Protecting Assets from Potential Future Long Term Care Costs in Pennsylvania
Updated: Jul 29, 2020
How do you protect assets from potential future long-term care and nursing home care costs? This article discusses several techniques to protect assets from potential future long-term care and nursing home care costs in Pennsylvania.
Data in the table above was compiled from Genworth’s 2019 Cost of Care survey. It compares annual nursing home costs with other types of care in 2020 vs. projected annual costs in 2040.
Philadelphia, PA’s western suburbs including Radnor, Wayne, Villanova, Malvern, Berwyn, King of Prussia and also the northeast suburbs including Newtown, Langhorne, Yardley, and most of Bucks County are included.
Genworth states that they surveyed over 15,000 healthcare facilities and service providers nationwide to compile the data. However, many facilities were not included in the survey.
The costs listed in the table above appear low compared to actual costs for care at the facilities with the best reputations in the Philadelphia suburbs. In practice, people often pay more, sometimes significantly more, than what’s shown in the table above.
Many discussions about protecting assets from nursing home care costs center around how to qualify for Medicaid. Medicaid is a federal government program that will pay nursing home costs once assets are below a certain level.
Qualifying for Medicaid can be very difficult for those who have saved and invested throughout their lives and now have sizable investment accounts, retirement accounts, and other assets.
Qualifying for Medicaid in Pennsylvania for Single Filers (as of 2020):
If “gross monthly income” exceeds $2,349, then the “countable resource” limit is $2,400. If gross monthly income is less than $2,349, then the “countable resource” limit is $8,000.
For single filers, this means Medicaid will not begin to pay for nursing home costs until “countable resources” are below either $2,400 or $8,000 depending on your gross monthly income.
Almost all assets, with some exceptions mentioned below, need to be gone before Medicaid will pay for the cost of care.
“Gross monthly income” counts social security benefits, pension income, interest, dividends, IRA withdrawals, and other sources.
“Countable resources” in Pennsylvania includes bank accounts, brokerage accounts, qualified retirement plans such as IRAs, cash value life insurance, and other sources.
A primary residence, up to a certain value and subject to limitations, is generally excluded from “countable resources".
Several other items including a car and a burial plot are also excluded from the “countable resource” calculation.
Data Source: DHS.PA.GOV
Qualifying for Medicaid in Pennsylvania for Married Couples (as of 2020):
The spouse applying for Medicaid benefits has the same “countable resource” limits described above.
The spouse staying at home is eligible to protect half of “countable resources” subject to a maximum of about $128k and a minimum of about $26k. In Pennsylvania, this limit is higher than in many other states.
An appeal can be filed, generally with the help of an experienced elder care or estate attorney, to protect more assets.
Very importantly for those in Pennsylvania, the spouse staying at home can keep all of their income without it counting against the other spouse’s Medicaid eligibility. This includes social security benefits, pension income, earned income, and other income sources as well.
In Pennsylvania, the spouse staying at home’s qualified retirement plans such as IRA accounts can also be kept without counting against the "countable resource" limits for Medicaid eligibility. This is favorable for PA residents, and this opens up several IRA planning techniques that can help with protecting assets from nursing home costs in PA that we'll discuss below.
The spouse at home may also be able to keep some of the other spouse’s income (such as social security benefits and pension income) if it’s determined they need additional income to prevent spousal impoverishment. This is subject to careful review by a county caseworker and certain “monthly maintenance needs allowance” limitations.
The rules in Pennsylvania for the spouse staying at home, sometimes called the “community spouse”, are fairly favorable compared to many other states.
Data Source: DHS.PA.GOV
In situations where it’s financially feasible, paying for nursing home costs privately has several advantages compared to paying through Medicaid:
Depending on where you live, a Medicaid recipient will have less choice of facilities. Not all facilities accept Medicaid payments.
