Half a Loaf: Better Than None Indeed

Use these links to jump to different sections:

• Saving Your Savings
• The First Step
• The Second Step

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 the need for care will strike. 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.

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

Saving Your Savings

When it’s time to enter nursing home care, the costs are daunting—in New Jersey, the average is $10,000 per month. Medicaid will cover nursing home care costs, but only when eligibility limits have been met. 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, on your way to becoming Medicaid eligible.

A common strategy, often referred to as “Half a Loaf,” is to set up a Medicaid annuity, which, coupled with a gift of approximately half your countable assets to a family member, can allow you to pass on between 40 and 60 percent of what you have. This strategy can allow your family to retain funds or property that would have otherwise been used up on your care.

Half a Loaf planning is based on a two-step process. Before you take steps, work with an elder law or estate planning attorney to assess how much you have in countable assets for Medicaid purposes. If you’re married and your spouse still lives in your home, they will be able to keep the house and, in addition to a community spouse resource allowance that adjusts annually, a share of the assets that is not counted against the other spouse for Medicaid purposes. In New Jersey, this allowance is half the countable assets, up to a maximum of $120,900.

The First Step

Under Medicaid rules, you may not simply give away your assets in order to qualify for coverage. Any gift made within the previous five years is counted as money that would have been used for your care. So, for example, if you give away $200,000 within five years of applying for Medicaid, and it costs $10,000 per month for your long-term care, you would be deemed ineligible for the period of time that money would have covered your care, or 20 months. Alternatively, if you do nothing, this amount of money will need to be spent down to $2,000 before you qualify, also 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 makes you ineligible for Medicaid for 10 months, you’ll need to cover your own nursing care for that period of ineligibility.

The Second Step

The next step in this process 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.

For more information on this area of law, see our overviews of estate planning, wills, trusts, and probate and estate administration.