Protecting Half on the Nursing Home Doorstep: The Gift and Loan Strategy
What do you do when a client comes in to see you and says that his mother is going into a nursing home and she has $300,000 in assets. In fact, mom scrimped and saved all of her life to have this nest egg and now she desperately wants to see her children get an inheritance.
Although you may protect all of your assets by planning five years ahead of time with a Medicaid Asset Protection Trust, all is not lost if nothing has been done and the client finds herself on the nursing home doorstep.
The advanced elder law technique, used to protect assets at the last minute, is called the “gift and loan” strategy. Here’s how it works. Let’s assume, for the purposes of our example, that the nursing home costs $10,000 a month. When mom goes into the nursing home, we gift one-half of the nest egg, in this case one-half of $300,000, or $150,000, to her children. Then we lend the other $150,000 to the children and they execute a promissory note agreeing to repay the $150,000 in fifteen monthly payments of $10,000 per month, together with a modest amount of interest. Now we apply for Medicaid benefits. Medicaid will impose a penalty period (i.e., they will refuse to pay) for 15 months on the grounds that the gift of $150,000 could have been used to pay for mom’s care for 15 months. Medicaid ignores the loan since it was not a gift. It is going to be paid back, with interest, according to the terms of the promissory note. What happens is that the fifteen loan repayment installments will be used to pay for mom’s nursing home care during the penalty period. Just when the loan repayments are finished, the penalty period expires and Medicaid begins to pick up the tab. Lo and behold, the children get to keep the $150,000 gift and mom has saved some of the inheritance for her children.
Also known as “half-a-loaf planning”, this technique has been approved in most states. And, of course, everyone knows what half-a-loaf is better than, right?