It’s best to start before the need arises.
Increasingly, older adult couples are choosing to cohabitate without getting married. A recent study shows that roughly one quarter of the nation’s cohabitating couples are individuals over the age of 50.1 The majority of these individuals have been married before. The reasons for choosing not to get married vary widely, but it isn’t uncommon for older adults to remain single to avoid negative consequences such as forfeiting a survivor’s pension or health insurance. While the choice to forgo marriage for many is logical prior to the need for long-term care (LTC), the choice not to marry can make paying for LTC and asset protection planning to pay for LTC costs challenging.
Early Planning
It’s critical for all planners, including elder and special needs law attorneys, to consider all methods of planning for LTC and asset protection for unmarried couples. Ideally, couples and their professional advisors begin thinking about the potential need for LTC well before either party develops a chronic illness and long before the need arises. The unmarried couple planning early may work with their financial professional and attorney to develop a financial and legal plan that allows both parties to self-insure. This requires careful planning, saving and investing; however, early planning may make this possible. Another asset protection option that requires early planning is for one or both parties to consider the purchase of an LTC insurance policy. An appropriate LTC insurance policy means that the couple will be able to pay privately, and the assets of either or both aren’t affected by the need for LTC. If there’s a disparity of wealth between partners, then the wealthier partner may choose to purchase an LTC insurance policy for the less well-off partner simply to avoid the issues that come with planning for public benefits later.
Later Planning
Unfortunately, many couples (married or unmarried) don’t consider the need and high cost of LTC until it’s too late to either purchase an LTC insurance policy or accumulate the wealth necessary to self-insure. In such instances, many look to public benefits to assist with the payment of LTC expenses.
In contemplation of the need for a spouse remaining in the community (the community spouse) to maintain some income and assets so as to not be completely impoverished (and likely dependent on additional public benefit programs), Medicaid policy provides for certain protections. These protections include exempting a certain amount of the couple’s countable resources, the amount commonly referred to as the “community spouse resource allowance” (CSRA).2 In addition, Medicaid will allow a monthly contribution of income from a Medicaid-eligible spouse living in a nursing facility to his community spouse. This is known as the “minimum monthly maintenance needs allowance” (MMMNA).3 Also, transfers between spouses aren’t considered uncompensated for Medicaid purposes.4 Above and beyond that which Medicaid allows, elder law practitioners have a number of strategies that can protect almost all of a married couples’ assets and have at least one spouse become eligible for Medicaid benefits. Unfortunately, these same protections aren’t available to unmarried cohabitating couples, regardless of the length of the relationship, how intertwined the couples’ finances are or how dependent one partner may be on the other for financial support. This failure of Medicaid policy to allow for such protections may seem counterintuitive because deeming rules apply to couples who are “living together in the same household and holding themselves out as a married couple to the community in which they live.”5 Yet, no protection or allowance is made for similarly situated unmarried couples who need LTC, regardless of how their finances are managed.6
Because there are no protections built into Medicaid policy for unmarried couples, elder law practitioners must approach public benefits planning differently than they would for a married couple. They could advise the couple to get married. There’s no length of time a couple must be married for the community spouse to be allowed to keep the CSRA and be entitled to the MMMNA. In addition to the spousal protections afforded by Medicaid, the home would be exempt so long as the community spouse resides there, and certain strategies like the name on the check rule could be used.7 Getting married has the added advantage of allowing unlimited transfers into the name of the community spouse without penalty. Ultimately, the plan must be agreeable to both parties, and there are additional considerations like capacity to marry, inheritances and children from previous relationships, but the marriage of the parties can make planning to protect the community spouse much easier.
Irrevocable trusts. If the couple is considering the cost of LTC at a time when it’s too late to purchase LTC insurance or to amass the necessary savings to self-insure, but when the need for care is years away, the couple can create irrevocable trusts and contribute certain assets to the irrevocable trust or trusts. When properly drafted, the transfer of assets to the trust is considered an uncompensated transfer that may leave the grantor ineligible for Medicaid for a period of up to five years.8 However, the assets held in the trust are considered exempt for purposes of Medicaid eligibility. Irrevocable trusts for public benefits planning may take several forms; however, they may be drafted such that the grantor retains the right to income distributions. In circumstances in which the assets are income-producing and it’s the income necessary to maintain the couples’ lifestyle or is necessary so that one partner may remain in the community, then the grantor may make both himself and his partner beneficiaries of the income, allowing either of them to remain independent in the community even after one has a need for LTC and Medicaid benefits. In addition to liquid assets, real property can be transferred into the trust and a lease agreement executed with the trustee that allows the partner remaining in the community (the community partner) to continue to live in the property. The irrevocable trust plan has the added benefit of ensuring that the assets pass to the desired heirs of the grantor at the appropriate time. The grantor may provide that remaining trust assets pass to desired heirs at the death of the grantor, or the grantor may have assets continue in trust for the benefit of the remaining partner and then pass at the remaining partner’s death.
