[IMPORTANT UPDATE TO THIS ARTICLE – PLEASE TAKE A LOOK AT THE POST HERE TO READ ABOUT SOME NEW DEVELOPMENTS THAT MAY AFFECT ISSUES I WROTE ABOUT IN THE ARTICLE BELOW!]
Having worked with the elderly for 23 years, particularly with the “Greatest Generation” who pride themselves on long term marriages like my parents’ – 61 years before Dad died in 2008 – and being someone who deeply respects that people believe marriage to be a sacred relationship, I do not say what follows lightly.
Under the changes to Medicaid that were passed in the recent Wisconsin Budget, I will be advising some clients that the best option is divorce. It’s simply a matter of what makes the best sense financially when one spouse needs long term care. I will also be advising older couples considering marriage, that it may be better to stay single.
I want to start by comparing what Medicaid allows a couple to keep when one spouse needs long term care, with what is estimated as necessary for a secure retirement:
Wisconsin’s Medicaid laws allow a single person to keep $2000 in countable assets. For a married couple, the allowable amount is between $50,000 and $115920, plus $2000 for the nursing home spouse. The house is not counted in this total as long as it is worth less than $750,000. A few other things are not counted also, such as retirement funds that belong to the spouse who remains in the community (called the “community spouse”).
These totals are significantly less than what is estimated that a couple should save for a comfortable retirement. An Article in Time discusses varying theories on how much you need to be secure in retirement: estimates range between 8-18 times your final annual pay. At 11 times annual pay, a household earning $75,000 a year would need to have saved $825,000. If you retire (or become disabled) at age 62, the multiple rises to 13.5 ($1 million).
Again according to the Time article, if you look at it another way:
BTN Research estimates that, assuming 5% average annual investment returns, for every $1,000 of monthly income you want over a 30-year retirement, you need $269,000 in the bank. Let’s consider that same household making $75,000 a year. To replace the commonly recommended 80% of income in retirement — or $60,000 in this case — the household would need $5,000 a month. In this calculation, this household’s number is $1.35 million, or 18 times final pay. A higher investment return would bring the numbers down.
Finally, there is the approach that Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits. Let’s take that same household, which spends every penny of its $60,000 income in retirement. Say this household collects $20,000 a year in Social Security. That leaves it spending $40,000 from other sources. So this household still needs a nest egg of $1.32 million, or just shy of 18 times final pay.
Focusing in on what a couple needs to save just to pay for health care, the Employee Benefits Research Institute estimates that:
A 65-year-old couple, who both had median drug expenses, would need $234,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses in retirement. They would need $317,000 in 2012 to have a 75 percent chance of covering their expenses, and $387,000 to have a 90 percent chance of covering their health care expenses.
EBRI NOTES Newsletter, Vol. 33, No. 10, October 2012.
So, we have estimates for the amount needed to cover health care of $387,000, the amount to cover retirement as a whole of $825,000 to $1.25 million, and Medicaid’s limit of $52,000- $117,920. Remember, Medicaid’s limit is based on the fact that there is a spouse still living in the community. The amount of money Medicaid allows that spouse to keep is well under half of what is recommended for a secure retirement.
Where a married person who needs long term care applies for Medicaid, almost everything the married couple owns is counted (with some exceptions). It does not matter whose name the assets are held in (with the exception of retirement funds I mentioned above). This means that almost everything is subject to having to be spent or reduced in order to qualify for Medicaid.
Historically, when one spouse needed and qualified for Medicaid, the remaining assets were allocated to the spouse still in the community. The community spouse could then do whatever he or she felt was appropriate with those assets. The community spouse was also free to leave any remaining assets to family members or other beneficiaries of the spouse’s choice, when the community spouse passed away after the institutionalized spouse. In other words, once this severe spend down was met, the State left the couple alone. Not anymore.
The new laws passed in the most recent Wisconsin Budget change this dynamic. They restrict the community spouse’s ability to do what he or she feels is appropriate with the resources allocated to him or her, during the first five years after the spouse in the nursing home (the “institutionalized spouse”) qualifies for Medicaid, and also when the community spouse dies. The new law says that for five years after the institutionalized spouse qualifies for Medicaid, anything that the community spouse gives away, or loans to family members, will cause the institutionalized spouse to be disqualified for Medicaid for a period of time.
The new law also allows the State to make a claim against the community spouse’s estate after the institutionalized spouse is dead, to recover the money paid on behalf of the institutionalized spouse. This severely reduces or eliminates the community spouse’s ability to leave anything for the family. And the new law presumes that anything the community spouse owns at death is considered marital property of the institutionalized spouse. So, if the community spouse has continued to work after the institutionalized spouse qualifies for Medicaid, and has managed to save some funds to replenish what had to be spent down, the State presumes it can reach out and snatch that money in probate after the community spouse dies.
The new law presumes all property to be marital at the death of the community spouse, and applies this presumption by reaching back to look at all property the couple owned up to five years before a Medicaid application was filed. Because of this, a couple will need to take extra steps to rebut this presumption. Also, this is the single most important reason that a couple considering marriage may not want to go forward. Essentially, unless you are extremely careful in the classification of your property with written agreements, the state will be able to take property at the death of the second spouse, to pay back any Medicaid received by the institutional spouse. This action, along with the fact that Medicaid considers all property owned by either spouse in a couple at the time of application, makes it extremely difficult in second marriage situations, if the couple wants to provide separately for their individual children.
