Affording Long-Term Care with Medicaid
Long-term care planning for an older person or couple can raise a tangle of legal and emotional conflicts.
First, there is the conflict between the family’s goals and current public policy as to who should be primarily responsible for the costs of an individual’s long-term care. The family’s goal typically is to have the costs paid for with public funds. Government policy, on the other hand, is to treat public funds as the payor of last resort, to be available only when the individual’s own assets have been spent down, and then only to the extent that his or her monthly income does not meet the full cost of such care.
Conflicts of interest can also arise within the family when adult children or other younger-generation family members are involved in the planning process for the older person or couple.
Any long-term care planning will unavoidably be short-term in scope, since federal and state Medicaid rules frequently change, usually in an effort to further tighten the eligibility rules or eliminate perceived “loopholes” in the law. Plans for long-term care thus need to be periodically reviewed and updated as necessary to keep current with changes in the law and within the family.
MEDICAID eligibility is the focus of most long-term care planning, but Medicaid is not the only potential source of payment. Other possible sources for long-term care coverage include:
MEDICARE. But Medicare is of only limited benefit to individuals concerned with paying for long-term care in a nursing facility, for the following reasons:
✔ Medicare coverage requires prior hospitalization for three or more consecutive days, not including the day of discharge. Many older persons in need of long-term care for dementia-related problems will not first need to be hospitalized in an acute-care facility.
✔ Medicare coverage is not truly long-term, since benefits are available for a maximum of 100 days of care. Even during that period Medicare will pay the full cost of care only for the first 20 days. For the next 80 days the patient is responsible for a daily co-pay, with Medicare covering only the balance. After 100 days, the patient has to pay the entire cost.
✔ Finally, Medicare covers only skilled-nursing care provided during this 100-day period. As a result, many residents in a long-term care facility will not be eligible for Medicare for any period, since their needs can be met with custodial-level care.
VETERAN’S PENSION BENEFITS. Veteran’s pension benefits can help pay for long-term care expenses, but are available only to veterans whose military service lasted at least 90 days, with at least one day served during a time of war, and whose countable income and assets fall below established thresholds. Pension benefits are also available to the dependents of deceased wartime veterans.
PRIVATE FINANCING. From a practical planning viewpoint, paying for care, either delivered at home or at a nursing home facility, from the family’s own funds may be necessary for some period of time prior to applying for Medicaid. This option will especially be recommended where the individual has gifted assets to family members within the look-back period (discussed below).
LONG-TERM CARE (NURSING HOME) INSURANCE. Long-term care insurance is an additional option for persons whose assets are substantial enough to make it unlikely that they will ever become eligible for Medicaid, and for those who fear the limited quality of care that a government-provided program such as Medicaid will likely pay for in the future. (See our related Article on long-term care insurance.)
Medicaid is a program jointly administered by the federal and state governments that provides a range of health care services for the aged (defined as those age 65 and older), disabled, or blind, including paying for an unlimited number of days of nursing facility services and at-home care. At the federal level Medicaid is administered by the Centers for Medicare & Medicaid Services of the Department of Health and Human Services.
Medicaid Program in Pennsylvania. This article will focus specifically on the Medicaid program as it is administered in Pennsylvania. Like other states, Pennsylvania is allowed some variation in how it interprets and administers the Medicaid program, so that Pennsylvania’s rules and regulations differ in certain respects from those of other states. In Pennsylvania, Medicaid is administered by the Department of Human Services (“DHS”).
WHO IS ELIGIBLE TO RECEIVE MEDICAID?
A broad range of individuals are covered under federally mandated Medicaid rules. For purposes of Medicaid planning, the relevant classes are those persons who are U.S. citizens, residents of the state providing benefits, and who are either categorically needy or medically needy.
INCOME LIMITS ON ELIGIBILITY
Medicaid is a needs-based program that limits eligibility to those persons who meet federally prescribed income and resource tests. In practice, however, for Pennsylvania residents there is not a separate income test used to assess Medicaid eligibility. The only relevant issue on income limits is whether the individual’s countable income (defined below) will be less than the applicable nursing facility charges. If the individual’s countable income exceeds the facility’s charge, no Medicaid benefits will be payable, even if the individual is otherwise eligible, since Medicaid will only pay for the difference between the two.
