“Half a Loaf” Planning for Medicaid and Nursing Home Costs

By Lesley Mehalick, J.D., LL.M., and Dennis McAndrews, Esq.

 

The term “half a loaf” is admittedly an odd phrase for a legally acceptable approach to qualifying for Medicaid (known in Pennsylvania as “Medical Assistance”) to pay nursing home costs.  Over the years, the approach has taken various forms, and has changed in response to efforts by state agencies to curtail its use, but the courts in Pennsylvania have expressly approved the valuable and beneficial approach described below.  This is an important tool in Medicaid planning because it allows the opportunity for outright gifting, which is limited when one is looking to have Medicaid pay for nursing home costs.

 

First of all, it is noteworthy that this “half a loaf” approach is used in a variety of Medicaid circumstances, but quite often is particularly valuable where the individual entering (or already in) a nursing home is unmarried.  It involves the purchase of a short-term annuity and the gifting of other assets.  Perhaps the best description of the approach is that which was expressly approved by the Third Circuit Court of Appeals in the case of Zahner v. Pennsylvania Department of Human Services in 2015.

 

In Zahner, the Medicaid applicant was in a nursing home, and gifted to his desired recipient (a child or close friend) an amount equal to one-half of the resources which were available to the applicant, and which would disqualify that applicant for Medicaid.  The applicant then applied for Medicaid knowing that the gifted amounts would create a period of ineligibility under Medicaid’s five-year lookback time frame of ineligibility for gifting.  Next, the applicant covered the period of ineligibility by purchasing, with the remaining half of the available assets, a short term, actuarially sound annuity (known in the field as “Deficit Reduction Act or DRA compliant“) which, when added to the applicant’s income sources (such as Social Security, pension, etc.) resulted in a sufficient stream of income to “pay off“ the period of ineligibility that was incurred as a result of the one-half gift.  Once the ineligibility period was “paid off,” the applicant became fully eligible for Medical Assistance to pay for the nursing home costs.  The one-half of resources that were gifted away remained fully and freely in the hands of the loved one or friend without any obligation to the government for those monies.

 

There are various requirements and calculations needed to insure that the annuity will qualify under the DRA and that it will be an amount that will cover the period of ineligibility.  We work with a trusted and highly competent annuity company in utilizing annuities in appropriate situations to allow for the transfer of significant funds to loved ones or friends, while obtaining DRA compliant annuities to pay for nursing home costs with the remaining assets.  Our highly capable Estates and Trusts Department team looks forward to working with your family to address these critical matters.