Americans should be aware of two very frightening statistics. It has been estimated that one in four Americans over the age of 70 and two in four over the age of 80 will spend some time in a nursing home. With only minor exceptions, the cost of this care is not covered by Medicare or supplemental Medicare insurance. The average cost of a nursing home stay today is between $50,000 and $60,000 a year, although it can run over $100,000! Additional funds are also needed to maintain the healthy spouse in the couple's residence when the other spouse enters a nursing home. Due to the high statistical probability of needing long-term care and its exorbitant cost, only people with over $1 million in income producing assets can afford to shoulder their own costs. For all others, planning is essential. For many with small estates, reliance on Medicaid, a need based Federal/state program, becomes inevitable. The focus of planning, then, is to ensure eligibility for Medicaid while protecting assets as much as possible. Medicaid planning is a highly specialized area of the law. It is important to have the help of a competent attorney who is well-versed on this topic. The cost of legal assistance to plan properly is relatively inexpensive when compared with costly mistakes that can be made by the uninformed. Since Medicaid is primarily for needy individuals, you need to be sure to understand the limits on assets and income that a person can have and still qualify for Medicaid. Also it is important to understand the restrictions on transferring assets to all but spouses. There is a three-year lookback rule for outright gifts and a five-year lookback rule when irrevocable trusts are involved. With some exceptions this rule lets Medicaid look at all gifts made within three or five years of applying for nursing home benefits. Gifts within this time can result in a period of ineligibility. What the state does is calculate the total value of the assets transferred and divide it by the monthly expense of a nursing home under the Medicaid system, which for Ohio Medicaid purposes is approximately $3,000. The resulting number gives the number of months that you are ineligible for Medicaid.

Long Term Care Insurance. One of the most important parts of planning is LONG-TERM CARE INSURANCE. Older Americans who are not yet in need of long-term care should consider buying a nursing home policy for long-term care. This type of policy provides a fixed daily dollar amount ($100 to $150 per day) for a predetermined period of time usually three years or five years. A long-term care policy can be used to pay the entire cost of care or merely supplement an individual's own funds. A long-term care policy can be used as a stop-gap measure to allow for additional planning. A policy that pays benefits for at least three years will give sufficient time to transfer assets and make other arrangements within the Medicaid lookback period. A policy that covers five years can allow the establishment of an irrevocable trust to protect your estate.

Reverse Mortgages. One method of paying for the cost of Nursing home insurance is with a reverse mortgage, also known as a Home Equity Conversion Mortgage. In a reverse mortgage, you don't make any payments; you receive them. Most Reverse Mortgages are backed by the full faith of the Federal government. It is a very flexible yet conservative financial program that allows homeowners to convert the equity in their homes into cash. Nothing has to be repaid until both you and your spouse no longer occupy your home due to a move, sale, or death. Simply stated, you are getting your own money back and at a time when you can put it to good use. With a reverse mortgage, you select a plan based upon how you would like to receive payments. You do not repay the loan as long as the home remains your principal residence, and your income or credit is not considered when qualifying you for the loan. To qualify for a reverse mortgage, typically, you, and any co-borrower, must be at least 62 years old and have a low or no outstanding mortgage balance. You must own and live in your home. HUD-approved condominiums and townhomes are also acceptable. The amount of money you receive depends on how old you are, how much your house is worth, and the payment option you choose. You can get a lump sum payment, regular monthly payments, money as you need it, or some combination of these options. Reverse mortgage companies will give you specific figures based on your situation and will provide you with a good faith estimate of fees. Almost all set-up costs of the reverse mortgage can be included in the amount of your loan, keeping your out-of-pocket expense to almost nothing. Another advantage to a reverse mortgage is that you don't have to pay any taxes on your reverse mortgage income. And this additional income does not affect your Social Security or Medicare benefits. Plus, you use the money any way you want. In addition to paying for nursing home insurance you can also use the money to buy life insurance to replace the value of your home for your heirs. You can also pay medical bills, take a vacation, buy a new car, pay off a small existing mortgage, make home improvements, and if medically possible, still afford to stay in your home with in-home care rather that move to a long-term care nursing home facility. You do not run the risk of losing your home. With a reverse mortgage you still own your house, you live in it as long as you want, and you can leave it to your heirs. If you are married and your spouse dies, you continue to receive payments as long as you live in your home. After your death, the loan balance becomes due and payable. Your estate or heirs may repay the loan by selling the home or by paying off the reverse mortgage so that the house can stay in the family. Any remaining equity goes to your heirs, including any increase in the value of the home after you start your reverse mortgage. You will never owe more that the market value of your home when it's sold. Federal Housing Administration (FHA) mortgage insurance will pay the difference if your reverse mortgage balance is more than the value of your home. If you decide to sell your house and move, the proceeds of the sale can be used to repay your reverse mortgage.

