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The Spousal Impoverishment Law: a false promise of security.

The Spousal Impoverishment Law enacted in 1989 promised to protect the spouse of a nursing home patient from being impoverished by the cost of catastrophic illness. The law has been ineffective in preventing financial ruin for the patient's spouse. The problem is that many people share the dangerous misconception that this law will protect the spouse of a nursing home patient. It's just not true!

The basic idea behind this law is a good one. Before 1989, all assets owned by a patient in a nursing home had to go to pay for care. Since the majority of institutionalized spouses were husbands and because typically the couple's assets were held in the husband's name (not just cash but also pensions and investments), the wife was rapidly forced into poverty.

Protecting the Spouse

Responding to an outcry from the public, the federal government passed a law that required each state to build in protections for the at-home spouse. The Spousal Impoverishment Law established certain maximums and minimums of income and assets that were set aside for the at-home spouse to keep.

What does this mean for you? The states have wide latitude in interpreting and applying the federal law; therefore, your financial situation can differ greatly depending on where you live. The best way to explain generally how the system works is by looking at a typical couple in a typical state.

A Typical Couple

Let's say Mr. and Mrs. Smith, who live in Massachusetts, have monthly income of $1000 from his social security, $500 from hers and $500 from his pension. They also have $50,000 in CDs, which generates $250 a month in joint income.

Mr. Smith is admitted to a nursing home. Health insurance and Medicare never cover custodial long-term care. Medicaid does, but first he must qualify.

Qualifying for Medicaid

Medicaid qualifies nursing home patients based on two criteria: income and assets. All of Mr. Smith's income from his pension and Social Security will have to go to the nursing home with three exceptions: a small personal needs allowance, his medigap insurance premium and an allowance to his wife to bring her up to the minimum monthly allowance mandated by the federal government, currently $985.

To determine how much of his income his wife will get, she adds up her income ($500 in social security plus $125 which is one-half of their income from CDs) and gets $625. She subtracts this from the legal minimum of $985 giving her $360, the amount of his income she may keep. (She may be entitled to more but the formula is too complex for this discussion. No matter what, the maximum the law allows an at-home spouse to keep of her husband's income is enough to bring her to $1718 a month. She can keep all income in her own name even if the amount is over the limit, but she will get none of his.)

The second criteria for qualifying for Medicaid is assets. Medicaid takes a "snapshot" of the couple's assets upon institutionalization. Everything is included except their home, a car and a few other items.

The Smith's assets are their CDs worth $50,000. Mrs. Smith gets to keep half or $25,000. (Federal law gives her half the assets but no less than a minimum of $13,740, up to a maximum of $68,700.)

Now let's run the numbers:

Mr. Smith applies for Medicaid. He will not qualify until he has "spent down" his $20,000. His half is gone in less than a year.

What happens to Mrs. Smith's financial situation? She keeps her half of the assets and part of his income. The law appears to have protected her. A closer look, however, shows this is only a temporary stay of execution. Here's why:

Older couples rely on principal to generate income to supplement social security and meager pensions. Look what happens if that principal is cut in half. Mrs. Smith now has $25,000 which generates $125 a month income, half of what they used to share. Moreover, once he starts receiving assistance she will get only $360 of his income. Her effective income has been cut by $1,265 per month. Her yearly income is now only $11,820, less than half of what she and her husband received before he was institutionalized.

Covering Living Expenses

Yet even with her husband away she will see no corresponding reduction in her living expenses. The mortgage may be paid off but the taxes will go on, and without a man to fix things as they break down, the cost of maintenance and repairs will rise. Food, clothing, utilities, and incidental expenses will continue to cost more because of inflation.

What if she needs new eyeglasses? a hearing aid?--things Medicare won't pay for. What if the furnace blows up? What if her car dies? She may outlive her husband by a decade or more. Each time she dips into her savings, her security is eroded. Bit by bit she moves closer and closer to the brink of poverty. If she becomes seriously ill, her medical expenses could wipe out savings completely.

What if Mr. Smith was ill at home for a long time before being institutionalized? Quite likely, the couple's assets were already greatly depleted before Medicaid cut them in half. They may have used savings to pay for medications, at-home nursing care, medical equipment like a wheelchair and a special bed and remodeling to accommodate them.

Is there any hope for Mrs. Smith? Let's say she inherits $10,000 from her Aunt Millie which she deposits in an account in her name. Can she keep it? No! Medicaid will require her to spend half of it on the nursing home.

The point is this: The Spousal Impoverishment Law is fine if the idea of a precarious existence on the brink of poverty doesn't bother you. If it does, it is imperative that you take measures to provide yourself and your spouse not just a bare subsistence but real financial stability. In order to do that you must be able to access Medicaid, the only program that pays for nursing homes.

Transfering Assets Ahead of Time

Experts tell us that roughly half of all people over 65 will need a nursing home at some time in the future. That means that statistically virtually every married couple will face this problem some day. If you don't move assets out of your name before you have a crises, there will be little you can do to head off a situation like the Smith's. To qualify for Medicaid, you must transfer assets 30 months before applying for assistance; therefore, it is crucial that you make these decisions before a problem arises.

The best way to assure your financial survival is to either give your assets to someone you trust like a son or daughter or put those assets in an irrevocable trust. You can set aside enough money to pay a fair share to get into a good nursing home and then be able to qualify for Medicaid.

Medicaid Caps

Even if you protect your assets, however, you may still face grave risks. The problem comes about not from your assets but because of your income. About half of all states will allow you to qualify for Medicaid if your monthly income is not enough to pay the monthly nursing home bill. The other half are so-called "cap states" where you can never qualify for Medicaid if your income is above a certain amount. (Florida and Arizona are two examples.)

Let's say the Smith's live in Florida. Mr. Smith will not be able to qualify if his monthly income is over the cap of $1,266. Since his income is $1,625 a month, he's shut out. With nursing homes costing an average $35,000 a year, Mrs. Smith's financial doom is sealed.

If you live in a cap state you must consider carefully how you will take your pension. Taking a lump sum rather than an annuity may keep your income under the cap. If Mr. Smith had done this, his income at $1,125 would have been under the cap and he would have qualified for assistance. You will pay more in taxes this way but you can protect the money by giving it to a relative to hold for you or putting it in trust.

The issues involved in planning a secure financial future are complex. You must realize that no law on the books right now guarantees any married couple financial security if either spouse is hit by a catastrophic illness.

Harley Gordon is a founding member of the National Academy of Elder Law Attorneys. His book, How to Protect Your Life Savings From Catastrophic Illness and Nursing Homes, is available from the publisher, Financial Planning Institute, P.O. Box 135, Boston, MA 02258: or order by phone: 1-800-955-2626. The price is $19.95 plus $4.00 shipping and handling.
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Title Annotation:Guest Column
Author:Gordon, Harley
Publication:The National Public Accountant
Date:Feb 1, 1993
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