By Dale M. Krause, JD, LL.M.
Estate planners and financial advisors often find themselves in a difficult position—a senior client has entered a nursing home without having done any planning to preserve their assets in this scenario. Most people think it is too late and that the client must exhaust their assets on the high cost of long-term care. However, there is an alternative option known as crisis Medicaid planning, and it offers estate planning professionals a means of helping clients in one of life’s most vulnerable situations.
Conversations surrounding long-term care have grown in recent years. Due to advances in medical science and increases in longevity, members of the 70-million-strong Baby Boomer generation are facing a challenge their predecessors did not—the inevitability of long-term care. The Centers for Medicare & Medicaid Services (CMS) estimates that as many as 70% of seniors will require long-term care at some point. In short, seniors are requiring long-term care at an unprecedented rate.
Many seniors have a difficult time accepting that they may need long-term care at some point. Understandably, the thought of surrendering one’s independence is something most try to avoid. However, failing to accept the reality of long-term care could have a devastating financial impact on seniors and their families. According to the 2021 Genworth Cost of Care Survey, the average cost of a semi-private room in a nursing home is $7,908 per month. At this price, long-term care stands to be the biggest threat to a senior’s financial wellbeing.
This is why long-term care planning is a crucial issue for estate planners and financial advisors. Advance planning for long-term care should always be discussed with clients looking to secure their assets before and after death. Notable options for this type of planning include the use of long-term care insurance or the use of an irrevocable asset protection trust designed for this purpose. However, it can be difficult for senior clients to understand the likelihood of needing long-term care and the impact it will have on their estate plan. So, it is not uncommon for seniors to decline these services.
Plan B: Crisis Medicaid Planning & the Medicaid Program
Seniors who do not have a proper strategy in place to minimize the financial impact of long-term care are truly at risk of losing everything to the nursing home. When they enter a facility and their family realizes the $8,000-per-month bill is not sustainable, they will need professionals like estate planners and financial advisors to help them. What professionals may not know in this situation is that there is a solution, even when the client is already in a nursing home: crisis Medicaid planning.
Before diving into the intricacies of crisis Medicaid planning, readers must first understand the fundamentals of the Medicaid program. Medicaid is a joint state and federal program meant to provide financial assistance for medical care to those in need. Concerning long-term care, Medicaid will cover a person’s stay in a nursing home (or another Medicaid-approved facility) including room and board, pharmacy, and incidentals. This makes qualifying for Medicaid desirable to individuals who did not plan in advance for a long-term care event.
However, to qualify for Medicaid, an individual must meet specific non-financial and financial requirements. Regarding the non-financial eligibility factors, the applicant must be over 65 years of age, blind, or disabled. The applicant must also be a United States citizen or a qualified alien. The individual must also be a resident of a Medicaid-approved facility, as previously noted.
Medicaid’s financial requirements are much more intricate than the non-financial requirements, and they differ depending on the marital status of the applicant. To add a layer of complexity, the financial requirements also vary from state to state. These financial requirements fall into two major categories: income and assets. Too much of either will prevent a person from qualifying for benefits.
To be eligible for Medicaid, an individual’s income must be less than the private pay rate of the facility in which they reside. This means their monthly income from all sources—including Social Security, pension, etc.—must be less than the nursing home bill. A few states apply a different restriction where the applicant’s income cannot exceed an amount other than the nursing home bill.
In the case of a married couple, the spouse in the nursing home (known as the institutionalized spouse) is subject to the rules for an individual previously noted. The income of the spouse living at home (known as the community spouse) is not considered when determining the eligibility of the institutionalized spouse. As such, the community spouse is not subject to income limitations or restrictions.
Although the community spouse is not subject to income limitations, there is a floor on the amount of income the community spouse should receive. This is known as the Monthly Maintenance Needs Allowance (MMNA)—a provision set forth by the Medicaid program that ensures the community spouse has enough income to support their lifestyle in the community once the institutionalized spouse begins receiving Medicaid benefits. This requirement is often referred to as an “anti-impoverishment provision” intended to protect the community spouse. If the community spouse’s income is less than the MMNA, they will receive a shift in income from the institutionalized spouse. As of July 1, 2022, this Monthly Maintenance Needs Allowance is between $2,288.75 and $3,435.
In addition to being income eligible, the applicant must also be within certain asset limits. Assets are divided into two categories: exempt and countable. Exempt assets are not considered when determining an applicant’s Medicaid eligibility. Some of the most common exempt assets include the primary residence, one vehicle, prepaid funerals, personal effects, and household items. In short, these are items that may be retained by the institutionalized individual and/or the community spouse without jeopardizing benefits.
