How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets
author: Gabriel Heiser, J.D., Attorney.
This book is a financial and legal guide to the ins and outs of the only government program that will pay for the long term nursing home care of your family member: MEDICAID.
$47.00 | 247 pages | More about the Book
Disclaimer: The following information is a description of some of the strategies people use to accelerate Medicaid's payment of their long-term care. This information does not constitute legal advice. You should always contact a lawyer or a qualified planner and not attempt these strategies yourself.
A person facing the prospect of long-term care with moderate income and assets may eventually have to rely on Medicaid to pay part or all of the cost of care. In the Medicaid chapter we learn of provisions to protect a healthy spouse financially. But many states rob a healthy spouse of a previously adequate income by allowing too little in protected resources and income. Likewise, children, relatives and friends are not recognized for the financial sacrifices they make in providing the early care before a recipient becomes bad enough to need Medicaid funded professional help.
Medicaid planning, using a professional Medicaid planning advisor or qualified elder law attorney, allows you to correct inequities in the system. Medicaid planning has gotten a bad name because some individuals, who would normally have too many assets to ever qualify for Medicaid, deliberately use it, many years in advance, to give away everything to their family so as to qualify for Medicaid. It is wrong to abuse the system in this way and to use taxpayer dollars to insure an inheritance for the family. And if that person is not anticipating immediate care, this strategy is just plain dumb.
Medicaid (Medi-Cal in California) will generally pay for certain health services, long term care services such as home care, and nursing home care for those with low incomes and limited resources. Medicaid has limitations on the amount of assets a person may own and the amount of income a person can receive each month before they are eligible. Eligiblity and services vary from state to state.
Our own experience with Medicaid planning, with families that attend our elder care planning workshops, is that there is no intent to take advantage of the system. In almost all cases the family is confronting an immediate need for long-term care and there is usually not enough money to pay for it out of pocket. They are looking for advice on how to get Medicaid to cover that care. Most families using Medicaid planning have very little assets to begin with. Most are simply concerned with keeping the house in the family. Children have seen their parents struggle to preserve and have pride in an asset they can call their own and possibly pass on to children. To be thwarted in trying to preserve the family home because of Medicaid recovery just doesn't seem right somehow.
Families feel the same about the small amount of savings that parents have accumulated over the years. It seems unjust to families to wipe out these accounts when other government health services don't require a sacrifice of assets. And indeed, the concept of Medicaid recovery seems to be only unique to Medicaid services.
Federal disaster relief, crop protection, Medicare services, aging services and programs for low income individuals do not require families to hand over their assets after the recipient dies. Or what if people live in a flood zone but can't afford flood insurance. If rising waters from a hurricane completely destroy their property and the federal government helps them rebuild that property, the government is not going to confiscate the home after they die. If people fail to insure for long-term care and Medicaid pays for that care, why does the government have the right to confiscate their property?
Some Medicaid planners will attempt to discredit other forms of funding long-term care such as using insurance or a reverse mortgage. They do this in order to discourage the public from using these other strategies. The intent is to limit competition ensuring that paying clients will rely entirely on Medicaid planning as a solution. On the other hand, many long term care funding specialists will use the same strategy against Medicaid planners to eliminate competition from their services. These people make Medicaid planners appear as evil or dishonest. Medicaid planning is no different from tax planning. In fact a Supreme Court decision condones honest methods of eliminating income taxes or estate taxes. Tax planning and Medicaid planning both put an additional burden on taxpayers, but one is considered ethical and the other not.
We believe that all strategies have their place in the scheme of things. Medicaid planning fits certain circumstances usually where families are in a crisis mode trying to preserve a few assets such as a house or a savings plan. There is no attempt to take advantage of the taxpayers. Using other strategies for paying the cost of care is much better for a younger generation wanting a plan that will allow for home care, assisted living and a choice in care services.
It is also important to consider that most states resist the concept of Medicaid recovery either overtly or discreetly. In fact one state, West Virginia refused to institute it until threatened by the federal government. Politically, state governments appear to be particularly hardhearted in taking away a widow's home after she dies or in depriving a poor family of a possible means of improving their situation by taking away their family assets. States do a miserable job in their recovery efforts. Secretly most states probably prefer Medicaid planners taking the heat for preserving family assets.
