by Anita Schnee, Attorney at Law
MARY’S STORY
The challenges that accompany aging also present an opportunity to plan, to make transitions smoothly and to preserve dignity with as many resources as possible. Mary was facing just that transition. She was one of the 46 million Americans over age 65.
Mary’s husband died after a long battle with cancer. Her children were scattered around the country and they were concerned about her living alone. They wanted to make sure that if her health started to fail, she would get the best care possible.
The first thing we elder-law attorneys would do for Mary would be to create truly powerful powers of attorney, for both financial and health-care matters. These would allow a trusted family member to act for Mary if there came a time when she could no longer manage her affairs or speak for herself.
We would also need to help Mary organize her finances to fit possible future circumstances. She owns her home and around $380,000.00 in savings.*
Note
The calculations in this article are based on Mary’s money, only. Residences are treated separately under the Medicaid rules. Find information here. Likewise, if Mary had a long-term care insurance policy, the calculations would be different. Read about long-term care insurance coverage here.
We could create one or two trusts for her. An irrevocable trust would shelter assets under her children’s management, so they could withdraw funds as Mary and the family needed. Another trust, a revocable trust, would make funds freely available for Mary’s home repair, travel, and anything desired.
TIMING IS EVERYTHING
Here are a few scenarios to show why, before moving money around, we urge you to do planning with us as early as is feasible.
Best-case scenario
If Mary consults us while her health is good and it seems likely that she could stay at home for the next five years, we could create an irrevocable trust that would permit her to shelter the great bulk of her $380,000.00 savings. If, after five years of doing this planning, Mary were to need long-term nursing-home care, the Medicaid program would be available to pay for the high cost of that care. Under this scenario, advance planning would protect essentially all of Mary’s cash savings.
If Mary needed nursing-home care within the five-year period
If Mary waits to consult us until the point where she needs long-term nursing-home care, or if she were to need that care sooner than five years out after making gifts or transfers, we could still preserve around half of Mary’s savings. The Medicaid rules allow for various planning strategies, which we would choose for Mary based on the particular circumstances of her case.
The Medicaid rules penalize transfers made within five years (sixty months) back from the date that Medicaid assistance is applied-for. This is known as the five-year “look-back” period. So if Mary had transferred her money or property within that time, and then needed to go into the nursing-home without having planned far enough in advance, the Medicaid rules would impose a substantial penalty.
Here’s a look at how that penalty is determined, what effect it would have on Mary’s finances if she had not done timely planning, and how, through the various strategies that the law permits, we would still be able to mitigate the impact of that “look-back” penalty even within the five-year period.
The penalty is calculated by dividing the amount of assets that were given away or transferred within the five-year period by what’s known as the “penalty divisor.” This number represents approximately the cost of one month’s nursing-home care. The penalty divisor in Arkansas, as of 2019, was $5,749.00.
In this scenario, the time over which Mary could be liable to pay out of pocket for her nursing-home care, before she became eligible for Medicaid, would be around five-and-a-half years (sixty-six months). This result is reached by taking the $380,000.00 that Mary transferred or gave away within five years, and dividing it by the penalty-divisor of $5,749.00. Without planning, then, Mary would be liable for pretty much the whole $380,000.00.
However, with planning strategies, we could still save her and the family approximately half of that amount. Even though Mary needed Medicaid before the five years elapsed, planning strategies could cut the penalty period in half. As a result, Mary would become eligible for Medicaid in half the amount of time, and around $190,000.00 would still be left for Mary to leave to her children or donate to charity as Mary chose.
Worst-case scenario
With no planning in place, the Medicaid rules require that Mary would have to pay for nursing-home care until she owned no more than around $2,000.00. At that point, Mary would essentially be destitute and the Medicaid program would step in to pay for her care. There would be nothing left for Mary’s children or favorite charities.
With our help, Mary could face aging with dignity. She would have resources to pay for the best care possible. She would have the peace of mind that comes with knowing that when the time comes, her finances and health care would be supervised by a trusted person armed with the legal authority that our documents provide. And she would know that she had done all she could to preserve a legacy for the people and the worthy causes that she, not the state, had chosen.
**This article is intended to serve informational purposes only. It is not intended to provide legal advice, nor should it be taken to assure future success in any particular case. Readers should not act, or refrain from acting, based on the information in this article, without first seeking counsel from an elder-law attorney licensed in the reader’s jurisdiction. In Arkansas, please call us at 870.425.2460. For qualified counsel in other jurisdictions, see here.
All calculations are based on Medicaid rules current in 2019. Some calculation factors change yearly. The Medicaid rules as a whole may also change, perhaps substantially, in years to come. Please consult us for current information.
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