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August 1991

Planning for long-term medical care. (Personal Financial Planning) (column)

by Bankosh, John J., Jr.

    Abstract- Traditional estate planning has diminished in importance with the advent of unified credit against federal estate and gift tax liability. However, increased concern over health care costs have opened up a new area of service in which estate planners focus on providing a client's with provisions for long-term health care. This requires consideration of tax consequences as well as the need for the protection of clients and their heirs. Three goals should be accomplished when planning for long-term health care: provision for sufficient income for the spouse, preservation of assets for descendants, and protection of clients' needs.

Traditionally, estate planning has been conceptualized by most accountants and their clients as a means to minimize estate taxes arising upon a client's death. With the introduction of the unified credit against federal estate and gift tax liability, permitting transfer of up to $600,000 in assets without estate or gift taxation, the importance of traditional estate planning has diminished for many clients.

However, because of trends in both life expectancies and health care costs, a new thinking is now required. This new thinking focuses on the likelihood that the client will need long-term health care for some period prior to death.

Recent statistics indicate that the risk of requiring nursing home care after attaining the age of 65 is approximately 35% to 40%. The cost of nursing home confinement varies substantially, but present estimates for a year of care range from $30,000 to $60,000. Presumably because of these overwhelming costs, 70% of all unmarried persons admitted to a nursing home become impoverished within three months; for married persons, the statistics show that 50% will exhaust their assets within six months of admission.

There are planning options available to address the probable need for long-term care with which financial planners should be familiar. The phrase "long-term care" is being used to refer to care of an ongoing nature which is required by persons suffering from a chronic or long- term physical or mental condition. It is care that tends toward maintenance, not rehabilitation, and typically is not covered by standard health insurance policies. This article analyzes Medicare, Medicaid, and private insurance options, as well as a discussion of some alternate financing methods. Also, an analysis of some of the tax implications of long-term care planning are included.

Ethical Issues

As a preliminary matter, it is important to recognize the difficult personal and ethical issues which planning for long-term care raises. Although there are various options by which nursing home and other care can be obtained, some of these options are neither available nor acceptable to a particular individual. As will be discussed, Medicaid does provide long-term care, but generally such benefits are available only to impoverished individuals. It may be possible to transfer assets in anticipation of future need for long-term care in order to qualify an individual for Medicaid assistance. A discussion of the rules and regulations, with planning ideas, surrounding those transactions is presented in the feature article "Protecting the Assets of Elderly Clients," by Ezra Huber, appearing in the May 1991 issue of The CPA Journal. When an individual is comfortable with this type of planning, it may help to compare it to the structure of a business transaction in a manner designed to minimize income tax liability. Moreover, an individual may be uncomfortable with long-term health care planning. Persons assisting in the long-term care planning process, either as professional advisors or as friends and relatives offering to help, must be sensitive to these concerns.


Medicare is a federally financed program designed to provide health insurance for persons aged 65 and older and for certain disabled individuals. Long-term care benefits provided under Medicare are generally of a very limited nature. Under Part A, which is the Medicare hospital insurance program, benefits may be received where confinement in a skilled nursing facility is required, but only if the following five conditions are met:

* The person has been hospitalized for at least three consecutive days, not counting the day of discharge, prior to transfer to the facility;

* The patient is transferred to the facility because care is required for a condition that was treated at the hospital.

* Admission to the facility is within a "short time" (generally 30 days) of discharge from the hospital;

* A physician certifies that the patient needs and receives skilled nursing or skilled rehabilitation services on a daily basis; and

* Confinement at the facility is not disapproved (by a utilization review committee or other intermediary body).

"Skilled nursing care" generally refers to care that can be provided only by or under the supervision of licensed nursing personnel. "Skilled rehabilitation services" can include, for example, the services of a physical therapist. Medicare will pay for such care only if it is provided by a participating facility. Many long-term facilities are not skilled nursing facilities and, of those that are, many do not participate in Medicare. Medicare does not pay for custodial care, which is care that can be provided by persons without professional skills or training. Care designed primarily to assist in meeting personal needs, such as help in walking, bathing, etc., is custodial in nature. Where skilled nursing or rehabilitation services are required only occasionally, such as once or twice a week, Medicare will not provide skilled nursing facility benefits.

Generally, if a nursing home confinement does qualify for Medicare hospital insurance benefits, all "covered services" will be paid for the first 20 days of the confinement. Facility services covered include the cost of a semiprivate room, all meals, regular nursing services, etc. After the twentieth day, the patient is required to make a co-payment; in 1990, this co-payment was $74 per day. Continued confinement beyond 100 days is not covered by Medicare.

