by Archie M. Richards, Jr., CFP^®
July 2, 2001

The costs of nursing-home care these days can knock an elderly person into la-la land. But if the individual has almost no assets, Medicaid picks up the tab. To reduce the assets, some parents make gifts to family members. The gifts must be irrevocable; they cannot be reversed.

It isn't a free ride. Medicaid payments are reduced if gifts have been made to individuals within the last three years (five years, to a trust). Nevertheless, gifts may still be appropriate even if nursing-home care has already started. (A power of attorney may be required.)

The actual period of ineligibility for Medicaid depends on the amounts gifted and the average cost of care, as determined by the local Department of Social Services. As possibilities, I cite examples from upper New York State. There, Social Services at present considers the average cost of care to be $5,629 per month.

Let's say an elderly mother gifts $5,629 to her children (or to anyone other than the spouse). This makes her ineligible for Medicaid for one month. During that brief period she must pay for her own nursing-home care.

If the parent has $130,000 and enters a nursing home without having made any gifts, she must, as a single person, spend all but about $3,800 before Uncle Sam is willing to step in, no matter how long this takes.

But if she gifts $56,290 (ten times $5,629) to the children, she must use her own funds for only ten months. Providing only about $3,800 remains, Medicaid then fills the bill.

Without gifting, the children get nothing. With gifting, they receive $56,290. Every little bit helps.

Estate planners follow the "Rule of Halves:" Give away half your property and use up most of the rest during the period you're ineligible for Medicaid.

If the parent doesn't yet need a nursing home, she might gift her home to the children with a "reserved life estate," meaning that the parent retains the right to live in the home for the rest of her life.

Let's say the parent is 70 years old and the house is worth $130,000. R. Thompson Gilman, Esq., of Rochester, New York, tells me that, according to the local Department of Social Services actuarial tables, the value of this reserved life estate at the time of the gift is $78,650. The value of the gift to the children is therefore $51,350 ($130,000 less $78,650).

Under these circumstances, the parent would be disqualified from receiving Medicaid payments for about nine months ($51,350 divided by $5,629). But if she continues living in the home for at least nine months and has only a small amount left, Medicaid could begin paying for nursing home care right away.

After the parent's death, the house is not subject to the costs and delays of probate. Probate applies only to property the decedent owns at death. The house was previously transferred to the children; nothing remains there. And the retained life estate ends when the resident dies; nothing remains there either. Since no part of the house is owned by the parent at death, it need not be probated.

Medicaid, as mentioned, is administered differently from one region to another, especially as to reserved life estates. This column provides only a notion of what might be possible. Check www.benefitscheckup.org and http://medicaid.aphsa.org/links.htm. If you have no computer, Digital Divide Network (toll free 866-583-1234) can inform you of public places where you may gain access to the Internet.

Jim wrote that he would like to set up a 529 Plan for the education of his four grandchildren. A column of mine said that the recent federal tax law provides that distributions from 529 plans will be tax free beginning in 2002. Jim notes that Connecticut's 529 plan says nothing about distributions being tax free. He's puzzled about the inconsistency.

Connecticut law and federal law don't have to be aligned, Jim. Withdrawals could be federally tax free but taxable by Connecticut.

Jim adds that he enjoys my columns because he "almost" understands them.

Join the club, Jim. Some of them I barely understand myself.

Say you know you're going to need scholarship money for a child's college. When the child is still young, choose an appropriate college and find out what special skills it values for scholarship purposes. Then, teach the kid those skills.