Jessica Arends | Attorney

Moving a love one into a skilled nursing facility is not an easy decision.  This tough decision is made worse with the concerns of how quickly the monthly cost of nursing home care will deplete a person’s financial resources. Skilled nursing care can cost at least $7,500 per month.   Most people are not equipped to handle such a large monthly expense or at least not for very long.

With these concerns in mind families are guided towards the government program – Medicaid – that will help cover the cost of nursing home care. Once a single person has certain assets valued at less than $2,000 they can apply for this benefit. On a monthly basis a person will pay a patient pay amount directly to the skilled nursing facility. The Medicaid program will pick up the remaining cost.  The monthly patient pay amount is generally calculated by looking at a person’s gross income, deducting a $60 needs allowance, and then deducting any health insurance premiums that the person pays.  So a single person that has depleted nearly all of their assets can rely on this program to cover their monthly bill with paying nearly all of their monthly income to the facility each month.  But there are some options that most don’t know about.

Imagine a scenario where a widow is left with $80,000 in the bank and is facing an $8,000 bill each month at a nursing home.  In just 10 months – the remainder of her life savings will be gone. She will have no financial legacy to pass on to her children.  The money that she and her husband saved over several years will have vanished in less than one year’s time.

The widow’s family is advised by the skilled nursing facility that once her $80,000 in cash has been depleted to $2,000 that she can apply for Medicaid benefits.  It is a relief that there is a solution but at the same time the family knows how important it was to the widow and her deceased husband to pass along some money to their children.  With this in mind, the family seeks out advice about what options they may have.

They seek the advice of an elder law attorney who explains that there is a way to honor the wishes of the widow.  The attorney talks about some concepts they have already heard of but in much greater detail. The attorney explains that a person looking to apply for Medicaid benefits to pay for skilled care will be penalized if they have make gifts within five years of filing for Medicaid.  In 2017, for every $8,018 gifted a patient would have to pay one month of care out-of-pocket before Medicaid benefits would begin.  But they learn that this penalty provision provides a planning opportunity.

The attorney explains that the first step is to find out whether the widow’s financial power of attorney (also referred to as a general durable power of attorney) authorizes the agent she has appointed to act on her behalf to make gifts of her assets.  After finding out that it does, the attorney explains that a half-loaf planning technique can be used to reach the widow’s goals and still attain Medicaid eligibility.

The planning involves making a gift and paying a penalty based on the amount of the gift.  For example, half-loaf planning would allow the widow in this scenario to gift one-half of her assets – $40,000.  The remaining $20,000 would be used to pay a penalty for making a gift within five years of applying for Medicaid benefits.  The attorney advises that the best way to make the gift is to create an irrevocable gift trust established by the power of attorney for the widow. An account will be opened for this gift trust and the agent under the power of attorney will transfer $40,000 from the widow’s account to the gift trust account.  The trust will specify that the widow’s children are beneficiaries and name a child as trustee to control the funds which will be distributed equally to the children at the death of the widow.

Because the widow has made a $40,000 gift she will have to pay a penalty.  The penalty is calculated by dividing the gift amount into $8,018 (2017 figure).  This will result in approximately five months of ineligibility meaning she will have to pay out-of-pocket for care during this time. However, she cannot apply for benefits until her total assets are $2,000 or less.

In order to get her assets down to $2,000, the approximate $40,000 remaining in the widow’s account will be loaned to a trustworthy person or invested in a Medicaid compliant annuity. The widow will then file for Medicaid benefits.  The trustworthy child or the annuity company will issue a monthly payment to the widow which together with her income will almost be enough money to pay the monthly cost of care at the nursing home.  Once the widow pays out of pocket for the length of the penalty period, Medicaid benefits will begin.

The end result is that the widow has set aside $40,000 to be divided among her children at her death rather than the children receiving nothing.

The half-loaf process has been stated in simple terms for the purpose of this article. However, this summary generalizes a technique that many people don’t know about.  An elder law attorney who is familiar with Medicaid benefits can help you learn more about this technique.

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