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REVERSE HALF-A-LOAF MEDICAID TRANSFER PLANNING STRATEGIES

Although many are familiar with existing IRS rules which permit a donor to give away $15,000 per year, per person (donee) without reporting the gift to the IRS (if you give more than $15,000 per year, then there is a duty of the donor to file a gift tax return – although there may not be a gift tax if the total excess given is less than $11.7 million in the donor’s lifetime), many are unaware that such gifts could create a transfer penalty for long-term care Medicaid eligibility if the uncompensated transfer was made within a five-year “look-back” period (five years prior to a long-term care Medicaid application).

Many (if not most) Americans have insufficient assets or income or long-term care insurance to pay for the cost of nursing home care – especially if care is needed for any lengthy period of time. The average nursing home care cost in Texas is over $7,100 per month. Generally, it is usually the elderly who need long-term (nursing home) care, and their income is often far less than $7,100 per month. If one is eligible for long-term care Medicaid, then the government will subsidize the cost of care (over the applicant’s income minus a few allowable deductions) plus medications. However, the applicant’s countable resources (some resources such as a home, car, pre-need funeral, etc. do not count) must be below $2,000 per month if the applicant is single (if married a much greater amount is allowed). Medicaid presumes any uncompensated transfers within five years of the application were purposefully made so that the government would subsidize the cost of care.

However, just because the applicant makes an uncompensated transfer within the five-year look-back period, it does not mean there are five years of ineligibility (see the October article on “New Medicaid Transfer Penalty Divisor Announced”, by clicking here). The transfer penalty is calculated by dividing the amount transferred by the average cost of care from the month when the applicant is otherwise eligible (i.e., countable resources are below $2,000 as of the first day of the month, income is below the income cap or a qualified income is established with the income being deposited into the trust, etc.). Thus, if the divisor was $7,100 per month and $71,000 was given, then there would be 10 months of ineligibility from the first day of the month that the applicant applies and is otherwise eligible.

Although Texas permits partial cures (if the donee returns gifted funds or pays the bills of the Medicaid applicant) to effectively reduce the transfer penalty by one-half (which is why this strategy is called the “reverse half-a-loaf), the most generally accepted transfer strategy in Texas permitted within applicable laws and rules is the use of a Medicaid compliant annuity in addition to the making of a gift. So, usually, the applicant gives away one-half of his or her countable resources and uses the other one-half to purchase a Medicaid compliant annuity that pays the difference between the applicant’s income and the cost of care. Usually, more than 50% of the countable resources are saved from spend-down to $2,000 by the use of this strategy. This type of non-countable resource (the Medicaid-compliant annuity) is merely an income stream. As a result of the annuity purchase, often a qualified income trust would be needed since the income of the applicant would exceed the income cap (presently $2,382 per month) for long-term care Medicaid eligibility. The annuity would be calculated for its cessation to coincide with the transfer penalty end date based on a mathematical calculation.

It should be mentioned that each Medicaid program (there are 109 Medicaid programs in Texas) has its own rules. This planning strategy is only applicable to the long-term (nursing home) care Medicaid program.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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