Under Mississippi and Federal law, transfers of assets by an Medicaid applicant within 60 months prior to a Medicaid application will result in a penalty of ineligibility.   Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed a penalty on people who transfer assets without receiving fair value in return. These restrictions, already severe, have been made even harsher by enactment of the DRA.

This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.  In Mississippi, this divisor is $4,600.

Example: For example, in Mississippi, where the average monthly cost of care has been determined to be $4,600, and you give away property worth $46,000, you will be ineligible for benefits for 10 months ($46,000 ÷ $4,600= 10).

Another way to look at the above example is that for every $4,600 transferred, an applicant would be ineligible for Medicaid nursing home benefits for one month.

In theory, there is no limit on the number of months a person can be ineligible.  However, for transfers made prior to enactment of the DRA on February 8, 2006, state Medicaid officials will look only at transfers made within the 36 months prior to the Medicaid application (or 60 months if the transfer was made to or from certain kinds of trusts). But for transfers made after passage of the DRA the so-called “lookback” period for all transfers is 60 months.

Example: If the individual made a $400,000 transfer on January 1, 2003, and waited until February 1, 2006, to apply for Medicaid — 37 months later — the transfer would not affect his or her Medicaid eligibility. However, if the individual applied for benefits in December 2005, only 35 months after transferring the property, he or she would have to wait the full 87 months before becoming eligible for benefits. On the other hand, if the individual made the transfer on February 10, 2006, he or she would have to wait 60 months before applying for Medicaid in order to avoid an ineligibility period.

The second and more significant major change in the treatment of transfers made by the DRA has to do with when the penalty period created by the transfer begins. Under the prior law, the 21.7-month penalty period created by a transfer of $100,000 in the example described above would begin either on the first day of the month during which the transfer occurred, or on the first day of the following month, depending on the state. Under the DRA, the 21.7-month period will not begin until (1) the transferor has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer.

For instance, if an individual transfers $100,000 on April 1, 2007, moves to a nursing home on April 1, 2008, and spends down to Medicaid eligibility on April 1, 2009, that is when the 21.7-month penalty period will begin, and it will not end until December 1, 2010.

Exceptions to the Transfer Penalty

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

(1) A spouse (or a transfer to anyone else as long as it is for the spouse’s benefit);

(2) A blind or disabled child;

(3) A trust for the benefit of a blind or disabled child;

(4) A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

(1) The applicant’s spouse;

(2) A child who is under age 21 or who is blind or disabled;

(3) Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances);

(4) A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or

(5) A “caretaker child,” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

Congress has created a very important escape hatch from the transfer penalty: the penalty will be “cured” if the transferred asset is returned in its entirety, or it will be reduced if the transferred asset is partially returned.

Is Transferring Assets Against the Law?

You may have heard that transferring assets, or helping someone to transfer assets, to achieve Medicaid eligibility is a crime. Is this true? The short answer is that for a brief period it was, and it’s possible, although unlikely under current law, that it will be in the future.

As part of a 1996 Kennedy-Kassebaum health care bill, Congress made it a crime to transfer assets for purposes of achieving Medicaid eligibility. Congress repealed the law as part of the 1997 Balanced Budget bill, but replaced it with a statute that made it a crime to advise or counsel someone for a fee regarding transferring assets for purposes of obtaining Medicaid. This meant that although transferring assets was again legal, explaining the law to clients could have been a criminal act.

In 1998, Attorney General Janet Reno determined that the law was unconstitutional because it violated the First Amendment protection of free speech, and she told Congress that the Justice Department would not enforce the law. Around the same time, a U.S. District Court judge in New York said that the law could not be enforced for the same reason. Accordingly, the law remains on the books, but it will not be enforced. Since it is possible that these rulings may change, you should contact your elder law attorney before filing a Medicaid application. This will enable the attorney to advise you about the current status of the law and to avoid criminal liability for the attorney or anyone else involved in your case.

Transfers

Given the fact that Congress has established a period of ineligibility for Medicaid for those who transfer assets, transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year lookback period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the size of the transfer.