Transfer of assets. Still another option, which is only logical if it’s clear which partner will have the need for LTC benefits, is to transfer assets from the partner needing care and benefits to the other. While this transfer would be considered uncompensated and leave the transferring partner ineligible for Medicaid benefits for a period of time up to five years, the assets would be exempt for Medicaid eligibility purposes because Medicaid wouldn’t examine the assets of the community partner. While this is a simple strategy, it leaves the assets transferred to the community partner vulnerable should the community partner later need assistance in paying for nursing care and would leave the transferred assets subject to the estate plan of the community partner. This may result in the unintentional disinheritance of individuals for whom the first partner intended to benefit. Another possible option that gives the transferring partner more control over the ultimate disposition of the assets is for each partner to create reciprocal third-party special needs trusts naming the other partner as the beneficiary for his life and then ultimately disposing of the assets to whom the grantor intended at the death of their partner. When considering such strategy, it’s prudent to make the trusts different enough such that the reciprocal trust doctrine wouldn’t apply. Simply leaving the ultimate disposition to different beneficiaries may be enough to alleviate any concern.
Reverse half a loaf plan. Should unmarried couples not have sufficient time to wait out the penalty period of up to five years, they could implement some version of a reverse half a loaf plan. In that plan, assets are transferred to a third party, in this case the community partner, a Medicaid application is then filed and a penalty period is assessed. Depending on state law, one version of the reverse half a loaf requires the income of the institutionalized partner to be paid to the facility, and any deficit is paid from the gifted funds. After a calculated period of time, the initial gift is effectively reduced, and a second Medicaid application is filed. At the filing of the second application, the Medicaid agency will evaluate the net gift and determine that the relevant penalty on the net gift has already run. The result is that the community partner will still maintain a portion of the institutionalized partner’s assets, which can then be used to supplement the institutionalized partner’s care and assist in supporting the community partner. Another version of the reverse half a loaf is one in which a smaller amount is transferred to the community partner, and some of the institutionalized partner’s assets are used to purchase a Medicaid-compliant annuity which, when combined with the institutionalized partner’s income, is almost sufficient to cover the monthly cost of care. Any shortfall may be supplemented by the assets held by the community partner.
Crisis Strategies
Other and more specific and targeted asset protection strategies may also be implemented. If the partner needing nursing care is the owner of the primary residence, the residence can’t be transferred to the partner remaining in the community without a transfer penalty. However, the partner owning the property can sell a remainder interest in the real property to the community partner. A life estate is exempt for Medicaid eligibility purposes for the institutionalized partner, and the sale can be structured such that the purchase price is financed with a promissory note that meets necessary Medicaid requirements.9 So long as the note payments don’t increase the income to beyond acceptable state limits, the partner in the nursing facility can become Medicaid-eligible, while the community partner can maintain the home. If this strategy is implemented, carefully consider the ultimate disposition of the real estate. If the estate plan of the partner in the nursing facility would leave the property in a different manner, then consideration must be given to the estate plan of the community partner.
Statement of intent to return home. If the institutionalized partner owns the home and the community partner lives in the home but doesn’t have the liquidity to purchase the home or a remainder interest in the home, then in many states, the institutionalized partner may sign a statement as to his intent to return home. This causes the real property to remain non-countable for purposes of the institutionalized partner’s Medicaid eligibility. Additionally, the institutionalized partner may consider giving or selling a small percentage interest in the home (perhaps even as small as 1 percent). It has the added benefit of allowing the community partner to live rent-free in the home and to use his income to pay for utilities and maintenance expenses. These payments are critical because many states don’t allow home maintenance expenses to be deducted from the required co-pay to the facility while the individual is eligible for Medicaid.