Medicaid recipients may have longer wait times to get into a facility. Especially in the Philadelphia suburbs, many nursing homes have wait lists. Limiting your search to only those nursing homes who accept Medicaid may extended wait times.
There’s more complexity with attempting to qualify for Medicaid compared to paying for care yourself.
First off, some of the techniques to attempt to qualify for Medicaid have costs and tradeoffs that must be incurred long before it’s clear whether you’ll ever have an extended stay in a nursing home.
Second, because the government is paying for those using Medicaid, they need to conduct due diligence, which can be extensive.
Further, the increased complexity doesn’t end at death. Medicaid may use the estate recovery process to attempt to recoup what it paid for nursing home costs from a deceased’s estate. The Medicaid estate recovery process can extend all the way until the time when the Medicaid recipient’s spouse dies as well.
The information below is an overview of a few techniques that can be used to protect assets from nursing home costs in Pennsylvania.
It addresses questions such as “How do I protect assets if my spouse goes into a nursing home?”, “Does a living trust protect assets from nursing homes?”, “Does an irrevocable trust protect assets from nursing homes?”, and “Are IRA assets protected from nursing homes?”.
It is not designed to be an exhaustive list.
Consult with an experienced Pennsylvania estate planning or elder law attorney who can provide customized advice unique to your situation. For our retirement planning clients, we can provide referrals to qualified, experienced attorneys who can help.
1 – Protecting Assets from Long Term Care Costs in PA: Four IRA Planning Considerations
Are IRA assets protected from nursing homes? Pennsylvania does not consider IRA accounts and other qualified retirement plans owned by the spouse staying at home, sometimes called the “community spouse”, as a countable asset.
This presents planning opportunities to protect assets for the community spouse:
Because the retirement accounts of the community spouse are not considered “countable resources” in PA, spend non-retirement accounts accounts first. Joint bank accounts and brokerage accounts will be considered as “countable resources” and will not be protected from nursing home costs. Spending assets outside of retirement accounts first is often good tax planning too.
Contribute to Roth IRA and Roth 401k accounts, and also consider Roth conversions. When contributing money into Roth accounts, you do not get a tax deduction in the current year. However, all principal and growth can later be distributed tax-free subject to age and holding period requirements. Another benefit of Roth IRAs is that they do not have Requirement Minimum Distributions. With Traditional IRA accounts, owners are forced to withdrawal money starting at age 72. The percentage you need to withdraw each year starts at about 3.9% of the account value, and this percentage increases each year as you get older. Point number one above was to preserve IRA assets because they have some built-in protections from nursing home care costs for the community spouse in Pennsylvania. Required Minimum Distributions for Traditional IRAs and other pre-tax retirement accounts make preserving retirement accounts harder because you are forced to withdraw some of the money each year. Any money in Roth accounts, however, can be left alone to compound and grow over time without Required Minimum Distributions at any point during the owner’s life. Because they don't have Required Minimum Distributions, Roth IRA accounts are great vehicles to preserve assets for the long-term and protect the community spouse.
Use the IRA money of the spouse perceived to be “more likely” to go to a nursing home first. The community spouse’s IRA accounts are protected in PA, but the spouse going to the nursing home’s IRA accounts are not protected. This technique won’t be applicable in all cases, but in some situations it can make sense. For example, Joe and Jane are married. Joe is significantly older, has health issues, and has a history of Alzheimer’s in the family. When they need income during retirement, it would be reasonable to use Joe’s IRA accounts before touching Jane’s IRAs. Jane’s IRAs can be left untouched to compound and grow larger for later. If Joe doesn’t end up going to a nursing home, there’s not necessarily any harm in implementing this approach. However, if Joe does go to a nursing home, more of Jane’s assets will be protected due to community spouse IRA protections in Pennsylvania.
