How to protect your assets from nursing home costs

I didn't realize just how much nursing home care threatened personal assets until my mother was admitted to a nursing home after being hospitalized for an accident at home.

I immediately applied for Medicaid on her behalf. Medicaid is the government assistance program that pays for nursing home care for people who meet the program's financial eligibility requirements.

Mom qualified after I pre-paid funeral costs to reduce her assets, but the finances are much more complicated when you have wealth. And, considering the high monthly cost of a semi-private nursing home, you can see how quickly your savings will disappear should you need nursing home care.

With that in mind, here's how to protect your assets from nursing home costs.

Purchase long-term care insurance

Long-term care insurance covers nursing homes, assisted living, adult day cares, or home health care for people who have a chronic illness or a condition that makes them unable to perform daily living activities such as dressing or bathing themselves.

There's a price for that coverage, though. "The cost of long-term care insurance has gone up dramatically and many people hesitate to purchase a product which is available if they need it, but much like term life insurance, has no cash value if they do not need to go into a nursing home," says elder law attorney Steven Weisman.

When purchasing this protection, keep in mind that the American Association for Long-Term Care Insurance reports that 30% of nursing home residents are institutionalized for one to three years. Only 12% reside in a facility for three to five years, and another 12% live there for five years or more.

Purchase a Medicaid-compliant annuity

A Medicaid-compliant annuity is relevant when there's a spouse who isn't institutionalized. When properly structured, it's a way to "spend down" and reduce the income Medicaid considers when deciding if you qualify for that assistance. People tend to make this purchase when they're in a last-minute or crisis Medicaid planning situation, notes Shawn Plummer, CEO of The Annuity Expert.

"Annuity purchasers are effectively giving a lump sum of money to an annuity company in exchange for equal amounts of monthly payments to a healthy spouse while the other unhealthy spouse is receiving medical assistance subsidized by Medicaid," he explains.

Form a life estate

Some of the strategies that can help protect your assets require advance planning—as in, at least five years before you'll need nursing home care. That's because the Medicaid system has a five-year "look-back" period that's designed to keep applicants from giving assets away or selling them at less than fair market value in order to qualify.

That look-back period applies to the life estate strategy, which allows a homeowner to keep a house until they die, even if death occurs in a nursing home.

With a life estate, "The home passes to the 'remainderman,' who is the person listed on the deed as the person to inherit the property upon the death of the 'life tenant,'" says Weisman. He adds that it differs from a joint tenancy in that until the homeowner dies, the "remainderman" has no interest in the property.

Put your assets in an irrevocable trust

An irrevocable trust is a legal entity that holds your assets and designates beneficiaries—but doesn't allow you to make changes or cancel the trust except under certain circumstances.

"Assets placed in the trust are legally no longer yours, and you must name an independent trustee," says Certified Estate Planner Chuck Czajka, founder of Macro Money Concepts. Because the trust owns the assets, not you, the assets aren't counted as a resource toward Medicaid eligibility.

Start saving statements and receipts

If you want to protect assets from nursing home costs, don't wait to take action because of that Medicaid look-back period. In addition, the documentation required for spending during that period means you will need to keep bank records and receipts for large expenses, including financial gifts. My mom wasn't wealthy, but she was informed, and she had all the paperwork waiting for me.

Finally, be certain to consult an elder law or estate planning attorney. They will help you understand the best options and strategies for your life stage and assets.