EXAMPLE: Mrs. Helen Bishop needs to enter a skilled nursing facility whose monthly charge is $7,500. Helen is applying for Medicaid with the intention that Medicaid will pay this monthly charge. Helen receives countable income of $3,000 per month, consisting of Social Security and required minimum distributions from an IRA. Assuming that Helen’s application is approved, Medicaid will only pay $4,500 per month, which is the difference between the facility’s charge and her own countable income. The nursing facility will likely require Helen to assign to it her countable income to make up the balance.
What is Countable Income?
In other words, how much of the individual’s gross income must be applied to the monthly nursing home charge? In calculating gross income, Pennsylvania will include all income currently paid to the individual, such as Social Security benefits, retirement account distributions, dividends, interest, etc. In addition the individual will be required to take all steps necessary to receive any retirement, annuity, and disability benefits to which he or she is entitled, and to assign to DPW his or her rights to receive medical support and third-party medical payments.
Several deductions are allowed from an individual’s gross income in determining “countable income”:
✔ Personal needs allowance (currently $45 per month for residents of a long-term care facility, $85 per month for residents of a personal care home, and $190.30 per month for residents of a domiciliary care home).
✔ Income needs of the individual’s spouse or family, if they are living in the community.
✔ Home maintenance deduction of $757.10, if it is likely that the individual will return to his or her home, but with a six-month limit.
✔ Medicare Part B and the Medigap Insurance Premium Once an institutionalized individual is eligible for Medicaid, all of his or her countable income must first be applied to pay for the costs of care.
RESOURCE LIMITS ON ELIGIBILITY
Medicaid eligibility will be primarily based on the individual’s countable resources, which includes all the real and personal property that the individual owns or controls or which is legally available to him or her.
For those deemed medically needy, the resource limit is $2,400.
For the categorically needy, the countable resource limit is generally $2,000. However, if the applicant’s income does not exceed 300% of the Federal Benefit rate (effective January 1, 2017, that amount is $2,205 per month), the protected amount is increased to $8,000.
Deeming Between Spouses
In the case of a married couple who are living together, the income and resources of one spouse will be deemed available to the other spouse in determining a spouse’s eligibility. When one spouse is institutionalized, however, the at-home spouse (referred to as the community spouse) will be entitled to keep or acquire a certain amount of income and resources (discussed below).
After eligibility has been determined, there is no deeming of income between the community spouse and the institutionalized spouse. Also, resources of the community spouse are not deemed available to the institutionalized spouse beginning with the month following the month of initial eligibility determination. No other relative’s income or resources will be deemed to the applicant. For example, an adult child’s income or resources will not be looked at in considering a parent’s eligibility.
EXEMPT ASSETS FOR ELIGIBILITY PURPOSES
Because the resource limit is based on non-exempt countable resources, it is essential to distinguish between countable resources and exempt assets. The following categories of real property and personal property are currently exempt in Pennsylvania:
✔ Principal Residence
The equity value of an applicant’s principal residence is fully exempt if the applicant, his or her spouse, or a dependent relative is residing there. For a single applicant living in a nursing facility, the principal residence will still be exempt if he or she intends to return there, but the amount of the exemption in such case is capped at $560,000 (for 2017).
What If the Home’s Value Exceeds the Cap? If the unmarried applicant’s house is valued at more than the home equity limit, the excess equity value could be eliminated by the applicant borrowing money from a bank or other lender which in turn would place a mortgage lien on the home. A reverse mortgage or home equity loan could also be used for this purpose. However, the wisdom of assuming such debt is questionable if the only reason for doing so would be Medicaid eligibility.
✔ Irrevocable Burial Funds
Defined as funds deposited with a financial institution or a funeral director under a written agreement stating that the funds cannot be withdrawn before the death of the named beneficiary. There is no dollar limit fixed by statute or regulation on the amount of the irrevocable burial fund exemption. Generally, however, the fund cannot be more than 125% of the average local burial costs. Here are the maximum amounts for irrevocable burial funds created in 2017 for several counties in western Pennsylvania:
Allegheny County $11,836.25
Westmoreland County $12,250
Washington County $16,625
Beaver County $15,625
Lawrence County $12,375
Butler County $15,062.50
Fayette County $12,970
Greene County $12,343.75
✔ Revocable Burial Funds
Up to $1,500.
