In those cases where a widow or widower has significant wealth, is in good health, and wants to protect his or her assets from a potential long-term nursing home stay, the best course of action is to have the person purchase a Long-Term Care Insurance (“LTCI”) plan (which is better known as 'Nursing Home Insurance"). However with 99% of the available LTCI plans not offering any type of premium refund feature should the insured not utilize the long term care coverage, because of the large annual premiums, most individuals will view a LTCI plan as a bad investment and will not proceed with the purchase.
Assuming the purchase of a LTCI plan is not a viable option, what is the next best option? The next best option is a gifting plan which is structured within the guidelines of Medicaid. The Medicaid rules now penalize all gifts made within the 5 year period immediately preceding a Medicaid application. So how would the gifting plan work?
Assume that Betty Smith, a 75 year widow, has a net worth of $500,000, excluding the value of her home, automobile, household furnishings, and prepaid funeral plan. She has monthly social security and pension income of $2,800, which amount is sufficient to meet her needs. She has two children, Tom and Ann, who are both married, in stable relationships, and financially well off. Betty wants to know that the $500,000 she has saved, which is invested in CDs, will be protected from a potential nursing home stay. Betty investigated the cost of LTCI, but declined to proceed with the purchase in that she concluded that it was a waste of money.
In light of the above, and after meeting with an elder law attorney, Betty gave each of her children a $250,000 gift. Betty filed a gift tax return in that each gift exceeded the annual $12,000 per donee gift tax exclusion; however, in that she had not exhausted her entire unified credit, Betty paid no actual gift taxes.
Immediately following receipt of their gifts, Tom and Ann established and funded the "Smith Family Revocable Trust. As co-grantors and co-trustees, Tom and Ann agreed that none of the trust corpus would be used by either of them in the first 5 years. The Smith children further agreed, in order to eliminate having to file an annual fiduciary income tax return, the $500,000 trust corpus would be invested in a tax deferred annuity. The tax deferred annuity that they selected had a guarantee, 5.5% per year for 5 years.
