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In discussing Medicaid planning, it must be remembered that the rules seem to change frequently. Changes continue to be made to the Medicaid rules, most of which are aimed at forcing individuals to pay for more and more of their own care. Each time that a “loophole” seems to be found, the government seeks to close that loophole. Thus, any individual planning for the possibility of providing for long-term health care must not only consider what the law is today but also must consider that the governing rules may well change before that individual is in actual need of long-term care. The last significant change was the federal legislation enacted on February 8, 2006, which considerably changed the Medicaid rules and curtailed many of the planning possibilities that had been previously available.
What follows is a summary of the law as most recently modified, as well as some general planning considerations.
Medicaid has two eligibility tests. The first is an income test. In general, if a single person’s income is less than the monthly nursing home bill, that individual may keep a modest amount as a “personal needs allowance” (roughly $73), and the balance of his income will be used to pay the nursing home. Medicaid will pay the difference. With respect to a married couple, the income of the healthy spouse remaining at home is not considered, but only the income of the institutionalized spouse is considered.
There is one notable exception. If the income of the at-home spouse is less than a federally mandated monthly minimum, that spouse is entitled to retain a portion of the institutionalized spouse’s income to bring him or her up to the federal minimum. The amount of income to which the healthy spouse is entitled is to be determined at a fair hearing before the Division of Medical Assistance.
In Massachusetts, prior to 2003, it had been the practice that excess countable assets sufficient to generate income to bring the healthy spouse’s income up to the federal minimum were first allocated to the healthy spouse, and if the assets were insufficient to generate the income needed, then the income from the institutionalized spouse was allocated to the healthy spouse. Now, under the new federal law, the state must first look to the income of the institutionalized spouse before it can allocate assets to the healthy spouse.
The second Medicaid test is an asset test. With a few exceptions, most of one’s assets must be “spent” down before one is eligible for Medicaid. The assets which an individual may retain are frequently referred to as “exempt” or “non-countable” assets. These include:
- The equity in one’s principal residence up to a certain value ($828,000, to be adjusted annually)
- Personal property (furniture, clothing, etc.)
- One automobile per household (regardless of its value)
- A prepaid funeral account (which can be for any amount if done irrevocably)
- A burial account which is specifically identified as such and does not exceed $1,500
- Term life insurance (and cash value life insurance–as long as the existing cash value does not exceed $1,500)
- $2,000 in cash or other investments
Most anything else, including vacation homes (even if located in another state) are “countable” assets and must be spent down.
The asset test is more complicated for a married couple. In general, all the assets of the couple are considered, regardless of whose name the title is in. (At one time, it had been possible to transfer all the assets from the name of the institutionalized spouse into the name of the at-home spouse to qualify the institutionalized spouse for Medicaid.) The same rules regarding “countable” versus “non-countable” assets apply with the exception that the at-home spouse may keep about $119,220 (adjusted annually for inflation) of the couple’s combined total assets.
In 2003, Massachusetts modified this rule to provide that the at-home spouse may now keep one-half of the couple’s combined assets up to the above maximum. In other words, if the combined total is $238,440 or more, the most that can be kept is $119,220, but if the total is less than $238,440, the at-home spouse only keeps half the amount. Prior to the 2003 change, even if the total was less than this $238,440 figure, the at-home spouse could keep at least $119,220. Thus, for example, if the couples’ total assets were $119,220 the at-home spouse could keep the entire $119,220 under the “old” rules, but now only $61,610 under the new Massachusetts rules (half of the $119,200 plus $2,000 for the institutionalized spouse).
One further exception to the asset test, in general, is the rule with respect to assets used in a business from which the individual derives his livelihood. In that case, those business assets, e.g., cash, accounts receivable, real estate, and other capital assets, are considered exempt.
One of the ways in which people seek to meet the asset test is to transfer their assets either directly to their children or into some type of trust. By divesting themselves of the ownership of these assets, it is hoped that they will then meet the asset test outlined above. There are, however, significant restrictions on what assets can be transferred as well as potentially adverse ramifications from making such transfers.
The law imposes what is referred to as a “look-back” period. The applicable statute provides that the value of any transfer made within this “look-back” period, if made for less than valuable “consideration” (i.e., made as a gift) and if made for the purpose of qualifying oneself for Medicaid, will be counted as if the person still owned the asset transferred.
Prior to the February 2006 changes, the look-back period was generally 36 months for an outright transfer and 60 months for transfers involving a trust. Generally speaking, the look-back period covers the period prior to the date of application for Medicaid. Under the new law, the look-back period is 60 months for any transfer, regardless of whether it is an outright transfer or a transfer to a trust.
