Medicaid Planning with the Half-a-Loaf or Rule of Halves Strategy
One of the prime planning techniques used before a change in the law meant to bar it, often referred to as “half a loaf,” was for the Medicaid applicant to give away approximately half of his or her assets, keeping enough money to pay for her care during the resulting penalty period. It worked this way: before applying for Medicaid, the prospective applicant would transfer half of his or her resources, thus creating a Medicaid penalty period. The applicant, who was often already in a nursing home, then used the other half of his or her resources to pay for care while waiting out the ensuing penalty period. After the penalty period had expired, the individual could apply for Medicaid coverage.
Under the old rules, the ineligibility period began as soon as the transfer occurred. Congress tried to end this practice by changing the rules so that the penalty period for the transfer now only begins when the applicant is (1) in the nursing home, (2) has spent down his assets, and (3) is not paying for his care from any other source. But the method still works in some states with some extra steps, often requiring one of two variations:
First, the parent transfers all of her funds to her children and applies for Medicaid, receiving a long ineligibility period. Then, after the application has been filed, the children return half the transferred funds “curing” half of the ineligibility period and giving the nursing home resident the funds she needs to pay for her care until the penalty period expires.
In the second variation, the parent gives half of his funds to his children and lends them the other half under a promissory note that meets certain requirements in the Medicaid law. The parent uses monthly repayments of the loan, along with his income, to pay his nursing home costs. In some states, annuities are also used as part of this planning scheme.
Don’t try either strategy on your own. An elder law attorney can advise you on what, if any, strategy works in your state and help you implement it so it works.