Case Facts: Evelyn recently entered a nursing home charging $6,500 per month for her care. She is 83 years of age, has countable resources of $250,000 and monthly income of $1,000.
OPTION ONE: DO NOTHING
With Evelyn having a monthly income shortfall of $5,500 per month, her countable resources will last only 45 months.
OPTION TWO: IMMEDIATE MEDICAID ELIGIBILITY.
Evelyn resides in state that will allow her to keep $2,000 of resources. As such, in order for Evelyn to be eligible for Medicaid in her state, she would need to spend-down approximately $248,000 of resources. The easiest method to spend-down the $248,000 is to convert the excess resources into a Single Premium Immediate Annuity (“SPIA”) that contains Medicaid qualifying language – i.e. irrevocable, non-assignable, equal payments, actuarially sound, State as beneficiary to the extent benefits are paid.
With Evelyn being 83-years of age, her remaining Medicaid life expectancy is 8.04 years / 96.48 months. As such, in order for Evelyn’s SPIA to be deemed “actuarially sound”, her SPIA may not be structured with a period certain/term longer than 96 months. By placing the $248,000 into a Medicaid SPIA structured over 96 months, the SPIA would pay her approximately $2,640 per month. Immediately following the SPIA purchase, Evelyn files a Medicaid application and is deemed immediately eligible for Medicaid because her excess resources of $248,000 have been converted into an exempt asset.
By adding Evelyn’s SPIA income of $2,640 to her social security income of $1,000, her total monthly income equals $3,640. Evelyn resides in a state with a personal needs allowance of $50 which can be deducted from her monthly income before determining her monthly co-pay to the nursing home ($3,640 - $50 = $3,590). As such, her co-pay to the nursing home has been reduced from $6,500 to $3,590. Resulting in monthly savings of $2,910!
OPTION THREE: MEDICAID ELIGIBILITY AFTER PENALTY PERIOD ASSOCIATED TO GIFTING ASSETS
Because Evelyn anticipates living for a long period of time and would like to leave an inheritance to her children, instead of Evelyn obtaining immediate Medicaid eligibility, she opts to make a gift and purchase a Medicaid SPIA to provide additional income to pay throughout a penalty period. As you may know, all states (except California) have a 60-month look-back period for purposes of gifting/transferring assets. Therefore, any gifts/transfers Evelyn makes during the 60-months immediately preceding a Medicaid application, will cause a penalty/ineligibility period. During the penalty period, Evelyn will be responsible to cover her own nursing home costs. Following the penalty period, Medicaid will pick up the bill.
In this case, Evelyn makes a gift of $120,000. The gift of $120,000 would create a penalty period of 24 months (total gift of $120,000 divided by state Divisor of $5,000).
In order for the penalty period to start, Evelyn must be deemed “otherwise eligible for Medicaid but for making a gift” meaning she must have income less than her cost of care and have no more than $2,000 of assets. Therefore, Evelyn cannot simply retain the remaining $128,000 of resources. In order to create additional income during the 24-month penalty period, Evelyn purchases a 24-month Medicaid SPIA with the resources ($128,000) that were not gifted/transferred. The 24-month Medicaid SPIA structured with a single premium of $128,000 would produce monthly income of $5,375. When adding the Medicaid SPIA income of $5,375 to Evelyn’s social security income of $1,000, she’ll have total monthly income of $6,375 during the 24-month penalty period to pay the nursing home bill — i.e. almost sufficient income to pay the total bill of $6,500.
Immediately following the 24-month penalty period, Evelyn will be eligible for Medicaid and will contribute her monthly income of $1,000 less her personal needs allowance of $50 to her cost of care ($950). As such, Evelyn’s co-pay to the nursing home has been reduced from $6,500 to $950. Resulting in monthly savings of $5,550!
SUPPLEMENTAL OPTIONS: OPTIONS FOR GIFTED MONEY ($120,000)
While discussing the Gifting/SPIA plan with Evelyn and her family, Evelyn’s only daughter (Catherine) whom will be the giftee of the $120,000 asks a valid question of “what should I do with the gifted money?” Whether the funds are gifted outright to Catherine or gifted to an irrevocable trust, it is important that the family realizes that Evelyn will not be eligible for Medicaid until after the 24-month penalty period. With Evelyn having only $2,000 in her name, most attorneys sleep better at night if the gifted funds remain in a secure and predictable account vs. immediately spent by the giftee(s) or invested entirely in the stock market.
The obvious risk of investing all of the money in the market is the potential for downturns/ recessions resulting in less money available to help pay for ancillary expenses for Evelyn during the penalty period. To avoid market risk, in many cases, the gifted funds will sit in a checking or savings account earning almost no interest at all.
SUPPLEMENTAL OPTION 1: PURCHASE DEFERRED ANNUITY WITH ROP
Instead of placing the entire $120,000 in a checking or savings account earning almost no interest or subjecting the funds to market downturns, we typically recommend that a large portion of the gifted funds be placed into a deferred annuity with a guaranteed rate of return and a return of premium clause. The return of premium clause guarantees that the owner will never receive less than the total amount invested into the contract.
At the same time, the policy provides peace of mind with a predictable, guaranteed rate of return which is greater than the return the money would earn if it were sitting in a checking or savings account. These are guarantees (regardless of market fluctuations) that many other investments simply cannot provide.
SUPPLEMENTAL OPTION 2: PURCHASE ASSET-BASED LTC POLICY WITH ROP
Another option for the gifted funds would be to provide LTC protection for the intended beneficiary/giftee. Revisiting Evelyn’s situation, we’ll assume that as a result of Catherine having to place her mother in a nursing home and taking care of her for many years prior, Catherine decides she is going to be proactive and pre-plan for LTC. Therefore, she uses a portion of the gifted funds ($100,000) and invests the money into an asset-based LTC policy for Catherine. The single premium of $100,000 would immediately become worth $175,112 as a death benefit and LTC pool. The monthly LTC benefit for Catherine would equal $7,004 per month to pay for long-term care expenses. The policy will cover expenses related to home healthcare, assisted living, and skilled nursing costs.
Finally, unlike a traditional LTC insurance policy that is a “use it or lose it” type of policy, the asset-based LTC policy we recommend to Catherine has an enhanced death benefit. Therefore, if Catherine is fortunate enough to never need LTC, her intended beneficiaries would receive the death benefit of $175,112