✔ Assets Used in a Trade or Business
If the business is essential to the individual’s self-support, and including other non-business property that is also essential for self-support.
✔ One Motor Vehicle
Regardless of make, model, or value.
✔ Term Life Insurance
Or any insurance policy without cash surrender value.
✔ Household Goods and Personal Effects
✔ Cash-Value Life Insurance Policies
Owned by the individual up to a maximum face value of $1,500 for each insured person. (If the face value exceeds $1,500, the cash surrender value of the policies in excess of $1,000 will be a countable resource.)
✔ Community Spouse Resource Allowance
For a married individual whose spouse is living at home. (See discussion below).
✔ Community Spouse’s Pension Funds
This exemption covers employer-sponsored plans in which the community spouse is a participant. In addition, it will Include the community spouse’s own IRA accounts and Keogh plans.
✔ Entrance Fee Paid to Continuing Care Community
An entrance fee paid to a Continuing Care Community or Life Care Community will be generally exempt, unless the contract under which it was paid contains certain provisions. For a Medicaid applicant who has been residing in a covered institution and paid an entrance fee, the contracts and other relevant documents will have to be reviewed to determine if the entrance fee will be treated as a countable resource that will have to be spent down before Medicaid eligibility will be achieved.
TREATMENT OF JOINTLY OWNED ASSETS AS AVAILABLE RESOURCES
Assets owned jointly by the applicant and others are treated as either countable or excluded resources, depending first on whether the co-owner applicant has a legal right to sever the joint ownership without obtaining the consent of the other co-owner(s) and, second, if such consent is needed, whether the other co-owner(s) in fact give or withhold such consent.
Transferring Assets as a Medicaid Strategy
In addition to the countable resources owned by the applicant at the time of application, Medicaid eligibility will also depend on whether the applicant (or his or her spouse) transferred assets in excess of $500 for less than fair market value within a certain time period before he or she entered the nursing facility or applied for Medicaid. Such transfers will include both:
✔ Outright transfers to third parties (other than the spouse), which are covered in this topic; and
✔ Transfers to or from a trust, if the trust was established by the applicant, his or her spouse, or another person acting at the direction or upon the request of the applicant or spouse (for example, an agent or court-appointed guardian). Transfers to trusts are covered in a following section.
NOTE: As will be detailed below, current law severely limits the effectiveness of gifting assets as a short-term planning technique.
How Does the Look-Back Rule Affect Gifting?
If an institutionalized individual (or the spouse) has transferred assets at less than their fair market value on or after the applicable look-back date, the individual will be treated as ineligible for Medicaid for a period measured by the amount transferred, without any pre-established limit on the length of such ineligibility.
For an institutionalized applicant the look-back date will be the date that is 60 months (i.e., five years) before the first date on which the applicant is both institutionalized and applies for Medicaid. A different rule applies for a non-institutionalized applicant. In such case, the applicable date is the date of application for Medicaid or, if later, the date on which the applicant disposes of assets at less than fair market value.
Period of Ineligibility – Daily Penalty Divisor
The period of ineligibility is determined on a per diem basis, i.e., the number of days that is equal to the total cumulative uncompensated value of all assets transferred by the individual (or the spouse) on or after the look-back date, divided by a daily penalty divisor that is based on the average monthly cost of nursing facility service in the Commonwealth for a private-pay patient at the time of application. As of January 1, 2017, the penalty divisor is $321.95 per day (or on a monthly basis, $9,792.65).
EXAMPLE: On June 1, 2017 Clara transfers title to her stock portfolio, valued at $450,000, to her children. On September 1, 2019 (27 months later) Clara enters a nursing home with assets of less than $2,400 and applies for Medicaid as a medically needy person. Assume that in 2019 the daily penalty divisor is $330. As a result of Clara’s transfer of assets within the look-back period, she will be ineligible for Medicaid for a period of 1,364 days ($450,000 / $330 = 1,364), or close to four years.
When Period of Ineligibility Starts
If the applicant (or his or her spouse) has transferred assets for less than fair market value on or after the look-back date, the starting period of ineligibility will be the later of:
✔ The first day of the 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 level care based on an approved application for such care but for the application of the penalty period.