When distributions are taken out of Traditional IRA accounts, whether that’s for nursing home costs or for any other purpose, income tax is due. However, when medical expenses exceed 7.5% of Adjusted Gross Income as of 2020, those expenses are deductible. This can, in essence, make part of your distributions from pre-tax IRA accounts “tax-free”. For example, if qualifying nursing home expenses are $200k for the year and Adjusted Gross Income is $240k for the year (AGI being composed of Social Security benefits, a small pension, and IRA distributions in this example), then medical expenses above $18k ($240k x 7.5%) are deductible. This means $182k of the $200k nursing home expenses ($200k total expenses - $18k non-deductible portion) would be tax deductible. This would offset a large majority of the tax due as a result of taking IRA distributions to pay for care.
2 – Protecting Assets from Long Term Care Costs in PA: Outright Gifts
Any assets gifted at least 5 years prior to applying for Medicaid will not be considered as a “countable resources” and will be protected from nursing home care costs. If assets are gifted within 5 years of applying for Medicaid, the applicant will be subject to a penalty and a period of Medicaid ineligibility.
See this article Minimizing Pennsylvania Inheritance Tax for further discussion about gifting.
3 – Protecting Assets from Long Term Care Costs in PA: Irrevocable Trusts
When an irrevocable trust is designed correctly with the help of an experienced Pennsylvania estate planning attorney and when assets are contributed to it at least 5 years prior to applying for Medicaid, those assets will be protected from nursing home costs.
Once assets are contributed to the trust, the trust becomes the legal owner and the terms can not be changed. However, it’s possible to continue receiving certain benefits from the assets contributed to the trust, such as income rights.
Not structuring the trust correctly can result in assets being consider “countable” and/or being subject to the Medicaid estate recovery process later on.
As a fiduciary financial advisor with retirement planning expertise, we work in coordination with experienced Pennsylvania estate planning attorneys to assist our retirement planning clients with trust planning when appropriate.
4 – Protecting Assets from Long Term Care Costs in PA: Long-term Care Insurance
Purchasing long-term care insurance can be reasonable in some cases, but there are many risks.
First, long-term care insurance providers generally reserve the right to raise premiums on existing policyholders after policies are issued. Existing policyholders are often forced to choose between either paying higher premiums to keep the same level of coverage, paying the same premium and accepting a reduced coverage amount, or discontinuing premiums all together and receiving some benefit based on the amount already paid.
It’s already uncertain whether you’ll need to go to a nursing home, how much it will cost, and how long the stay will be. Long-term care insurance further complicates this because future premium costs are uncertain as well. It's difficult to perform a cost/benefit analysis without knowing the future cost of the insurance premiums.
Second, your policy may not provide benefits for the type of care you want. For example, your policy may only provide coverage for care in a facility. What happens if you’re able to receive sufficient care at home, and you’d much rather stay at home then go into a facility? Do you go to the facility so that your long-term care insurance policy will pay, or do you stay in your own home and pay for the care out of your own pocket?
Third, receiving payments can be a hassle. Some policies are “reimbursement policies”. These policies require an itemized list of bills and receipts to be submitted to the insurance company on an ongoing basis to request payment. The insurance company will then review the request and decide what will be paid. What happens if there’s a dispute about coverage? Keep in mind that, while needing to go through the hassle of claiming reimbursement, the insured is experiencing health conditions that require ongoing care. The burden of managing reimbursements will likely fall on someone else (hopefully someone else is around to help).
Many “hybrid” long-term policies have become popular recently. The basic structure is that, in exchange for a lump sum payment today, you’ll have a policy that provides long-term care benefits later. Further, if you don’t need the long-term care benefit, there is some life insurance death benefit that goes to beneficiaries. The concept sounds attractive and at first glance the numbers often look attractive too, but please read the fine print before buying.
Many of these contracts do not make the full “long-term care benefit” available when the insured actually needs the money. Instead, the benefit is payable in monthly installments only, and it would require the insured to need care for many years for the full benefit to paid out.
