My parents-in-law sold their home and bought an RV. They have $200K in the bank. How can they protect their assets from being used for nursing-home costs?

My father-in-law has health issues. While he is not quite ready for a nursing home, that may be a necessity in the near future. He has state retirement benefits and a very small Social Security check. 

My mother-in-law operated an at-home daycare service, caring for a couple of children. Therefore, she has no Social Security in her old age. They sold their home a year ago and live full-time in an RV. 

The majority of their assets are in cash. They have a couple hundred thousand dollars at best, held in joint accounts. They still have Colorado driver’s licenses, but receive mail at our house in South Dakota.

If my father-in-law has to go into a nursing home and his assets are surrendered for his care, his wife has no income. How can their assets be protected so that she has a means of support?

Concerned Son-in-Law

Dear Son-in-Law,

Most states have a five-year look-back period on maneuvers people make with their finances for such purposes. 

As such, there would need to be a five-year grace period in most states between setting up such a trust and filing for Medicaid coverage. But it would all depend on the rules and limits in their particular state.

Medicare is a federal program that provides health coverage if you are 65 and over. Medicaid, on the other hand, provides health coverage for those who have a very low income.

“Medicare does not cover long term care costs such as a nursing home,” Larry Pon, a financial planner based in Redwood City, Calif., tells MarketWatch. “However, if your assets and income are low enough, he may be able to take advantage of Medicaid.”

One option: Medicaid Self-Directed Services is a Medicaid program that compensates family caregivers. The Family Caregiver Alliance has a state-by-state guide for such services.

Another possibility: A transfer of assets between the healthy spouse and the spouse that requires care. You can read more on the eligibility requirements here

Medicaid planning strategies

Medicaid Asset Protection Trusts are one such valuable planning strategy,  according to the American Council on Aging. “Whether that be services in one’s home, an assisted living residence, or a nursing home, there is an asset (resource) limit,” the organization says. 

“To be eligible for Medicaid, one cannot have assets greater than the limit,” it adds. “Medicaid’s look-back period is meant to prevent Medicaid applicants from giving away assets or selling them under fair market value to meet Medicaid’s asset limit.”

In 49 U.S. states and Washington, D.C., the look-back period is 60 months; in California, it’s 40 months.

“Even after the ‘initial’ look back period, if a Medicaid beneficiary comes into some money, say for example, via an inheritance, and gives all (or some) of the money away, they are in violation of the look back rule,” the American Council on Aging adds.

An annuity or Medicaid-compliant promissory note can also help protect people’s savings from Medicaid or nursing-home costs.

Given the amount of money involved and the fact that they have already sold their home — a move I would not have recommended — I would strongly suggest your parents-in-law consult a financial planner and/or elder-care attorney to establish what options best suit your parents-in-law.

Social Security complications

“It is interesting you make the comment that there is no Social Security for your mother-in-law,” Pon says. “It sounds like she did not report her income from her daycare business, which means no income taxes or Social Security taxes were paid. This is one of the consequences of not reporting the income on her tax return.”

“Your mother-in-law should get her Social Security report from the Social Security Administration,” he adds. “This report will tell you if she worked enough to qualify for Social Security and Medicare. If she is short, it is a good idea for her to report her income and pay the income, Social Security, and Medicare taxes.”

“If she has not reported her income, there is a chance the IRS will audit her,” Pon says. “Her risk is high if her customers claimed the Dependent Care Credit on their tax returns for the fees paid to her daycare business because they would have to report her name and identification number on the form to take advantage of the Dependent Care Credit which is reported on Form 2441.”

Assuming your parents-in-law have been married for longer than one year, your mother-in-law should also be able to apply for up to half of her husband’s Social Security. This also applies to divorced couples, as long as they were previously married for 10 years, and the ex-spouse remains unmarried. You can read more here.

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