This is the fifth of five columns describing strategies to protect the financial security of married persons whose spouses are in nursing care. This final column explains the pros and cons of investing in a small business, how it works, and in what states it is available.
We have been exploring alternatives for a couple named Sam and Hazel. Sam recently became a nursing home resident and will not be returning home. His monthly nursing home bill is $8,000, far above their combined income. They have a homestead worth $200,000 (even at today’s depressed home values) and $200,000 in savings. This puts Sam and Hazel well above median household net worth of around $180,000, but spending $8,000 a month just for Sam’s care will deplete their investments rapidly.
The Medicaid agency tells Hazel that their home is not counted and Sam could be eligible for Medicaid when half of their savings has been expended on his care. Hazel would like to know if there is an alternative plan that would allow her to keep more of their savings.
The objective is to make the excess assets, here approximately $100,000, non-countable or exempt. Giving the money away is a possibility, but tricky. Medicaid would make Sam ineligible for Medicaid nursing care payments for a period determined by dividing the gift by the average cost of nursing care, as determined by the state. This period of ineligibility would not start until Sam is in need of Medicaid because he is in a nursing facility and financially eligible. These gift strategies are complicated and difficult to implement. Fortunately, there are ways that make the excess assets unavailable while Sam qualifies for Medicaid, without permanently depriving Hazel of the financial security those assets represent. We have previously considered investment in the home, immediate annuities and sole-benefit trusts. The fourth strategy involves investment in a small business.
We have previously considered ways to incorporate countable funds in an exempt investment, such as the home, or to convert an asset into an income stream as an irrevocable trust or an immediate annuity. Small business investment is a way to make funds unavailable because the investor cannot easily take the money back.
Publicly-traded stocks are easily bought and sold. Putting money into the stock market provides no advantage in trying to qualify for Medicaid assistance with nursing home bills. However, investing in what are called close or small corporations may make the money unavailable because the stock is unmarketable or legally nontransferable.
Buying into a small corporation, partnership or limited liability company can be difficult. There are many regulatory hurdles to public sales of securities. Small, nonpublic offerings have many restrictions to protect the investing public. An investor usually must know the entrepreneur personally to learn about an investing opportunity.
The principals or major shareholders of a small business must work closely together. They may worry about one of the owners selling out to a competitor or undesirable business associate. Ojai Foods in the recent television series “Brothers and Sisters” provides a case study of why small business owners need to be wary of who becomes an owner. Nora Walker and her family are saddled with the mistress of Nora’s late husband, Holly Harper, as an owner and executive. The conflict that this causes is one of the continuing plot themes. Small business owners often place limits on when their interests can be sold and who can buy into the company to avoid this type of conflict. These limits are called buy-sell agreements.
Investments in small businesses are generally considered risky. For this reason, the liquidation value of $100,000 sunk into a small business might be $50,000 or less, even without a buy-sell agreement or other limitation on stock transfers. This immediate shrinkage of the value of the capital contribution is not a gift. Although this is the natural result of buying into a company, the expectation is that the investment will become greater or will generate in an income stream as the business prospers. Business investments are riskier than putting money in CDs or T-bills, but they have the potential to be much more profitable.
When Sam goes into a nursing home, Hazel could tie her excess assets up by investing in a small business. This would be a possibility if she has a trusted friend or family member with a business that could use an influx of cash.
Protecting assets by tying them up in a small business investment is not simple or easy. The interest in the business could not have a liquidation value that would allow it to be a countable asset for Medicaid purposes. At the same time, Hazel will have to show the Medicaid agency that the interest was worth what she paid for it. Furthermore, the agency will be predisposed to classify the investment as a disguised gift to other owners of the business. Despite the difficulties, such a business investment might be the only realistic alternative in some states.
Federal Medicaid law permits Medicaid applicants and recipients to purchase investments at fair market value at any time, even if the transaction converts a countable asset into one that is noncountable. Furthermore, most states have Medicaid rules that exempt assets used in a trade or business. The difficulty is in convincing the local Medicaid office that a asset-protection strategy they have not seen before is consistent with Medicaid rules.
For more information about these Medicaid devices, or for a referral to an Elder Law attorney in your state, please call either of the numbers below or visit my website and click on the “contact” button.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
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