Eldercare and Special Needs Planning

Eldercare and special needs planning addresses two critical challenges: managing the substantial costs of long-term care and ensuring that individuals with disabilities can maintain government benefits while receiving supplemental support. Financial planners must understand both the costs involved and the legal strategies available to protect clients and their families.

Long-Term Care Costs

Long-term care represents one of the largest potential expenses in retirement. Understanding current costs helps planners develop realistic funding strategies.

2025 National Average Costs

Regional Variation: Costs vary significantly by state. Nursing home costs range from approximately $175/day in Texas and Louisiana to over $1,000/day in Alaska and California. Semi-private room monthly costs range from $5,639 in Texas to $31,282 in Alaska.

Cost Projection: If long-term care costs continue increasing at their historical rate (approximately 5% annually), a nursing home stay that costs $112,420 today could cost nearly $186,000 in 20 years.

Medicaid Planning

Medicaid is the primary payer for long-term care for those who have exhausted their resources. Understanding Medicaid eligibility rules is essential for effective planning.

Asset and Income Limits (2026)

The 60-Month Look-Back Period

Medicaid reviews all financial transactions during the 60-month (5-year) period immediately preceding the application date. The purpose is to identify asset transfers made for less than fair market value that would disqualify the applicant.

Example: An applicant who applies for Medicaid on January 1, 2026, would have all financial transactions reviewed back to January 1, 2021.

Transactions That Trigger Penalties:

• Gifts to family members (including graduations, birthdays)
• Property transferred for less than fair market value
• Assets sold below market price
• Vehicles donated to charity
• Payments to caregivers without formal care agreements

Penalty Period Calculation: The penalty period equals the value of the transferred asset divided by the average monthly cost of nursing home care in that state. For example, if the average cost is $10,000/month and the individual gifted $50,000, the penalty period would be 5 months of Medicaid ineligibility.

State Exceptions to the Look-Back Period

Exempt Assets Under Medicaid

Certain assets do not count toward the asset limit:

• Primary residence (up to equity limits, typically $713,000-$1,071,000 in 2026)
• One automobile
• Personal belongings and household items
• Irrevocable burial contracts
• Term life insurance (no cash value)
• Assets in qualifying special needs trusts
• ABLE account balances (up to $100,000 for SSI purposes)

Medicaid Spend-Down Strategies

Legitimate Spend-Down Methods:

• Pay off mortgage or home improvements
• Purchase exempt assets (prepaid funeral, new vehicle)
• Pay for home care or medical equipment
• Establish a Medicaid-compliant annuity
• Fund a special needs trust for a spouse
• Pay accumulated debts

Special Needs Trusts

Special needs trusts (SNTs) allow assets to be held for the benefit of an individual with disabilities without disqualifying them from means-tested government benefits like SSI and Medicaid.

First-Party (Self-Settled) Special Needs Trusts

A first-party SNT is funded with the disabled individual's own assets, such as an inheritance, personal injury settlement, or accumulated savings.

Requirements:

• Beneficiary must be under age 65 when trust is established and funded
• Trust must be irrevocable
• Trust must be established by parent, grandparent, guardian, or court (or by the beneficiary if mentally competent)
• Medicaid payback required: Upon the beneficiary's death, remaining trust assets must first reimburse Medicaid for benefits paid

Third-Party Special Needs Trusts

A third-party SNT is funded by someone other than the disabled beneficiary, such as parents, grandparents, or other family members.

Key Advantages:

• No age restriction (can be established for beneficiaries of any age)
• No Medicaid payback required at death
• Can be revocable or irrevocable
• Remaining assets pass to designated beneficiaries

First-Party vs. Third-Party SNT Comparison

Distribution Rules for SNTs

Trustees must follow strict rules to preserve benefit eligibility:

• Never pay funds directly to the beneficiary (causes dollar-for-dollar SSI reduction)
• Pay third parties for goods and services
• Funds should supplement, not replace, government benefits
• Cover "special needs" (recreation, education, travel) rather than basic living expenses

2024 Food Expense Rule Change: Effective September 30, 2024, the SSA no longer counts food expenses paid by a third party (including an SNT) as in-kind support and maintenance (ISM). Trustees can now pay for groceries and restaurant meals without reducing SSI benefits.

Pooled Special Needs Trusts

Pooled trusts are established and managed by nonprofit organizations. Individual beneficiaries create sub-accounts within the larger trust.

Advantages of Pooled Trusts

• Lower minimums: Accept accounts of any size (vs. $500,000+ at banks)
• Professional management: Administered by special needs planning experts
• Investment efficiency: Pooled assets provide better investment opportunities
• Cost-effective: Lower administration fees than individual trusts
• Expertise: Staff stays current on changing benefit rules

Pooled Trust Requirements

• Must be established and managed by a nonprofit organization
• Can accept first-party or third-party contributions
• First-party sub-accounts require state Medicaid payback (though nonprofit may retain some portion)
• Must maintain beneficiary's benefit eligibility

ABLE Accounts

Achieving a Better Life Experience (ABLE) accounts provide tax-advantaged savings for individuals with disabilities that began before a specified age.

2026 ABLE Account Limits and Rules

Key 2026 Change: The ABLE Age Adjustment Act raises the disability onset age requirement from before age 26 to before age 46, effective January 1, 2026. This dramatically expands eligibility.

ABLE Account Benefits

• Tax-free growth: Earnings grow tax-deferred
• Tax-free withdrawals: Qualified disability expenses are tax-free
• SSI protection: First $100,000 does not count toward SSI resource limits
• Medicaid protection: Account balance does not affect Medicaid eligibility
• No Medicaid payback in some cases: If beneficiary dies and Medicaid payback is waived by the state

SSI Interaction with ABLE Accounts

• If ABLE balance exceeds $100,000, SSI benefits are suspended (not terminated)
• Benefits resume when balance drops below $100,000
• Medicaid eligibility continues regardless of ABLE balance

ABLE to Work Provision

Employed ABLE account owners who do not participate in an employer-sponsored retirement plan can contribute an additional $15,650 (continental U.S.) beyond the standard limit. This provision was made permanent under SECURE Act 2.0.

Powers of Attorney and Healthcare Proxies

Comprehensive eldercare planning includes advance directives to ensure decision-making authority is properly delegated.

Durable Power of Attorney for Finances

• Authorizes an agent to manage financial affairs
• "Durable" means authority continues if principal becomes incapacitated
• Should be prepared while client has mental capacity
• Springing powers activate only upon incapacity

Healthcare Proxy (Durable Power of Attorney for Healthcare)

• Designates an agent to make medical decisions
• Activated when principal cannot make decisions
• Agent should understand principal's values and preferences

Living Will (Advance Healthcare Directive)

• States preferences for end-of-life medical treatment
• Addresses life-sustaining measures, artificial nutrition, pain management
• Works in conjunction with healthcare proxy

HIPAA Authorization

• Permits designated individuals to access medical records
• Should be completed alongside healthcare proxy
• Can include financial institutions for disability claims