As you may have noticed, within the new site there is an Ask Dale section. This section is provided to allow elder law attorneys and individuals a place to obtain answers on the various questions related to Medicaid Compliant Annuities, crisis Medicaid planning, or other related topics.
Within the questions I received throughout this prior week from the Ask Dale section, the most popular was inquiries on the Gifting/Short-Term Medicaid Compliant Annuity planning technique, more commonly referred to as the Half-a-Loaf.
With over 45 states having passed the legislation associated to the Deficit Reduction Act of 2005 (“DRA”), and with Krause Financial Services having significant experience within many post-DRA states, it is clear that Half-a-Loaf planning is still a viable planning strategy for an individual nursing home resident who wants to qualify for Medicaid benefits.
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.
Under prior law, 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 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 pre-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 cost.
To illustrate a Half-a-Loaf plan, the following example is provided:
Ethel, a widow, is 85 years of age, and is a permanent resident of a Lansing, Michigan, nursing home. With countable resources of $145,000, she has a spend-down amount of $143,000. This amount was determined by subtracting Ethel’s individual resource allowance of $2,000 from her countable resources. Additionally, with the nursing home charging $6,000 per month for her care, and with her monthly income being only $1,200 from social security and pension, she has a monthly income shortfall of $4,800. However, Ethel would like to qualify for Michigan Medicaid benefits as soon as possible.
Step 1: Financial Calculations.
With Ethel’s monthly income shortfall of $4,800 being added to the Michigan Divestment Penalty Divisor of $6,362, the monthly burn rate is $11,162. With the monthly burn rate then being divided into the spend-down amount of $143,000 the resulting figure is 12.81 months. This is the term of the Half-a-Loaf plan.
Step 2: Determine the Gift Amount.
The immediate gift amount is $81,497.22. The gift amount was determined by multiplying the term of the plan by the Michigan Divestment Penalty Divisor of $6,362. This amount will then be immediately gifted directly to Ethel’s intended beneficiaries.
Step 3: Determine the Medicaid Compliant Annuity Investment Amount.
The Medicaid Compliant Annuity investment amount is $61,502.78. This amount was determined by reducing the spend-down amount of $143,000 by the gift amount of $81,497.22. Utilizing a Medicaid Compliant Annuity, which is structured with 13 monthly consecutive payments, Ethel will receive a monthly payment of $4,758.50 per month. The total pay-out of the Medicaid Compliant Annuity will equal $61,860.50. With Ethel’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 Michigan – Department of Human Services as the primary beneficiary to the extent of benefits provided, Ethel’s Medicaid Compliant Annuity is deemed actuarially sound and meets all of the requirements of DRA. Following the transfer of the gift and purchase of the Medicaid Compliant Annuity Ethel 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 Ethel implementing the aforementioned Half-a-Loaf plan, she would be ineligible for Medicaid benefits until the end of the 12.81 month divestment penalty period. Additionally, during the divestment penalty period, Ethel would have total monthly income of $5,958.50, of which amount is available to pay the nursing home. With the nursing home charging Ethel $6,000 per month, less the total monthly income of $5,958.50, Ethel’s monthly income shortfall equals $41.50. Over the course of the 12.81 month divestment penalty period, Ethel’s total monthly income shortfall will reach $531.62.
Step 5: Elimination of the Monthly Income Shortfall.
With Ethel having retained an individual resource allowance of $2,000, she would be in a position to cover the total monthly income shortfall of $531.62.
Interesting Points:
- Had Ethel not opted to proceed with the Half-a-Loaf plan, and continued privately paying for her nursing home care, she would have exhausted all of her spend-down amount in approximately 29 months.
- By opting to proceed with the Half-a-Loaf plan, Ethel’s intended beneficiaries will receive a wealth transfer of $81,497.22. This amount is more than 50% of the $143,000 spend-down amount.
- Krause Financial Services completed the planning for Ethel free-of-charge, and a processing fee of $1,000.00 was charged for the short-term Medicaid Compliant Annuity in that the benefit period was less than 36 months in length.
- Finally, in the event that Ethel was to predecease the 12.81 month divestment penalty period, the State of Michigan – Department of Human Services would not be entitled to any of the residual benefits remaining in the 13 month Medicaid Compliant Annuity in that the Department did not provide any medical assistance benefits to Ethel. As such, Ethel’s intended beneficiaries would be entitled to receive any residual benefits remaining in the Medicaid Compliant Annuity.
As always, I welcome any comments or questions that you may have. If you’d like to speak further regarding Half-a-Loaf planning, please feel free to contact one of the Krause Financial Services representatives with any further inquiries you may have.
