Articles and Publications

The Cost of Aging is Astronomical: A Deeper Look at How to Afford to Live Out Your Golden Years

June 5, 2023

By Mallory A. Moreno and Christine A. Barone
Principals, Chuhak & Tecson P.C.
Certified Elder Law Attorneys

The article is reprinted from the Illinois State Bar Association’s
Section on Elder Law, Elder Law newsletter, May 2023
Vol 28 No 7


The enactment of the Affordable Care Act (also known as “Obamacare”) was a pivotal moment for many Americans struggling to afford health care costs. However, the only public “insurance” plan for long term institutional care is Medicaid. Most people falsely believe Medicare will cover all health care costs as they age; unfortunately, Medicare only pays for approximately seven percent of skilled nursing care in the United States, not to mention the many administrative pitfalls that seniors face when Medicare benefits run out. Private insurance pays for even less. This means that most of the middle class must ultimately rely on the Medicaid program to afford advanced skilled care and medical assistance.

Unlike Medicaid, Medicare is an insurance program which most working Americans contribute to with each paycheck, making it an entitlement program. Once a certain age is attained, workers are generally able to utilize Medicare for their care needs. On the other hand, Medicaid is a means-tested governmental benefit, meaning that the government considers one’s means (assets and income) when determining eligibility. To qualify for governmental assistance programs, it is necessary to first apply and fulfill certain requirements, both financial and non-financial. 

In Illinois, to become eligible for Medicaid long-term care benefits, the general rules require the applicant to: (1) be 65, incapable of gainful employment (as defined by the Social Security Administration), or be blind; (2) reside in a licensed long-term care facility; and (3) meet certain financial requirements. While the first two requirements are straight forward, the third requirement is often much more complicated than it appears. 

To qualify financially for Medicaid, a married couple may, generally, retain no more than $120,780 in countable assets as of 2023. An unmarried individual may retain no more than $2,000 in assets, though this may also be a bit on the rise in the near future. Further, as of 2023 a married couple may retain $3,715.50 in monthly income, and an unmarried individual may retain only $30 in monthly income. Although these rules may seem simple, the exceptions to these rules create complexities and nuances that can often be difficult to understand and navigate, especially without the guidance of an expert. Usually, it is the exception to the rule that allows applicants to maintain some of their hard-earned livelihood and their dignity as they continue to age. 

The Illinois Department of Healthcare and Family Services (the “Department”) administers Medicaid in the State of Illinois. However, Medicaid is a federally funded program, and therefore to qualify for federal reimbursement, the State of Illinois must comply with applicable Federal statutes and regulations. This means that applicants are protected under state and federal laws, and the Department must also follow state and federal laws and regulations.

Important Considerations

Prior Gifts

The accuracy of the records regarding prior gifts during the five years prior to application is extremely important. Under Medicaid eligibility laws, gifts made by the applicant during this period of time will result in a penalty period of ineligibility imposed for the number of days the gift could have sustained the costs of care. More specifically, if a Medicaid applicant transfers assets within this “lookback period,” the applicant will be ineligible for Medicaid for during the resulting “penalty period.” The penalty period is calculated by taking the total amount of gifts and dividing that amount by the private pay rate at the facility where the applicant lives.

For example, if gifts were made over the past five years, which totaled the sum of $30,000 and presuming the private pay rate at the time of the Medicaid application is $6,000 per month, this gift results in a penalty period of five months. This is calculated by taking $30,000 (amount of the gift) ÷ $6,000 (monthly private pay rate) = 5 months.

Furthermore, the penalty period starts on the later date of either (1) the date the gift is given or (2) the date the applicant is eligible for benefits and would otherwise be receiving institutional level of care. In other words, the penalty period is imposed when the applicant only has the allowable amount of funds to qualify for Medicaid (which is $2,000 for an unmarried individual or $120,780 for a married couple). As such, if a gift of $30,000 was made in 2018, and the elder entered a nursing home in 2019, Medicaid would not cover for 5 months. The five-month period would begin when the elder has less than $2,000. The result is that the nursing home would be required to collect against the gift recipient or otherwise forgo payment for the five-month penalty period, or if very aggressive, the nursing home could evict the resident for nonpayment (assuming the applicant has no other way to pay privately for care during the penalty period).

Again, the public policy behind this rule is that the state is attempting to discourage individuals from giving away assets to purposely qualify for Medicaid benefits while simultaneously asking the State to cover their care costs after the gift is made. The State’s position is that the applicant in these circumstances could have used the money to pay for care costs had the money not been gifted, and this would save the State from having to expend its Medicaid funds to otherwise pay for applicant’s care costs.

In very limited circumstances, a hardship waiver may be granted, but it is better to cover the penalty period by purchasing an annuity, if funds are available.  On the other hand, depending on the nature and type of gifts, the gift may be disregarded or considered “exempt.” For example, a transfer to a child with a disability or to a spouse is an exempt gift which is not subjected to a penalty. Thus, it is imperative that one have complete information regarding all transactions made in the last five years before applying for Medicaid benefits, either for oneself or, more commonly, on behalf of another. This will ensure that the applicant can properly plan and reduce or eliminate any potential penalty period.

