Understanding MassHealth and Nursing Home Care: A Case Study in Smart Financial Planning

In my practice as an elder law attorney, I often work with families facing a difficult transition: a loved one’s decline has become so severe that they can no longer provide care at home. It’s a sobering moment when we realize that our parents - who have always been our caregivers - need care themselves.

The emotional challenge of moving a parent to a nursing home is often compounded by a daunting financial reality. With monthly costs around $15,000, many families find themselves asking: "How can we possibly afford this?”

THE STANDARD NURSING HOME ADVICE

Nursing homes typically offer what seems like a straightforward solution: spend down the patient’s life savings to $2,000, and then MassHealth will cover the care costs for life. While this advice isn’t wrong, it is incomplete and costly for families.

Let me share a recent case that illustrates why.

A REAL-WORLD EXAMPLE

We recently worked with a niece whose aunt, in her early 90’s, needed nursing home care. The situation looked like this:

1. The aunt had a monthly income of $5,900 from Social Security and various annuities;

2. She has approximately $100,000 in savings;

3. The nursing home charged about $13,000 a month;

4. The niece, acting as power of attorney, was paying about $7,000 monthly from savings to cover the shortfall.

The nursing home advised continuing this approach until the savings were depleted - about 14 months - at which point the aunt would qualify for MassHealth. They offered to handle the MassHealth application “for free.”

A BETTER STRATEGY: THE STRATEGIC ANNUITY

We recommended a different approach using an insurance annuity. Here’s how it worked:

1. the aunt used her $100,000 in savings to purchase an annuity from an insurance company;

2. the insurance company agreed to pay $2,300 monthly, for 3.5 years;

3. the aunt immediately qualified for MassHealth, without a 14-month waiting and spenddown period;

THE FINANCIAL BENEFITS

This strategy created two significant advantages:

1. Immediate rate reduction:

   1. Private pay rate: $13,000 per month

   2. MassHealth rate: $8,400 per month

   3. Monthly savings of $4,600;

   4. Total savings over 21 months: $95,000

2. Protected Assets - when the aunt passed away after 21 months:

   1. MassHealth’s claim was minimal ($4,200)

   2. The remaining annuity payments of $44,000 went to the family

THE TRUE COST OF “FREE” HELP

When nursing homes offer to handle MassHealth applications for free, it’s worth considering what that really means. In this case, following their advice would have cost the family $44,000.

Every family’s situation is unique, and there are often multiple approaches to handling long-term care costs. Before following a nursing home’s financial advice, consider consulting with an elder law attorney who can outline all available options and help you choose the strategy that best service your family’s interests.

When your parents die with debt

The death of a parent is a difficult experience at any age. Adult children who lose a parent deal with the added stressor of realizing a parent left debt behind. In the past decade, we've seen a steep increase in debt among senior households. According to a report from the Employee Benefit Research Institute, nearly half of families age 75 and older have an average of roughly $37,000 in debt.

Most senior debt is tied to housing expenses, but auto loans, medical bills, credit cards, and student loans also factor in. If you think your parent may die with debt, here are some things to remember:

• You are usually not personally responsible. When a person dies, his debts are typically owned by his estate. When the estate does not have enough assets to cover all the debt, those bills usually remain unpaid and creditors take the loss.

• The executor will need to sell estate assets to satisfy any debt, but if there are still bills left over, you are likely not personally obligated to pay. An important exception to this is medical bills.

• Certain assets are protected. If you directly inherit protected assets, which are assets like life insurance policies or retirement benefits naming you as beneficiary that do not pass through the estate, you do not have to use those funds to pay your deceased parent’s debt.

This does not mean collection agencies will leave you alone. Debt collectors may continue to call you or try to guilt you into paying. You should keep notes of who calls you, which days and times they call, and what they say. If you have this problem with a collection agency, talk to the attorney managing the probate. Costs of administration like court fees and professional fees are a priority debt, which means the probate attorney is paid before other bills and likely will not have to be paid by you personally.  

Transferring your home to adult children

The home is the most valuable asset for many people. Many people consider either adding their adult children to the deed or just gifting it to them outright in an effort to avoid probate. Making such a transfer should result in avoiding probate, at least on the home, however, there are many reasons not to do so. Here are a few:

First, while there may be an understanding between the parents and the children that the transfer is current in name only and the parents will continue to live in the home until they have passed away, technically it is a complete and immediate transfer. This means that if the child who has been given part or complete ownership of the home has any legal issues - divorce, lawsuit, bankruptcy - the home will be part of their countable assets.

Instead, putting your home in a trust with your children as beneficiaries after you have passed away can avoid those problems. The assets in the trust should not be counted as assets owned by that child either during your lifetime or after you have passed away.

Second, many people think that they will be able to qualify for Medicaid (MassHealth) by transferring their home to their children while they are still living. This is true in very limited circumstances. For most people, however, it is only effective if the transfer occurred more than 5 years before the parent applies for MassHealth. All the issues outlined above are also issues in this case.

