Medicaid Crisis Planning: A Case Study

Three p's of estate planningMany people falsely believe that if they or their loved one has to enter a nursing home unexpectedly (after an acute event such as a stroke, an accident, a heart attack, etc.), that they have no choice but to spend down all of their assets (typically on nursing home care) before they can qualify for Medicaid.

This couldn’t be further from the truth.

When something like this happens, an elder law attorney can assist with what is called “Medicaid Crisis Planning“. The goal of Medicaid crisis planning is simple, to protect as many assets as possible while at the same time getting the applicant approved for Medicaid benefits as soon as possible. At an average cost of $6,000 to $10,000 per month or more for skilled nursing care in North Carolina, you can see why this is important!

Here is a quick case study to show you what I mean about how we could protect assets while still getting someone approved for Medicaid quickly.

Medicaid Crisis Planning: Ken’s Story

Ken is an 85-year-old widower who recently suffered a stroke and is now in a nursing home. His daughter, Jenny, wants to know what can be done to protect her Dad’s assets. She has two brothers, Adam and Mike, who each live several hours away. Nursing home care for Ken is $8,000 per month.

Ken owns the following assets:

Home in his sole name, no mortgage ($300,000)
Checking Account ($20,000)
Savings Account ($100,000)
IRA ($200,000)

Ken’s Income includes:

Social Security ($2,500/month)
IRA Distributions ($2,000/quarter)

This scenario is not that uncommon. Ken is not extremely wealthy, but the money he does have, he wants to protect for either his own care (believe it or not, there are many expenses that Medicare and/or Medicaid will NOT pay for), or to leave as a legacy for his children.

Does Ken Currently Qualify for Medicaid?

No. To qualify for Medicaid in North Carolina, (assuming you qualify medically, which Ken does), you must meet certain income and asset thresholds.

Ken’s income must be less than the monthly cost of care at the nursing facility. In this case, Ken’s income is $2,500 per month and the monthly cost of care is $8,000. (We don’t count the IRA distribution as those assets will no longer be available to Ken after planning is completed).  So Ken will qualify under the income rules.

But with regard to assets, the applicant cannot have more than $2,000 in countable assets at the time that they apply for Medicaid. How does this look for Ken?

What are Ken’s “countable” assets for Medicaid purposes?

In North Carolina, the home of the applicant is non-countable, up to $560,000 in equity (as of 2017). If you are married, then there is no limit on the amount of equity you can have in the home.

But there is one BIG caveat here…

The applicant MUST have the intent to return home. And who doesn’t want to return home?

Even if it is clear to everyone in the world that there is no way the applicant is ever returning home, their intent is what matters.

Because Ken clearly would want to return home, the home is an exempt (or non-countable) asset.

Now as for the other assets…

The Checking, Savings, and IRA are all counted against Ken for purposes of Medicaid. So Ken has to “spend down” those assets before he can qualify for benefits.

Before you go thinking that Ken will need to spend all of this money on his nursing home care, (a common myth perpetrated by the nursing homes themselves), here are some strategies that could be used to properly spend down Ken’s assets and get him qualified for Medicaid sooner.

Allowable Spend Downs for Ken

We never mentioned that Ken owned a car. Perhaps he needs one for when his children come to visit him and want to take him out to eat. The applicant is permitted one vehicle, of any value.

In North Carolina, the applicant may purchase an Irrevocable Funeral Contract to pre-pay for their funeral/burial. Alternatively, they may put up to $1,500 into a bank account designated for this purpose. We typically recommend the irrevocable funeral contract because more money can be sheltered that way.

If Ken’s home needs any renovations, this would be a good time to do it, as home renovations are a permissible expense.

If Jenny decides to hire a lawyer to assist with this Medicaid crisis planning (smart girl that Jenny…) then those fees are permitted.

If Ken wanted, he could purchase a second home or rental property as a tenant in common with his kids. However, if this was a rental property, the income would count against him for Medicaid. This is not a common strategy when people are trying to get qualified quickly.

What can be done with the Remaining Assets?

Let’s presume that Ken is able to spend down approximately $20,000 in assets, leaving approximately $300,000 that needs to be spent down.

In this situation, Ken could gift away a portion of those assets. However, when gifting assets, a “penalty” will be triggered by Medicaid. The penalty is the amount of the gift divided by $6,300 to come up with the number of months that Ken would be disqualified from Medicaid Benefits.

The assets that are not gifted would be placed into a Medicaid Qualified Annuity, which is a special annuity that is not considered a countable asset. The reason we do this is that the income from the annuity would provide sufficient cash flow to cover the shortfall between Ken’s monthly cost of care and his current income – which is this case is approximately $5,500 per month.

So how much should be gifted and how much would be placed into an annuity? We have a complex software that runs these numbers for us and can figure this out to the penny so you don’t have to.

Also, we would typically recommend that the gift of assets be done to a Medicaid Asset Protection Trust, so that the assets are available for Ken, and preserved for his kids when he dies.

Does anything else need to be done to qualify Ken for benefits?

Ken (or Jenny) needs to make sure that all the appropriate paperwork is submitted with the Medicaid application. A Medicaid Asset Protection Trust would need to be set up to take the money from the gift, and the spend-down plan must be implemented.

How Much Money Could Ken Protect Through Medicaid Crisis Planning?

Assuming that Ken has spent approximately $20,000 in assets on home improvements, a car, a funeral contract, etc., that leaves $300,000 that must be dealt with.

Of that $300,000, we would transfer $164,102 into a Medicaid Asset Protection Trust for Ken’s benefit. The remaining $134,148 would be placed into a non-countable Medicaid Qualified Annuity.

The transfer into the Medicaid Asset Protection Trust would trigger a penalty of 26.05 months during which time Ken would not be eligible for Medicaid. But during that time, the Annuity would provide $5,300 per month of income to pay the shortfall for Ken’s nursing home care. You will note that there is a $200 deficit between the cost of care and Ken’s income. We do this to make sure that Ken doesn’t accidentally have too much income so that he would be disqualified from benefits.

Final Thoughts on Medicaid Crisis Planning in North Carolina

I hope that this case study helps you to understand how Medicaid Crisis Planning works and how it can be used to protect a significant amount of assets in North Carolina. Not all assets, but a significant amount.

As always, if you have any questions, feel free to call us at (919) 460-5422 or register for one of our upcoming workshops where we discuss these and other planning strategies to help you and your loved ones to pay for long-term care at a skilled nursing facility.