Avoiding Long-Term Care Disasters

Dolan Smart Money Move: Your parents may be candidates for a four-year long-term care policy—or you may buy it for them. With a four-year policy, they may transfer their assets to their heirs or put them in a trust when they go into a nursing home, and still qualify for Medicaid before their long-term care coverage expires.

The caveat is that if they try to transfer their assets within three years (36 months) of their Medicaid application, or if they transfer their assets into a trust within five years of their application, Medicaid will most likely disqualify the transfers. In this case, they will be forced to spend most of their life savings, and sell their home and most of their possessions before Medicaid will pay for long-term care.

Let's walk through an example: If you are admitted to a nursing home on January 1, 2008, and you transfer your home to your children on that same day, you can apply for Medicaid after January 1, 2011 and your home's value is protected. A four-year long-term care policy would cover you in those intervening years.

Other Options

If your parents need long-term care now and Medicare doesn't cover it, we have a couple of alternatives for you to consider. We realize neither of these options is cheap, painless or risk-free—but neither is watching your parents impoverish themselves.

1. Consider a reverse mortgage on their house.

The lender pays them a percentage of the value of their home with a guarantee that your parents may live there for the rest of their lives. There are good reverse mortgages and then there are some bogus ones, but fortunately there are helpful sources of information and advice. (One of our favorites is AARP, which you can find at www.aarp.org/money/revmort.)

Make sure you show the contract offered by lenders to a lawyer before you decide on anything. You can find a HUD-approved counselor, who will review your contract free of charge, through the National Reverse Mortgage Lenders Association in Washington. Check out their information at www.reversemortgage.org. The site also has an important reference tool: a state-by-state listing of approved reverse mortgage lenders.

2. Sell your parents' house and put the proceeds in a money market fund that offers check-writing privileges.

Once your parents' savings run out—which means they are now practically broke— Medicaid will start paying for their care and they can't be kicked out of the facility once they're in. We suppose that's good news, but it can be a painful journey getting there if you don't do some advance planning.

Want to learn more about Long-Term Care Insurance? Click below:

• Dolans Guide to Long-Term Care Insurance
• Cut Your Long-Term Care Costs