There are generally two types of Medicaid coverage: Medicaid home care (also referred to as community based Medicaid), which provides home health care, some hospital coverage, doctor appointments, medications, etc. And, Medicaid nursing home care (also referred to as institutional Medicaid), which is care in a skilled nursing facility or similar institution.
To qualify for Medicaid, a Medicaid recipient (whether for home care or nursing home care) may only keep a small amount of assets and income. In 2016, a Medicaid recipient living alone may keep no more than $14,850 in non-exempt assets and have no more than $825 per month in income (both of these amounts increase depending on the number of family members who live with the Medicaid recipient), plus an unearned income credit of $20 if the applicant is over 65, blind, or disabled. An individual in a nursing home or similar institution is restricted to a personal needs allowance of $50 per month. Income includes Social Security payments, distributions from IRAs and other retirement accounts, interest, and dividends, etc.
Transfer of Assets
Giving assets away to qualify for Medicaid is not permitted. A Medicaid applicant who does so is “penalized” – denied Medicaid benefits – for a period of time following the transfer; provided, however, that there are certain transfers which are considered “exempt transfers”.
The Look-Back Period
In determining the penalty period, Medicaid will “look back” at the applicant’s assets over a period of five (5) years. The “look back” period examines account statements, deeds, tax returns, etc., and is intended to discover any transfer of assets which would disqualify an applicant from Medicaid. The transfer of assets penalty period begins on the date the applicant makes his or her Medicaid application, is in an institution receiving care, and would otherwise be eligible for Medicaid but for the transfer of assets.
The Planning Process
Because of the threat of a penalty period, the obvious solution would be to merely wait the five (5) years from the date of the transfer to apply to Medicaid. That way, Medicaid will not see the transfer within the look-back period.
But, what if, as happens many times, the applicant needs Medicaid to pay for the nursing home within the five (5) year look-back period? Or, as happens quite often, the applicant needs Medicaid nursing home care immediately? This is where the Good Elder Law Practitioner’s long-term care planning techniques are useful.
One technique that we use to protect assets AND qualify a person for Medicaid nursing home benefits is what we call the promissory note (i.e., loan) / gift plan. It entails a transfer of some of the exposed assets and a loan of the remaining exposed assets, and is explained as follows:
Under Medicaid’s rules, whereas a transfer of funds is a penalty transfer, a loan of those same assets instead is not a transfer but is a conversion of those assets into an income stream. In other words, loaning money, instead of gifting it, will not create a penalty period nor will it create an exposed asset for Medicaid purposes. The loan would merely create an income stream to the Medicaid applicant and income does not disqualify a person for Medicaid benefits.
Scenario One: John has $450,000 in non-exempt assets. John must be admitted to a nursing home. John does nothing with his assets. His family pledges to use his assets to pay for his care. The nursing home costs $400 per day. On average, this amounts to $12,000 per month. $450,000 divided by $12,000 per month is 37.5 months. In 37.5 months, John’s $450,000 will be spent entirely on his nursing home with nothing left to show for it. After the money has all been spent down, then John could make a Medicaid application to pay for his Medicaid. Because John would then have less than the threshold for purposes of Medicaid nursing home care benefits, Medicaid would pay for John’s nursing home.
Scenario Two: John has $450,000 in non-exempt assets. John must be admitted to a nursing home. John gives all $450,000 to his daughter, Darla. While John now has less than the $14,850 threshold for purposes of Medicaid nursing home care benefits, the $450,000 gift created a penalty period of approximately 38 months … or a little more than three years. $450,000 divided by $12,029 per month (which is what Medicaid believes is the average cost of nursing home care in NYC) or 37.41 months.
Scenario Three: Rather than gifting the entire $450,000 to Darla, John gifts only half of it but loans to Darla the other half. Medicaid applies a penalty period on the half that he gifted, but not on the half that is a loan. So John, who transferred $225,000 to his daughter, will incur a roughly 18 month penalty period during which he will not be able to receive Medicaid but will use the monthly loan repayments from his daughter to pay for nursing home care. After the roughly year and half penalty period, John starts getting Medicaid while his daughter legally keeps $225,000.
In Scenario One and Two, John’s family will have preserved nothing from John’s assets. In Scenario Three, John’s family will have preserved at least half of John’s assets, with the savings likely being greater when an actual calculation can be made. The question boils down to whether, in this hypothetical, John’s family wants to do the planning … or not. The bottom line is that Medicaid will likely be needed at some point. Is it better to get Medicaid involved sooner and save a good amount of money? Or, wait until it become necessary and get Medicaid involved when there is nothing left to save.
Nursing home Medicaid planning is not to be entered into lightly. Use only a qualified Elder Law attorney. If you would like to learn more about nursing home Medicaid benefits, or other types of Medicaid planning, or have questions regarding the above, please contact us at (877) 207-6803 or firstname.lastname@example.org.