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Probate & Property

March/April 2024

Crisis Planning: The Oxymoron that Could Save Your Client

Dale Krause


  • Attorneys may not know how to proceed when they encounter a client in crisis—one who did not proactively plan and is now entering a long-term care facility.
  • Crisis planning can help these clients in the form of Medicaid planning, allowing a client to accelerate their eligibility for Medicaid benefits while preserving their assets in the process. 
  • This article discusses how crisis planning works in practice and spend-down options, including the Medicaid Compliant Annuity, available to attorneys and their clients.
Crisis Planning: The Oxymoron that Could Save Your Client
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It is no secret that the US population is aging. The oldest members of the Baby Boomer generation began turning 75 in the year 2021, with about 70 million peers to follow. The senior population is growing and, due to advances in medical science, living longer than previous generations. Therefore, it is now more likely than ever that seniors will require skilled long-term care in their lifetimes. In fact, according to the US Department of Health and Human Services’ Projections of Risk of Needing Long-Term Services and Supports at Age 65 and Older (Jan. 2021),, over 50% of individuals turning 65 today are expected to require long-term care at some point.

Although long-term care is an inevitability for most people, many fail to understand the financial burden that follows placement in a nursing home. According to the 2021 Genworth Cost of Care Survey,, the average cost of a semiprivate room in a nursing home is $7,908 per month. With the average stay in a nursing home being over two years, it is not surprising that long-term care can wipe out a person’s entire life savings, leaving nothing behind for their loved ones.

This financial reality is what makes long-term care an issue for estate planning and elder law attorneys. As attorneys, we take specific measures to ensure a client’s assets are protected and distributed in accordance with their wishes after death. But what about protecting their assets while they are alive? Entering the nursing home is arguably the biggest threat to your client’s estate plan. Clients who do not have the proper plans in place to minimize the financial effect of long-term care are truly at risk of losing everything. Fortunately, attorneys can provide a solution, even if the client is already in a nursing home.

Where Medicaid Comes in

Now that more seniors are entering nursing homes, conversations surrounding Medicaid have increased significantly. Medicaid is a joint state and federal program meant to provide financial assistance for medical care to those in need. Concerning long-term care, Medicaid covers a person’s stay in a nursing home (or another Medicaid-approved facility), including room and board, pharmacy, and incidentals. This makes qualifying for Medicaid desirable for individuals who failed to plan in advance for a long-term care event through mechanisms such as long-term care insurance.

In order to qualify for Medicaid, an individual must meet specific nonfinancial and financial requirements. Regarding the nonfinancial stipulations, the individual applying for care must be age 65 or older, blind, or disabled and must also be a US citizen or a qualified noncitizen. The individual must also be a resident of a Medicaid-approved facility, as previously noted. In short, Medicaid benefits are reserved for those in need of the medical care provided by nursing homes. Some states employ “waiver” programs that extend long-term care Medicaid benefits beyond skilled nursing homes, including assisted living facilities and at-home medical care programs.

Medicaid’s financial requirements are much more intricate than the nonfinancial requirements, and they differ depending on the marital status of the applicant. To add a layer of complexity, the financial requirements also vary from state to state. These requirements fall into two major categories: income and assets. Too much of either will prevent a person from qualifying for benefits.

To be eligible for Medicaid, an individual’s income must be less than the private-pay rate of the facility at which the individual is seeking residence and care. This means the individual’s monthly income from all sources—including Social Security, pension, etc.—must be less than the monthly nursing home bill. A few states apply a separate restriction where the applicant’s income cannot exceed an amount other than the nursing home bill.

In the case of a married couple, the spouse in the nursing home (known as the institutionalized spouse) is subject to the rules for an individual previously noted. The income of the spouse living at home (known as the community spouse) is not considered when determining the eligibility of the institutionalized spouse. As such, the community spouse is not subject to income limitations or restrictions.

Although the community spouse is not subject to income limitations, there is a floor on the amount of income the community spouse can receive. This is known as the Monthly Maintenance Needs Allowance (MMNA)—a provision set forth by the Medicaid program that ensures the community spouse has enough income to support herself in the community once the institutionalized spouse begins receiving Medicaid benefits. This requirement is often referred to as an “anti-impoverishment provision” intended to protect the community spouse. If the community spouse’s income is less than the MMNA, the spouse will receive a shift in income from the institutionalized spouse. As of January 1, 2024, this MMNA is between $2,465 and $3,853.50, according to the 2024 SSI and Spousal Impoverishment Standards. Letter from Daniel Tsai, Dir., Ctr. for Medicaid & CHIP Serv., Updated 2024 SSI and Spousal Impoverishment Standards (November 14, 2023),

In addition to being income eligible, the applicant must also be within certain asset limits. Assets are divided into two categories: exempt and countable. Exempt assets are not considered when determining an applicant’s Medicaid eligibility. Some of the most common exempt assets include the primary residence, one vehicle, prepaid funerals, personal effects, and household items. The institutionalized individual or the community spouse can retain these items without jeopardizing benefits.

