Many senior citizens are worried about probate and death taxes.  For most people, the fear of probate and estate taxes is misplaced.  The greatest threat to our hard earned money is not probate or taxes, but nursing home costs.

This year and next year, a person can die with $5,000,000 of assets without any estate tax.  Under current law, beginning 2013, $1,000,000 will be tax free at death.  Estate taxes will not be a problem for most of us.

Probate (a court proceeding) is required when a person dies with assets in his or her sole name.  Although going through probate is inconvenient, it usually is not very expensive.  If a person dies owning a home and bank accounts, the probate might cost $5,000 to $10,000.

Nursing home costs, on the other hand, run $8,000 to $14,000 a month!  If staying in a nursing home costs $9,000 a month, that totals $108,000 a year.  Three years in a nursing home will cost $324,000.  This could wipe out everything a person has saved over a lifetime.

Medicare, which most of us have after age 65, pays only for a maximum of 100 days of nursing home costs.  Even though the rules say that they can pay for up to 100 days, on the average, Medicare only pays for about 25 days of nursing home costs.  As soon as the patient’s condition stabilizes, Medicare stops paying.  The patient then has to use his or her own money to pay $8,000 to $14,000 a month.  To get Medicaid (which is different from Medicare) to pay for nursing home expenses, the patient’s assets have to be below a certain amount.  If you are married, you and your spouse together can have $111,560 in assets and still qualify for Medicaid.  If you are single, you can have only $2,000 in assets.

Some senior citizens, because they don’t want to lose their assets to nursing home costs, will give their assets away to children.  You need to be careful, because when you give away assets, there will be a penalty period during which Medicaid will not help you.  Many people think the penalty period is 5 years.  The penalty period can be shorter or longer than 5 years.  These rules are complicated, and you should not give away assets without expert advice.

If you do get your assets below $2,000 and qualify for Medicaid, the government will help pay your nursing home expenses.  But watch out, because there is a trap.  Even though the home is an “exempt asset” and is not counted when adding up your assets, if you are single, the government can usually put a lien on your home.  Even if you are married, if you are in a nursing home and your spouse dies first, a lien will go on your home.  A lien is like a mortgage.  It guarantees that the government will someday get back all the money it pays for your nursing home expenses.  Your children are forced to sell the home or mortgage it to pay back the government.

Another trap is having your home in a revocable living trust.  A trust is good for protecting your assets from probate.  However, a revocable living trust cannot protect your assets from nursing home costs.  In fact, since May 10, 2003, you cannot qualify for Medicaid if your home is in a trust, even if you have less than $2,000 in assets.  To qualify for Medicaid, the Medicaid office will force you to take your home out of your revocable living trust.  When you take your home out of your trust, the government will be able to put a Medicaid lien on it!

Estate planning is now a lot trickier than it used to be.  Many senior citizens who have trusts think they are safe.  They actually face the risk of nursing home costs, which for the ordinary person, is a far greater threat than probate or taxes.

More and more senior citizens are becoming concerned about nursing home costs.  No one really wants to go to a nursing home.  Nearly every elderly person would prefer to stay at home.  However, no matter how much children love their parents, caring for an elderly parent at home can be so stressful that a stay in a nursing home often becomes necessary.  A Kaiser Family Foundation Survey in 2003 found that if you are 65 years of age or older, there is a 45% chance that you will spend some time in a nursing home.  The average nursing home stay is 2.4 years.

Medicaid is the most common way of paying for nursing home costs.  When you apply for Medicaid for nursing home costs, they will count your assets to see if you qualify.  They do not count the value of your home.  However, there is a trap here.  Even though the Medicaid rules say that your home is an “exempt” asset which is not counted when you apply for Medicaid, once you are on Medicaid, they may be able to put a lien on your home.  A lien is like a mortgage.  It will guarantee that the government will be paid back money that they pay for your nursing home costs.

For example, suppose you have to spend the last 3 years of your life in a nursing home.  Suppose you have very little in assets besides your home.  Medicaid pays your nursing home bills, but puts a Medicaid lien on your home.  At a cost of $9,000 per month, your nursing home stay could cost $324,000!  After you pass away, you owe to the government the entire amount they paid for you.  The government will approach your children who are hoping to inherit the home.  They will give your children a chance to go to a bank to borrow the money to pay off the amounts Medicaid paid for your nursing home costs.  If your children want to keep the home, they are forced to buy it.  If they cannot afford to do that, the government could sell the home, and keep the proceeds from the sale, up to the amount that is owed to them.  If there is any money left over after all expenses, your children get to keep the extra.

