As the Baby Boomer generation ages and the U.S. population lives longer, the demand for nursing home care is skyrocketing. The median cost of a semi-private room in a U.S. nursing home is currently $8,669[1] per month, a figure that will only rise as the need for long-term care grows. Unfortunately, many people cannot afford these costs without depleting their life savings. By 2029, it is estimated that 54% of seniors won’t have enough financial resources to pay for long-term care,[2] leaving families financially strained and searching for solutions.

As the need for long-term care services expands, there is a growing necessity for legal and financial strategies tailored to seniors and their families who are facing rising care expenses. Estate planning and elder law attorneys play a crucial role in providing solutions to older adults navigating a long-term care crisis, including those already residing in nursing homes.

Medicaid and Long-Term Care

For seniors who haven’t planned ahead for their care or have exhausted their Medicare or long-term care insurance benefits, Medicaid is a viable solution for covering long-term care costs. For nearly 60 years, Medicaid has provided healthcare coverage and related financial assistance to medically needy individuals with limited means, including children, single parents, disabled individuals, and the elderly. This article focuses on Medicaid requirements and planning strategies specifically for the aged, blind, and disabled.

To qualify for Medicaid, applicants must meet strict non-financial and financial criteria. Non-financial requirements include being 65 or older, blind, or disabled; being a U.S. citizen or qualified non-citizen; and residing in a Medicaid-approved facility. These criteria establish the applicant’s medical need.

Financial qualifications for Medicaid are more complex, varying by marital status, state of residence, and other factors. Generally, financial requirements are divided into income and assets. Excessive income or assets can disqualify an individual from Medicaid.

In most states, an applicant’s income must be less than the private pay rate of the facility where they seek care. This includes all sources of income, such as Social Security, pensions, and other earnings. After eligibility is established, the institutionalized individual’s income contributes to the monthly Medicaid co-pay, minus certain allowances and deductions.

For married couples, the institutionalized spouse faces the same income restrictions, while the community spouse’s income is not considered in the eligibility determination. However, if the community spouse’s income falls below a certain threshold, they may receive an income shift from the institutionalized spouse, called the Monthly Maintenance Needs Allowance (MMNA), to prevent impoverishment. The MMNA varies by state and ranges from $2,555 to $3,853.50 as of July 1, 2024.[3]

Medicaid also imposes strict asset limits. An individual can typically retain $2,000 in countable assets, known as the Individual Resource Allowance. For married couples, the community spouse can keep a separate amount called the Community Spouse Resource Allowance, varying by state from $27,480 to $137,400 as of January 1, 2024.[4] Countable assets exceeding these limits must be spent down before an applicant can qualify for Medicaid.

For Medicaid purposes, assets are classified as either exempt or countable. Exempt assets, which don’t affect eligibility, include the primary residence,[5] one vehicle, household items, personal effects, small life insurance policies, and funeral trusts. Countable assets, which do affect eligibility, include bank accounts, stocks, bonds, additional real estate, and vehicles.

The Troublesome Asset

Retirement accounts, such as traditional IRAs, 401(k)s, and Roth IRAs, are not uniformly categorized as exempt or countable across all states. Some states exempt IRAs for both the institutionalized individual and the community spouse, others only for the community spouse, and some only if the owner takes required minimum distributions (RMDs). However, most states consider IRAs as countable assets, requiring spend-down for Medicaid eligibility.

In states where IRAs are not countable, annuitizing the account is unnecessary, thus allowing the applicant to retain the account and avoid tax consequences. Conversely, in states where IRAs are countable, converting the IRA to a future income stream via a Medicaid Compliant Annuity (MCA) allows the applicant to spend down the account while avoiding the immediate tax consequences of full liquidation.

A Spend-Down Solution

An MCA, a single premium immediate annuity with zero cash value, converts assets into future income. To be Medicaid compliant, the annuity must be irrevocable, non-assignable, actuarially sound, make equal monthly payments, and name the state Medicaid agency as a beneficiary.[6]

MCAs can be funded with either tax-qualified (e.g., IRAs) or non-qualified funds. Transferring an IRA to an MCA spreads tax consequences over the annuity term, making it economically advantageous. Rather than incur immediate taxation, the account owner is taxed on payments made from the MCA within each calendar year.

When a crisis plan necessitates annuitizing an IRA, there are two primary methods to transfer the funds to a Medicaid Compliant Annuity.

• The first option is a 60-day rollover. Here, the IRA owner contacts the holding company and requests the account’s liquidation without tax withholding. Within five to seven days, the company issues a check, giving the owner 60 days to reinvest the funds into an MCA to avoid immediate tax consequences.
• The second option is a trustee-to-trustee transfer. This method involves the IRA owner completing authorization paperwork for the plan administrator to transfer funds directly to the insurance company issuing the MCA. In this case, no further action is required by the individual as the IRA and MCA custodians handle the transfer.

