I recently bought a LT Care policy which will provide some assistance if my wife or I ever needs to go into a nursing home (or requires in-house assistance), but which falls short of offering complete protection. So I've started thinking about what would happen if one of us did require care that exhausted the policy's benefits. Is it possible in this scenario to provide a base level of care for the affected person without leaving the other spouse indigent?

The obvious solution in this situation would be Medicaid, but Medicaid also has special asset transfer rules. My understanding of the current rules is as follows:

- Medicaid will look back for asset transfers 5 years from the date one becomes eligible for assistance.

- Assets may be transferred to a spouse at any time, but a spouse's assets must also be used up before someone becomes eligible for assistance. Assets transferred to a spouse in the form of yearly income "for the sole benefit of the spouse" (e.g. a lifetime annuity) are exempt from these rules though.

- A principal residence (up to certain limits) is exempt from these rules.

- A principal residence transferred to a child under the age of 21 is also exempt. Certain states have "filial responsibility" laws, but these are rarely enforced.

- IRA's and other retirement assets cannot be transferred and must be used up before someone is eligible for Medicaid assistance. I believe some kind of apportionment takes place if an IRA is annuitized for the benefit of both spouses, but I'm not 100% clear on this.

Is my above understanding correct? If so, then it seems the trick, upon realizing that one spouse may need care, is to transfer the bulk of one's assets out of his/her estate, but leave that person with enough assets (including insurance) to get through at least 5 years without assistance. In this regard, these would be my questions (assuming the 5 year lookback period is met, and the house is worth less than the Medicaid limits):

- If you transferred your house and all non-retirement assets to your spouse and annuitized the bulk of the liquid assets over the lifetime of your spouse, would that insulate these assets from Medicaid's grasp?

- Likewise could the assets be transferred to a trust for the benefit of a minor child, with the proviso that the assets be available to maintain the lifestyle of the spouse?

- If an IRA is annuitized over the life of both spouses with 100% of the yearly income going to the surviving spouse, how would Medicaid look at this if one spouse is institutionalized and eventually runs out of assets, but the other spouse is fully or partially dependent on that income stream?

- If assets were transferred to a spouse, could the spouse then get a divorce and be exempt from the Medicaid rules? It seems to me that this would be considered to be a "sham" transaction unless pretty stringent conditions were met.

- Is there anything else that should be considered?

I'm not looking for definitive detailed advice, but am just trying to understand how the system works and general strategies used in this type of situation.

Thanks for your help.

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