The new law also will, I believe, have the unintended consequence of making it more difficult for the community spouse to get credit. In 1986, the Marital Property Act was passed in Wisconsin to make it easier for spouses to obtain credit and to equalize the benefits available between spouses by allowing most property to be considered as belonging to both spouses, regardless of which spouse earned it, unless the couple agreed otherwise. Wisconsin’s new Estate Recovery law will change this, because creditors will pick up on the fact that if they extend credit to a community spouse, they stand behind the state in line to collect any outstanding money when the community spouse dies. For example, if the community spouse applies for a credit card after the institutionalized spouse is on Medicaid, and dies with a balance due on the card, any funds in the community spouse’s estate will go first to payback the Medicaid that was given to the institutionalized spouse (assuming that spouse is also deceased).
So, to sum up, Wisconsin’s new Medicaid laws require a couple to have less than a third of what is conservatively estimated as necessary for retirement and then put ties on what the spouse in the community can do with that money. Then Wisconsin wants to take the money back after the community spouse dies, plus any additional money the community spouse has managed to save. If your spouse needs Medicaid for long term care, the state will be involved for the rest of both of your lives, and even after you die. Don’t forget what I wrote about in a previous blog, about how the state will restrict your ability to sell your home.
These Medicaid rules create a scenario where when one spouse needs long term care, the other’s finances must go down with the ship. Granted, the situation is better than it used to be, before changes in Medicaid law created spousal impoverishment to begin with. But the allowance given the community spouse simply is not enough to keep up with the rising costs of health care. In my area of Wisconsin, nursing home care is around $9000 per month. If a community spouse’s resources are limited to $116,000 more or less, within a year that spouse will be impoverished if he or she needs long term care. So, a couple can choose to pay privately if they have saved enough money or if they have long term care insurance (generally a good idea if it can be obtained.) Or they can choose to spend down to qualify for Medicaid, at the financial peril of the community spouse.
The other option is to consider divorce. Here is an example that shows how this works:
The Smith’s are in their 60s and have $600,000 in bank accounts, investments and IRAs. Joe Smith, the husband, develops the need for long term care. $300,000 is in an IRA held by Joe. Sally has an IRA of $50,000. The rest are in savings and investments. Sally Smith the wife applies for Medicaid on Joe’s behalf, and is told that they will need to reduce their assets to $117,920.
If they follow traditional Medicaid planning, they will need to reduce their assets by over $400,000 before Joe can qualify for Medicaid. Joe will need to liquidate some or all of the IRA with tax consequences. Sally’s IRA will not count under Medicaid rules. Moreover, there will be strings on what Sally can do with the money for five years after Joe qualifies for Medicaid, plus the state will reach out and grab funds through estate recovery when Sally dies (after Joe), and make it more difficult to pass assets to children.
On the other hand, if they consider divorce, they will split the assets in some fashion, whatever Joe has can be placed in a supplemental needs trust, and the transfer of his IRA to Sally under the court order is tax free. Also, Sally can still get Joe’s Social Security income if they have been married long enough, and Sally can leave the assets to whomever she pleases. For example, if the assets are split evenly in the divorce, Sally will get $300,000, and Joe’s $300,000 can be put in a trust that will not disqualify him for Medicaid. Sally will be able to get Joe’s Social Security income if they both qualify. If it is important to this couple that Sally be financially secure in light of Joe’s need for care, and that their heirs are able to receive some of the funds they have saved, then divorce is the best option.
Similarly, it will be extremely important for couples who stay married, to carefully track whose assets are whose, to essentially protect what is allocated to the community spouse through marital property agreements. There will also need to be a probate after the institutionalized spouse dies (when in the past this has been largely unnecessary) to make clear what belonged to that spouse at death by getting a court order. I have to say, that Wisconsin’s legislature has managed to create a permanent employment situation for elder law attorneys, since people will have to use lawyers a whole lot more to simply protect assets from the improper estate recovery that is imminent.
It also means that aging couples who are considering marriage should become educated about the effects of this law prior to making a decision to get married. Particularly if it is a second marriage situation with children from prior marriages, a couple may opt to stay unmarried instead of subject themselves and their children to the severe consequences of this law. This will mean more couples “shacking up” (as my mom would have said with a disapproving frown) instead of actually going forward with marriage.
The Federal government is responsible for setting the base amount that the married couple is able to keep, and this is significantly less than what is needed for security in retirement, or even to cover a couple’s anticipated health care costs. Individual states such as Wisconsin make the decision on how aggressive they want to be in going after assets of a spouse who needed long term care (subject to following federal rules which I believe Wisconsin violates in this new law). Both levels of government are responsible for this miserly treatment of assets when one spouse needs long term care. These laws essentially mean that if a couple has not saved enough to pay privately for care when one spouse needs nursing home care, they will have to spend down so much that Medicaid for the second spouse is virtually guaranteed if that spouse also needs long term care. If that community spouse manages to avoid the need for long term care, and continues to earn and save as recommended, their savings will be taken by the state up to the amount that the state paid out for Medicaid. This is a disincentive for any community spouse to continue to earn and save as long as possible, and an incentive for couples to get divorced.
Plan to see more baby boomer divorces unless this law is changed.