Harry’s dementia has been getting worse and he will need nursing home care soon. His loving daughter, Grace, has already been spending 20 hours per week helping Harry – without charge – with dressing, eating, and other “activities of daily living.”
The Medi-Cal eligibility worker (as she was trained) tells Grace that Harry must first “spend-down” almost all of his $250,000 savings for nursing home care, before Harry will qualify for Medi-Cal long-term care benefits. The Medi-Cal eligibility worker is right about the spend-down requirement, but she could not have been more wrong about Harry’s best spend-down strategy!
Instead, Harry’s attorney calculates that the “present value” of Grace’s services, for the rest of Harry’s life, based upon the prevailing pay rates of other caregives, is exactly $223, 408.06.
Harry pays Grace a lump sum in that amount, in exchange for a lifetime contract. Harry is immediately eligible for Medi-Cal, by spending-down on precisely those extra services that will improve his quality of life. Meanwhile, Grace, is being paid for work that she would have done for free, but this keeps her from being completely disinherited (which would have happened, if the advice of the Medi-Cal eligibility worker had been followed). This is what attorneys call “a good result.”
But there is yet another tax trap! Grace is suddenly in a higher tax bracket, and next year she would have to pay a huge income tax bill (about $85,000)! Also, what if, five years later, Grace has triplets and she can no longer fulfill her lifetime contract? What is she and her brother start to argue, when he insists that, because of her “default,” she should give back some of the money?
So the attorney keeps planning. The attorney sets up a special escrow account and prepares special escrow instructions. Harry puts the money in the escrow account, which pays Grace every three months. Her income taxes are lower, AND, if she can no longer perform services for Harry, there will be no “default” problem.