Exempt assets stand in contrast to countable assets, which include any resource or property not listed as an exempt asset that holds value and could become liquid. Common countable assets include checking or savings accounts, CDs, stocks, bonds, mutual funds, nonhomestead real estate, second vehicles, and virtually any other investment that could be readily converted to cash.

The classification of retirement accounts (including, but not limited to, traditional IRAs, 401(k) accounts, and Roth IRAs) varies greatly by state. In select states, retirement accounts are considered exempt assets for both the community spouse and institutionalized spouse. Some states exempt retirement accounts only for the community spouse. Other states will treat them as exempt only if the owner is taking the owner’s required minimum distributions (RMDs). This means that the owner can have a retirement account of any value, and it will not prevent the owner from qualifying for Medicaid benefits, although the RMDs will count as income to the owner. Ultimately, however, most states consider retirement accounts as countable assets to the owner.

Although the Medicaid rules regarding countable and exempt assets render an institutionalized individual effectively impoverished, there is a carve-out that allows the Medicaid applicant to retain assets with a limited value, referred to as the Individual Resource Allowance. In most states, the Individual Resource Allowance is $2,000. This means a Medicaid applicant can retain no more than $2,000 in countable assets and remain eligible for benefits. If the applicant is single, this is all the applicant may keep. If the applicant is married, the community spouse can retain a separate amount known as the Community Spouse Resource Allowance (CSRA). This allowance varies by state but is generally between $30,828 and $154,140 as of January 1, 2024.

Beyond asset limitations, the Medicaid program also employs restrictions on giving assets away. Medicaid rules stipulate that if an applicant or a spouse has made an ineligible transfer of assets within the last five years—the lookback period—the applicant will be subject to a period of ineligibility—the penalty period—when the applicant is otherwise eligible for Medicaid.

The lookback period is the five-year period before an individual applies for Medicaid. At the time of application, the caseworker will look back over the last five years to determine if the applicant divested any assets. If the applicant or spouse made any ineligible transfers within this timeframe, the applicant will be ineligible for benefits for a certain period of time based on the total amount divested.

A divestment is a transfer of assets for less than fair market value. Many people also refer to transfers of this nature as gifts. Actions that qualify as divestments include giving money or items to loved ones, transferring assets to an irrevocable trust, or selling items, like a vehicle, for less than their fair market values.

The penalty period is the period of ineligibility applicants are subject to when they have made divestments during the five-year lookback period. The penalty period begins once the applicant is deemed “otherwise eligible” for Medicaid benefits, aside from the ineligible transfer. The length of the penalty period is based on two figures: the total amount of divested assets and a state-specific divestment penalty divisor. The primary problem is many clients may not be aware of these rules and could be divesting assets without realizing the consequences divestment may have on their long-term care needs.

The Value of Crisis Planning

Unsurprisingly, most individuals are not automatically eligible for benefits. Countable assets in excess of the applicable limit must be eliminated, or “spent down,” for the person to qualify. In many cases, this can be accomplished by paying off a mortgage or other debt or purchasing or improving exempt assets. Most families, however, typically spend this money on the nursing home bill until they have depleted their life savings.

The concept of crisis planning provides a solution and is a growing practice area for estate planning and elder law attorneys. Crisis planning involves the legal rearranging of one’s assets to spend down the value of those assets for Medicaid purposes, yet still achieving an economic benefit for the client in the nursing home. The ultimate goal is asset preservation for those who would otherwise lose everything paying this bill.

Some crisis planning strategies vary by state, but one of the most common planning strategies that is applicable in nearly every state is the use of a Medicaid Compliant Annuity (MCA). An MCA is a single-premium immediate annuity (SPIA). In this case, the institutionalized individual or the community spouse establishes the contract with an insurance company that provides regular payments in exchange for a lump-sum premium. In short, the client uses an annuity to convert assets into a future stream of income without any cash value.

An MCA must comply with the Deficit Reduction Act of 2005. Pub. L. No. 109-171 (S. 1932), 120 Stat. 4, The annuity contract must be irrevocable and non-assignable, provide equal monthly payments, have a term that is equal to or less than the owner’s Medicaid life expectancy, and designate the state Medicaid agency as the primary or contingent death beneficiary. Life expectancy is typically determined by the Actuarial Life Table published by the Social Security Administration. Most cases require the state Medicaid agency be designated the primary death beneficiary on an MCA. Exceptions exist in cases where the owner has a minor or disabled child, or in situations where the person in the nursing home purchases the MCA and has a community spouse at home. An MCA can be funded with either qualified or nonqualified assets, making it a desirable option for those who own a retirement account in a state where the value of that account is considered a countable asset.