Again, transferring your home to a specific type of trust can solve this problem. It can protect your home while you are still living and protect it from a claim by MassHealth after you’ve passed away, enabling you to transfer it to your children at that time.

Third, as always, there are tax issues. When you pass away, there is an automatic basis step-up. That means the value of your home increases from the value at the time you bought it to the value at the time of your death. Your children will inherit it at its present value, without paying taxes on the increase in value. Transferring your home to children while you are still living does not avoid that tax.

Pandemic downturn opens estate planning opportunities

It is not breaking news that many financial investments and bank accounts have taken a hit as a result of the global spread of Coronavirus. According to most predictions, it is likely to take some time for the markets to rally and the economy to pick up again. This presents an opportunity for some taxpayers, who might be able to take advantage of certain estate planning strategies as a result of the economic climate:

Refinance any loans or debt.

Low interest rates make it a great time to refinance. This includes mortgages, car loans, bank loans, and even loans to family members. Refinancing your loan will result in lower monthly payments and less interest paid over the life of the loan.

Gift assets while the values are low.

Giving away assets is always a good idea if you expect you’ll have a taxable estate. In 2020, and individual taxpayer can give up to $15,000 per recipient with no tax consequences. A married couple can gift up to $30,000. The current annual federal estate tax exclusion is $11.8 million for an individual, and $23.8 million for a married couple. Under the federal Tax Cuts and Jobs Act of 2017, the exclusion is scheduled to go back to the 2017 level - $5 million for an individual, adjusted for inflation - on January 1, 2026.

When you give a gift while the asset value is low, you are essentially saving money. This is because the value of the gift is likely to increase over time, benefiting the recipient in the long-run.

Take advantage of low interest rates and low asset values with a GRAT.

A Grantor Retained Annuity Trust is an irrevocable trust that an individual (the grantor) funds with assets he or she expects will appreciate in value over time. It is a gamble, but because many stocks have depreciated in value it is a safer bet than usual.

The grantor retains the right to an annuity from the GRAT for a certain number of years. The annuity is calculated by applying an interest rate the IRS sets monthly, called the section 7520 rate, to the value of the assets in the GRAT. The rate is currently low, which also makes this vehicle favorable because the interest rate affects the value of the transfer for tax purposes. When the term of the GRAT ends, any assets that remain are distributed to the beneficiaries of the trust.

The grantor can set the annuity amount to be equal to the section 7520 interest rate, which would effectively return all of the assets to the grantor in the form of the annuity payments. While a transfer to a trust for the benefit of someone else would normally be considered a taxable gift, the fact that all of the assets could come back to the grantor makes the gift have a zero, or close to zero, value.

The plan is for the grantor to survive the term of the GRAT and for the assets to appreciate in value beyond the amount of the 7520 rate. The result of this is a tax-free gift, where the beneficiaries end up with the underlying assets at their value.

Make additional donations to support causes you care about.

Under the federal CARES Act, which was signed into law at the end of March, a taxpayer can get a federal income tax deduction for charitable contributions of to 100 percent of their adjusted gross income. The goal was to encourage people to donate to COVID-19 related causes. The provision increases the maximum of 60 percent to 100 percent for 2020. This 100 percent limit applies only to direct, cash contributions to charities. It does not apply to contributions to donor advised funds, supporting organizations, or private foundations.

Beyond the 100 percent amount, donations can be carried forward for five years, subject to the limit of 60 percent of adjusted gross income. A charitable lead trust (CLT) can also be used to support a charity. This type of irrevocable trust is set up to support the charities for a certain amount of time, with the remainder going to family members or other selected beneficiaries.

Review your estate plan basics

The Covid-19 pandemic has offered a great reminder to review the elements of your estate plan. Below are some key items to consider.

Health care proxy and power of attorney: Review each of these to be sure you are comfortable with the agents you have chosen to make both medical and financial decisions on your behalf if you are unable to make them for yourself. You should also have alternate agents in place in case the first agent is unavailable. If your documents are older, now may be a good time to update them.

Last will: Review to be sure you are still comfortable with the person you nominated to be your personal representative, and be sure that you have named an alternate. This should be a responsible adult who lives relatively close to you. Be sure you have nominated a guardian and alternate guardian for any minor children you may now be responsible for.

Trust: Review your trust(s) to be sure the person you named to be trustee after you have passed away is still available and willing to act in that capacity. Review the beneficiaries of your trust and the way in which you have divided assets among them. It is important to include special provisions for any minors or others who may be unable to manage their own finances.

Beneficiaries: Review the named beneficiaries on all your other accounts, such as IRA’s, life insurance policies, investment accounts, etc. Remember that these accounts only pass outside of probate if you have named beneficiaries on file at the administrating company. Failure to do this can result in the person(s) administering your estate having to go through a probate for a single asset.