Only about 5% of Americans have long-term care insurance. Many are uninsurable or cannot afford such insurance. At most, Medicare pays part of 100 days. Less than 1% of nursing home residents are receiving Veterans benefits.

The major alternative to private pay is, therefore, Medicaid.

By carefully designing a thorough Medicaid plan, security can be ensured for the Community Spouse and a legacy can be preserved for children. Failure to design a sophisticated plan may result in the Community Spouse being unable to maintain his or her standard of living. In some instances, the family home may have to be abandoned. The rules of eligibility for Medicaid are strict.

The applicant must be a U.S. citizen or a resident alien and a resident of the state in which he or she applies. It must be medically necessary that the person be placed in the nursing home. Some state are Income Cap states. This means if a persons income exceeds the cap, he or she is ineligible for Medicaid. Other states are Medically Needy states. If the persons income is less than the cost of the nursing home, they are eligible from an income standpoint.

There are also asset limits. A Medicaid recipient is usually allowed to retain a small amount of assets, usually in the neighborhood of $2,000. If the person is married, the Community Spouse is allowed to retain a portion of the couples assets. Some states permit the Community Spouse to retain one-half of the countable assets with a ceiling of $92,760 for calendar year 2002 and a floor of $18,552. In other states, the Community Spouse is able to retain all of the countable assets not to exceed $92,760.

Certain assets are not counted, such as a home, under certain circumstances, personal effects, wedding and engagement rings, medical equipment, and certain types of burial funds. In a situation where there is a married couple, the assets of both the husband and wife are combined. This is true notwithstanding the fact that a prenuptial agreement may have been signed.

For Medicaid penalty purposes there is a 36-month lookback for transfers to an individual and a 60-month lookback for transfers to a trust. If the transfers are made during the lookback period, they are penalized. The penalty is a period of ineligibility for Medicaid. The penalty is calculated by dividing the uncompensated value of the transferred assets by the state divisor which is based on the average cost of a semi-private room in a nursing home in that state or region of state. The penalty can be longer than 36 or 60 months or it can be shorter. Transfers by either the Institutionalized Spouse or the Community Spouse are penalized. Certain transfers are exempt from Medicaid transfer penalty. These include transfers of a home, in certain circumstances, and transfers to certain disabled persons.

Medicaid planning involves a number of tax considerations.

These relate to income tax, gift tax, and, possibly, federal estate tax. Failure to comply with the tax law in designing a Medicaid plan usually results in the payment of significant extra taxes. By designing a Medicaid plan taking advantage of the tax law, significant savings can be achieved.

The key to Medicaid planning is to act quickly. Failure to act eventually costs a considerable amount of money. If a nursing home cost in a particular state is $5,000 per month, then that is the cost of additional months of nursing home care that the family must pay. Since the Medicaid penalties for transfers begin the date of the transfer, it is possible to protect significant assets by planning early.

In those cases where planning was not done and the person is already in a nursing home assets can also be protected, but the earlier the planning is done, the more money is saved. Married persons care about their spouses, children care about their parents, parents care about their children. By proper planning, the security of the Community Spouse can be maintained and a legacy can be preserved for the children.