The most striking change under the new federal law is the determination as to when the disqualification period beings. Under the prior law, if any assets were given away during the look-back period, the individual would be ineligible for the length of time it would have taken to spend those assets on nursing home care (assuming the Massachusetts average cost – currently about $9,300 per month, which amount is adjusted each year).
For example, suppose an individual had $186,000 in countable assets. If he was entering a nursing home and wanted to give his children at least part of those assets, and assuming further that the actual monthly cost of the nursing home was $9,300, he could have given away one-half of his assets, or $93,000. By doing so, the disqualification period for Medicaid would have been 10 months ($93,000 divided by $9,300). That period of disqualification would have run from the date the transfer was made. During that 10-month disqualification period he would have had to pay for his own care in the nursing home–without Medicaid assistance.
Because the individual had retained $93,000, he would have had enough money to pay for his own care for that 10-month period, and he would not have been in jeopardy of losing his nursing home care. Once the 10 months had elapsed, he could have applied for Medicaid and under the prior law, he would have been eligible to receive such assistance. The new law effectively prevents this type of transfer (often previously referred to as “half-a-loaf” planning).
The New Look-Back Period
Under the new law, the disqualification period runs from the first day of a month during or after which assets have been transferred for less than fair market value, or the date on which the individual is eligible for Medicaid and would otherwise be receiving institutional care, whichever is later. Using the example as above, if that individual entered a nursing home and gave away one-half of his $186,000, instead of being ineligible for Medicaid for 10 months, his period of ineligibility would be 20 months. The reason is that the new law requires that the disqualification period begin on the date in which the individual is institutionalized and has spent down his countable assets to $2,000. In the example cited above, the $93,000 which he retained would make him ineligible for 10 months and the $93,000 he gave away would make him ineligible for an additional 10 months. In essence, the new law penalizes an individual who makes a gift during the look-back period as the disqualification period will not start to run until the individual is receiving institutional care and would otherwise qualify for Medicaid but for the transfer. Under prior law, the disqualification period began to run from the date the gift was made; thus, gifts could be made during the look-back period as long as sufficient assets were retained to pay for nursing home care during the disqualification period.
The federal statute also contains a curative provision. If an asset is transferred away, and then transferred back to the individual, the look-back period is cured. There are two potential problems here. First, once an asset is given away, the individual making the gift must now rely on the willingness of the recipient to give the asset back. Second, if the asset given away was a “countable” asset, when it is returned to the individual it will likely now have to be spent down anyway.
The curative provision does have a potential good use, however, with respect to exempt or non-countable assets. For example, people often transfer their homes to their children to protect the home (so the home will not be subject to the recovery rules discussed below). As long as the individual owns the home, it is considered an exempt asset. When, however, the individual transfers that asset away, it triggers the look-back rules. If that individual should need nursing home care within 60 months of having transferred the house away, the full value of the house will be a countable asset and would likely disqualify the individual from receiving Medicaid. If, however, the house is transferred back to the individual, it would retain its exempt status and would not be counted in determining the individual’s eligibility for Medicaid. (If the individual dies owning the house, it will be subject to the claims of the Commonwealth for recovery of the Medicaid benefits paid.)
With respect to all of the above rules, the new law provides that each state will implement a hardship exemption. If the application of the transfer of asset rule would deprive the individual of medical care such that the individual’s health or life would be endangered or the individual would be deprived of food, clothing, shelter or the necessities of life, those rules may be waived on an appeal. The new law also permits the nursing home where the individual is residing to file an appeal on behalf of that individual, with the individual’s consent, if a hardship exists. Any such waiver is to be made on a case-by-case basis.
Under the new law, the purchase of an annuity will be treated as a disqualifying transfer unless the Commonwealth is named as a remainder beneficiary for at least the amount of medical assistance paid on behalf of the annuitant or as a secondary beneficiary after the healthy spouse or a minor or disabled child. There is some uncertainty in the new law as to whether the healthy spouse must also name the Commonwealth as a remainder beneficiary if the annuity is purchased by the healthy spouse. The idea behind the annuity is to have the healthy spouse use excess assets (assets that otherwise would have to be spend down) to purchase an annuity for himself or herself in order to create an income stream. There is no limit on the healthy spouse’s income. Thus, as long as the annuity met certain criteria, including being actuarially sound and irrevocable, and having the Commonwealth named as a remainder beneficiary, it is not deemed to be a disqualifying transfer. Even if the healthy spouse must name the Commonwealth as a remainder beneficiary of the annuity, there is still an advantage in purchasing the annuity as the health spouse will have the benefit of the increased income and may possibly live beyond the terms of the annuity, thereby effectively preserving the full value of the assets used to purchase the annuity. Moreover, all that the Commonwealth can recover from the annuity is the amount it had paid out to the nursing home, which is generally far less than what a nursing home would have charged for private pay care.
