If your mother is in a pinch and doesn’t have time to do any sort of extensive planning, then the modern Half-a-Loaf strategy might work for her. The idea is to transfer about 50 to 60% of countable assets to someone of your mother’s choice and then use her remaining assets to purchase a Medicaid annuity to pay for medical expenses during the penalty period. [Note: if your mother no longer has the mental capacity to gift property, she might not be able to utilize this strategy.]
Let’s review information from previous chapters:
- Medicaid does not consider a compliant annuity to be a countable resource or a transfer of assets in the state of Texas. This means that the money used to purchase the annuity will not extend the penalty period.
- The length of the penalty period will depend on the amount that your mother transfers. As of 2020, the penalty period will last one day for every $213.71 that is transferred.
- The penalty period will not begin until the Medicaid Effective Date. This is the first day your mother enters the nursing home, assuming she has also submitted her Medicaid application.
- In Texas, the actual end of the penalty period is the final day of the month when the penalty period is calculated to end. For instance, if your mother faces a transfer penalty through March 1st, 2021, she will have to wait until April 1st, 2021 for her Medicaid coverage to begin because she was still facing a penalty at some point in March.
The annuity is meant to pay for your mother’s care while she faces the transfer penalty. A properly designed Modern Half-a-Loaf strategy will have the annuity and the penalty period ends at the same time. The income will stop flowing from the annuity just before your mother becomes eligible for Medicaid.
Example of a Modern Half-a-Loaf Strategy (Advanced)
I’d like to take you through the actual implementation of a Modern Half-a-Loaf Strategy that I used with one of my clients. Before I continue further, I strongly advise against attempting this kind of strategy yourself. A single miscalculation could result in a gap in your mother’s care or a needless extension of her Medicaid ineligibility. With that said, let’s proceed.
Modern Half-a-Loaf Calculation: Set Up
My client’s mother had a monthly income of $2,000, but her monthly expenses were $6,000. This gave her a monthly shortfall of $4,000. Thankfully, she had a large savings of $400,000 that she could use to fund this deficit, but, in my opinion, spending all of her life savings primarily on medical expenses would have been wasteful, especially if there were better options. After all, at the rate of $4,000 per month out-of-pocket, she would be completely out of money in less than nine years, with no assets left over to leave to her family.
She was perfect for a Modern Half-a-Loaf Strategy. By transferring about half of her assets to a family member and purchasing an annuity, she could save a significant amount of money and live off the monthly payouts from the annuity until she qualified for Medicaid.
Modern Half-a-Loaf Calculation: The Process
- First, take the monthly income shortfall and add it to the monthly payments divisor. This requires a calculation because Medicaid has established a daily payments divisor, but not a monthly one. This is easy enough - just multiply the daily payments divisor by the average number of days in a month (counting leap years, this is about 30.44).
Monthly income shortfall = $4,000
Monthly payments divisor = $213.71 * 30.44 = $6,505.33
Total = $4,000 + $6,505.33 = $10,505.33
- Next, take the total amount of assets and divide it by the sum from Step 1. This will give us both the penalty period and the period certain (annuity duration) for the annuity in months. Because the period certain needs to be a whole number, we’ll round down.
Penalty period = Period certain = $400,000 / $10,505.33 = 38.08 = 38 months (rounded down)
- Now we can multiply the penalty period by the monthly payments divisor from Step 1 to find the gift amount. This might seem strange; we usually work the other way and divide the gift amount by the payments divisor to find the penalty period. To check our work, you can divide the gift amount by the monthly payments divisor, which should give you the penalty period from Step 2.
Gift amount = 38 * $6,505.33 = $247,202.54
- Now we’ll find the single premium (total up-front payment) for the annuity. Since all of the assets are going to the gift and the annuity, simply find the difference between the total asset value and the gift amount from step 3 to find the single premium.
Single premium = $400,000 - $247,202.54 = $152,797.46
- Now, to find the monthly payout for the annuity, divide the single premium from Step 4 by the period certain from Step 2.
Monthly payout = $152,797.46 / 38 = $4,020.99
- Let’s see how my client’s mother did. We want to make sure that this leaves her with enough money to pay her bills during the annuity. First, find her total income during the annuity (her outside income plus the monthly annuity payout). Then, take the difference between her expenses and her income to find her monthly shortfall during the annuity. (Note: She only has a shortfall if this number is positive. Otherwise, we have nothing to worry about.)
Monthly shortfall = $6,000 - ($2,000 + $4,020.99) = -$20.99
- Multiply the monthly shortfall from Step 6 by the penalty period (in months) to find her total shortfall over the term of the annuity. Make sure that your mother has enough assets set aside, separate from the gift amount and the annuity, to cover this shortfall.
Total shortfall = -$20.99 * 38 = -$797.62 (a surplus)
- Now, let’s calculate your mother’s savings after the annuity, once she has qualified for Medicaid. First, find her monthly Medicaid co-payment, which is her non-annuity monthly income minus the monthly personal needs allowance ($60). Then, find the difference between her previous out-of-pocket medical expenses and her Medicaid co-payments. This is her monthly savings. Her total savings depends on the total amount of time that she is on Medicaid.
Monthly Medicaid co-payment = $2,000 - $60 = $1,940
Monthly savings from Medicaid = $6,000 - $1,940 = $4,060
Modern Half-a-Loaf Calculation: Summary
In this example, my client’s mother will be able to shield over 60% of her assets from the Medicaid estate recovery program, and she will spend the rest on an annuity that will pay her expenses until she becomes eligible. She will qualify for Medicaid in just over 3 years, and for every year that she is on Medicaid, she will save almost $50,000 compared to paying out of pocket.
