The population is growing older, and Americans are living longer. This means a further increase in the need for long-term care over the coming decades. In fact, 56% of the U.S. population turning 65 today is expected to require long-term care at some point, according to the U.S. Department of Health and Human Services.
But this care will come at a staggering cost. By 2029, 54% of older Americans will not have enough financial resources to pay for long-term care, Health Affairs reports, leaving many individuals and their loved ones seeking a solution to cover these costs and protect their nest egg. As the demand for long-term care increases, financial professionals have a unique opportunity to provide life-changing solutions to older adults and families who are experiencing a long-term care crisis.
Medicaid and long-term care
Older Americans who have not planned for long-term care or who have exhausted their Medicare or long-term care insurance benefits may seek Medicaid eligibility to cover their care costs. Medicaid provides health coverage for a variety of individuals with limited resources and income, including those who are aged, blind or disabled.
To qualify for Medicaid, applicants must meet strict nonfinancial and financial requirements. To meet the nonfinancial qualifications, the applicant must be 65 years of age or older, blind or disabled; be a U.S. citizen or qualified noncitizen; and reside in a Medicaid-approved facility.
The financial qualifications for Medicaid are much more complex, and they differ depending on the applicant’s marital status, state of residence and other criteria.
The applicant’s income typically must be less than the private pay rate of the care facility in which they reside. After the applicant qualifies, their income is used to pay the Medicaid copay to the nursing home. In cases involving a married couple, the spouse at home, also known as the community spouse, is not subject to any income limitations when determining Medicaid eligibility. Instead, if the community spouse has income below a certain threshold, known as the Monthly Maintenance Needs Allowance, they may be eligible to receive income shifted from the institutionalized spouse. The MMNA varies by state but is generally between $2,288 and $3,715 as of Jan. 1, 2023.
To meet Medicaid’s asset requirements, the institutionalized individual typically can keep $2,000 in countable assets. The community spouse can retain a separate amount known as the Community Spouse Resource Allowance. The CSRA varies by state and is generally between $29,724 and $148,620 as of Jan. 1, 2023. In order for the applicant to qualify for Medicaid benefits, they must first spend down any countable assets exceeding these limitations.
Common countable assets include checking and savings accounts, certificates of deposit, money market accounts, stocks, bonds, mutual funds, additional real estate and property beyond the primary home, and additional vehicles beyond the primary vehicle. Separate from countable resources, applicants and their spouses can retain certain assets that are exempt from Medicaid’s consideration.
Common exempt assets include the primary residence, one vehicle, household furnishings and appliances, personal effects and clothing, and life insurance policies and funeral trusts below a state-specific limit. The primary residence is considered exempt unless the Medicaid applicant’s equity in the home exceeds a state-specific limit, which is between $688,000 and $1,033,000 as of Jan. 1, 2023.
Planning with individual retirement accounts
Common assets notably missing from the lists of countable and exempt assets are retirement accounts. Although retirement accounts come in many forms, for the purposes of this article, the term “IRA” refers to all applicable retirement accounts.
When it comes to determining Medicaid eligibility, states treat IRAs differently. Some states consider IRAs belonging to either spouse to be exempt. Some states view IRAs owned by the community spouse as exempt, and some consider IRAs to be exempt only if the account owner is taking the required minimum distributions. Most states, however, treat IRAs as countable and view the entire account as a resource available.
Like other countable assets, if an IRA is considered countable, it must be spent down before the applicant can qualify for Medicaid. However, liquidating an IRA can result in hefty tax consequences for the account owner. However, an IRA can be transferred to a tax-qualified single-premium immediate annuity that meets specific requirements deeming the contract Medicaid compliant.
Transferring an IRA to a Medicaid-compliant annuity
To eliminate a countable IRA, the applicant can transfer the account to a Medicaid-compliant annuity, which is a SPIA that converts excess assets into an income stream with zero cash value.
The MCA is a useful tool used in crisis planning to help Medicaid applicants spend down their excess countable resources. To be Medicaid compliant in most cases, the annuity must be irrevocable, nonassignable and actuarially sound. It must make equal monthly payments and name the state Medicaid agency as a beneficiary.
The state Medicaid agency must typically be named the primary beneficiary to the extent of benefits provided on behalf of the institutionalized individual. However, exceptions exist in certain states and in certain cases involving a married couple or a minor or disabled child. In these instances, the state must be named contingent beneficiary.
Instead of incurring immediate tax consequences from liquidating an IRA, transferring it to an MCA spreads the tax consequences over the term of the annuity, since the account owner is taxed as payments are made within each calendar year. An IRA can be transferred to an IRA-MCA with either a 60-day rollover or a trustee-to-trustee transfer.
Depending on which spouse owns the IRA, they may benefit from a different crisis planning strategy. Since ownership of an IRA cannot be transferred, the IRA-MCA must be owned by the owner of the IRA. If the community spouse owns the IRA, they can transfer the account to an IRA-MCA, and the income received from the payments will not be considered by the Medicaid agency when determining eligibility. However, if the institutionalized spouse owns the IRA, the monthly payments from the IRA-MCA cannot exceed their income limitation. Plus, the payments may be used to pay the monthly Medicaid copay to the nursing home.
In these cases, if the community spouse has income that is low enough, they may be eligible for an income shift from the institutionalized spouse based on the MMNA rules. That way, a portion or all of the IRA-MCA income will be shifted to the community spouse.
If the community spouse does not qualify for a MMNA transfer, however, the couple may benefit from the name on the check rule. This strategy is based on the Medicaid stipulation regarding who income is attributed to — the person whose name is on the check. With this strategy, the institutionalized spouse remains the owner of the IRA-MCA, but the community spouse is designated as payee and, therefore, will receive the monthly payments from the annuity. Although the name on the check rule is an excellent strategy in many states, it has not been universally accepted nationwide; therefore, it may not be viable in certain jurisdictions.
As more older Americans seek help from agents and advisors to protect their life savings in the face of long-term care, financial professionals should be prepared to help their clients, especially when those clients have tricky assets such as IRAs to consider. Medicaid applicants can protect their countable IRA by transferring it to a Medicaid-compliant annuity, allowing them to avoid the immediate tax consequences of liquidation. This way, seniors can accelerate their eligibility for Medicaid benefits without losing their assets first.