The House of Representatives is scheduled to vote on S. 1932, the Deficit Reduction Act of 2005 (“the Act”), when it returns from winter break on February 1. While it is not a given that the Act will pass, the most likely outcome appears to be that the Republicans will maintain a small enough margin of “yea” votes to have the law go into effect.

When the Senate passed S. 1932 by the smallest of margins in late December, many people were predicting the end of Medicaid planning. While it is true that many of the easier types of planning strategies will be eliminated and it will be much more difficult for a senior to stumble into qualifying for Medicaid, many viable planning strategies will remain should the Act become law. In addition, there may be a “window of opportunity” to put plans in place under the old law in those states where legislation will need to be put into place in order to bring the state plan into compliance with the Act.

One planning strategy that will emerge is the use of an Irrevocable Trust to implement various pre-need planning strategies. For those people who know there is a high likelihood they will need long term care in the future (perhaps they have a family history of Parkinson’s or Alzheimer’s Disease), they can transfer assets into an irrevocable trust, retain an income interest, and apply for Medicaid after the new five year lookback period has elapsed.

A new planning strategy, known as the “reverse half-a-loaf,” is being touted by some elder law attorneys as one of the better strategies that will be available under the new Act. As the name implies, it is the reverse of the “half-a-loaf” planning strategy that has been popular among elder law attorneys for many years. Half-a-loaf involves gifting away assets while retaining sufficient assets to private pay for nursing home costs during the period of ineligibility caused as a result of the gifts. The reverse half-a loaf strategy will involve making a series of gifts in the same month in order to get assets below the threshold qualification limit for Medicaid coverage, and then returning some of those gifts in order to shorten the period of ineligibility created under the Act. Because the period of ineligibility is shortened due to the return of the gifts, the net result is that the recipients of the gifts are able to retain approximately half of the assets that were transferred and use that money to pay for the needs of the senior that are not covered under Medicaid. In some cases, the remainder of the gifts may be placed in an irrevocable trust.

While some questions remain unanswered and there is no question that Medicaid planning will be made more difficult in the event that the Act passes, there is no question that many planning strategies will remain for those who are knowledgeable about the interaction of the various Federal and State codes and regulations that govern Medicaid, Social Security, income tax and property law. It will become more important than ever to engage the services of an attorney knowledgeable in elder law in order to preserve assets for senior clients who may need long term custodial care in the future.

Morris, Hall & Kinghorn focuses in all aspects of Elder Law, including qualification for Medicaid. Click here to request a complimentary consultation to discuss how the new law may affect your clients and how we can be of benefit to you and your clients.