A Durable Power of Attorney. An important part of planning is to have a durable power of attorney. When a person becomes incompetent, he/she can no longer take steps for Medicaid planning, such as transferring assets without court approval. However, if a durable power of attorney is signed before the onset of incompetence, another person can still act on his behalf. The durable power of attorney is a legal document that names an agent to act in the place of the person granting the power who is called the principal. A durable power of attorney gives the agent broad authority to handle the financial affairs of the principal. The power is "durable" because it continues to be effective despite the incompetence of the principal. The power ends at the principal's death. It is important to be sure that the durable power of attorney is drafted by an attorney who concentrates in estate planning. Preprinted forms available at stationery stores may not include all the powers necessary to do proper Medicaid planning. While an attorney drafted durable power of attorney costs a little more, this is not the place to save pennies, it can save thousands of dollars.

Home Preservation Trust. A major item of concern for many older Americans is preservation of their residence. While a residence of a married couple is treated as an "exempt asset" for Medicaid (ownership of a home, regardless of value, will not keep a person from qualifying), there are still good reasons for taking action. If a single person enters a nursing home and cannot show an expectation of returning to the home, it loses its exempt status. Even though the home is exempt for purposes of determining your Medicaid eligibility, the state has a right to recover against the home after the owner dies. The recovery is limited to the Medicaid funds expended on the owner's behalf. If spouses own a home jointly, consider transferring the home to the sole name of the healthy spouse. Then have that spouse provide in his will (or better, in a Living Trust) that the property passes to children or others (not the ill spouse) upon death. There is no lookback period for transfers between spouses, so a deed change just before a Medicaid application will not affect eligibility.

One method is to transfer the home to children or other relatives, retaining a life estate," and wait out the three-year lookback period. (A life estate gives the parent the right to live in the home for life.) You must understand, however, that if the property is not the home or an income producing asset, Ohio calculates the value of a life estate based upon the life expectancy of the holder of the life estate and uses the result as a resource in determining the qualification for Medicaid. For example, assume that the non-exempt property is worth $100,000 and the holder of the life estate is 70 years old. The value of the life estate of the non-exempt property for Medicaid purposes would be $60,522 (which is calculated from the Ohio Public Assistance Manual). Also be sure to understand the tax and other legal ramifications for any such transfers. Certain transfers of a home within the lookback period will not disqualify an applicant, for example, to a child who is under age 21, blind or disabled, to a sibling who is a co-owner and who has lived in the home for at least a year, to a child who has been living in the home for two years and who had provided care to the applicant, which enabled him to her remain in the home.

Law changes to Medicaid since 1993 severely restricted the use of trusts in Medicaid planning. It is still possible to create a trust that pays only income to the trustor (the person who creates the trust), with the assets of the trust passing to others upon the trust trustor's death. What is significant is that the trust clearly limits the interest of the trustor to income, after the appropriate waiting period, the assets in the trust will not be counted for determining Medicaid eligibility. Also, the trust must be irrevocable, meaning that the trustor cannot have the right to cancel the trust and reacquire the assets or exercise any control over the assets. Caution must be used here. An income-only trust should only be used by those able to wait out the five-year lookback period.

A "Home Preservation Trust" can shelter a home from the estate recovery program, preserve a step-up in basis, and preserve the capital gains tax. The main drawback is that, in order to be a Home Preservation Trust, the trust must be irrevocable. The trustor loses control over selling or refinancing the home. If the applicant is incompetent, a trust can be established if a Durable Power of attorney previously signed by the applicant grants the power to establish an inter vivos (Living Trust). In this case the inter vivos trust would be irrevocable. This type of trust is primarily for persons or couples with assets of $100,000 to $400,000 to be protected for Medicaid purposes. The use of a trust may cause the Ohio Department of Human Services to look more closely at all transfers. The transfer of a residence into a trust with the elderly person retaining the right to live in the house may cause the Department of Human Services to argue that the person has retained an interest in the home large enough to disqualify him or her from Medicaid benefits. To stop this the transfer of a home into a Home Preservation Trust should be also include a formal written lease with actual lease payments at fair rental value if the trustor or spouse remain in the home. The Tax Code makes matters more complicated in the drafting of Home Preservation Trusts. Although the Department of Human Services does not use tax law when reviewing transfers (to a Trust or otherwise), the tax laws do apply to these trusts for purposes of income, estate and gift taxes. The income, estate and gift tax complications must be carefully reviewed and discussed. The Home Preservation Trust should hold only the residence property. In order to obtain all the possible benefits previously discussed, the income if any (although there will probably not be any) must be accumulated and allocated to the trust. The trustor-applicant should reserve a limited testamentary power of appointment over the house to appoint to the children. Power of appointment is a legal term where the trustor is allowed, through a will or better, through a Living Trust, to designate who the house will pass to upon his or her death. There can be no access by anyone to income or principal. The Home preservation trust must be irrevocable when it is set up. Irrevocability only upon incompetency or entry into the nursing home could cause the house to be an available asset.