Gifting to Avoid Nursing Home Costs- Too Many Planning Intentional Impoverishment

Health care costs continue to be a top retirement concern, yet few Americans know about their options or the potential dangers of improper planning. More importantly, the most common "simple" plans compromise, unnecessarily, important goals and objectives due to misconceptions. 

Gifting Assets May Risk Home Health Care 

For example, according to a recent survey of financial advisers by Nationwide Financial, 42% of financial advisers say their clients are currently considering giving away their assets to their children so they can qualify for Medicaid to avoid paying for a nursing home.  There are obviously some circumstances making such gifting appropriate.  But, many Americans do not understand the adverse consequences of relying on Medicaid to pay for their long-term care costs.  

Perhaps the most important of these is that the senior abandons control over their long term care and short term health care planning.  Such a result flies in the face of one of the most important objectives most senior's claim to have, and that is to maintain control of their care.  In fact, according to the  Nationwide Financial survey, maintaining control is the most important aspect of retirement health care planning to most seniors.

Many seniors also underestimate the risks of gifting.  Knowing their children to be responsible and loving, they assume the assets will remain as a safety net for their later needs.  But, what if a child is unfortunate, and suffers economic catastrophe through no fault of their own?  Gifting subjects assets to numerous other risks, such as the claims of creditors of children, loss through divorce or disability, and additional long-term care risks.  Moreover, most seniors have no idea what happens if their children predecease them.  Simply, gifting means, for all intents and purposes, that the senior may never see those assets again, regardless of need. 

Gifting may also have adverse tax consequences.  Passing property to heirs by way of inheritance has one important tax advantage- a step-up in basis on appreciated property such as real estate, stocks, and business, to the fair market value on the date of death.  The result is an effective tool in washing away for the heir the capital gains taxes that otherwise would have been realized upon sale of the assets.  The donee, the person receiving a gift, will pay the same capital gains taxes as the deceased would pay if he or she were alive and selling the property.  With capital gains tax rates approaching income tax rates, the tax disadvantage of gifting can be significant.

   

Moreover, the Medicaid gifting rules are complicated, and may not be well-understood by the donor, or the donor's family.  A gift can result in a period of disqualification from Medicaid, necessitating the family to pay for the nursing home regardless of the gift.  Moreover, lawful and permissible spend down opportunities may be lost.   In one disastrous example, a couple gifted their home to their children creating an improper transfer and a corresponding period of ineligibility when the husband applied for Medicaid.  Had the home remained in the wife's name, it would not have been countable in determining his eligibility for Medicaid.  

But perhaps most importantly, the senior's ability to direct care may be forever compromised.  For example, the nursing home they would like to stay in may not accept Medicaid patients. Home care may be impossible after gifting.  Although Medicaid programs vary by state, few will pay for home health care. But tragically, basic health care control may also be compromised.  Fully one-third of doctors do not accept Medicaid patients, according to an August study by Health Affairs, and that number is expected by many to rise.  Regional and local rates of participation in Medicaid vary widely, meaning simply that the gifting senior may be left with few health care providers from which to choose.  Abdicating control of basic health care is especially offensive given that many of these seniors will never need long term care, and of those that ultimately need the care, many would not see financially devastating costs as a result.  

One planner characterized fear-based gifting as akin to intentionally burning down the house based upon rumors that wildfires might reach the neighborhood.  

There are, fortunately, numerous alternative options to giving away assets to qualify for Medicaid.  These include:

• Paying your own way. Affluent seniors who want to retain control of their finances may decide to foot the bill themselves. Many folks are surprised to learn that they may be able to afford to pay for nursing home care given that the average stay is less than three years.

• Buying traditional long-term care insurance. These policies often include important desirable options, such as coverage for home health care.  Some policies will pay family members that become caregivers.  The one major drawback is that someone may invest substantial savings into a policy they may never need.

• Buying life insurance that uses the death benefit to provide long-term care insurance.  Some folks that cannot qualify for long term care insurance, for example because they have used a walker or cane recently, may nonetheless qualify for life insurance.  Most of these policies make the death benefit , or even a multiple such as two times the death benefit, available prior to death to pay for long term care.  These policies avoid the most common objection to traditional long term care insurance, that being the substantial cost, and loss of assets in the event the policy is not needed. These policies, too, often include important desirable options, such as the ability to have some or all of the premium returned if need arises.  

• Set up a trust. Those who want to protect their assets can consider setting up an irrevocable trust instead of giving assets directly to their children.  With competent management outside of the ownership of the children, a trust better manages the risk of loss, and consequence of loss of control.

Long-term care planning may be  complicated.  But with assistance available from an elder law attorney, financial planner, and long term care insurance agent, it is likely that a senior will discover a more suitable option than impoverishment and Medicaid.

• This article is based on, "Pitfalls of Medicaid, long-term care planning," published by USA Today, and written by Christine Dugas, a personal finance reporter. To read the article, go here.