Below are a few of the strategies used to protect income and assets. Since Medicaid rules vary from state to state, you need to talk to a qualified planner or elder law attorney in your state to see the range of planning tools that can be used for your particular situation.
Income Annuity in the Name of the Community Spouse
This technique relies on two Medicaid rules. The first rule is that income between couples is attributed to the spouse who owns the income. Unlike assets which have to be shared for Medicaid eligibility, income does not have to be shared. For example if the Medicaid recipient has a total income of $500 a month and the community spouse has a total income of $4000 a month the community spouse is not required to contribute any income towards the care of his or her spouse. Medicaid will cover the bill less the $500 a month, which less a monthly allowance must be spent towards the cost of care. The second rule allows a spouse to transfer any amount of assets to another spouse without penalty of losing Medicaid eligibility.
Using these two rules, here is how a Medicaid annuity strategy works.
The person needing long-term care -- the institutional spouse -- applies to Medicaid in order to receive Medicaid services. In this case suppose the couple has $100,000 of cash equivalent assets and owns a home and a car. As long as the healthy spouse -- the community spouse -- lives in the home she can keep the home and the car and those assets do not prevent the institutional spouse from receiving Medicaid help. In this example, the institutional spouse must spend $50,000 of the couple's assets down to less than $2000 and have an income insufficient to cover the cost of care and then Medicaid will take over.
Once the Medicaid application has been approved, instead of starting the spend down to $2,000 and then having Medicaid pick up the balance of the cost, the institutional spouse transfers his $50,000 to his wife. This is allowable and will not disqualify the Medicaid approval process but it does not yet take away the responsibility to spend down the cash. The community spouse then uses the money to purchase an immediate income annuity for a period equal to or less than the allowable life expectancy in the HCFA transmittal 64 table. Assets have now been converted to about $800 a month in income. The income belongs to the community spouse and does not have to be shared with the institutional spouse. Therefore the spend down as been avoided. Evidence of this transaction is presented to Medicaid and because the institutional spouse no longer has any attributable assets, Medicaid starts paying its share of the bill.
This strategy serves two purposes. First, it may give the community spouse a larger income than she otherwise would have had under Medicaid rules. Second, even though it represents income, the community spouse has managed to keep $50,000 that would normally have to be spent.
In the past, some planners have set up annuities that provide a remainder payout should the community spouse die too soon. This is usually paid to the children and in the past was used as a way to transfer assets to the children without penalty. Under the deficit reduction act of 2006, the state must be named as beneficiary for any remainder payout. This new rule discourages the use of these annuities to transfer assets to the next generation.
It is important for the planner to follow Medicaid guidelines in transmittal 64 in order to avoid a penalty. If the payout period of the annuity exceeds the life expectancy in Medicaid tables, then the excess amount of total income payment over the life expectancy becomes a transfer for less than value and represents a penalty. This in turn results in a penalty period equal to the amount of excess divided by the monthly Medicaid rate in that state. Medicaid will not start paying for care until this penalty period has been met with someone else paying for that care. We have included the transmittal 64 table below. Medicaid annuities are also required to be irrevocable and it is preferable to make them nonassignable. It's important to use a qualified adviser to make sure you do all of this properly.
Section of Transmittal 64 Dealing With Annuities (Medicaid Annuities)
B. Annuities.--Section 1917(d)(6) of the Act provides that the term "trust" includes an annuity to the extent and in such manner as the Secretary specifies. This subsection describes how annuities are treated under the trust/transfer provisions.
When an individual purchases an annuity, he or she generally pays to the entity issuing the annuity (e.g., a bank or insurance company) a lump sum of money, in return for which he or she is promised regular payments of income in certain amounts. These payments may continue for a fixed period of time (for example, 10 years) or for as long as the individual (or another designated beneficiary) lives, thus creating an ongoing income stream. The annuity may or may not include a remainder clause under which, if the annuitant dies, the contracting entity converts whatever is remaining in the annuity into a lump sum and pays it to a designated beneficiary.
Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound.
To make this determination, use the following life expectancy tables, compiled from information published by the Office of the Actuary of the Social Security Administration.
The average number of years of expected life remaining for the individual must coincide with the life of the annuity. If the individual is not reasonably expected to live longer than the guarantee period of the annuity, the individual will not receive fair market value for the annuity based on the projected return. In this case, the annuity is not actuarially sound and a transfer of assets for less than fair market value has taken place, subjecting the individual to a penalty. The penalty is assessed based on a transfer of assets for less than fair market value that is considered to have occurred at the time the annuity was purchased.
For example, if a male at age 65 purchases a $10,000 annuity to be paid over the course of 10 years, his life expectancy according to the table is 14.96 years. Thus, the annuity is actuarially sound. However, if a male at age 80 purchases the same annuity for $10,000 to be paid over the course of 10 years, his life expectancy is only 6.98 years. Thus, a payout of the annuity for approximately 3 years is considered a transfer of assets for less than fair market value and that amount is subject to penalty.
LIFE EXPECTANCY TABLE - MALES
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LIFE EXPECTANCY TABLE - FEMALES
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Proper Use of Medicaid Annuities
It is important to use the services of a qualified Medicaid planner or elder law attorney when implementing Medicaid income annuities. The annuity must follow "HCFA Transmittal 64 " guidelines or it may be challenged and disqualified as a "transfer for less than value" by your state Medicaid.
Some states have established rules against the use of Medicaid annuities even though Federal Medicaid law and Federal guidelines condone their use. State disallowance of Medicaid annuities has been challenged in several court cases with the States in question being judged on the wrong side of the issue. On the other hand if your state disallows Medicaid annuities it's best for you not to do one than to end up incurring the costs of an expensive legal battle.
When Annuities Should Not Be Done
The two most serious pitfalls that annuity salespeople often fail to disclose are that income received by a Medicaid recipient from an annuity will be paid to the nursing home, and that there will be an attempt at estate recovery in those states which have estate recovery against income annuities.
There is also concern about the improper sale to the elderly of an allied vehicle called a deferred annuity. Congress allowed the deferred accumulation, annuity vehicle as a means for holding or accumulating money, tax deferred, until it would be annuitized into retirement income in a person's later years. It makes great sense for a 55 year old person at the peak of his or her earning years to purchase a deferred annuity for a period of 10 years with the idea of converting it to income after he or she retires and would be in a lower income tax bracket.
It makes much less sense for a 70-year-old widow in a 15 percent tax bracket to purchase a deferred annuity with the idea of deferring income until a later date. What often happens instead is that the annuity cash account accumulates deferred taxable earnings and instead of being converted to income, money is taken out in a lump sum. First dollars taken out of deferred annuities are treated as earnings and tax due on these lump sum surrenders is likely to push the owner's 15 percent tax rate into a higher bracket. Also, early surrenders from deferred annuities within the first 7 to 10 years result in surrender penalties of 1% to 10%. These penalties are rarely disclosed by annuity sales people.
Deferred annuities are also a lousy way to create an inheritance. Unlike stocks, bonds or property which receive a step-up in basis on the death of the shareholder (results in zero taxes to the heirs), there is no step-up in basis for the income which has been accumulated in a deferred annuity. Eventually, this income must be distributed and the tax paid by the heirs. The longer the income accumulates, the larger it becomes and the larger the ultimate tax bite.
Unfortunately, there are firms that aggressively market annuities improperly to seniors. These organizations often conduct marketing seminars under the guise of educating the attendees about financial issues affecting senior citizens. The advertisements contain scare tactics and false and misleading information. While some of the underlying information might be truthful, it is often presented in a sensational manner. All of this is done with the intention of persuading the senior citizen into purchasing a deferred annuity. Some annuity salesmen make as much as $500,000 to $1,000,000 a year in deferred annuity sales commissions.