Here’s a hypothetical example…“Deposit $50k today, receive up to $200k for long-term care costs 20 years from now, and receive $100k in death benefit if you don’t need the long-term care”.
This might sound reasonable at first. However, the $200k long-term care benefit isn't all available when you need it. It's only available, in this hypothetical example, in the form of monthly installment payments of $2,777 per month for up to 6 years.
The insured would need to require long-term care for 6 years to receive the full $200k "lifetime maximum benefit". While some small percentage of the population will require long-term care for 6 years or longer, the odds of needing care for that long are very slim. As a result, it's very unlikely the full "lifetime maximum" benefit will be used.
In fairness, many contracts do not require 6 years of care to receive the "lifetime max benefit". However, it’s important to understand that in many situations, what a policyholder is actually purchasing is similar to a term annuity that pays monthly income for a predetermined amount of time, but only if you need certain types of care. The money is not accessible all at once. Further, there are almost always caps on the amount the policy will pay.
People often buy long-term care insurance because they buy into the vision of protecting themselves from future long-term care expenses. Without question, that is a major concern for many. However, buying long-term care insurance does not necessarily protect the insured from future long-term care costs to the extent they may think.
Depending on the quality of the policy and the costs, buying a policy could actually leave the insured more exposed than if they had forgone a policy and self-insured instead. Work with a fiduciary advisor, one who does not get paid commissions to sell policies, to analyze all options to protect yourself from long-term care costs, rather than simply putting blind faith into a policy.
5 – Protecting Assets from Long Term Care Costs in PA: Responsible Growth Investing During Retirement
Too often, someone retiring at age 65 puts too much of their money in CDs, bonds, or insurance products that pay very little interest.
Healthcare costs are inflating at a rate above 5% per year. Interest on a 10-Year US Treasury Bond is currently below 1%. This is the equivalent of your money’s purchasing power earning a return of negative 4% per year, year after year.
That’s bad enough in one year, but over 20 years by the time a 65-year-old today reaches age 85, the impact will be severe.
Responsible growth investing, as part of comprehensive retirement planning, generally includes:
Keeping some assets in FDIC insured bank accounts for liquidity and protection from market fluctuations. I call this the "short-term bucket".
Keeping some assets in high-quality, investment grade bonds or bond funds for principal stability. This is the "middle bucket".
Keeping some assets in high-quality stock and stock funds for long-term growth and inflation protection. This is the "long-term bucket".
For someone in there 50s, 60s, or 70s today, an important part of protecting assets from potential future long-term care costs is establishing a well-organized investment plan that will continue to pursue responsible growth during retirement. This can increase the chance you'll be able to pay for care yourself, retain control, and avoid Medicaid complexity. This is what's often referred to as "self-insuring".
Not only does creating a well-organized plan that allows you to continue to invest for growth during retirement, responsibly, help protect you from future long-term care costs, but it's a good overall retirement planning best practice as well.
An experienced Pennsylvania fiduciary financial advisor with retirement planning expertise can help you design a well-organized investment plan appropriate for your unique situation.
There are other methods to protect assets in certain situations, such as paying down debt, upgrading the house, or, as a last resort, divorce. An experienced Pennsylvania estate planning or elder care attorney should be consulted to design a plan that make sense for you.
There are steps you can take to protect your assets from potential future long-term care and nursing home care costs in Pennsylvania. Pennsylvania’s laws are more favorable than many other states for protecting assets from nursing home costs.
As a fiduciary financial advisor with retirement planning expertise, estate planning and asset protection are well within our scope of work. When it makes sense for our retirement planning clients, we work with experienced Pennsylvania estate planning and elder law attorneys to design estate plans and asset protection plans in a way that coordinates well with overall retirement planning.
In general, priority #1 is to establish a well-organized, comprehensive plan for retirement. Once there’s a solid foundation built, adding in other planning techniques to accomplish goals such as protecting assets from nursing home costs requires only an incremental improvement to the existing plan.
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