Even with trusts, Medicaid and eldercare, money is the bottom line

Q: Last year, my mother-in-law was diagnosed with Alzheimer's. My father-in-law went to a lawyer and put together a revocable trust with himself and his daughter as trustees. They knew that eventually his wife would be unable to handle their finances.

Then he got really sick and died within three months. We're still having difficulty coping with his death — and now trying to take care of his wife. Even though she will go into a nursing home someday and never come out, the trust says she can apply for all "public benefits," and when she gets them, they are supposed to pay for her expenses.

Then it gets very confusing. If there are expenses that Medicaid doesn't cover, the trust is supposed to pick up the difference. Aren't people who are on Medicaid supposed to have no other assets? If she's on Medicaid and the trust pays her additional expenses, won't Medicaid find out and take away her eligibility? We just want to do the right thing.

A: The eldercare world is an amazing mess, and you've discovered one of the craziest parts of it. As with many things in life, it comes down to the money.

For decades, regulations allowed attorneys to help older people give away their assets as early inheritances so that the older person could go on welfare (Medicaid) and have the public pay for her care.

Historically, it's called "Medicaid planning," but I call it "artificial impoverishment." Medicaid doesn't pay care providers well, so most of the top-quality places don't accept Medicaid, especially for difficult clients such as those with memory loss. Older people who went into these arrangements had no idea they were saying goodbye to many different, excellent options. Medicaid was created for the impoverished, but many middle-class and wealthy people have used it as an entitlement.

Here's an example: My mother died of Alzheimer's, probably like your mother-in-law will. In the past, my mom would have lived for years in a nursing home. Because she was able to pay privately, however, she lived for six years in an exceptional assisted-living facility — and never went to a nursing home. Since the alternatives cost about $2,000 a month less than a nursing home, we were able to save money. And she had superior care.

Because Medicaid pays so poorly, few assisted-living facilities in King County accept Medicaid, and almost none of those excels in dementia care. So, if your mother-in-law has funds but dispenses them through Medicaid planning, she will "plan" her way out of some really good care choices.

Most of this became illegal a few years ago when Congress finally closed some of the loopholes. I understand there are schemes to get around the regulations, but for the most part it's much tougher to plan someone's money away today.

Plus, there are some good Medicaid planning tools that make sense. I contacted an attorney, Janet L. Smith, for help answering this question. Here's what she told me:

"There's not quite enough information here for me to go on, but it sounds like the trust in question is a 'special-needs trust' or a 'supplemental-needs trust' (two names for the same thing). They allow someone to get public benefits but still have a source to pay for extras, such as clothing, shoes, personal care, companion care and hearing aids (items Medicaid doesn't pay for)."

If drafted correctly, Smith says, trusts are a legitimate planning tool for spouses where one is likely to need long-term care. Nothing forces anyone to go onto Medicaid. However, let's say a couple has spent most of their joint assets. The wife is in a nursing home that costs $7,000 a month. Rather than bankrupt the husband paying for her care, a trust allows him to use their resources for his needs and apply for Medicaid for his wife.

The husband dies, leaving a small bit of money. Instead of having the wife inherit his savings and be taken off Medicaid until that money is spent, it goes into a special-needs trust to buy her the extras she needs.

I have no problem if people use Medicaid when it's used as it's intended — for the poor who have no other choices. But those who have assets yet don't plan how they're going to pay for their care someday are likely to learn a bitter truth: Much of what Medicaid covers (though not all) is not likely to be the quality they hoped for. As much as I hated the fact that my mom had Alzheimer's, I felt good knowing she was receiving good care — because we could pay for it, and we called the shots.

Most of us age accidentally, without planning or forethought. Aging Deliberately tells us how to age on purpose. You can reach Liz Taylor at lizt@agingdeliberately.com or write to P.O. Box 11601, Bainbridge Island, WA 98110.