In addition, in these sales seminars, the income tax benefits of deferring income are usually exaggerated, the surrender charges for early withdrawal are usually glossed over if mentioned at all, the appropriateness of the annuity for the age of the purchaser is rarely discussed, and the attendees are misinformed that the purchase of the annuity will help protect the asset from subsequent claims of a nursing home. The details as to how the annuity needs to be structured for Medicaid eligibility, however, are rarely mentioned. Finally, the overall disadvantages of annuity ownership are never raised.
Prepaid Funeral Instead of or in Addition to Burial Funds
Federal rules allow a person on Medicaid to keep up to $1,500 for funeral expenses. Most states allow a recipient to buy a prepaid funeral plan. The limit for such a plan is always higher than the $1,500 allowed by Federal rules. As an example, if your state allows $7,000 for a prepaid funeral plan then you should use the full amount you have money for to buy a plan.
Your state may also allow additional costs such as the burial plots, caskets and vaults to be tacked on, thus raising the limit.
Use of Spend Down Resources
People assume money being spent down for Medicaid eligibility needs to be applied to care costs. In reality, Medicaid is only interested in seeing the potential Medicaid recipient's resources reduced to less than $2,000. How the money is spent is only questioned if there has been a transfer for less than value.
In order to qualify for Medicaid more quickly, you may want to use some of the spend down money to pay off debt, trade in the old car and buy a new one. (Medicaid typically allows a community spouse to retain just one car), or fix up the house.
Intend to Return Home
If a single person receiving Medicaid care in a facility has a house, that property could be subject to sale to pay for Medicaid expenses. The house is only protected if a qualifying child or dependent lives there or if the recipient intends on returning home. Some states require a medical doctor to certify a return home, but in many states it only requires the signature of the recipient whether that recipient has justification or not. In the states that allow it, always have your loved one sign an intent to return home. At least you have use of the property while your loved one is still alive.
Medicaid treatment of a Home
If the community spouse lives in the home then the home is exempt from determining Medicaid eligibility. It does not count as an asset and prevent the institutional spouse from receiving Medicaid help. On the other hand any other real estate property, not the primary residence, will have to be converted to cash and spent down before Medicaid will start paying the bill.
If the community spouse living in the home does not in turn need Medicaid help in the future then one of two things can happen to the house after the death of the institutional spouse. Legally Medicaid has a claim against the property for recovery services. And in some states a lien against the property, called a TEFRA lien, can be filed in anticipation of Medicaid's cost. The lien can be filed before the death of the care recipient but only a few states actually do that. States that have authority to file these liens often don't so until after the death. At the death of the community spouse, the property cannot be sold until the lien is satisfied. But in states where there is no lien, if the community spouse dies after the institutional spouse it's unlikely that state Medicaid recovery will use the property as an asset for recovery.
And in many states if the property is inside a trust, the state may not consider the house an asset for recovery even though most states have altered their definition of estate to include a trust. Many states still rely on filing a claim in probate court to initiate recovery. The bottom line is very few states are efficient at recovery especially when it comes to a primary residence. Always contact and work with a competent adviser when dealing with recovery issues. You can never assume what your state recovery program will actually do.
Special Home Exemption Rule
It's often the case that a daughter will move in to take care of Mom or Dad or both. In this case Medicaid has a special leniency rule to allow transfer of the home to the daughter and not result in a penalty for a transfer for less than value. If the child provides care for a parent in a parent's home for at least two years, and that care kept the recipient out of a nursing home, the property can be transferred to the child without penalty and the property will not be a subject asset for Medicaid recovery. Medicaid will require some proof of this. Typically an affidavit from a third-party care provider such as a doctor or an agency stipulating that the care was given for at least two years and resulted in keeping the care recipient out of a long-term care facility, will be sufficient evidence. It's important to use a legal adviser to make sure you do this properly.
Some states, in estate recovery, only go after property that goes through probate. Property titled in joint tenancy with rights of survivorship passes at death to the living tenant and avoids probate. If the title is in joint tenancy or held in trust and the joint tenant or beneficiary, at death, changes title before the state files its lien then the state could have no legal claim against the property.
