If your widowed parent is in a nursing home, you might think that it is too late to save assets, or that you can’t get government help to pay for their care before all of their money runs out over time. That is not true. You can save money and avoid a future need for probate and estate administration.
A few years ago, a federal court ruled that a Medicaid-compliant annuity may be acceptable, even if the term of the annuity’s length is a fraction of the life expectancy of the person for whose benefit it is obtained. That ruling allows use of a gift-annuity strategy to enable an immediate application for Medicaid, which in Pennsylvania is administered by the Department of Human Services (DHS) and is referred to as Medical Assistance or MA.
It is important that the applicant’s power of attorney (POA) document includes language which clearly permits unlimited gifting. Such a POA is part of what we refer to as the foundational documents, which also include a last will and testament and a healthcare directive.
Before we prepare the foundational documents, I ask our clients this: “If you get the care you need, and it is clear that there could be money left over, do you want that money to go to a nursing home, the government, or your children?” You may guess what they always answer.
To be eligible to apply for Medical Assistance to pay for nursing care, a person must have a medical need for nursing home care. Secondly, that individual’s gross monthly income must be less than the monthly cost of the care. Since nearly all persons have pension incomes which total less than $10,000 per month, these two conditions are easier to meet to become qualified for Medical Assistance.
It is the third requirement, that a person must be “under-resourced,” which normally is the barrier. Any person who has less than $2,400 in total cash value of all resources is under-resourced. A person who has a gross monthly income of less than $2,349 may have up to $8,000 in cash value of all resources.
A sixty month “look-back period” before submission of the application for Medical Assistance restricts the family from taking or hiding the parent’s resources. Uncompensated transfers of assets are “gifts.” If they total more than $500 in any one of the sixty calendar months, they are penalized. Some families wonder, “how will DHS discover that we took our parent’s money?”
DHS requires up to five years of bank statements to be submitted with the application for MA. DHS analysts request explanation of large checks and large cash withdrawals. Similarly, DHS requests five years of tax returns so that assets which were on tax returns, but not included on the MA application, are discovered.
DHS uses a formula to compute the length of a penalty period when MA will not pay for care in a nursing home. Penalty periods are a family problem since Pennsylvania law allows a nursing home to collect the cost of nursing care from any adult child of a parent who is disqualified from receiving MA because of gifting. The only defense is parental abandonment.
While the uncompensated transfers of assets, or “gifting,” is penalizable, it is not a criminal offense. The gift-annuity strategy calculates how much money may be “gifted,” and still have enough remaining to purchase a Medicaid-compliant annuity to provide funds to pay the nursing home during the penalty period.
We use proprietary computer software and several facts of the individual case to make this calculation. We can usually calculate the penalty period and the annuity needed down to the day and the dollar amount of what DHS will eventually determine.
If you get lost with the arithmetic of this example, do not worry: Dad is a widower whose monthly income is $4,200. His monthly insurance cost is $200, which is a deduction from his income. His monthly cost of nursing care is $10,100. If he had $6,000 more income per month, his income less insurance deduction would still be $100 less than his cost of care. He has $425,000 of total resources remaining, including the value of his now-empty house , to be spent-down before becoming under resourced and “otherwise eligible” for MA, but for the penalty period.
The penalty divisor is the average monthly cost of nursing care in Pennsylvania. Assuming that divisor is $11,000, if Dad gave $264,000 to his children, this would result in a penalty of 24 months being assessed by DHS, which would determine a specific future date when Dad would be eligible. Dad’s income could be increased with a $144,000 annuity that would pay $6,000 per month during the 24 months of the penalty period to offset not quite all the monthly cost of care.
The $425,000 in this example would be spent down with a gift of $264,000, an annuity of $144,000, and other costs of $17,000, which might include a burial account. Even if some of the gifted funds would be spent to make up for the intentional monthly deficit between Dad’s total income and the cost of care, after 24 months, when Medical Assistance would start to pay, there should still be well over $200,000 of gifted funds remaining.
Gifted funds could be used during Dad’s lifetime for whatever he might want. Upon his death, funds could be divided among children as an inheritance. If Dad would die before the twenty-four annuity payments were received, the children would receive the remaining payments.
There would be no need for estate administration since Dad would have no assets at the time of his death. If Dad would live for one year after implementation of the gift-annuity strategy, there would be no inheritance tax. This strategy can work for amounts of less than $100,000, and to fix problems caused by gifts already made.
If you have a widowed parent in a nursing home, do not try to do this yourself. Get help from a knowledgeable and experienced elder law attorney. Additional information about Medical Assistance is available here: https://keystoneelderlaw.com/faq-about-medicaid-for-long-term-care/
Dave Nesbit, Attorney