The benefit of using an MCA in the case of a retirement account is avoiding tax consequences associated with liquidating the account. Rather than creating a taxable event through liquidation, the funds may be transferred, tax-free, to the annuity. The funds are then taxed as payments are made over the term of the annuity. All payments received within a calendar year will be taxable to the owner. This allows the owner to eliminate the IRA as an asset for Medicaid purposes, spread the tax liability over several years, and accelerate the owner’s eligibility for benefits.

When a client requires long-term care and the family receives the first nursing home bill, the family is likely in shock. Not only is there an emotional element the family must work through, but the high cost of care and the complexities of the Medicaid system often cause families to become overwhelmed. Crisis planning with MCAs, however, helps to ease the financial part of this burden, allowing for relief from the nursing home bill and the preservation of certain assets in the process.

Using Annuities in Practice

In addition to providing peace of mind to individuals experiencing a long-term care event, crisis planning also provides a tangible economic benefit to clients and their families. When using an MCA, however, properly structuring the annuity is crucial to a positive outcome. There are two main strategies involved when using an MCA, and they differ depending on the marital status of the institutionalized person.

When working with a married couple, the primary goal is to set aside assets to be used for the benefit of the community spouse. Although the Medicaid program provides a separate and distinct resource allowance for the community spouse, it may not be enough. Using an MCA allows the community spouse to set aside funds that would otherwise be used to pay the nursing home yet still qualify the institutionalized individual for Medicaid benefits.

Any countable assets in excess of the community spouse resource allowance are funded into an MCA owned by and made payable to the community spouse. The community spouse has flexibility in choosing an annuity term (i.e., the length of time in which the annuity pays back the initial investment and interest to the owner), so long as it is equal to or shorter than their Medicaid life expectancy. Depending on the annuity provider the attorney is working with, annuities with terms as short as two months are available in nearly every state. The shorter the term, the higher the monthly income to the community spouse will be, and the longer the term, the lower the monthly income will be.

Generally, attorneys should recommend a term that provides an amount of monthly income compatible with the community spouse’s current and future potential expenses. For example, should a community spouse be in poor health, a shorter term may be more appropriate to provide enough monthly income for medical and care expenses, and to reduce the likelihood of passing away before the annuity ends due to Medicaid’s primary beneficiary requirement. A longer term may be more appropriate in cases where the community spouse is in good health, the annuity premium is a higher dollar amount, or retirement accounts are involved, to reap the benefits of prolonged taxation.

Planning for a single person is often a vastly different strategy. First, an individual’s asset limit is significantly less than that of a community spouse in most states. Second, the individual’s income is directly subject to paying a portion of the nursing home bill, with the Medicaid program picking up the remaining costs. Therefore, any income generated from an annuity owned by an institutionalized single individual goes to the nursing home.

In these cases, the common strategy is to intentionally create a penalty period of ineligibility by divesting approximately half of the individual’s funds to an irrevocable trust or other giftee. The goal of this strategy is to create a wealth transfer to the client’s intended heirs in the form of a divestment, triggering a penalty period. The client then uses the remaining assets to purchase an MCA, which will help the client privately pay for care during the penalty period. The MCA term is structured to be congruent with the penalty period, so the annuity contract is terminated when the penalty period ends. Meanwhile, the divested funds are protected from recovery by the state Medicaid agency.

This plan comes with a few caveats. For starters, if the individual passes away before the end of the penalty period and annuity term, the individual will not have gained any economic benefit since the individual will have been privately paying for care during that time. Additionally, some states enforce income restrictions that render this strategy not viable. Generally, however, this strategy allows single institutionalized individuals to save approximately half of their assets by way of the wealth transfer, as opposed to spending down nearly their entire nest egg on the nursing home bill alone.

Having a Backup Plan

Ideally, clients would choose to engage in more proactive long-term care planning strategies, whether that be through long-term care insurance, proper irrevocable trust planning, or other means. But many clients choose not to create a proactive plan for several reasons, including believing they will never require care or deeming the cost of a proactive plan to be unaffordable.

It is crucial, however, that they have other options available should they find themselves in a crisis Medicaid situation in the future. After all, it is long-term care that is truly unaffordable for most. These costs loom as one of the biggest financial threats to a client’s estate plan, and with asset preservation being one of the primary goals of estate planning and elder law attorneys, having a backup plan, like crisis planning, is crucial to properly serving your clients.