How To Completely Understand The Rule of Halves

This week I’m sharing a blog on Medicaid from Dave Zumpano, who focuses in Medicaid planning. I’ll be sharing Medicaid blogs from Dave Zumpano monthly in this space.

Now, here’s Dave’s blog:

Blog Author: David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Many Medicaid planning practitioners are aware of the rule of halves, but it is an area of confusion for many attorneys newer to the practice. Where does the rule of halves come from? Is it codified? Well, sort of. To understand the rule of halves you have to first understand the Medicaid law and then understand math.

42 USC 1396p (c) (1) (e) provide a penalty period shall be imposed on any individual who transfers assets for less than its fair market value (uncompensated transfer). The law further states the penalty shall be calculated by taking the amount of the uncompensated transfer and dividing it by the average cost of one month’s nursing home in the region in which the Medicaid applicant resides. That is all the law states, so the question becomes where does the rule of halves come from? That’s where math comes in. In essence in light of the law identified, if you take any amount of money and divide it by two, the half you gave away will create a penalty period equal to what the half kept will pay.

If an individual has $100,000.00 of excess assets, and gives half away, the $50,000.00 transfer will create a penalty period that will always equal the period the retained amount will pay thru. Assuming a regional divisor of $5,000.00, the penalty on the $50,000.00 transfer would be 10 months, and the $50,000.00 retained would thereby pay 10 months in a nursing home ($5,000.00). While the rule of halves, in its purest form, makes sense in practice, it’s a little more complicated because one of the fallacies in using rule of halves, is it presumes that the regional divisor actually equals the cost of care (even by law it supposed to, it often doesn’t).

In the same example if you gave away $50,000.00 in a location the divisor is $5,000.00, it would create a 10-month penalty period, but, if the cost of care was actually $6,000.00, then the $50,000.00 retained would not pay through the 10-month penalty period (you would need $60,000). The federal Medicaid law requires the state to publish at least annually, the average cost of one‑month’s private paid nursing home (regional divisor). Each state however, has their own way to calculate this and most facilities are above (rarely below) that regional rate. A few states (Illinois for example) have made the divisor the actual cost of care at the facility where care is being provided. That negates any concerns about the effectiveness of the rule of halves calculations.

Finally, when planning using the halves calculation, one must also consider the income of the Medicaid recipient. When a cost of care in excess of the divisor, creates in a shortfall of retained funds needed to pay through any penalty period, failing to take income into account, often creates excess resources for the client at the end of the penalty period, which will render them ineligible.

To illustrate, assume again an individual had $100,000.00 excess assets and transferred $50,000.00 with a monthly divisor was $5,000.00. The $50,000.00 transferred would create a 10-month penalty and the $50,000.00 retained would pay through the 10‑month penalty. All other things being the same, at the end of 10 months, with the recipient in a nursing home, they’re not spending their monthly income (assume $1,200.00 Social Security) the client would have accumulated an additional $12,000.00 ($1,200.00 a month times 10 months) and have excess resources and therefore not be eligible for Medicaid until additional spend-down and penalty may be created.

Proper planning utilizing the rule of halves assumes an analysis of the actual cost of care, the actual regional divisor and the actual income of the recipient are considered. The LWP Medicaid Qualifying software automatically calculates the optimal client assets to transfer and retain considers the actual cost of care, the regional divisor and the client’s actual income.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com