On the other hand, state recovery does not go after property itself but simply requires repayment of Medicaid costs based on assets a Medicaid recipient held prior to applying for Medicaid. The family is responsible for coming up with the money based on the value of the assets. It's very likely, however, in most states that property passing in joint tenancy will simply escape Medicaid recovery or assessment because recovery services may not even be aware of the death of the care recipient until the property has passed in ownership. At that point it could become a legal challenge between state recovery and the family and possibly for bad publicity the state may forgo any further legal action. On the other hand, as Medicaid budgets become stretched, states may become more aggressive in recovery tactics that the law allows them.
Many people anticipating Medicaid services are tempted to put a child's or sibling's name on property titles to avoid probate and Medicaid recovery. It may not be a good idea.
There are at least four problems.
- If the other person on the title becomes subject to a judgment, even one arising from an accident, then at least 50% of the property can be lost to the judgment.
- The other person on the title must consent to any disposition of the property. He or she might not be in accordance with what the original owner wants to do.
- Redoing the title must occur at least 3 years prior to claim in order to avoid look back rules and a sanction on a gift to a non spouse owner.
- The person assuming joint ownership has received a gift and loses the step-up in basis at death. Capital gains taxes may have to be paid. And if the property is not the principal residence of the new tenant, the capital gains exclusion cannot be used either.
Transfer Title of the Property to The Community Spouse
Transfers to a spouse of any assets are exempt from Medicaid eligibility rules. An institutional spouse, anticipating Medicaid, can transfer title in the home to the community spouse and it has no effect on Medicaid eligibility. This can be done either with a quit claim deed or through a trust. With the asset no longer in the name of the care recipient, Medicaid recovery cannot use the house as a basis for recovering its costs. And the community spouse can transfer the house to a member of the family and as long as this is done beyond the three-year look back period, then Medicaid can't assess a penalty period for a transfer of assets for less than value if the transferring spouse eventually needs Medicaid services. It's important to use a legal adviser to make sure you do this properly.
Trust to Avoid Probate
Common trusts to avoid probate are called "living" or "inter vivos" trusts. A trust never dies, thus it is not subject to probate. Most arrangements make the trust the owner of the property with the original owner(s) as trustee(s) (caretaker as it were) and beneficiaries(s). Thus the property reverts to the estate at death. Most people initiate these trusts to avoid probate. Assets in these trusts, other than a primary residence, are transparent to Medicaid. These trust assets are subject to Medicaid spend down rules.
The trust can be used in states where Medicaid recovery only uses primary residences passing through a probate as being subject to recovery. However, a growing number of states do not recognize these arrangements to avoid probate estate recovery and go after primary residences in revocable trusts regardless of ownership.
To do it right for these states requires an irrevocable trust with no life interest, set up 5 years or more before a Medicaid claim. Very few people are willing to do these kinds of trusts.
Some people also include a so-called "life interest" in property in arrangements where property is gifted or in irrevocable trusts. The life interest gives them use of the property until their death even though they don't own it. Medicaid in many states does not recognize life interest and the property is considered to be in the ownership of the person who gifted it and subject to look back rules and recovery.
Move Loved One Needing Care to Another State
A person needing Medicaid covered care in one state may not qualify under that state's rules but might qualify under the rules of a neighboring state. Of particular concern are candidates suffering from dementia or Alzheimer's. It's difficult to quantify their need for care and in some states, those people who are cognitively impaired might not get help with Medicaid even though their needs might be greater than the needs of those who are physically disabled.
Families should consider moving loved ones who have been declined in one state, to live with a member of the family in another state and possibly qualifying in that state. In addition the new state may be more lenient with Medicaid recovery procedures.
Give Away Assets
We have already discussed the moral implications of using Medicaid planning strategies for unfairly qualifying for Medicaid and shifting the burden of cost to the taxpayers. New look back rules under the deficit reduction act have effectively done away with gifting strategies used in the past to accelerate eligibility for Medicaid. This does not mean that gifts cannot be used, but planning must be done many years in advance. Under these new circumstances the whole concept of gifting in order to qualify for Medicaid probably makes little sense.