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This is Strategy #14 from Lamson & Cutner’s publication, “25 Strategies to Prevent Financial Ruin from Long-Term Health Care Costs.” Click here to see the other strategies.

An effective method to protect cash and assets for someone who needs nursing home care, and who has transferred assets within the “look back” period is to use a private annuity strategy. It usually preserves approximately 40% to 50% of your resources, if any transfers have been or are going to be made during the “look back” period.  This strategy is based on a Federal statute, so it’s one we use frequently, with confidence that it will provide a beneficial result for our clients.

As an illustration, let’s say you’ll be entering a New York City nursing home. You have $200,000 you want to protect from being lost to Medicaid requirements to pay for your own care. It’s a two-step plan.

First, about half of the amount, around $100,000, is given as a gift to a child, sibling or other trusted person. That will result in a “penalty period” of 8 months or so, depending on the “regional rate” in effect at the time (see Strategy 3 for an example of how the penalty period is calculated).

In the second phase of the strategy, the law firm will help you to create a private annuity.  You will “purchase” this annuity from the child, sibling or other transferee, for the remaining amount of roughly $100,000. An annuity is a contract that makes specific payments at set intervals.  If properly structured to comply with the law, the purchase of the private annuity does not incur a Medicaid penalty.

Here, the annuity is structured to create a stream of income, and will pay about $12,500 per month for 8 months to you. You will then use this money, together with your other income (Social Security, pension, etc.), to pay the nursing home. The amount of the annuity is carefully calculated so that the income from it, plus your other income, will cover the cost of care during the “penalty period” imposed by Medicaid.

The end result: instead of using almost the entire $200,000 to pay for nursing home care, which Medicaid would otherwise require before paying any benefits, in the vicinity of $100,000 has been preserved. You’ve transferred the money to a trusted source, who can use it on your behalf while you’re in the nursing home. Whatever is left after you die can go to your loved ones, providing a financial benefit to your family it would not otherwise have had.

As an example, we represented an 85-year-old widow who had numerous investments and property in Florida, and who needed to move into a nursing home.  We calculated what the penalty period would be when she transferred assets.  We then prepared a private annuity in an amount equal to approximately 50% of the value of her holdings.

She transferred everything she owned to her daughter; about 50% was to buy the private annuity from her daughter, and 50% was a gift.  The private annuity contract required her daughter to provide her with monthly payments that enabled her to pay the nursing home bill during the penalty period.  The other 50% was saved in her daughter’s name.  Her daughter can now use that remaining half to attend to her mother’s needs, and make her stay at the nursing home as pleasant as possible.

After her mother passes on, the daughter will keep whatever is left, which she would not have received, had these planning steps not been taken.

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