Exempt assets stand in contrast with countable assets, which include any resource or property not listed as an exempt asset that holds value and could become liquid. Common countable assets include checking or savings accounts, CDs, stocks, bonds, mutual funds, non-homestead real estate, additional vehicles, and virtually any other investment that could be readily converted to cash.
Treatment of IRAs from a Medicaid countability perspective varies by state. In a select few states, IRAs are considered exempt assets for both the community spouse and institutionalized spouse. Some states only exempt IRAs for the community spouse. Still, other states will only treat it as exempt if the owner is taking their Required Minimum Distributions (RMDs). This means that the owner can have an IRA of any value, and it will not prevent them from qualifying for Medicaid benefits. One pitfall, however, is that RMDs count as income to the owner.
Although the Medicaid rules regarding countable and exempt assets render an institutionalized individual effectively impoverished, there is a carve-out that allows the Medicaid applicant to retain assets with a limited value referred to as the Individual Resource Allowance. In most states, the Individual Resource Allowance is $2,000. This means a Medicaid applicant can retain no more than $2,000 in countable assets and be eligible for benefits. If the applicant is single, this is all they may keep. If the applicant is married, the community spouse can retain a separate amount known as the Community Spouse Resource Allowance (CSRA). This allowance varies by state but is generally between $27,480 and $137,400 as of January 1, 2022.
Unsurprisingly, most individuals do not automatically qualify for Medicaid. Countable assets exceeding the applicable limit must be eliminated, or “spent down” for the person to qualify. In many cases, this can be accomplished by paying off a mortgage or other debts, purchasing or improving exempt assets, or other assets preservation strategies. However, most families typically spend this money on the nursing home bill until they have depleted their life savings. The alternative option is to engage in crisis Medicaid planning.
Crisis Medicaid Planning Tools
As discussed, those attempting to qualify for Medicaid as a means of paying for long-term care can do so by “spending down” otherwise countable assets. Eliminating these assets is how one can accelerate eligibility without first exhausting their assets on the nursing home bill alone. These spend-down methods constitute process of crisis Medicaid planning.
Common spend-down methods include paying off any outstanding debts, purchasing or improving exempt assets (for example, a new vehicle), and using tools to convert excess assets into income. These tools typically include promissory notes and Medicaid Compliant Annuities (MCAs). Both a promissory note and an MCA work by converting a lump sum of assets into an income stream.
In the case of a promissory note, the note is typically made between the institutionalized individual or the community spouse and a family member. The lender lends money to the maker who must then repay the money in accordance with the terms of the contract (typically monthly payments for a certain period of time). An MCA, on the other hand, is a single premium immediate annuity (SPIA). In this case, the institutionalized individual or the community spouse establishes the contract with an insurance company that provides regular payments in exchange for a lump sum premium.
Both promissory notes and MCAs must comply with the Deficit Reduction Act of 2005. In most cases, a promissory note must be non-transferable, may not cancel upon the lender’s death, and must require payments continue to the lender’s estate, which subjects the balance of the note to recovery by the state Medicaid agency for expenses paid on the institutionalized individual’s behalf. In regard to an MCA, the annuity contract must be irrevocable, non-assignable, provide equal monthly payments, have a term that is equal to or less than the owner’s Medicaid life expectancy, and designate the state Medicaid agency as the primary or contingent death beneficiary.
While it may seem the promissory note and the MCA stand on equal footing, it is important to recognize the promissory note is not a viable crisis Medicaid planning strategy in every state. Several state Medicaid agencies specifically restrict the use of promissory notes as an allowable tool. Plus, promissory notes do not solve the problems associated with IRAs. Specifically, an IRA cannot be used to fund a promissory note, as it would first need to be liquidated. However, an MCA can be funded with an IRA.
The benefit of using an MCA in the case of an IRA is the avoidance of tax consequences associated with liquidating the account. Rather than creating a taxable event through liquidation, the funds may be transferred, tax-free, to the annuity. The funds are then taxed as the annuity payments are disbursed to the owner. All payments received within a calendar year will be taxable to the owner. This allows the owner to eliminate the IRA as an asset for Medicaid purposes, spread the tax liability over several years, and accelerate their eligibility for benefits.
Medicaid Compliant Annuity Strategies
The core concept of using an MCA in crisis Medicaid planning is to fund countable assets that exceed the owner’s asset limitations into an MCA. Because the MCA has no cash value, the assets are no longer countable in the eyes of the Medicaid program. However, specific strategies using this tool may differ depending on the marital status of the Medicaid applicant.