One of the prime planning techniques used prior to the enactment of the DRA, often referred to as “half a loaf,” was for the Medicaid applicant to give away approximately half of his or her assets. It worked this way: before applying for Medicaid, the prospective applicant would transfer half of his or her resources, thus creating a Medicaid penalty period. The applicant, who was often already in a nursing home, then used the other half of his or her resources to pay for care while waiting out the ensuing penalty period. After the penalty period had expired, the individual could apply for Medicaid coverage.

Example: Mrs. Jones had savings of $72,000. The average private-pay nursing home rate in her state is $6,000 a month. When she entered a nursing home, she transferred $36,000 of her savings to her son. This created a six-month period of Medicaid ineligibility ($36,000 ÷ $6,000 = 6). During these six months, she used the remaining $36,000 plus her income to pay privately for her nursing home care. After the six-month Medicaid penalty period had elapsed, Mrs. Jones would have spent down her remaining assets and be able to qualify for Medicaid coverage.

While you could generally give away approximately half your assets, the exact amount depended on a variety of factors, including the cost of care, the transfer penalty in your state, income, and possible other expenses. One of the main goals of the DRA was to eliminate this kind of planning. To determine whether a variation of this type planning is still an available strategy to you, you will have to consult with a local elder law attorney.

Any transfer strategy must take into account the nursing home resident’s income and all of her expenses, including the cost of the nursing home. Also, be very, very careful before making transfers. Also, bear in mind that if you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.

In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren’s eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.

Transfers should be made carefully, with an understanding of all the consequences. In any case, as a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid; and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.

Remember:

You do not have to save your estate for your children. The bumper sticker that reads “I’m spending my children’s inheritance” is a perfectly appropriate approach to estate and Medicaid planning.

Even though a nursing home resident may receive Medicaid while owning a home (the DRA has restricted Medicaid eligibility for some homes; click here for more information), if she is married she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows him or her to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at his or her death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.

Permitted Transfers

While most transfers are penalized with a period of Medicaid ineligibility of five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:

* Your spouse (but this may not help you become eligible since the same limit on both spouse’s assets will apply)
* Your child who is blind or permanently disabled.
* Into trust for the sole benefit of anyone under age 65 and permanently disabled.

In addition, you may transfer your home to the following individuals (as well as to those listed above):

* Your child who is under age 21.
* Your child who has lived in your home for at least two years prior to your moving to a nursing home and who provided you with care that allowed you to stay at home during that time.
* A sibling who already has an equity interest in the house and who lived there for at least a year before you moved to a nursing home.

 

Trusts

The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in a living (or “inter vivos”) trust. A trust is a legal entity under which one person — the “trustee” — holds legal title to property for the benefit of others — the “beneficiaries.” The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it.

A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.

Income-only Trusts

An “irrevocable” trust, on the other hand, is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be touched during your life. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or for your benefit. However, if you do move to a nursing home, the trust income will have to go to the nursing home.

You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.

You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.

One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a “special testamentary power of appointment” so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.

Remember, funding an irrevocable trust can cause you to be ineligible for Medicaid for five years.

Testamentary Trusts

Testamentary trusts are trusts created under a will. The Medicaid rules provide a special “safe harbor” for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant’s support. If payments are solely at the trustee’s discretion, they are considered unavailable.

Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.

Supplemental Needs Trusts

The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called “special needs trusts”) is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.

Supplemental needs trusts are usually created by a parent or other family member for a disabled child (even though the child may be an adult). Or, the disabled individual can create the trust with his or her own money, provided the trust meets certain requirements. These latter trusts are sometimes called “(d)(4)(A)” trusts, which refers to the authorizing statute.

Protection of the House

As explained in the Medicaid section of this site, after a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” For many people, setting up a “life estate” is the most simple and appropriate alternative for protecting the home from estate recovery. A life estate is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a future or “remainder” interest in the property. He or she has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder. As with a transfer to a trust, the deed into a life estate can trigger a Medicaid ineligibility period.

Example:

Jane gives a remainder interest in her house to her children, George and Mary, while retaining a life interest for herself. She carries this out through a simple deed. Thereafter, Jane, the life estate holder, has the right to live in the property or rent it out, collecting the rents for herself. On the other hand, she is responsible for the costs of maintenance and taxes on the property. In addition, the property cannot be sold to a third party without the cooperation of George and Mary, the remainder interest holders.