Because of the great danger of losing the home to nursing home costs, it becomes important to understand how you can protect your home from Medicaid liens.  The first thing to remember is that a Revocable Living Trust will not protect your home from nursing home costs!  This is one of the most common misunderstandings.  Many people have a “living trust” and think they are safe.  A living trust (also called Revocable Living Trust) will protect your assets from probate, but it will not protect from nursing home costs.

The government will not place a lien on your home as long as your spouse is living in the home.  The danger is that the spouse who is living in the home could die first, or also end up in a nursing home.  Then the home is no longer protected from Medicaid liens.  This kind of problem can be prevented by advance planning.  In my opinion, the best method for protecting the home from nursing home costs is for the parents to give the home to the children, but to keep a “life estate.”  A “life estate” means that the parents can live in the home for the rest of their lives.  Yet, they have given the home to the children.  (For those of you who do not have children, I apologize for always talking about children.  This technique will work just as well with a niece or nephew or anyone else you choose to inherit your home.)  In next month’s column, I will explain in more detail how this life estate method works.

OKURA & ASSOCIATES, 2010

             I am thinking about a meeting I had recently.  The daughter of a client came to discuss her mother’s situation.  Mother is elderly.  She suffers from congestive heart failure.  Recently, she was so weak that she was hospitalized for a while.  Then she was transferred to a nursing home.  For now, Medicare is paying for the nursing home cost.  When Medicare stops paying in a few weeks, mother will have to pay the bill herself.  This nursing home costs about $10,000 a month!  Daughter met with a social worker to discuss finances.  The social worker found out that mother has saved up quite a bit of money.  Medicaid will not pay for mother’s nursing home costs until she has less than $2,000.  The social worker advised the daughter that mother should “spend down” her money until she has less than $2,000.  She suggested different ways that mother could spend down the money.  When mother heard that she could not give money to her daughter and grandchildren, she was upset.  She had worked hard and saved money.  She wanted her daughter and grandchildren to have it. 

            Some of the advice given by the social worker was correct.  Some of it was wrong.  I told the daughter that it is not true that mother has to spend all of her money.  Some of it can be given to the daughter and grandchildren.  The social worker’s advice would have resulted in the unnecessary loss of tens of thousands of dollars.  I do not blame the social worker.  She was trying her best to help this family. 

            It is just impossible for anyone to give proper advice for Medicaid Planning unless the person is an expert in it.  The Medicaid laws are very complicated.  There are federal Medicaid laws and state Medicaid laws.  The Hawaii Administrative Rules on Medicaid are very complicated.  The Department of Human Services has internal memos and policies regarding Medicaid that are generally not shared with the public.  There are interpretations of rules which I believe are in the heads of specialists at the Department of Human Services which are not written down.  The only way a person can become an expert in Medicaid Planning is to spend years studying the law and actually working on Medicaid cases to see how the rules are interpreted.  As I have explained some of our creative Medicaid Planning techniques to Medicaid eligibility workers, I have discovered that the vast majority of Medicaid eligibility workers who handle Medicaid applications every day are not experts in the Medicaid law.  In my opinion, among the thousands of attorneys in Hawaii, less than 1% are experts in Medicaid Planning.  I had a case last year in which a woman came to me after being given wrong Medicaid advice by an attorney who specializes in Estate Planning, but not Medicaid Planning.

            If you have a loved one in a nursing home or about to enter a nursing home, you cannot rely on the advice of friends or relatives.  You cannot rely on the advice of well meaning social workers and Medicaid workers.  You cannot even rely on the advice of an attorney unless he or she is an expert in Medicaid Planning.  If you find an attorney who specializes in Medicaid Planning, before you hire him, ask him how many Medicaid Planning cases he has handled.  If it is less than a dozen cases, be careful.  If you were having brain surgery, you would not want to be the first patient on whom the surgeon is operating.

            Some people in nursing homes are paying thousands of dollars a month, waiting until they run out of money, when they can qualify for Medicaid.  This is a sad and unnecessary loss of money.  In most cases, some money can be saved by proper Medicaid Planning.  In some cases, 100% of the money can be saved!  It is true that the Medicaid laws are becoming stricter as the years go by. However, there is still room for creative Medicaid Planning.   

© OKURA & ASSOCIATES, 2009           

Sanford K. Okura received his Doctor of Jurisprudence Degree from Stanford University in 1976.  He specializes in Estate Planning and Medicaid Planning to protect assets from nursing home costs, probate and estate taxes.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

This column is for general information only.  The facts of your case may change the advice given.  Do not rely on the information in this column without consulting an estate planning specialist.