Is It Too Late To Plan?

Posted on March 11, 2015

This article concerns nursing home costs. Nearly everyone knows someone whose life savings have been totally exhausted by nursing home expenses. As people live longer and nursing home costs continue to rise, the risks of rapid depletion of the estate become even greater.

Clients have a natural desire to leave as much of their hard earned estate to their children as possible but this goal can be quickly frustrated once a client enters a nursing home.

Many seniors and their families have learned of the "five year lookback" pertaining to Medicaid eligibility. Medicaid is the only government program that will pay for long term skilled nursing care. Most people who enter a nursing home pay privately for some period of time and if they live long enough, eventually go on Medicaid.

The "five year lookback" rule provides generally that assets irrevocably transferred to children (or other beneficiaries) or to a qualifying trust more than five years before the donor applies for Medicaid will not be counted in determining Medicaid eligibility.

Thus, many clients in their 60's and 70's transfer their homes or other assets to children in order to start the five year time clock running. The technique is quite effective for asset protection.

But what if you don't have five years to plan? What if you are already in a nursing home, watching your resources drain away at a rate of $12,000 or $13,000 per month? Is it too late to plan?

Maybe not! We have been using a "Promissory Note" technique that has allowed nursing home patients to legally transfer part of the estate to children and achieve Medicaid for ongoing nursing home costs much sooner than would otherwise be the case.

The technique threads through Medicaid regulations and has passed scrutiny in New York. If a nursing home client has $320,000 for example and is paying $13,000 per month on nursing home costs, he can gift approximately half, or $160,000 to his children, and at the same time loan the other half, or $160,000 to a child. The child signs a Promissory Note to the parent, promising to repay the $160,000 loan over 15 months, with interest, at the rate of $10,900 per month. The client receives $2,000 Social Security, so the Note payments and other income total almost the full monthly nursing home cost.

The patient now has no "resources" other than his monthly income. All the assets are in the children's hands. Having no resources, he can apply for Medicaid. On the application, the $160,000 gift is disclosed. This disqualifies the applicant for 15 months commencing with the application. He cannot get Medicaid right away, but the period of ineligibility is 15 months (not five years!). The plan is designed so that the Note payments and other income very nearly cover his nursing home obligation for the 15 months, after which time Medicaid is applied for again. Assuming all the "i's" are dotted and "t's" are crossed, the nursing home patient will then go on Medicaid, and the children retain the $160,000 previously gifted to them.

"Don't try this at home." This is not something a patient and his family can do on their own. A large volume of advance preparation is needed to have all the requisite documentation available when it is needed.

There is an opportunity for saving part of the estate for nursing home patients. The technique works for married and single clients (there are also other planning techniques, particularly for married clients) and anyone paying privately with about $80,000 or more in resources is a candidate for this type of planning.

Pass this article to a friend who might benefit from knowing about this plan. It's not too late!

R. Thompson Gilman