Purchase of life estate. Similarly, if the community partner is the owner of the property and the partner entering the nursing facility has excess countable liquid assets, then the partner entering the nursing facility can purchase a life estate in the home of the community partner. The life estate interest is exempt for Medicaid eligibility purposes, and the transaction isn’t considered an uncompensated transfer if the institutionalized partner lived in the home for one year because the partner living in the facility received an asset of value in exchange for the cash payment.
Still further options are to have the partner entering the nursing facility purchase items that can be titled in his name and are exempt for Medicaid eligibility purposes, but that can be used for the benefit of the community partner. Vehicles or burial plots are examples.
Undue hardship exception. Another option to protect real property by making it an exempt asset is to use the exception that exempts property whose sale would cause undue hardship for the other owner.10 This is useful if the couple owns the property jointly. Presumably the other partner is residing in the home. The couple can demonstrate the hardship by showing that moving would be physically difficult for the community partner due to age or medical condition. Income, the lack of a paying job (when appropriate) and the difficulty in obtaining a new mortgage, lack of additional assets and other financial factors can further be used to demonstrate hardship.
Care agreement. A strategy to protect and transfer liquid assets may be to have the partner in need of care make payments to the healthy partner to provide care. Such payments need to be made pursuant to a care agreement that’s valid pursuant to state law and meets the requirement of the state Medicaid plan. Typically, such agreements must specifically state the services to be provided and the location of such services, as well as outline the amount to be paid for the services. The caregiver/partner will be required to keep track of his time caregiving as well as the services provided. Most practitioners suggest that the arrangement be evaluated to determine if the caregiver is an independent contractor or household employee as required by the Internal Revenue Service, and either a 1099-MIS may be issued or payroll will need to be established and a W-2 issued at the end of the year. If the arrangement appears to be more of an employer/employee relationship, payroll can often be established using a local accounting firm or bookkeeper, or there are online companies that will establish payroll and make necessary income tax withholdings and payroll tax.
Domestic partnership agreement. California state courts will recognize a registered domestic partnership agreement. These agreements establish the financial terms and responsibilities for unmarried couples and can include how property is divided in the event of a separation and the agreement to provide support. If one of the partners (presumably the wealthier partner) has agreed to provide financial support in the event of separation to the other partner and it’s the supporting partner needing care, then it appears as if the partner in need of support may pursue court action for the agreed on support. As with other court orders, should the court order support, then it’s binding and won’t cause a transfer penalty for Medicaid purposes and may establish a stream of income that must be paid to the community partner much like the MMMNA. At this time, only California recognizes registered domestic partnerships between unmarried heterosexual couples, but other states may follow suit.
Variety of Factors
While asset protection planning and LTC planning for unmarried couples can be challenging, they’re not impossible. The strategy chosen will depend on the age, health, earning capacity and family situation of both partners. Early planning may result in private payment through either LTC insurance or self-insuring. Later planning may require the use of trusts and the contemplation of uncompensated transfers. Crisis planning may require creative purchase and sale strategies. Regardless of wealth or timing, the practitioner will be able to find a solution to assist unmarried couples in their asset protection and LTC planning that will leave both partners protected and cared for.
Endnotes
1. Renee Stepler, “Number of U.S. adults cohabiting with a partner continues to rise, especially among those 50 and older,” Pew Research Center (April 6, 2017), www.pewresearch.org/fact-tank/2017/04/06/number-of-u-s-adults-cohabiting....
2. 42 U.S.C. Section 1396r-5(c).
3. 42 U.S.C. Section 1396r-5(d)(3).
4. 42 U.S.C. Section 1396r-5(f).
5. SI501.50.
6. “Deeming” is the concept that another person’s income and resources are available to pay for food and shelter costs for an individual who’s eligible for supplemental security income (SSI) purposes. With the exception of a few states, eligibility for SSI results in immediate eligibility for Medicaid.
7. 42 U.S.C. Section 1396r-5(b). The “name on the check” rule is the policy that attributes income payable to a certain individual to be solely the income of that individual. Thus, if the individual retirement account of the institutionalized spouse is paid to the community spouse, then the annuity payments are considered to belong to the community spouse rather than the institutionalized spouse. This often allows a couple to protect the entirety of a qualified retirement plan despite the ownership of the plan.
8. 42 U.S.C. Section 1396p(c).
9. POMS Section SI1110.515.
10. POMS Section SI 1130.130.