Protecting a Healthy Spouse’s Assets

When a married couple is faced with long term care for one of them, whether at home or in a nursing home, the fear of financial ruin is strong. But Congress has passed what is called the spousal impoverishment rules, which is the opposite of how it sounds. The are designed to protect a significant portion of your life’s savings, and if used properly, these laws will protect most of a typical family’s assets, but they must be transferred into the healthy spouse’s name. That may require having the all important Power of Attorney if the sick spouse cannot sign. 

First, the house can be switched to the health spouse and it no longer counts as an asset. If the applicant is living in the house and is not married, the house is exempt up to $955,000. Second, the healthy spouse can have $137,400 without any questions. After that amount the rest of the bank accounts and investments must be “spent down.” This is often misunderstood. Spend down can be done by paying off debt, or trading in that old car and buying a new one.

The state allows both spouses to buy a prepaid funeral contract. If there is nothing else the family needs to purchase, the rest of the money above the $137,400, in the healthy spouse’s name can be used to buy what is called a single premium immediate annuity. Once that is done the assets no longer are counted by Medicaid and the sick spouse qualifies for Medicaid. It’s not quite that simple, if the sick spouse has IRA’s or 401K’s, as there are income tax laws, and time limits and sometimes cash out penalties to transfer the assets to the healthy spouse. It is even possible to switch a 401K from the sick spouse to the healthy spouse without paying income tax if the power of attorney authorizes the sick spouse to get a court order authorizing the transfer. But it can be done to avoid over $200,000 of annual nursing home care.

But the story doesn’t end there, because another problem is how to protect the healthy spouse’s assets if the healthy spouse dies before the sick one. That is where a special will with a trust called a testamentary trust inside it, can largely protect the assets, including IRA’s. The sick spouse must get a certain portion of the estate called the statutory share, but that is usually a small part of the total assets so the bulk of the assets can be preserved for the children and the sick spouse can continue on his or her Medicaid program. This was not always the rule but in 2001 the Connecticut Supreme Court upheld the federal law which provides for a great portion
of the assets to be saved, if the ‘healthy’ spouse dies first and sends the assets into a trust inside the will.

Careful planning can result in protecting some or all of a couple’s life savings if one of them needs long term care, and that planning must include doing what is allowed in case the ‘healthy’ spouse dies before the one on Medicaid. The word to the wise is, get that planning done. And while it is easier to protect assets with advance planning, it is still possible to protect almost all of a married couple’s assets at the last minute as long as a thorough Power of Attorney is in place that the family can use to switch the assets to the healthy spouse. Here’s to good health, with smart planning to protect the family’s hard-earned money.