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With Krause Financial Services able to provide commercial Medicaid Compliant Annuities as short as 2 months, you may be asking yourself "How would my client EVER use such a tool?!"  Such a short-term Medicaid Compliant Annuity is most often used in conjunction with a Gifting Plan, more commonly referred to as the Half-a-Loaf approach.

The goal of a Half-a-Loaf Plan is to allow the nursing home resident to give away approximately one-half of his or her spend-down amount, while retaining the other half to pay for his or her nursing home care.

Prior to the Deficit Reduction Act of 2005 ("DRA"), many individuals would give half of his or her spend-down amount away, the penalty period would commence immediately, and the nursing home resident would simply retain the other half of the spend-down to privately pay throughout the penalty period associated to the gift.

However, DRA has altered the commencement date of a divestment penalty period.  A divestment penalty period now begins the later of the date of the transfer or "the date of which the individual is eligible for medical assistance under the state plan and would otherwise be receiving institutional level care..."  As such, in a post-DRA Half-a-Loaf Plan, the divestment penalty period associated to the gift would not commence due to the other half of the spend-down amount that the nursing home resident retained to pay the nursing home private pay costs.

To illustrate how a 3 month Medicaid Compliant Annuity is properly utilized, the following example is provided:

Helen, a widow, is 82 years of age, and is a permanent resident of a Bloomington, Indiana, nursing home.  With countable resources of $24,500, she has a spend-down amount of $23,000.  This amount was determined by subtracting Helen's individual resource allowance of $1,500 from her countable resources.  Additionally, with the nursing home charging $4,800 per month for her care, and with her monthly income being only $1,500 from social security and pension, she has a monthly income shortfall of $3,300.  However, Helen would like to qualify for Indiana Medicaid benefits as soon as possible.

Step 1: Determine the Term of the Plan.
With Helen's monthly income shortfall of $3,300 being added to the Indiana Divestment Penalty Divisor of $4,611, the monthly burn rate is $7,911.  With the monthly burn rate being divided into the spend-down amount of $23,000 the resulting figure is 2.9 months.  This is the term of the Half-a-Loaf Plan.

Step 2: Determine the Gift Amount.
The immediate gift amount is $13,371.90.  The gift amount was determined by multiplying the term of the plan by the Indiana Divestment Penalty Divisor of $4,611.  This amount will then be immediately gifted directly to Helen's intended beneficiaries.

Step 3: Determine the Medicaid Compliant Annuity Investment Amount.
The Medicaid Compliant Annuity investment amount is $9,628.10.  This amount was determined by reducing the spend-down amount of $23,000 by the gift amount of $13,371.90.  Utilizing a Medicaid Compliant Annuity, which is structured with 3 monthly consecutive payments, Helen will receive a monthly payment of $3,214.69 per month.  The total pay-out of the Medicaid Compliant Annuity will equal $9,644.07.  With Helen's Medicaid Compliant Annuity returning more than she had invested within her Medicaid life expectancy, and with the Medicaid Compliant Annuity naming the State of Indiana - Family and Social Services Administration as the primary beneficiary to the extent of benefits provided, Helen's Medicaid compliant Annuity is deemed actuarially sound and meets all of the requirements of DRA.  Following the transfer of the gift ad purchase of the Medicaid Compliant Annuity, Helen would immediately apply for Medicaid benefits.  The purpose of the Medicaid application is to commence the divestment penalty period associated to the gift.

Step 4: Economic Results.
With Helen implementing the aforementioned Half-a-Loaf Plan, she would be ineligible for Medicaid benefits until the end of the 2.90 month divestment penalty period.  Additionally, during the divestment penalty period, Helen would have total monthly income,e of $4,714.69, of which amount is available to pay the nursing home.  With the nursing home charging Helen $4,800 per month, less the total monthly income of $4,714.69, Helen's monthly income shortfall equals $85.31.  Over the course of the 2.90 month divestment penalty period, Helen's total monthly income shortfall will reach $247.40.

Step 5:  Elimination of the Monthly Income Shortfall.
With Helen having retained an individual resource allowance of $1,500, she would be in a position to cover the total monthly income shortfall of $247.40.

Interesting Points.

• Had Helen not opted to proceed with the Half-a-Loaf Plan, and continued to privately pay for her nursing home care, she would have exhausted all of her spend-down amount in approximately 5 months.
• By opting to proceed with the Half-a-Loaf Plan, Helen's intended beneficiaries received a wealth transfer of $13,371.90.  This amount is more than 50% of the $24,000 spend-down amount.