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Plan for Illness, Medicaid 'Impoverishment'

The catastrophic cost of nursing home care causes fear and uncertainty for older Americans. The issue is the most urgent for married couples, for whom a typical scenario might looks like this:

Mom and dad's greatest fear is that they will outlive their money and become a burden upon their children. They have $300,000 in savings and retirement plans. They own a house worth $250,000, and get $15,000 in Social Security benefits. Nursing home care costs $198 per day on average for a semi-private room, and more than $400 per day in some areas. If either spouse enters a nursing home, the extra expense will quickly drain their finances and leave the at-home spouse unable to meet expenses.

Medicaid's rules allow the at-home spouse to continue to live in the marital home and, depending upon the state, keep up to $110,000 in assets and up to $2,739 of the institutionalized spouse's income. Only at that point will Medicaid step in.

The U.S. Department of Health & Human Services aptly names these "spousal impoverishment provisions." Ellen Turf, of Chicago, knows from personal experience that this can happen: "My mother-in-law had a stroke and went into a nursing home. My father-in-law could keep his house, car and only $60,000. He couldn't survive on that amount of money. He lived 25 years, and it was a terrible struggle for many years."

The prospect of leaving an impoverished spouse and nothing for the children gives elders a strong incentive to plan ahead. "Medicaid planning" refers to the art of structuring your affairs to meet the eligibility rules. One hurdle is the look-back period, which makes one ineligible for Medicaid to the extent they have transferred assets during the five years before applying for benefits. Getting around this rule requires long-range planning for something that might not happen.

Attorney Harry Margolis, of Margolis & Bloom in Boston, says his firm often counsels the at-home spouse to buy an immediate annuity, thus transforming "countable assets" into income. If the annuity benefit expected during the at-home spouse's lifetime exceeds the amount paid, the policy's value is not countable asset.

To the debate over whether it is wrong to plan to make oneself eligible for government benefits, Margolis' responds: "We're not breaking any rules. What we have is a system that the public obviously doesn't buy into. Most people don't go into a nursing home, and few of those who do have purchased long term care insurance." Margolis feels a universal long-term care insurance plan would be the fairest alternative to the current "back-door system" under which "only those lucky enough to avoid nursing home care get to leave anything to their children."

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William T. Baldwin is president of Pillar Financial Advisors of Waltham, Mass., where he counsels clients on a wide range of issues, including asset allocation, investing, estate planning and tax strategies. He holds degrees in accounting, law and taxation. He was recognized five times by Worth magazine as one of the nation�s top financial advisers and was called one of the �Top 100 Independent Financial Advisors� by Barron's. He is the immediate past chairman of the National Association of Personal Financial Advisors.

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