We spoke at a seminar last week. An audience member asked: is divorce a strategy for securing government assistance with long-term care costs? Our short answer: usually not. But the fuller answer is more interesting.
First, some background
Sometimes seniors believe that their Medicare coverage will help pay the costs of long-term care. Their children often assume that government benefits will be available. But Medicare actually provides very little assistance with long-term care costs.
Medicare sometimes covers short-term rehabilitative care in a hospital or nursing home setting. But that subsidized care is time-limited — and also cost-limited.
Other programs like Veterans’ benefits, Indian Health Services and even private insurance sometimes are in play. But few long-term care patients will qualify for those benefits.
By far the most significant long-term care benefit for most patients is the federal-state Medicaid program. In Arizona, that means the Arizona Long Term Care System, or ALTCS.
How ALTCS works for married couples
When one spouse requires long-term care in a nursing home or other setting, that spouse might qualify for ALTCS assistance. But ALTCS counts the assets of both the patient and his or her spouse in making the decision. That raises the obvious question: if I’m about to put my spouse into a nursing home setting, is divorce a strategy to make them eligible for benefits, saving assets for my own future needs?
It might seem that simply moving assets into the name of the community spouse (that’s what ALTCS calls the spouse who’s not seeking a subsidy) should help. If you and your spouse agree to make all the community assets into your separate assets, that should make them unavailable for ALTCS purposes, right.
Wrong. ALTCS doesn’t care about your agreement, or the titles on assets. Any asset available to either spouse is treated as fully available to the institutionalized spouse. It doesn’t matter whether you entered into your agreement a week ago, five years ago or even before you ever married.
That’s why soemetimes divorce looks like a strategy. Wouldn’t it make sense to transfer all (or most) assets to the community spouse, and then get divorced?
There are several problems with this approach — in addition to the emotionally charged idea of divorce itself. Let’s consider the problems that usually mean divorce is not a strategy.
Equitable division of assets
In Arizona (as in most states), property belonging to a couple ordinarily must be divided “equitably” on divorce. That doesn’t necessarily mean equally, but transferring all of the assets to one spouse will never satisfy the requirement. So the community spouse is more likely to end up with about half of the community’s assets than a disproportionate share.
But can’t the couple enter into an agreement to divide assets? Yes, generally speaking, they can. But if one spouse is already in the nursing home, it’s unlikely that they will have the capacity to enter into such an arrangement. And the community spouse using a power of attorney to sign that agreement will also be problematic — at best.
What about the money brought into the marriage by the community spouse. Won’t that be returned to them in the divorce? Generally, yes — but the longer the marriage, the less likely that the property has been kept separate. And an attorney will probably be needed to represent the institutionalized spouse; that cost alone makes divorce less of a good strategy in many cases.
Types of assets to be divided
Let’s assume for a moment that we can get past those problems. Could divorce be a better strategy then? Perhaps, but not always.
Let’s assume that our couple has a home (with no mortgage) worth about $500,000. Because they’ve been thrifty over the years, they also have almost a million dollars in various investments. On top of that, they also each have IRAs of a couple hundred thousand dollars.
When divorce is the strategy of choice, that means that the property will need to be divided. Can the house be assigned to the community spouse, since they will continue to live there? Yes — but then an approximately equal amount of savings must be transferred to the institutionalize spouse’s side of the ledger. And the two IRAs will probably be left with their respective owners.
That means that our community spouse has a house, their own IRA and investments of about $250,000. They will no longer be the beneficiary of the institutionalized spouse’s IRA or the investments — if any are left at death. Using divorce as a strategy in these facts might actually leave the community spouse in a worse position. And that will generally be more clearly true if the value of the couple’s home is a larger share of their assets.
Alternatives to divorce as a strategy
It might actually be possible to protect more of the couple’s assets for the benefit of the community spouse without filing for divorce at all. First, the couple’s residence is not considered as an available asset in the ALTCS application — or at least the first $688,000 of value in the home (in 2023) is not. Though applicants often worry about the possibility that ALTCS will “take” the home (that’s not what they actually do — they impose a lien on it for care costs they pay), there is a special rule when there is a community spouse. ALTCS will waive its lien and forego collection from the home’s value.
Next, the community spouse is entitled to retain half of the couple’s other assets — though that benefit is limited to $148,620 in 2023. The institutionalized spouse has a paltry $2,000 cash allowance, but that can mean that up to about $150,000 of liquid assets are protected.
And finally, there are a number of techniques available to the community spouse to effectively increase the amount protected. So, in our hypothetical above, the couple can easily protect their home plus $150,000, leaving $850,000 and their IRAs vulnerable. Depending on their ages, the IRAs might be relatively easy to deal with. And more advanced techniques can help protect much — maybe most — of the remaining investments.
So is divorce ever a strategy?
Yes, divorce can be a legitimate strategy — but not very often. But imagine that the community spouse happens to have been the wealthier one, and brought significant wealth into the community. If the institutionalize spouse’s separate property, and their share of community assets, are both small, then divorce might be a strategy. But only if the couple had the foresight to enter into a prenuptial agreement (before they married), or took steps to maintain separate property after the marriage.
One other circumstance sometimes makes divorce a reasonable strategy. If the couple has significant assets and the care is projected to be very long-term, it can sometimes seem more comfortable to the community spouse to remove the anxiety about future costs. Of course, a very wealth couple might well be able to pay the long-term care costs without consuming principal, and so the divorce strategy in such a case may be more about peace of mind for the community spouse, rather than a purely financial calculation.
But please don’t try this at home
These rules are very complicated. They are also non-intuitive. Don’t try to make a life-altering decision like implementing a divorce strategy without extensive discussions with someone who knows how these rules work. And while it might seem like there is no alternative, there almost always is.
And please remember: we are Arizona attorneys. We know about ALTCS rules. We don’t know how the comparable rules work in other states. Sometimes we know a thing or two about other states’ rules, but we aren’t licensed to practice there, and we certainly don’t know any other state’s rules well enough to give you any advice. And similarly, lawyers in other states don’t know about Arizona’s rules and nuances — so do be careful about what you read and what well-meaning friends tell you (or send you) about how you might address your concerns if only you lived in New York, or Florida, or … well, you get our point. We hope.
Our bottom line for those seminar participants: yes, divorce is a strategy for consideration. But usually not a winning strategy.