Half a Loaf is Better than None

Last week, we discussed caregiving options with modest estates. But what if you have saved more than the national average of $35,000. Is there anything that you can do to protect those assets for you and your loved ones in the event of your nursing home admission?

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 loved ones 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. But what you are not told is that if you have more than $2,000 in countable assets, you have other 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 $8,000 per month. You sell your home and put the proceeds in your money market account, which with your other savings now totals $180,000. You have no other assets. Your only income is your monthly Social Security of $1,145.

If you did no planning, you could only keep $2,000 and would have to spend down $178,000 on nursing home care. It would take you about 26 months to spend down your account. After the 26 months, you would then have to apply for Medicaid to pay for your nursing home care.

Once approved for Medicaid, the amount that you would pay the nursing home would be $1,085, which is your Social Security of $1,145 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 savings plus $60 of your Social Security each month. This is not a good result.

You do not have to spend down the $178,000 on nursing home costs. The Medicaid rules provide you with other family friendly options. One of the first things you could do is use up to $12,130 in 2015 to buy a pre-paid funeral, so you spend $8,000. Next, you do not want to forget your loved ones. 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 decide to gift $97,008 to your loved ones.

You know that the Medicaid divestment rules apply to this gift.When you apply for and are approved for Medicaid within five years of the $97,008 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 $97,008 by the average nursing home cost in Michigan, which is $8,084 in 2015. This works out to twelve months.

During that initial twelve 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 $80,992 you have left.

With that remainder of $80,992, you now buy yourself a twelve month pension which pays out $6750 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.

Now that your assets are down to $2,000, you apply for Medicaid to pay for your nursing home care. It is approved, but because of your $97,008 gift to your loved ones, there is a twelve month penalty period before Medicaid will start paying for your nursing home care.

You now have just about enough to pay for your $8,000 a month nursing home costs during the twelve month penalty period. Your $1,145 in Social Security along with your $6,750 monthly pension totals $7,895. You are only $105 short per month for payment of your $8,000 private pay nursing home cost. Usually your loved ones will pitch in the $105 per month; they can pay it out of the $97,008 gift.

In month twelve, both the divestment penalty period and your pension end. Starting in month thirteen, Medicaid pays for your nursing home care. Your monthly patient pay amount to the nursing home is $1,085. As before, it is equal to your monthly Social Security income of $1,045, less your personal allowance of $60.

These family friendly Medicaid rules allow you to provide for you and your loved ones while Medicaid provides for your care. So let’s figure out how much you have provided for you and your loved ones.

You keep countable assets of $2,000. You have a pre-paid funeral of $8,000. You have made gifts to your family of $97,008. Your loved ones have paid $1,260 ($105/month x 12 months) for your nursing home costs. The total amount the Medicaid rules allow you to save for you and your loved ones total $105,748 out of your original $180,000 savings. This is called “half-a-loaf” planning because you are saving at least half of the countable assets for you and your loved ones.

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 if you are married and both of you are in a nursing home. You just split the divestment penalty period between the each of you. You would not want to do this half-a-loaf planning if you were married and only one of you were in the nursing home. There are some better options for you and your loved ones that we will discuss next week.

However, if you are in a nursing home, you may not be able to handle your own finances. If this is the case, in order to get these protections provided 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 this 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 could result in many months of divestment penalty periods or Medicaid ineligibility and substantial bills to you and your loved ones for your nursing home care. Seek out competent legal specialists who have knowledge and experience in elder law and Medicaid applications and can advise you properly.

By: Matthew M. Wallace, CPA, JD

Published edited April 12, 2015 in The Times Herald  newspaper, Port Huron, Michigan as: Half a loaf is better than none

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