When Jane dies, the house will not go through probate, since at her death the ownership will pass automatically to the holders of the remainder interest, George and Mary. Although the property will not be included in Jane’s probate estate, it will be included in her taxable estate. The downside of this is that depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation. The upside is that this can mean a significant reduction in the tax on capital gains when George and Mary sell the property because they will receive a “step up” in the property’s basis.

Life estates are created simply by executing a deed conveying the remainder interest to another while retaining a life interest, as Jane did in this example. In many states, once the house passes to George and Mary, the state cannot recover against it for any Medicaid expenses Jane may have incurred.

Another method of protecting the home from estate recovery is to transfer it to an irrevocable trust. Trusts provide more flexibility than life estates but are somewhat more complicated. Once the house is in the irrevocable trust, it cannot be taken out again. Although it can be sold, the proceeds must remain in the trust. This can protect more of the value of the house if it is sold. Further, if properly drafted, the later sale of the home while in this trust might allow the settlor, if he or she had met the residency requirements, to exclude up to $250,000 in taxable gain, an exclusion that would not be available if the owner had transferred the home outside of trust to a non-resident child or other third party before sale.

Spending Down

Applicants for Medicaid and their spouses may protect savings by spending them on noncountable assets. This may include:

* paying off a mortgage,
* making repairs to a home,
* replacing an old automobile,
* updating home furnishings,
* paying for more care at home, or even
* buying a new home.

In the case of married couples, it is often important that any spend-down steps be taken only after the unhealthy spouse moves to a nursing home if this would affect the community spouse’s resource allowance.

Immediate Annuities

Immediate annuities can be ideal planning tools for spouses of nursing home residents. For single individuals, they are less useful. An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life. In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem.

In order for the annuity purchase not to be considered a transfer, it must meet three basic requirements: (1) It must be irrevocable–you cannot have the right to take the funds out of the annuity except through the monthly payments. (2) You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000). (3) If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy. (4) Under the DRA, the state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf.

Example:

Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $101,640 (in 2007). However, Mrs. Jones has $214,640 in countable assets. She can take the difference of $111,000 ($214,640 minus the sum of $101,640 and the $2,000 Medicaid recipients are allowed to retain) and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life. (In certain states, following the death of the community spouse the state may be able to recover what’s left of the annuity as reimbursement for Medicaid expenditures to the institutionalized spouse; see Estate Recovery under the Medicaid section of this site.)

Except in the case of clients with substantial savings, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain, the term must be shorter than the life expectancy of the healthy spouse. Finally, where the healthy spouse has a relatively low income, the annuity may provide little benefit since it will only supplant income that he or she would be entitled to from the unhealthy spouse.

Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home.

In short, immediate annuities are a very powerful tool in the right circumstances, but of little or no use in other cases. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose.

(The use of immediate annuities as a Medicaid planning tool is under attack in some states. Be sure to consult with a qualified elder law attorney in your state before pursuing the strategy described above.)

Increased CSRA

Before passage of the Deficit Reduction Act of 2005 (DRA) community spouses in some states whose own income was less than their MMMNA (see discussion under Medicaid section of site) had an alternative to receiving the shortfall from the income of the nursing home spouse. These community spouses could petition the state Medicaid agency for an increase in their standard resource allowances (called the community spouse resource allowance, or CSRA) so that the additional funds could be invested in order to generate income to make up the shortfall in the MMMNA. The DRA will put an end to this practice. Under the new law, an increased resource allowance may only be granted to community spouses whose income is still not enough to reach the MMMNA after first receiving the income of the nursing home spouse. However, this new rule applies only to those who become institutionalized after the law’s enactment (February 8, 2006) or implementation by the state. States are in the process of implementing the DRA’s provisions. Check with a qualified elder law attorney in your state to determine the status and effective date.

The Attorney’s Role

Do you need an attorney for even “simple” Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be “yes.” The social worker at your mother’s nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you’re applying for Medicaid, you may have missed out on significant planning opportunities.

The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. As described above, this may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.

If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets.