Prior to the passage of the Affordable Care Act’s Medicaid expansion, couples sometimes faced wrenching decisions when one partner was diagnosed with a chronic or progressive illness, like Alzheimer’s or dementia. A New York Times article published in 2009 tells such a story. A woman faced the choice of losing her inheritance or divorcing her husband (who had been diagnosed with early-onset dementia). Without the protections of the Medicaid expansion, some states require individuals to drain down their assets before they qualified for Medicaid coverage, putting couples in a situation where they faced the choice of staying married, or losing their nest egg, 401(k), and even having to sell their home or reverse mortgage their home, before they could access Medicaid coverage.
According to the National Bureau of Economic Research, in states that expanded Medicaid (which covered all adults under age 65 as long as their incomes were lower than 138% of the poverty line, without looking at their assets), the divorce rate lowered by 11.6% among college-aged individuals between the ages of 50 and 64. The researchers believe that the expansion of Medicaid may be one reason why the gray divorce rate has gone down in this age group. Without requiring couples to drain down their assets to pay medical bills, more couples were able to stay married and qualify for medical assistance.
Yet, the effect of the expansion might be less relevant for couples who need long-term nursing home care for one partner, given that Medicaid’s long-term eligibility requirements for seniors seeking nursing home assistance or home and community-based services does have asset limits. Researchers found that medical divorce is a significant reason why older couples get divorced, meaning that financial strain due to nursing home costs may be contributing to the growing number of “gray divorces.”
Medical divorce is a term used to describe a kind of financial planning strategy that some couples use when one partner becomes seriously ill and faces high medical costs, or requires nursing home care, while the other partner remains healthy. Rather than draining their shared marital assets to pay medical and nursing home bills, the couple chooses to divorce to help secure care for the needy partner, while protecting the financial quality of life of the healthy spouse. In some contexts, medical divorce can protect the assets and income of the healthy partner if the other partner becomes chronically ill and faces high medical and nursing home expenses.
While the Medicaid expansion helps protect access to medical care, Medicaid’s long-term care eligibility and nursing home eligibility for seniors in Washington state remains tied to asset tests and asset limits. To be eligible for Medicaid long term care for seniors, only the applying partner’s income is counted for eligibility, protecting the non-applying partner’s income. The non-applicant partner is also able to keep up to $154,140 in assets when his or her spouse applies for nursing home Medicaid; but for home and community-based nursing services under Medicaid, the asset limit for the non-applying spouse is $68,301. When couples have shared assets that exceed these thresholds, they would have to spend down their assets to these thresholds before the applying spouse can access nursing home Medicaid. Given the high costs of nursing home care, some couples might have an incentive to divorce where each partner’s share of assets exceeds $154,140 or where the couple brings in a high income. Even though this might mean that the sick partner might still have to spend down their share of assets after the divorce, it means that divorce could protect a higher value of the healthy partner’s share of community property. Fortunately, few couples find themselves in this position. Medicaid will not count all assets to meet the asset-test threshold. Exempt assets include a home shared with the applicant’s spouse, clothing, personal items, furniture, appliances, and a vehicle.
According to the National Council on Aging, the median monthly cost of a nursing home is $9,429. While assisted living costs are lower, with an average monthly cost of $5,350, many assisted living facilities increase their fees if individuals need additional services. For individuals who need assistance with daily living activities, like eating, dressing, and bathing, the higher level of care provided at nursing home facilities may be required. Federal guidelines dictate what kind of services must be offered by nursing home facilities, which includes assistance with activities of daily living, skilled nursing services, rehabilitation services, customized dietary services, medical coordination, social activities, and more.
If you and your partner find yourself in the position of planning for long-term care, or are facing the immediate need for long-term care, you might be wondering if medical divorce is right for you. In this article, we’ll explore situations where medical divorce may not be necessary, look at estate planning options that can help you and your spouse avoid the need for medical divorce, and explore some issues that can arise when couples do choose medical divorce.
When Medical Divorce May Be Unnecessary
If you’re thinking of filing for medical divorce so one partner can qualify for nursing home Medicaid or home and community-based services Medicaid, you may want to first explore whether you are already protected under Spousal Impoverishment Provisions. According to the American Council on Aging, Spousal Impoverishment Provisions can protect the income and assets of a non-applicant spouse. Under these provisions, the income of the community spouse would not be counted when determining the eligibility of the spouse seeking Medicaid nursing home care or home and community-based services. Under Minimum Monthly Needs Allowances, a Medicaid nursing home applicant could be eligible to transfer some or even all their monthly income to their lower-earning non-applicant spouse (up to certain monthly limits), protecting this spouse from having to spend the couple’s shared monthly income (from Social Security and other income sources) to cover nursing home costs, and ensuring that one spouse isn’t left destitute because the other needs nursing home care.
While a couple’s shared home wouldn’t count as an asset under Medicaid asset limits, Washington’s Medicaid Estate Recovery Program could potentially seek reimbursement after the Medicaid beneficiary passes away. If your spouse, minor child, or disabled child lives in your home after you pass away, the state would not pursue the Medicaid Estate Recovery Program until your spouse passes away. If you and your spouse want to pass your home on to your children or other heirs, you may need to speak to an estate planning lawyer about estate planning tools you might be able to use to protect your home for future generations. Estate planning strategies could potentially protect the inheritance of the home.
Another option couples have if they exceed asset limits would be to “spend down” assets in a structured way. Paying off a mortgage, making home renovations, prepaying for funeral expenses, and paying off debt are some ways that couples can “spend down” assets to qualify for Medicaid, while protecting their shared net worth. There might be other legal ways to “spend down” assets. These include creating “life care arrangements” or converting assets into an annuity. Life care arrangements are legal contracts between an elderly individual and a family member or close friend that last for a person’s lifetime and remain in effect even after a person enters nursing home care. These contracts must offer reasonable compensation for the services offered and must specify the hours of service and services to be provided.
It is important to note that Washington has a “look-back rule” where Medicaid can look at transfers of assets made within 60 months of applying for Medicaid. Any transfer of assets that doesn’t meet Medicaid requirements would be counted as assets for Medicaid qualification. Individuals who violate these rules could face penalties. Giving away your assets to your children or selling assets for less than fair market value could be seen as a violation of the look-back rule. If you’re thinking of using estate planning methods for Medicaid planning, it might be wise to speak to an estate planning lawyer in Washington who handles Medicaid Planning, like the attorneys at Truce Law.
Estate Planning for Medicaid
Estate planning for Medicaid generally only works if you do it early. In other words, if a loved one needs nursing home care soon, many estate planning methods won’t work because they would fall within the 60-month look-back period. Certain irrevocable trusts, special needs trusts, and life estate deeds might be able to protect assets from the asset limit tests that qualify (and disqualify) individuals for Medicaid and may be able to protect assets and property for future heirs. Yet, the specific wording of the trust and the ability of the person applying for Medicaid to use the trust as an “available resource” makes a difference. This is why it is important to have an estate planning lawyer familiar with Medicaid laws to help you plan.
The Washington State Health Care Authority has a table that designates whether a trust would be considered an “asset transfer” under Washington law and shows whether the trust would count as an “available resource” asset for Medicare qualification. If you’re considering establishing a trust or doing estate planning for Medicare, your best bet is to speak to an estate planning lawyer in Washington at Truce Law today. Our attorneys can review your specific situation and help you explore the options that may be available to you. These options will vary depending on whether your loved one needs nursing care now, or whether you are planning today for the potential need for nursing care in the future.
If your concern is protecting your home for future heirs, a life estate deed may be an estate planning option. With a life estate deed, an individual can sell a home to a son or daughter, but retain a life estate, namely, the right to live in, use, or rent the property for the remainder of their lifetime. When the life tenant passes away, ownership goes to the person on the life estate deed and can protect the home from Medicaid’s Estate Recovery Program. When a life estate is in place, the value of the home can still be used as a countable asset that could potentially exclude you from receiving Medicaid nursing home benefits. If your spouse lives in the home protected under a life estate deed, the life estate home would be exempt from being counted as an asset. If you are single, Washington’s home exemption rules would apply, and up to $1,071,000 of home equity would be exempt from Washington’s asset test rules. Yet, if you want to use a life estate deed to protect your heirs, you’ll need to plan. Life estate deeds may be subject to the Medicare lookback period.