Insurance is available to supplement the protection afforded under the Medicare program. Often referred to as "Medigap" coverage, the long- term care benefits provided under these policies typically are, like Medicare, limited. Medigap plans tend to cover co-payments and deductibles under the Hospital and Medical Insurance portions of Medicare. 1 Most Medigap policies will pay for long-term care only where a policyholder receives skilled care in a facility that participates in Medicare. Additionally, the insurance tends not to provide benefits after the 100th day of confinement.


Medicaid is a joint federal and state program that is designed to provide medical benefits to needy persons. It is operated on the state level, under general guidelines established by the federal government. Variations in Medicaid eligibility and benefits exist from state to state, due to the joint nature of the program. As a consequence, individuals involved in the Medicaid area must be cognizant of both federal law and the rules of the state Medicaid program with which they are working.

Benefits under the Medicaid program are available to "categorically needy" persons and may also be offered to individuals who are considered "medically needy." "Categorically needy" persons generally include those persons eligible for Supplemental Security Income, although some states use more restrictive standards. "Medically needy" individuals are covered at the option of the state and represent aged, blind, or disabled persons whose income or assets exceed the applicable categorically needy standard but who are unable to pay the costs of medical care. At present, 36 states, including California, Florida, New York, and Texas, and the District of Columbia, provide benefits for medically needy individuals. States that participate in the Medicaid program are required to provide certain benefits, including skilled nursing facility care and home health services, to categorically needy persons; other services such as hospice care, care in an intermediary care facility, etc., are provided to categorically and medically needy individuals at the state's option.

The amount of income that an individual can receive and still be eligible for Medicaid varies from state to state. The income eligibility level is also affected by the basis of the applicant's Medicaid eligibility, the number of persons in the applicant's family, etc. Only income that is actually "available" to the applicant is to be considered in determining eligibility. However, income available includes income received by an applicant's spouse, under certain "deeming" rules.

The operation of the deeming rules could produce harsh results, particularly if an applicant is married and his or her spouse does not require institutional care. As a consequence, these rules have recently been revised in several respects. For example, federal Medicaid regulations now prohibit states from treating income of the community spouse as available to the institutional spouse if the couple has "ceased to live together" and only one applies for Medicaid. Under this rule, the income of the community spouse is no longer considered in determining Medicaid eligibility, starting the month after the month of separation. 2 In another significant change, the community spouse is now entitled to retain from the couple's income an allowance keyed to a percentage (currently 122%--may be higher in some circumstances) of the federal poverty line. 3 If this income is owned by the community spouse it is not treated as available to the institutional spouse under the deeming rules.

The asset restrictions for Medicaid eligibility also vary from state to state. Many states use the Supplemental Security Income standards, under which an applicant may own a house, regardless of value, a car worth up to $4,500, etc. 4 Similar to the income restrictions, assets of a spouse are attributed to the applicant for purposes of determining eligibility, under the Medicaid "deeming" rules. As is the case with income deeming, however, reforms limiting the circumstances under which assets will be treated as available to an institutional spouse have been implemented.

Beginning in 1989, a new rule applies with respect to treatment of a couple's nonexempt assets. Under this provision, assets are pooled for purposes of determining Medicaid eligibility, regardless of formal ownership. The community spouse is entitled to retain the greater of $12,000 or 1/2 of the pooled nonexempt assets, up to a maximum of $60,000. Federal law permits states to increase the $12,000 floor, again to a maximum of $60,000. In states that have exercised this option, such as New York which adopted the $60,000 figure, a community spouse would be permitted to retain all of the pooled nonexempt assets, as long as the total of those assets amounted to less than $60,000.


An alternative to financing nursing home care through expenditure of private assets or reliance upon the Medicaid system is the purchase of long-term care insurance. Long term care insurance typically is provided by indemnity policies which provide benefits at a specified dollar amount per day. The cost of such coverage varies substantially, depending on such factors as the applicant's age and health, the benefit level chosen, etc. Many policies contain deductible periods, under which the applicant is responsible for paying all nursing home costs for a specified number of days, and policy coverage begins only after this period expires. Also, policies usually limit the period during which benefits will be provided--for example, for 2 years, for 3 years, etc.

