Last week, we discussed your financial options when you are married and one of you is in a nursing home. Medicaid rules are very different when you are both in a nursing home or you are single and in a nursing home.
You have probably heard that you have to spend down all of your assets on nursing home care to $2,000 before you can apply for Medicaid to pay for your nursing home expenses. Often what you are not told is the Medicaid rules allow those assets to be spent down in a variety of ways for you and your family other than on nursing home care.
If you are in this situation, we firstly look at the exempt assets that you can keep. Subject to certain limits, these include your home, prepaid funeral expenses, burial plot, one automobile and life insurance with a cash value of $1,500 or less.
Next, we look at your countable assets which are those assets that are not exempt. It is true that if you are in a nursing home, you can only have up to $2,000 in countable assets when you apply for Medicaid to pay for your nursing home care. If you have more than $2,000 in countable assets, you have many options under the Medicaid rules.
These rules can best be explained with a story problem example. It is kind of like the story problem you had in school with the two trains leaving from New York and LA at different times and traveling at different speeds and you had to calculate when and where they would meet.
Let’s say that you are widowed and can no longer care for yourself at home and have to move to a nursing home at a monthly cost of $7,000 per month. You sell your home and put the proceeds in your money market account, which now totals $145,000. You have no other assets. Your only income is your monthly Social Security of $888.
If you did no planning, you could only keep $2,000 and would have to spend down $143,000 on nursing home care. It would take you about 20½ months to spend down your account. After the 20½ months, you would have to apply for Medicaid to pay for your nursing home care.
Once approved for Medicaid, the amount that you would have to pay the nursing home would be $828, which is your Social Security of $888 less a $60 personal allowance that you are allowed to keep. This is called your monthly patient pay amount. You have now only protected $2,000 of your assets plus $60 of your Social Security each month. This is not a good result.
You do not have to spend down the $143,000 on nursing home costs. The Medicaid rules provide you with many other family friendly options. One of the first things you could do is use up to $11,970 to buy a pre-paid funeral, so you spend $8,000. Next, you do not want to forget the kids. Medicaid rules have specific provisions that provide for gifting to your family while still qualifying you for Medicaid to pay for your nursing home care. You then gift $76,310 to your children.
You know that the Medicaid divestment rules apply to this gift. In our example, when you apply for and are approved for Medicaid within five years of the $76,310 gift, it would trigger a divestment penalty period during which Medicaid will not pay for your nursing home care. That divestment penalty period is calculated by dividing the total gifts of $76,310 by the average nursing home cost in Michigan, which is $7,631 in 2013. This works out to ten months.
During that initial ten month penalty period, even though Medicaid is approved, it would not pay for your nursing home care. As you will see, that is not necessarily a bad thing. However, before you can apply for Medicaid and start the penalty period running, you have to spend down the $58,690 you have left.
With that remainder of $58,690, you now buy yourself a ten month pension which pays out $5,869 per month. This pension must be in the form of a Medicaid compliant annuity or promissory note, either of which must meet all of the Medicaid requirements. The purchasing of this pension in the form of the annuity or note is not a divestment. It does not create any penalty period. You are exchanging a countable asset for an income stream.
You now have just about enough to pay for your $7,000 a month nursing home costs during the ten month penalty period. Your $888 in Social Security along with your $5,869 monthly pension totals $6,757. You are only $243 short per month for payment of your $7,000 private pay nursing home cost. Usually your family will pitch in the $243 per month.
In month ten, both the divestment penalty period and your pension end. Starting in month eleven, Medicaid pays for your nursing home care. Your monthly patient pay amount to the nursing home is $828. As before, it is equal to your monthly Social Security income of $888, less your personal allowance of $60.
These family friendly Medicaid rules allow you to provide for your loved ones while Medicaid provides for your care. So let’s figure out how much you have provided for you and your family.
You keep countable assets of $2,000. You have a pre-paid funeral of $8,000. You have made gifts to your family of $76,310. Your family has paid $2,430 ($243/month x 10 months) for your nursing home costs. The total amount the Medicaid rules allow you to save for you and your family is $83,880. This is called “half-a-loaf” planning because you are saving about half of the countable assets for you and your family.
Even if you have already been in the nursing home for years on private pay, you can still do this half-a-loaf planning for your remaining assets. You can also do this half-a-loaf planning for you and your spouse when both of you are in a nursing home. You just split the divestment penalty period between the each of you.
However, if you are in a nursing home, you may not be able to handle your own finances. In order to get these protections provided for by the Medicaid rules, you would need a properly drafted financial power of attorney. Your financial power of attorney must have a broad power of gifting that is not limited in any manner and specifically allows gifts to your power of attorney holder.
Now that you have heard about these options, do not try to do some Medicaid planning on your own. We have only discussed the simplified version of these asset protection options for presentation purposes only. Actual Medicaid rules are much more complex. With improper planning, you could unknowingly create divestments. This results in penalty periods without Medicaid qualification and substantial bills to the family for your nursing home care. Seek out competent legal specialists who have knowledge and experience in elder law and Medicaid applications.
By: Matthew M. Wallace CPA, JD
Published edited October 27, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Half a loaf is better than no bread at all