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Friday, April 10, 2020

The Reverse Rule of Halves in Medicaid Planning

Medicaid provides a penalty period for the transfer of assets for less than its fair market value within 5-years of an individual’s application for Medicaid. The penalty is calculated by taking the amount of the transfer and dividing it by the average cost of one month of nursing home care in the region where the applicant resides.

A strategy used to maximize an applicant’s excess assets is the Reverse Rule of Halves. Essentially, this strategy allows the applicant to retain at least half of his excess assets and to become eligible for Medicaid sooner. When using this strategy, the Medicaid applicant gives 100% of their excess assets to a family member or multiple members. As this transfer may be a violation of Medicaid’s look back rule, a penalty period of Medicaid ineligibility will result. The family member, however, can return half of the gifted assets in installments back to the Medicaid applicant through a promissory note, so that the penalty period is also cut in half. The applicant, then, can use the returned assets to pay for care during the penalty period.

To utilize this strategy, the assets must be accessible either through a competent individual’s signature, joint ownership, or a Durable Power of Attorney. The return of assets will need to be done through a Deficit Reduction Act (DRA) compliant promissory note. To determine the value of assets that can be preserved with this strategy, the following factors are considered: 
  1. Total value of the applicant’s assets that constitutes excess resources for Medicaid purposes;
  2. Total monthly fixed income of the applicant;
  3. Actual private monthly cost of the nursing home that the applicant will be entering or is in; and
  4. Average monthly nursing home cost figure used by the Medicaid district in which the applicant resides to calculate transfer penalty periods.

While there is a specific procedure calculating the maximum amount, the amount gifted is usually approximately equal to the maximum value of assets that can be protected. To determine whether this applies to a specific applicant’s circumstances and to determine whether using the Reverse Rule of Halves is the best strategy for their specific needs, applicants are encouraged to retain counsel as early as possible.

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