Supplemental Needs Trusts

Because Medicaid only pays for the long-term care facility, without proper planning, many family members find themselves having to supplement the needs of a relative, including payments for clothing, transportation, uncovered medications, dental care, hearing aids, eyeglasses, personal care products, and the like. To prevent this from happening, an applicant for Medicaid benefits may choose to establish a Supplemental Needs Trust. This is a specific type of trust designed for the benefit of the Medicaid applicant to ensure funds are set aside to assist with their additional and unexpected costs that are not otherwise covered by public benefits.

In general, a trust is a legal entity that is created for the purpose of managing assets. The person creating the trust is the “grantor” or “settlor.” The fiduciary managing the trust is the “trustee.” The person who benefits from the assets in the trust is the “beneficiary.” There are many different types of trusts, but the Supplemental Needs Trust (sometimes called a “Special Needs Trust”) is a very specific and unique type of trust. For individuals over the age of 65, the Supplemental Needs Trust available for this type of Medicaid planning is sometimes called a “Pooled Payback Trust,” a “d(4)(C) Trust,” or an “OBRA Payback Trust.”

The “Pooled Payback Trust” will have co-trustees who manage the trust itself. The co-trustees of this type of trust must be a bank and a non-profit association. The trustees will charge an annual fee based on the amount of assets and the age of the trust. The assets of the beneficiary are pooled together with other beneficiaries who are participating in the pooled trust. This is done for investment and asset management purposes, but each individual beneficiary maintains a “sub-account” in the pooled trust with his or her own assets for his or her sole benefit and supplemental needs. Additionally, like gifts discussed above, the creation of this type of trust will result in a penalty period, so an annuity must be purchased to sustain this penalty period. Generally speaking, an experienced practitioner and Medicaid planner can save approximately 60% of the applicant’s assets by utilizing this type of trust.

For individuals under the age of 65, a “d(4)(A) Payback Trust” is also an option. These trusts are also sometimes called “Self-Settled Special Needs Trusts” or “1st Party Special Needs Trusts” because they are funded with the assets of the beneficiary. A d(4)(A) Payback Trust does not require co-trustees like the Pooled Payback Trust. However, both types of trusts have payback provisions, which are discussed further below. It is important to note that for individuals under the age of 65, transferring assets to this type of trust will not be subject to a penalty period unlike for individuals over the age of 65.

If a Medicaid applicant decides to create a supplemental needs trust, it must be irrevocable, meaning that it cannot later be changed or undone. When the beneficiary passes, any assets remaining in the trust will be paid back to the State of Illinois as reimbursement for the Medicaid that was paid on the person’s behalf during his or her lifetime. For this reason, the trust is sometimes referred to as a “payback trust.” 

Medicaid-compliant Annuities

Certain types of annuities are exempt for Medicaid-eligibility purposes. The characteristics of an exempt annuity include:

  1. the annuity must be irrevocable;
  2. the annuity must be in immediate payout status and cannot be cashed out for a lump sum payment;
  3. the annuity must have the State of Illinois listed as the primary beneficiary (after a spouse, if applicable);
  4. all payments must be capable of being made over the lifetime of the beneficiary based on certain life expectancy tables utilized by the State of Illinois (or, in other words, actuarially sound); and
  5. all payments must be of equal size.

Since an annuity is not considered an asset but is treated as a stream of income for Medicaid purposes, it can be helpful in offsetting a penalty period. For example, if there is a penalty period of 12 months, the penalty period is said to begin when an applicant for Medicaid would “otherwise financially qualify” for Medicaid. As described in the gifting section above, this is when the applicant has less than the asset allowance. Thus, if a penalty period is to be imposed, and the individual Medicaid applicant has $20,000 remaining, it would be wise to establish an annuity to cover that penalty period, rather than spenddown down that asset and waiting until the applicant reduced his or her assets to $2,000. Otherwise, the family would need to support the Medicaid applicant or risk a potential involuntary discharge from the facility for nonpayment.

When using the applicant’s assets to fund a Supplemental Needs Trust like the one identified above, the transfer of funds into the trust will be penalized the same way that a gift would be. By way of illustration, if applicant has $150,000 in countable assets (assets above and beyond the exempt $2,000 for an individual), the trust could be funded with approximately $90,000 (approximately 60% of countable assets). If the private pay rate at applicant’s nursing home is $7,500 per month, then the amount transferred to the trust ($90,000) would be divided by the monthly private pay rate ($7,500), resulting in a 12-month penalty period. In other words, the applicant could have used the $90,000 to privately pay for the nursing home for 12 more months, but instead, he chose to transfer that $90,000 into an exempt trust that will not be used to pay the nursing home but instead will be used to cover any other supplemental needs of the applicant not otherwise covered by public benefits.

