Bonnie Kraham: Medicaid gift and loan strategy can protect half of assets
The gift and loan strategy for single people (including widows and widowers) filing for Medicaid to pay for nursing home costs saves substantial amounts of money for the family instead of paying it out to the nursing home.
It is much better to plan ahead by either buying long-term care insurance or, if there is no long-term care insurance, by creating a Medicaid Asset Protection Trust that protects trust assets from nursing home costs after the assets are in the trust for five years.
Unfortunately, many people do not plan to protect assets from nursing home costs because the thought of living in a nursing home is unattractive. The reality is that we are living longer and the older we get, the higher the chance of needing a nursing home the last few years of life.
Fortunately, New York allows the gift and loan strategy when a single person who never planned ahead needs a nursing home that can cost between $12,000 and $20,000 per month.
A typical example is an adult child who comes into the office saying mom needs a nursing home now. Dad passed away years ago. Mom has life savings of $500,000 she always promised would go to the child when she died, never dreaming her money would instead go to her nursing home costs. At this point, the Medicaid law determines what she can keep and what goes to the nursing home.
A single person applying for Medicaid in a nursing home may only keep $15,750 in total assets.
Instead of having to “spend down” her money to pay nursing home bills until only $15,750 or less remains in her bank account, the gift and loan strategy works as follows and should only be done under the guidance of a qualified elder law attorney.
Mom signs an elder law power of attorney that includes unlimited gifting powers. Mom gives the child $250,000 and loans the child $250,000 under a written promissory note that provides payments to mom, with interest, over the life of the loan. The five-year look-back rule means that any gifts made by mom in the past five years cause a penalty period.
Her gift to the child causes a penalty period of 19.5 months, a computation based on Medicaid’s regional rates for nursing home costs. Mom must self-pay the nursing home bill from her own assets during the penalty period. Over the next 19.5 months, the child pays the nursing home bill from Mom’s bank account with the monthly loan payment plus her income. With the last payment, the penalty period expires, and Mom qualifies for Medicaid to pay for her nursing home costs for the rest of her life. The child keeps the $250,000 gift amount.
The figures assume mom was able to keep $15,750 and otherwise complied with the various other Medicaid requirements. The $500,000 represents her next egg available for nursing home costs. The gift and loan strategy, sometimes referred to as “half a loaf" planning, saved half for her child even at the eleventh hour of Mom needing a nursing home.
Bonnie Kraham is an attorney practicing elder law estate planning with Ettinger Law Firm, 75 Crystal Run Road, Middletown. She can be reached at 845-692-8700, ext. 119 or bkraham@trustlaw.com. This column is intended to provide gener