
- Primary home in which the Medicaid recipient or his/her spouse currently resides. Note: Medicaid may deny payment for long-term care services if the equity value of your house is above a certain level: in 2018, that’s $572,000 in most states, $858,000 in some states with higher housing costs.
- One vehicle (Converting opportunity: Use money from savings to purchase a newer, more comfortable car)
- Term life insurance
- Personal items, including jewelry and family heirlooms (Converting opportunity: Take available cash and upgrade your jewelry)
- Household assets, including appliances
“Certainly, if you’ve got a mortgage you ought to pay that off,” Barringer says. “Pay off your car. Those are places where you can put money, though there are limits.”
There are also other opportunities Medicaid applicants can use to reduce their savings, including:
- Prepay final planning expenses, such as funeral services
- Invest in medical equipment, such as a newer wheelchair, extra eyeglasses, or a new hearing aid
- Pay for home repairs, which can be heath related (installing a chair lift) or not (putting on a new roof)
- Pay off debt (mortgage, car loan, credit cards, etc.)
- Purchase a no-cash-value life insurance policy
Transferring countable assets like a rental property or second vehicle to a family member via an irrevocable trust is another way to plan. The downside is that you then lose all control over these assets. So choose any trustee carefully.
Plan ahead
The most effective spend-down strategies are those that begin long before you need them. That’s because, while every state has slightly different rules for how it runs its Medicaid program, they all include some sort of look-back period, says Barringer.
In plain English, that means you can’t just transfer your assets one day and qualify for Medicaid the next. When you apply, you’ll have to disclose all of your financial transactions in the look-back window (typically five years). And any major gifts or asset transfers made for less than market value can result in a penalty period. So, selling your house in the last three years won’t be held against you, as long as you sold it for a fair market value and retained the earnings. But transfer your home’s title to your grown child or try to sell it for a fraction of what it’s really worth, and you may not be eligible for Medicaid.
Thinking things through
Before leaping to minimize your monthly income and divest all of your “countable” assets, a risk/reward analysis is essential. Do Medicaid benefits outweigh the comfort of having more than $2,000 in available cash? Is having your husband’s skilled care paid for by Medicaid worth divorcing him (even if it’s in name only)? Again, a qualified estate attorney, elder law attorney, or financial planner can help with these tough questions.
Long-term care can be stressful—or even prohibitive—to pay for without a plan. Get started early by having the right conversations with your loved ones and trusted experts.
By Kate Rockwood