After transferring IRA funds to an MCA, the next step is to determine the appropriate strategy based on specific case details. If the IRA belongs to the community spouse, the MCA must also be owned by them, as retirement asset ownership cannot be transferred. Income from the MCA payments is directed to the community spouse, which does not impact the Medicaid income limits for the institutionalized spouse.

Conversely, if the IRA belongs to the institutionalized spouse, they must also own the MCA. However, this may affect Medicaid eligibility due to income limits. If the community spouse qualifies for an income shift under the Monthly Maintenance Needs Allowance rules, part or all of the MCA income may be redirected to them. The remaining income, after deductions, goes towards the nursing home as the Medicaid co-pay.

In cases where the community spouse does not qualify for a MMNA shift, the entire MCA income from the institutionalized spouse is applied to the Medicaid co-pay to the nursing home, providing no economic benefit to the couple. In such scenarios, practitioners may explore an alternative strategy.

The Name on The Check Rule

The Name on the Check Rule strategy is grounded in a Medicaid regulation stipulating that income is attributed to the individual whose name is on the check. This rule, originating from 42 U.S.C. § 1396r-5(b)(2)(A)(i), specifies that if income payments are made solely in the name of either the institutionalized spouse or the community spouse, it is considered available only to that respective spouse.

This strategy becomes particularly advantageous when the institutionalized spouse owns a countable IRA that is transferred to a Medicaid Compliant Annuity, and the couple wishes to prevent MCA payments from being allocated to the nursing home as part of the monthly Medicaid co-pay. Using this tactic, the institutionalized spouse retains ownership and annuitant status of the MCA but designates the community spouse as the sole payee. This designation ensures that the income is attributed solely to the community spouse, so the institutionalized spouse’s income eligibility is not at risk. The income from the MCA payments can then be used by the community spouse to supplement their living expenses at home.

Another benefit of this strategy is that the community spouse can be named as the primary beneficiary of the MCA ahead of the state Medicaid agency. This exception allows the community spouse to recover any remaining funds from the MCA if the institutionalized spouse passes away, bypassing the estate recovery process.

While the Name on the Check Rule may be a viable planning strategy in many states, its acceptance varies. Some jurisdictions recognize it, while others do not, leading to mixed results. Therefore, practitioners should exercise caution and seek guidance from those familiar with the strategy before implementation.

It’s important to note that while effective for Medicaid planning, the Name on the Check Rule is not addressed in IRS Treasury Regulations. Consequently, tax liability on the IRA and MCA income remains with the institutionalized spouse, who is responsible for paying taxes on these payments annually.

Moreover, employing this strategy may subject the MCA to scrutiny by local Medicaid offices, especially if it involves a short annuity term and significant monthly income diversion to the community spouse. To mitigate potential issues, many practitioners opt for a longer MCA term aligned with the institutionalized spouse’s full Medicaid life expectancy. Additionally, maintaining a thorough paper trail, such as using paper checks instead of electronic payments, provides clear documentation supporting the strategy if needed during the Medicaid review processes.

Conclusion

As the demand for long-term care rises, elder law attorneys must prepare to handle “troublesome” assets like IRAs. By transferring IRAs to Medicaid Compliant Annuities and utilizing strategies like the Name on the Check Rule, attorneys can help seniors preserve their assets and secure economic benefits, rather than depleting their savings on care costs.  As is the case with any and all planning strategies, a team of experts should be consulted to determine if this is the best solution.

*Dale Krause, J.D., LL.M. is the President and CEO of Krause Financial—a firm that specializes in asset preservation solutions, education, and resources for long-term care, including Medicaid Compliant Annuities, funeral expense trusts, long-term care insurance, and more.

[1] Genworth Cost of Care Survey, December 2023, available at: https://www.genworth.com/aging-and-you/finances/cost-of-care

[2] The Forgotten Middle: Many Middle-Income Seniors Will Have Insufficient Resources for Housing and Health Care, from Health Affairs, April 2019, available at: https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2018.05233

[3] 2024 SSI and Spousal Impoverishment Standards, available at: https://www.medicaid.gov/federal-policy-guidance/downloads/cib05222024.pdf

[4] See n. 3

[5] The primary residence is considered exempt unless the Medicaid applicant’s equity in the home exceeds a state-specific limit, which is between $713,000 and $1,071,000 as of January 1, 2024. Additional exceptions exist when the home is occupied by a spouse or minor or disabled child.

[6] 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.