Nursing Home Crisis Planning

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Minimizing the Nursing Home Penalty Period

An effective method to protect cash and assets for someone who needs nursing home care, and who has transferred assets within Medicaid’s five year "look back" period,, is to use a private annuity strategy. It usually preserves approximately 40% to 50% of your resources, if any transfers have been or are going to be made during the "look back" period. This strategy is based on a Federal statute enacted in 2006, so it’s one we use frequently with great confidence that it will provide a beneficial result for our clients.

As an illustration, let's say you'll be entering a New York City nursing home. You have $200,000 you want to protect from being lost to Medicaid requirements to pay for your own care. It's a two-step plan.

We first have to reduce your “countable resources” to an amount below the Medicaid eligibility level of $16,800 (in 2022) right away. The first step of the plan involves transferring about half of your assets to a trust or a third party (for example, a child, sibling, or close friend). This gift will trigger a Medicaid “penalty period,” but it will ultimately be the portion of your money that is saved. The penalty period is the amount of time during which Medicaid will not pay for your nursing home care (click here to see how the penalty period is calculated).

Download our Nursing Home Medicaid Handout

The second step of the plan is to use the portion of your assets that is not transferred, to buy a private annuity. A private annuity is a contract that requires specific payments at stated intervals. The private annuity contract will usually be made with a family member or friend, who could be the same person to whom you made the above gift. To illustrate, you might pay $100,000 to your daughter, and she would sign a contract to pay you $10,000 per month for ten months. The private annuity in the example above can be structured specifically so that the monthly installments, together with any other income you have (Social Security, pension, etc.), will cover your nursing home costs during the penalty period that you incurred from making the gift of the other portion of your assets. If the private annuity is properly drafted to comply with the law, your purchase of the private annuity will not incur a Medicaid penalty. It is considered a “purchase,” not a “transfer,” because you have actually paid for something of equivalent value – a stream of future income.

The end result of this strategy: instead of using almost the entire $200,000 to pay for nursing home care, which Medicaid would otherwise require before paying any benefits, approximately $100,000 that was not used to buy the private annuity has been protected. You've transferred those assets to a trusted source, who can use the money on your behalf while you're in the nursing home. Whatever is left after you pass on can go to your loved ones.

"Immediate annuities," which are the kind used for this planning method, have a long, well-established history of being a contract for a stream of income, with no ability to demand return of principal. That's a critical element for the annuity to be considered Medicaid compliant, and for the entire strategy to be acceptable within Medicaid guidelines.

Some Elder Law firms will use a promissory note, instead of an annuity, for this strategy. Our use of annuities does not imply that promissory notes won’t work. The law currently allows either to be used. However, we believe a properly prepared annuity is a safer vehicle because of its well-established history of being a contract for a stream of income, with no ability to demand return of principal.

In general, safest is best with Elder Law planning. A small advantage can make a difference in a successful outcome for a client, and may later prove to be more significant than first anticipated.

In representing an 85-year-old widow who had numerous investments, assets, and property in Florida, we arranged for everything to be re-titled in the name of her daughter. About half was deemed a “transfer” (a gift). The other half was deemed a “purchase” of a private annuity we prepared, in an amount designed to offset the cost of her nursing home care during the penalty period imposed on her by Medicaid. She went into the nursing home, and during the penalty period (which by careful design coincided with the private annuity period), her daughter wrote checks to her that she used to pay for her nursing home care. The net result was that we were able to save about half of the widow’s financial resources, which her daughter can now use for attending to her mother’s needs. This will help make the mother’s stay at the nursing home as pleasant as possible.

After her mother passes on, the daughter will keep whatever is left. Her mother would not be as well cared-for, and she would never have been in a position to receive an inheritance, had these planning steps not been taken.

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