Under prior law, an individual’s principal place of residence was considered an exempt asset regardless of the value as long as the individual expressed the intent to return home. This rule has been modified to provide that an individual shall not be eligible for Medicaid if the equity in the home exceeds $828,000. This rule does not apply, however, if the spouse or a minor or disabled child resides in the home.
Normally the transfer of one’s principal residence is considered a “disqualifying” transfer which triggers the look-back rule. There are, however, a few limited exceptions. Spouses can transfer their principal residence from one to the other without any problem. Thus, for example, if one spouse is in a nursing home, he or she can transfer his or her interest to the healthy spouse still at home. There are three other permissible transferees. The first is a child of the transferor who has been living in the home with the parent and who has been a “caretaker” for the parent for at least the two years preceding the transfer. To qualify as a caretaker the child must be able to establish that, but for the child’s care, the parent would have required nursing home care sooner. Thus, it is not enough that the child simply had been living with the parent. Another permissible transferee is a sibling who has had an equity interest in the home and who has been living in the residence for at least one year prior to the transferor’s admission to the nursing home. The last permissible transferee is a minor or disabled child living in the home.
A Life Estate
A technique that had been used frequently in the past was to transfer assets, particularly, real property, to children subject to a retained life estate (the right to live in the house for the rest of one’s life). The idea had been that because the life estate terminates automatically upon death, there is nothing for the Commonwealth to place a lien on when the individual life tenant dies. Further, because of the retained life estate, the property is includible in the life tenant’s taxable estate, preserving the step-up in basis for the remaindermen (the ultimate owner(s) of the property). Such a transfer is, of course, subject to the look-back rules. The actuarial value of the interest given away (the value of the house less the value of the right to live there for the transferor’s life expectancy) is a “transfer.” Under the new law, this type of transfer, even though it is only of a partial interest, might disqualify an individual from Medicaid eligibility if that individual is in need of nursing home care at any time during the 60-month period following the transfer.
Prior to the new federal law, as a way of sheltering excess assets, it was possible for a parent without a primary residence who was about to enter a nursing home to purchase a life estate interest in his child’s home. This purchase was not considered a disqualifying transfer and because the interest was a life estate interest that terminated automatically at death, there was nothing against which the Commonwealth could place a lien. This practice has been modified under the new law to provide that a purchase of a life estate interest in another individual’s home will be treated as a countable asset unless that individual resides in the home for a period of at least one year after the date of purchase.
Outright gifts are still an option provided that enough assets are kept to pay for care during the 60-month look-back period. The problem that always exists with outright gifts is that the individual giving away his assets becomes dependent upon the individuals to whom the gift has been made. Another problem is the income tax “cost basis” which the recipients have in property that is given to them. The donee of any property assumes the same tax basis which the donor had. Often, when a parent gives his house to his children in an attempt to protect it, his basis in the property is very low in comparison to the fair market value of the property. When the children ultimately sell the property, there is often a substantial capital gains tax to be paid.
On the other hand, had the individual died owning that piece of property (including owning a life estate interest in the property), the children would have received a “step-up” in basis, i.e., their cost basis would be increased to equal the fair market value at the time of death, thereby avoiding the built-in capital gain. There is no easy answer and no single answer to each situation, however. While no one likes to pay more taxes than they have to, it may be better to have one’s children pay the higher income tax than risk not being able to pass the property to those children at all.
Because the new law makes no distinction between an outright gift and a gift to a trust, irrevocable trusts are likely a better option than an outright gift. It is permissible to establish an irrevocable trust under which an individual retains only the right to receive the income. So long as there is no discretion in the trustee to pay the principal (or any part thereof) back to the individual, the principal would be protected (assuming that the 60-month look-back period had expired with respect to the original transfer into the trust). The only portion of the trust that could be reached would be the income stream. The law provides in part that
“if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which or the income on the corpus from which payment to the individual could be made shall be considered resources available to the individual.”
Although this language is not entirely clear as to whether the principal of a trust wherein only the income can be used will be considered as a countable asset, to date, the Division of Medical Assistance has not treated the principal of an irrevocable “income-only” trust as a countable asset. Thus, such trusts may be an appropriate alternative for individuals who do not wish to make outright transfers. The advantages to an irrevocable income-only trust are that if it is drafted correctly, the beneficiaries benefit from a step-up in basis in the value of the assets upon the death of the creator of the trust, and if real estate is transferred to the trust, the capital gain exclusion ($500,000 for a married couple, $250,000 for a single individual) is preserved so long as it is the principal residence of the creator of the trust. Moreover, if a parent is uncomfortable in transferring an asset outright to a child, transferring the asset into an irrevocable trust will ensure that the asset is not dissipated during the parent’s lifetime.