If you have time to plan, you and your partner might also consider purchasing long-term care insurance. This coverage will require you and your partner to pay a monthly premium, but by choosing long-term care insurance, you and your partner can plan for nursing care and receive peace of mind, knowing that nursing care is covered should you need it, while protecting your assets for future generations.
Purchasing a Medicaid-compliant annuity might be yet another way you and your spouse might be able to qualify for Medicaid, while also staying compliant with look-back rules. When you and your spouse convert assets into an income stream through an annuity, however, the income generated from the annuity will be counted as income under Medicaid’s income limits. Whether your annuity would count as Medicaid-compliant will depend upon the type of annuity you purchase. Speaking to an estate planning lawyer or financial planner is important if you and your partner plan to take this route to qualify for Medicaid nursing home care.
Finally, it is important to note that certain types of asset transfers may be exempt from the look back rule. This includes asset transfers to disabled or blind children, or a child who is the parent’s caregiver.
Estate planning for Medicaid can get complicated, and it usually only works if you plan well-ahead of when you or your partner would need nursing home care. If you have questions, reach out to the estate planning lawyers at Truce Law in Washington today.
Medical Divorce in Washington
A medical divorce might still make sense where a couple’s net worth exceeds asset exemptions, or where it’s too late to use estate planning tools to protect assets, and where other spend-down options have been exhausted. Because Washington is a community property state, if a couple takes their divorce to court, the judge may split the couple’s assets in half and may even require that the higher-earning spouse pay the lower-earning spouse alimony. One way to avoid this outcome is for couples to choose collaborative divorce, where couples resolve their divorce settlement privately, with the assistance of their collaborative lawyers. With this process, couples have more control over the way they choose to divide assets.
Yet, even if a couple chooses the collaborative divorce route with the intention of pursuing a “medical divorce” it’s important to speak to a lawyer because other issues can arise. To file for divorce, both parties must be of sound mind and capable of making their own financial and personal decisions. If you wait too long, and one partner is found to be incapacitated by the court, it is possible that a guardian may need to be appointed to protect the person’s interests during the divorce, especially if the court suspects that the vulnerable partner might not be of sound mind to sign divorce papers. If a divorce agreement overly favors one partner (which may be the case in a medical divorce), the court may scrutinize the case more closely to ensure that the medically fragile partner has the capacity to make decisions. If a medical divorce leaves one partner destitute, the divorce might also face closer scrutiny by the court.
Usually a high net-worth medical divorce will result in both parties still receiving significant assets but have the effect of protecting the community assets of the spouse who doesn’t need nursing home care. Divorce always has financial consequences for both parties. Your collaborative divorce lawyers can structure the division of assets during your divorce to best protect both your interests. In this way, the division could protect the healthy spouse financially, while ensuring that the medically fragile spouse has a financial plan in place for nursing care and support.
Next Steps
In most cases, medical divorce won’t be necessary, nor is it always the best path forward. There are laws in place that protect a financially healthy spouse when their partner needs long term nursing care. Yet, there are situations where a couple’s income and net worth exceeds asset limits, and where spend down requirements would result in both parties losing significant assets because of one partner’s need for nursing home care. Estate planning is one-way couples can avoid such a situation, but if one partner needs more immediate nursing care due to an emergency or recent health development, then medical divorce may be an option in some limited circumstances.
Medical divorce can raise complicated questions in some situations, and both parties would still need to be of sound mind to begin the process. Otherwise, questions of guardianship could arise. If you have questions about whether medical divorce is right for you, you may want to speak to a estate planning or divorce lawyer. The Truce Law Firm is a Washington estate planning law firm that has the resources in place to help you navigate the challenges that can arise when one person becomes ill. We can help you explore the full range of options available to you, including estate planning, and medical divorce, and help you and your partner chart the best course forward.
This article is for educational purposes only and does not constitute legal advice. Every situation is unique. For guidance specific to your circumstances, consult a licensed family law attorney in your area.