Few things can play havoc with a thoughtful financial plan as surely as a long stay in a nursing home. According to the Genworth Financial 2008 Cost of Care Survey, a private room costs $209 per day on average nationally, which adds up to more than $76,000 a year. In parts of Connecticut and Massachusetts, as well as metro New York and San Francisco, the average annual cost runs into six figures.

Despite what some clients might think, Medicare pays only about 15% of the nation's nursing home bills. Medicaid pays nearly three times as much—but Medicaid is a federal-state welfare program that steps in only after people have depleted most of their assets. Therefore, "Medicaid planning" has become a prime concern for many seniors and their younger relatives. The object is to keep some assets in the family while still qualifying for Medicaid and thus off-loading the responsibility for nursing home fees.

Qualifying Basics

People qualifying for Medicaid are allowed to keep household goods, a car, term life insurance, up to $1,500 in a mortuary trust and burial plot and up to $2,000 in cash. They can also keep a house. There are limits, however, on how much home equity they can have if they want Medicaid to pay for nursing home bills. For married couples, one spouse must meet the above requirements for Medicaid to pay his or her nursing home bills. The other spouse, known as the community spouse, can have up to $104,400 is assets in 2008 and no more than $2,610 per month in income.

The Herculean task of qualifying for Medicaid should not be underestimated. "I recently helped my 86-year-old aunt get approved for Medicaid," remembers Connie Stone, who heads Stepping Stone Financial in Chagrin Falls, Ohio. "I felt privileged to be able to do so, but it was a tremendous amount of work." The time and paperwork involved was overwhelming, according to Stone.

Even after her aunt spent down her assets and was finally approved for Medicaid, the hard work was not yet done. "Ohio has a resource [asset] limit of $1,500 for Medicaid," Stone says. "My aunt gets income from a pension and from Social Security. We have to keep on top of things, to see that her bills are paid promptly. We pay her property tax each month rather than quarterly, for example, so that she doesn't have a buildup of cash in the bank."

Because such planning is quite complex and clients typically must use up most of their assets in order to qualify, Medicaid generally should be a last resort for long-term care. Still, clients without long-term-care insurance must be creative in searching for ways to pay for nursing home stays.

Unfortunately, Medicaid planning has become much more difficult since Congress passed the Deficit Reduction Act (DRA) of 2005, which made significant changes to the Medicaid look-back period and waiting (or penalty) period. The look-back period refers to the time frame during which Medicaid can look at a person's records to see if he or she has given away any assets. The waiting period is the amount of time a person is penalized for giving away assets and must wait until Medicaid coverage can begin.

Closing Loopholes

"When Congress passed the DRA, the Medicaid planning party was pretty much over," says Rick Shapiro, who heads Investment & Financial Counselors in West Hartford, Conn. One provision of this law extended the look-back period to 60 months. Formerly, this period was 36 months, except for transactions involving trusts; now, the 60-month period applies to all applicants.

To see how this might work, suppose Joan Jones is a 75-year-old widow with about $400,000 in assets. She lives in an area where nursing home stays average $10,000 a month, so a few years in a nursing home could wipe out her assets. She gives most of her assets to her daughter Lynn, who promises to help Joan with day- to-day expenses. This gift takes place in October 2008.

If Joan needs to go into a nursing home in November 2013, she can spend down her few remaining assets and apply for Medicaid. "When she applies, she must reveal any transfers within the prior 60 months," says Robert Fleming of Fleming & Curti, a law firm in Tucson, Ariz. Because more than 60 months will have passed since she transferred assets to Lynn, Joan need not reveal the October 2008 gift on her application for Medicaid, which will be approved if Joan has virtually no assets and scant income.