The remaining approximately $60,000 in applicant’s countable assets would then be used to purchase a Medicaid-compliant annuity as described above. This annuity is calculated specifically to pay out an income stream that, when added to applicant’s current income (e.g., Social Security, pension, etc.), will essentially cover the penalty period. For example, if applicant already received $2,500 in monthly income from Social Security and pension combined, the Medicaid-compliant annuity would be calculated to pay out approximately $5,000 per month for the 12-month penalty period to create monthly “income” of $7,500 to continue to privately pay the nursing home. At the end of the penalty period, Medicaid benefits would start to pay the facility. Applicant would continue to pay over his or her net income to the facility (from Social Security and pension because the annuity would be completely paid out at that point), and the $90,000 transferred to the trust would be protected and exempt from Medicaid with the funds safely available for applicant’s sole benefit.


Medicaid applicants should also be aware of what is known as a “spenddown.” A spenddown occurs when a Medicaid application is filed for an applicant that has assets over the qualification amounts of $109,560 for a married couple and $2,000 for an individual. Some nursing homes will oftentimes file applications for Medicaid applicants when there are excess countable assets over these allowable limits, which then results in forcing those funds to be paid to the nursing home, rather than utilizing them for any of the above noted planning to benefit a Medicaid applicant.

For example, if at the time of an application, an applicant has $60,000 in countable assets (those assets over $2,000), a spenddown will be imposed. This means that before Medicaid will start paying for the applicant’s nursing home care, the applicant will be required to spenddown $60,000. Once the application is approved with a spenddown imposed, the funds can then only be utilized to pay the nursing home or for qualifying medical expenses and nothing else.

Proof of how the funds are utilized must be provided to the Department to demonstrate that the funds have been spent down. Any use of the funds that are not for payment of the nursing home and/or qualifying Medicaid expenses will not count towards the spenddown. Again, Medicaid will not pay for any nursing home care expenses until the spenddown is fully met. As such, it is imperative to ensure proper planning of any countable assets prior to the filing of a Medicaid application.

Funding a Prepaid Funeral Arrangement

Another consideration for an applicant to make is a prepaid funeral plan. It may come as a surprise to many, but the costs of funerals continue to grow exponentially with each passing year. Rather than leaving one’s family to cope with the grief of losing a loved one and a five-figure funeral bill to pay, it is vital to consider making prepaid arrangements prior to application for Medicaid. A pre-need funeral arrangement qualifies as an exempt asset under the Medicaid Rules if properly established and funded. There is no maximum amount that may be placed into a prepaid funeral arrangement if:

  1. it is irrevocable;
  2. the total cost is the identical equivalent of a guaranteed funeral contract; and
  3. it is funded with an insurance policy purchased through the funeral home. 

The funeral home, acting as an agent of the insurance company, sells the individual the life insurance policy, and the insurance policy is then assigned to a third party who promises payment to the funeral home. Common insurance companies utilized include Forethought and Homesteaders Life. 

It is important to include as many of the potential expenses as possible, including opening and closing of the grave if burial is desired, as this is a significant expense to be paid to the cemetery. This cost may be included in the prepaid funeral arrangement or may be established separately with the cemetery of your choice. The policy must also include language stating that, upon the death of the person, the State will receive all amounts remaining in the trust, including any remaining payable proceeds under the insurance policy up to an amount equal to the total medical assistance paid on behalf of the person. It is therefore advisable to seek legal review of a funeral/cremation arrangements by an expert to ensure the contract meets all Medicaid requirements.

This is even more important to consider because the funds in the supplemental needs trust outlined above cannot be used to pay funeral expenses after the beneficiary (applicant) passes away. Thus, it is always advisable to consider making this purchase prior to funding the trust or immediately thereafter to avoid the exorbitant cost of an unpaid funeral should an applicant pass away having not made these arrangements in advance.


Applying and qualifying for Medicaid benefits to pay for long-term care in a nursing home is oftentimes not as straightforward and simple as one may expect. It is important to understand that there are more intricacies involved than merely financially qualifying for Medicaid benefits. A proper review of the “lookback period” of five years is imperative to ensuring that upon an applicant’s approval for Medicaid benefits, those benefits will be paid without any penalty period.      

Further, it is important to know that there are planning measures that can be taken to ensure that excess funds are protected for the benefit of a Medicaid applicant. Medicaid will pay for nursing home care, but will not cover ancillary expenses. With proper planning, funds can be protected through utilizing an exempt Supplemental Needs Trust and a Medicaid-compliant annuity to ensure a Medicaid applicant’s family members are not left to cover those costs or to front funds to cover any imposed penalty period.

Spending down all funds until one financially qualifies for Medicaid is not the only option. Meeting with a qualified attorney with experience in this area will ensure not only that an application for Medicaid benefits will be approved without any penalty period or spenddown issues, but also that all avenues of possible protection of assets for the benefit of a Medicaid applicant are properly explored and taken.