As an alternative to deeding one’s residence to children subject to a retained life estate, it may be preferable to consider transferring the entire interest in the house to an irrevocable income-only trust (specifically including the right to occupy any real estate owned by the trust). The advantage of the trust is that greater control can be retained over the house. If a house is transferred directly to the children subject to a retained life estate, and if the parent wants to sell the house, he must have the consent of the children. While one would hope that one’s children would consent to such a sale, there can be situations where obtaining the consent of the children could be a problem, e.g., one of the children has a creditor problem or is going through a divorce. Further, the children would be entitled to receive a share of the proceeds of the sale (equal to the actuarial value of their “remainder” interest in the property). If, on the other hand, the house is owned by an irrevocable trust, the trustee can sell the house and the proceeds are all paid to the trust. The trust can then purchase another residence and/or invest the proceeds to provide an income stream to the trust’s creator.
While revocable trusts remain a viable estate planning option, particularly with respect to avoiding probate administration hassles, there is a potential danger to be guarded against when using such trusts. The law makes it clear that any asset in a revocable trust will be a countable asset. A provision frequently inserted in revocable trusts allows the trustee to distribute the trust assets to the ultimate beneficiaries should the trust creator ever become in need of long-term care. Typically, the trustee will retain enough assets to provide for the care of the trust creator during any look-back period and will distribute the balance of the trust assets to the ultimate beneficiaries. Again, however, the transfer of assets to the ultimate beneficiaries will still be subject to the 60-month look-back period.
Nursing Home Insurance
Long-term care insurance is one alternative that remains available. With long-term care insurance, an individual may avoid the Medicaid lien against his or her estate upon death. The regulations provide that no recovery for nursing facility or other long-term care services may be made from the estate of any person who:
- Was institutionalized
- Notified the division (on the Medicaid application) that he or she had no intent on returning home
- On the date of admission to the long-term care facility had long-term care insurance that met the requirements of 130 CMR 515.014 and the Division of Insurance Regulations at 211 CMR 66.09(1)(e)(2)
The critical question that must be answered is whether or not one can afford such insurance. The older an individual is before purchasing such a policy, the higher the premiums. Further, there is always the risk that the insurance will never be used. A better alternative may be to purchase life insurance to be owned by one’s children. If the individual does have to go into a nursing home and if a significant portion of his assets is spent down, the life insurance policy can, in effect, replace what the children would otherwise have inherited. Unlike the long-term care insurance, unfortunately, death is certain, and the life insurance benefits will be paid at some point in time making the payment of the life insurance premiums paid a surer investment.
The new federal law permits each state to enact long-term care partnerships. This means that states will be allowed to offer long-term care policies to individuals. If an individual purchases a qualified long-term care policy, then for the purposes of determining that individual’s Medicaid eligibility, the amount of that individual’s countable assets equal to the insurance benefit payments will be disregarded.
One planning method that should be considered and which appears to be unchanged by the new federal law, is the creation of a testamentary trust (a trust created within a will). The idea is that each spouse should create a will with a testamentary trust for the benefit of the other spouse giving the Trustee discretionary powers with respect to the distribution of income and/or principal to the surviving spouse. Each spouse could own one-half of the total combined assets such that on the death of the first spouse, the one-half of those assets owned by the deceased spouse should then be protected in the event the surviving spouse applies for Medicaid. (Under federal law, assets in a testamentary trust are not “countable” assets vis-à-vis the surviving spouse’s Medicaid eligibility even though the Trustee has the discretion to make distributions to that surviving spouse.)
Assuming an individual does ultimately receive Medicaid benefits, when that individual dies, his estate will be subject to the claims of the Commonwealth for recovery of some or all of those benefits. The 1993 statute requires each state to implement mandatory recovery programs. Thus, for example, in Massachusetts when an individual dies and his estate is probated, notice must be given to the Division of Medical Assistance. That notice gives the Division the opportunity to make a claim against the decedent’s estate to recover any benefits paid. This enables the Division of Medical Assistance to put a lien on those assets in the decedent’s probate estate, i.e., those assets which were in the individual’s sole name at the time of his death.
There is no doubt that the new federal law greatly restricts many of the planning opportunities that had been in place prior to February 2006. It is important to remember, however, that the federal law applies only to transfers made on or after the date of enactment. Thus, be wary of transferring assets now into an irrevocable trust that already exists and which is subject to the “old” rules in effect prior to August 10, 1993.
The effective date of the federal law is the date of its enactment, which was February 8, 2006. There is a provision in the federal law which provides that if it is necessary for a state to enact legislation to carry out the provisions of the new law, then for that state the effective date is extended to the first day of the first calendar quarter beginning after the close of the first regular session of the state legislature that begins after the date of the enactment of this Act.