Planning for a married couple typically involves the concept described above—the owner of the MCA funds the assets that are preventing Medicaid eligibility into the annuity and the institutionalized spouse can become immediately eligible for benefits. In most cases, the community spouse is the owner the MCA. They receive the payments from the annuity over the term of the contract. Since the community spouse can have unlimited income, the excess income created from the annuity is not of concern to the state Medicaid agency. Additionally, assuming the annuity is funded with non-qualified assets, only the small amount of interest paid on the annuity is taxable to the owner—the principal is not.
This strategy may differ when dealing with tax-qualified assets depending on which spouse owns the IRA in question. If the community spouse owns the IRA, the strategy remains the same. If the institutionalized spouse owns the IRA, they must be the owner of their MCA. The institutionalized spouse will also be the payee of the annuity, which could affect their Medicaid co-pay unless the income from the annuity is diverted to the community spouse by way of the MMNA rules previously described.
However, some state Medicaid agencies may allow the institutionalized spouse to designate the community spouse as payee of their MCA. This is another method of shifting income to the community spouse known as the “Name on the Check Rule.” In many cases, when dealing with a married couple, estate planners and financial advisors are able to preserve up to 100% of the couple’s countable assets at risk.
Typical strategies using an MCA start to get particularly creative when dealing with a single person. Since there is no spouse to act as the annuity owner or to divert income to, a single person’s MCA income would affect their Medicaid co-pay and thus the anticipated savings from the plan. While there is no great way to save all of a single person’s countable assets at risk, there is a way to save about half of these assets. This strategy, known as the Gift and Annuity Plan (or, sometimes the “Half-a-Loaf” Plan), involves leveraging the Medicaid program’s policies against divestments.
In this case, the single person intentionally divests approximately half of their excess countable assets. This could include making an outright gift to a family member or funding an irrevocable trust. The person then uses their remaining assets to fund an MCA. Between making the gift and purchasing the annuity, the person has effectively eliminated their assets. At that point, they are able to apply for Medicaid benefits and trigger a penalty period of ineligibility due to the gift. The individual then uses the income from the MCA to pay for care during the penalty period. While the strategy may sound complex, it is a common spend-down strategy in most states.
When Crisis Medicaid Planning is a Good Fit
While there are a multitude of crisis Medicaid planning tools and strategies, this process may not make sense for every client. Most importantly, the individual must be entering long-term care indefinitely. Some seniors may require temporary care in a facility for rehabilitative purposes. In those cases, crisis Medicaid planning is not a good fit due to the restructuring in assets the process requires.
However, for those seniors who have not done any planning in advance for a long-term care event, crisis Medicaid planning may be able to provide them the financial relief they need to preserve their assets and leave a legacy to their loved ones. It is now more likely than ever that estate planners and financial advisors will encounter clients in this situation. The important thing to remember is that they do not have to deplete their money paying the nursing home. They do have options, though seeking advice from a properly trained professional is key to a positive outcome.
Dale M. Krause, J.D., LL.M., is the President and CEO of Krause Financial Services—a firm that specializes in asset preservation solutions through the use of Medicaid Compliant Annuities, Long-Term Care Insurance, and other insurance products. With over 30 years of experience in the elder law and insurance industries, Dale is a renowned expert in long-term care planning. He regularly speaks at legal and financial planning forums across the country, educating and empowering other professionals. His work has been featured in several major publications, including The Wall Street Journal, NAELA News, Senior Market Advisor, and Lawyers Weekly USA. Dale also played an integral role in many landmark Medicaid Compliant Annuity cases, including Weatherbee v. Commonwealth of Pennsylvania and Zahner v. Mackereth. For more information regarding Dale, his accomplishments, and his company, visit www.medicaidannuity.com.
 Genworth Cost of Care Survey 2021, conducted by CareScout®, November 2021, available at: https://www.genworth.com/aging-and-you/finances/cost-of-care.html.
 Some states employ “waiver” programs which extend long-term care Medicaid benefits beyond skilled nursing homes, including assisted living facilities and at-home medical care programs.
 2022 SSI and Spousal Impoverishment Standards, available at: https://www.medicaid.gov/federal-policy-guidance/downloads/cib06022022.pdf
 Retirement accounts come in many forms, including (but not limited to) the traditional IRA, 401(k) accounts, and Roth IRAs. For purposes of this article, the term “IRA” will be applied to all appropriate retirement accounts.
 See n. 3.
 Pub. L. 109-171 (S. 1932) available at: https://www.congress.gov/bill/109th-congress/senate-bill/1932
 Medicaid life expectancy is typically determined by the Actuarial Life Table published by the Social Security Administration, though some states use state-specific life expectancy tables.
 Most cases require the state Medicaid agency be designated the primary death beneficiary on a Medicaid Compliant Annuity. Exceptions exist in cases where the owner has a minor or disabled child, or in situations where the person in the nursing home purchases the MCA and they have a community spouse at home.