The Family Home as a Nest Egg.
For many Americans of a certain age, their fulfillment of the American Dream is represented by owning the family home outright. After many years of careful and regular payments, maintenance and improvement, it is the single greatest asset they can leave to a younger generation that will be coming of age in a much more turbulent economic environment.
But as happens when we get older, our minds and bodies are not what they once were. Once it seemed like a good idea to carefully cultivate your nest egg primarily in the form of the family home. Now that the health issues have made the money tight, having all that equity locked up is starting to pinch more than it did before.
The cost of long term care today is mind bogglingly expensive. It isn’t uncommon for monthly care in a memory care unit to cost $10,000 per month, and that will like only go up in an ageing population. While you may have retirement accounts and some other assets you can spend down to hold back the need to sell your home for a little while, looking at those costs over the course of five, ten or more years, you may be looking at well over a million dollars in end of life care. At that rate, it won’t take long to go through everything you have, and still have years of costs to meet. I can say, from personal and professional experience, I know how scary that realization can be.
Recently, I had a client approach me asking about selling the family home to make ends meet because her husband, sadly, is beginning to show early signs of dementia. They do not have a lot of retirement reserves to draw upon, and since she is still working, she needs to consider care for her husband during the workday. It is an expense that will hurt a bit in the short term, but the larger problem is the probability of memory care in the long term.
In order to offset these costs, she thought, she could sell the family home. It is completely paid off. They aren’t particularly attached to the house itself. Now that the kids have long since grown up and moved out, it is more house than they need. Since they are not quite retirement age, she thought they wouldn’t take quite the tax hit that they would if they dipped into their retirement accounts for extra expenses. Anyway, she reasoned, if the costs got too out of hand, they would both be eligible soon for Medicare. In the meantime, they could sell the house, rent a small apartment nearby that they could easily afford, and start using the equity from the house as a ready cash reserve for their steadily increasing care needs.
Every case is different, of course. But in this case, it sounds like a solid plan, right?
Here is why it isn’t.
Medicare is Not Medicaid
I really wish the government had come up with different names for these programs. Or more to the point, a different name for Medicaid. Because the two programs, while they serve similar, sometimes overlapping purposes, are very, very different. But the similarity in names causes so much unnecessary confusion.
If you are close to retirement, you can expect Medicare to provide for most of the medical expenses associated with ageing: hospitalization, check-ups, and even medications are covered. However, Medicare does not cover costs for nursing home or memory care. At all. And as I pointed out, those costs today can easily run $10,000 a month, and are certain to go up over time. But Medicaid does cover those costs… if you qualify.
For most people reading this, without the help offered by Medicaid, they would hit the upper limit of their resources pretty quickly. But because of the common conflation of Medicare and Medicaid, many people think Medicare will be there for them if they need nursing home care; only to find out, at the worst possible time, that it will not. At that point, it is probably too late to do what needs to be done to qualify for Medicaid.
This was the mistake my client was making: she was thinking she could sell the house, and the supplemental income would help with day care expenses now. Then in a few years, when she retires and her husband grows closer to needing full-time care, Medicare would provide for their long-term needs. The first problem with that plan, as we now know, is that Medicare will not meet that future expense. The second problem is that Medicaid can… but only if they do not get rid of their house.
OK. Then What is Medicaid?
Let’s define our terms here. Medicare is a federal government program of insurance that provides for the medical needs of every American upon reaching 65 years of age. It is age dependent: available to every American aged 65 and over, rich or poor, no matter your economic condition.
Medicaid is a program funded jointly by the states and federal government. It provides for medical and related care for those who qualify, depending on state-specific criteria. It is asset dependent, meaning only those below a certain asset threshold, depending on the state, are qualified.
Where Medicare cannot under any circumstances pay for a nursing home for a person suffering from dementia, Medicaid does, if the applicant meets the qualifying income and asset threshold. For Louisiana, that asset threshold for the applicant is $2,000.
But here’s the tricky part: Medicaid also has a “look back” period, which for Louisiana is five years. Medicaid’s look-back period is meant to prevent applicants from giving away assets or selling them under fair market value in an attempt to meet Medicaid’s asset limit. From the time you are approved for Medicaid, any assets transferred during the look-back period will incur a penalty of ineligibility for that period. So in Louisiana, if you are applying for Medicaid at the time I am writing this, you can expect that if you transferred more than $2,000 in assets going back as far as July, 2016, Medicaid will deem that transfer as money you could have applied to your long term care, and will penalize you accordingly. That is a long time to stay flat broke before you can prove you are, in fact, flat broke.
Of course, there is a catch. In Louisiana, that $2,000 does not include the equity in your family home. Nor does it does not include a new home, to the extent, for example, you sell your old house to buy one closer to the kids for equal or greater value. But if your plan is to sell your home for a nice little profit that you can use to pay down your ballooning expenses, think again. Because if you do, you can pretty much forget qualifying for Medicaid anytime in the next five years.
Obviously, this is only an example. Medicaid rules are complicated, and everyone’s situation is different. So this should be taken not as generalized advice, but as an illustration of why Medicaid planning is important. Smart people, like my client, look before they leap, and talk to their lawyer before making any life-changing move. I am really glad she did, because now we can craft a plan where she and her husband keep their family home, keep the value represented by their family home, and begin planning for a time they know is probably coming; when the costs of nursing home care will far exceed their income and their assets.
That can be a scary prospect for people facing down the triple whammy of ageing, ailing, and the end of their working lives. But it doesn’t have to be. Regardless of how much your personal care winds up costing as you age, you want to keep what you’ve earned in life, and pass it on as a legacy for your loved ones. Careful planning now can protect your property, and ensure it is available when you and your loved ones need it the most.