Half a Loaf Medicaid Planning: Protecting Assets from Nursing Home Costs

Paying for nursing home care when you or a loved one can no longer live at home is a hardship you never fully see coming. It’s usually impossible to know in advance when or how care needs will arise. If you, like many, are faced with an imminent need for nursing home care and you hope to avoid wiping out the family’s assets, there may be some options.

A common strategy, often called “Half a Loaf,” is to set up a Medicaid annuity that, combined with a gift of about half your countable assets to a family member, can let you pass on 40% to 60% of what you have. This strategy can let your family retain funds or property that would otherwise be used for your care.

While it’s best to plan for long-term care well ahead of time, most people don’t. “You’ll occasionally get someone who’s just getting older and is being proactive, but more often than not, it’s crisis planning. Much more the rule than the exception,” says Lawrence Friedman, an elder law attorney at FriedmanLaw in Bridgewater, New Jersey.

“It’s not a topic people want to talk about, and not everybody’s going to need long-term care. Plus, it’s expensive to do the planning. It may save you hundreds of thousands of dollars, but it’s still significant legal fees to put out in advance.”

Qualifying for Medicaid While Retaining Assets

When it’s time to enter nursing home care, the costs are daunting. Medicaid will cover nursing home care costs, but only once you meet eligibility limits. In New Jersey, you can have $2,000, plus some qualifying assets.

Because the program is based on impoverishment, doing no planning means you have to spend everything you have before you’re eligible for Medicaid. However, with some planning, you may be able to save some of your life savings by passing it to your spouse or children as you work toward Medicaid eligibility.

Half a Loaf Medicaid planning follows a two-step process. Before you take steps, work with an elder law or estate planning attorney to assess your countable assets for Medicaid purposes. For example, if you’re married and your spouse still lives in your home, they can keep the house and, in addition to an annual community spouse resource allowance, keep a share of the assets that doesn’t count against the other spouse for Medicaid purposes. In New Jersey, this allowance is half the countable assets, up to a maximum of $162,660.

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Step 1 in Half a Loaf Medicaid Planning: Give Away Assets

Under Medicaid rules, you may not simply give away your assets in order to qualify for coverage. An uncompensated transfer within the 60-month look-back period may trigger a Medicaid penalty period unless an exception applies.

For example, if you give away $200,000 within five years of applying for Medicaid, the penalty period is calculated using New Jersey’s average daily private-pay nursing-facility rate, not the $10,000 monthly cost of your own care. Alternatively, if you do nothing, you’ll need to spend down to $2,000 before you qualify, which also takes 20 months.

In Half a Loaf planning, you would give away approximately half of your remaining assets. Using the preceding example, you could gift a family member $100,000. Because that gift may trigger a Medicaid penalty period calculated using the state’s transfer-penalty divisor, you may need to cover nursing care during that period once you are otherwise eligible for Medicaid.

Step 2 in Half a Loaf Medicaid Planning: Use Remaining Assets To Purchase an Annuity

The next step is to use your remaining assets to purchase a Medicaid-compliant annuity. “A Medicaid-qualified annuity has special provisions that a regular annuity would not have,” explains Friedman. “There are insurance brokers who know what’s required to make an annuity Medicaid-qualified. Make sure you go to the right people.”

The annuity is calculated to pay out the amount needed to cover care for the period of ineligibility triggered by the gift — in the example, 10 months. It’s essential that this be done correctly, or the money will still be counted as an asset, and your penalty period would not begin to run until it’s gone, defeating the plan.

“Annuity planning should work, if done properly,” Friedman says.

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