The purchase of long-term care insurance protection must be approached with caution. Policies generally pay only when the insured is confined to a facility licensed by the state and that participates in Medicaid or Medicare. Also, the policy may require prior hospitalization or, for payment of custodial care expenses, prior confinement in a skilled nursing facility, which very often results in an unexpected denial of benefits. A preexisting health condition may limit benefits paid or may mean that an applicant is simply unable to obtain long-term care protection. Also, the policy may exclude from coverage confinements related to mental retardation, to conditions without demonstrable organic causes, or to conditions arising from alcoholism or nervous disorders, etc.

Long-term care insurance policies typically do not provide for blanket coverage of nursing home care, instead specifying a daily dollar benefit. Most policies do not automatically adjust for inflation, unless the applicant wishes to pay an additional premium. Even when the applicant elects to purchase an inflation adjustment feature, the protection may be inadequate if the rate at which long-term health care costs are rising is in excess of the rate of inflation in the general economy.

Other Financing Methods

In addition to the options discussed above, there are other methods, less well known, by which to finance long-term care. For example, one strategy is to develop a program by which to accumulate sufficient savings to be used to pay long-term health care bills. Such programs may involve home equity conversions, under which an individual draws upon the equity of the homestead while continuing to reside there. The resulting cash can be invested to produce additional funds, used to purchase long-term care insurance, etc. Home equity conversions are not used frequently, and require disposition of the home, which may be an asset transferable under Medicaid without penalty. Commentators differ as to the usefulness of whole life, universal life, and annuity products as savings vehicles to be used for long-term care purposes. Although these investments do permit a tax-free accumulation of funds, the ultimate amount of savings resulting, in light of health care costs, may be inadequate. Life care communities, which represent a service arrangement, are available in some localities. These are residential facilities that offer health and social services in exchange for an entrance fee and a monthly payment. However, these programs require the applicant to move to the residential facility and may be too costly for some individuals. Also, some life care communities have experienced financial difficulties. Applicants should investigate the solvency of the facility, the circumstances under which fees can be raised, and the services that the facility promises to offer, prior to making a commitment.

Tax Implications

A plan for financing long-term care needs cannot be developed in a vacuum. A necessary corollary in designing any such plan is an analysis of the estate, gift, and income tax consequences of the proposed plan. There are several typical strategies for protecting family assets from the financial risk of long-term health care. The Ezra Huber article, "Protecting the Assets of Elderly Clients," has an extensive discussion of the various strategies.

Three Goals

Planning for long-term health care requires individuals to not only consider the gift and estate tax consequences but also the need to protect their heirs and themselves. The accountant's job is not to make the decision for the client, but to make sure the client has all the facts and is aware of the options when planning for long-term health care. The donor usually wants to accomplish three goals when planning for long-term health care. They are to:

1. Provide the spouse, who is not in need of medical care, with sufficient income;

2. Preserve the assets for descendants; and

3. Protect themselves.

(1) Medicare provides two basic types of insurance coverage. Part "A," or "hospital insurance," covers inpatient hospital care, hospice care, etc., and includes the inpatient skilled nursing facility care coverage described above. Part A also provides insurance protection for home health care, in limited circumstances. Part "B" provides medical insurance benefits for physician services, clinical diagnostic laboratory tests, etc. Part B beneficiaries pay a premium for the coverage; for most persons, this will amount to $28.60 per month in 1990. Part B services generally are subject to a $75 annual deductible, which can be met by any combination of covered expenses. A 20% coinsurance requirement also applies to many Medicare services, under which a beneficiary is responsible for 20% of the approved cost of any covered service. Medigap policies often pay this 20% coinsurance charge.

(2) Note that other rules may be applicable in some circumstances, such as where separation is for reasons other than institutionalization, etc.

(3) The new community spouse income allowance rules were contained in the 1988 Catastrophic Coverage legislation. That law generally placed a $1,500 ceiling on the monthly allowance.

(4) As with the income limitations, the restrictions on the amount of resources which can be held by an SSI applicant are designed to limit the program to "relatively poor" persons. Resources are defined as things which an applicant owns, such as real estate, personal belongings, savings, etc. In 1991, the resource limit for a single individual is $3,000; for a couple, a $4,300 ceiling applies. Certain assets are not counted in determining the value of an applicant's resources, however. These exclusions include the items described in the text (a home, surrounding land, and a car used for essential transportation or worth $4,500 or less) and also certain personal and household goods, etc.

(5) The effective date for inter-spousal transfers is October 1, 1989. The applicable effective dates may be later if a state obtained a delay in connection with the enactment of enabling legislation.

By Arlene M. Hibschweiler, Assistant Professor; James F. Hopson, Professor and Chairman, Business Department; and John J. Bankosh, Jr., Assistant Professor, all of the State University of New York at Fredonia

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