EXAMPLE: On June 30, 2017 Mary, age 54 and in good health, makes a gift of stocks valued at $350,000 to an irrevocable trust that she established for the purpose of funding her grandchildren’s education. (Medicaid eligibility was not a reason for Mary creating the trust.) In January 2018 Mary sustains serious injuries in an automobile accident that require her admission to a skilled nursing facility. By March 1, 2020, which is some 33 months after the gift to the education trust, all of Mary’s assets have been spent on her nursing care, and she applies for Medicaid with total resources under $2,400. Assume that at that time the state’s daily penalty divisor is $360. As a result of the gift Mary made to the education trust in June 2017, Mary’s stocks will be treated as a countable resource and she will be ineligible for a period of 972 days ($350,000/ $360 = 972.22) starting on March 1, 2020. Thus, Mary will be ineligible for Medicaid until 2023, but with no assets to pay for her care in the meantime.
NOTE: Gifting assets within the five-year look-back period will be penalized even if the evidence clearly shows that there was no intent to accelerate Medicaid eligibility by making such gifts.
What Happens If Multiple Gifts Are Made?
When assets are transferred on more than one occasion, the starting period of ineligibility will be the first day of the month during or after which such assets were transferred and that does not occur in any other period of ineligibility. Multiple transfers will result in potentially longer consecutive periods of ineligibility rather than concurrent or overlapping periods of ineligibility. If a new transfer would occur during an existing penalty period, the new penalty period will not begin until the existing period has ended.
EXAMPLE: Sam transfers some stocks to his children on May 1, 2017 for which a penalty period of 210 days (or seven months) is imposed. Two months later, or July 1, 2017, Sam transfers additional securities to which a 90-day penalty period applies. Because the second transfer takes place within the first transfer’s penalty period, the second penalty period will not begin until the first penalty period has expired, i.e., on December 1, 2017. Thus, the first penalty period runs from May 1, 2017 through November 30, 2017, and the second penalty period from December 1, 2017, through February 28, 2018.
Gifting of Jointly Owned Assets
Assets held by the applicant and another person in the form of joint tenancy, tenancy in common, or similar arrangement will be treated as transferred by the applicant if a transfer is made by anyone that reduces or eliminates the applicant’s ownership or control of the asset. This rule will apply even if the applicant did not contribute to the purchase of the joint asset nor personally make the transfer.
Exceptions to Asset Transfer Rules
Certain gifts are made specifically exempt from the asset transfer rules. They include:
Transfer of Residence to Exempt Family Members
No ineligibility will be triggered if the individual transfers title to his or her residence to certain family members who meet the law’s exemption requirements.
Transfers of assets to the spouse or to another for the sole benefit of the spouse, and transfers from the spouse to another for the sole use of such spouse.
✔ Transfer of assets to a minor, blind, or disabled child (“disability” is based on SSI criteria).
✔ Transfer of assets to a trust solely for the benefit of such child.
✔ Transfer of assets to a trust solely for the benefit of a beneficiary under age 65 who is also disabled.
Transfers to Purchase an Annuity
A transfer of funds that are used to purchase an annuity will be treated as exempt if the annuity is a commercial annuity contract purchased by or on behalf of an annuitant who applies for Medicaid, and if it is:
✔ Purchased either as part of, or with proceeds from, a qualified retirement account, OR
✔ Irrevocable and non-assignable; actuarially sound, as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration; and if it provides for payments in equal amounts during the term of the annuity, with no deferral of payments or balloon payments allowed.
DHS as Beneficiary of the Annuity
In addition, for the annuity purchase to be treated as an exempt transfer it must name DHS as the remainder beneficiary in the first position for at least the total amount of medical assistance that will have been paid on behalf of the institutionalized individual. In the alternative, DHS can be named as beneficiary in the second position if it follows the community spouse or a minor or disabled child, but in such event is named in the first position if such spouse or a representative of such child disposes of any such remainder for less than fair market value.
Transfer in Exchange for Promissory Note, Loan, or Mortgage
Funds transferred in exchange for a promissory note, loan, or mortgage during the look-back period will be treated as exempt only if the note, loan, or mortgage:
✔ Has a repayment term that is actuarially sound, as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration (in this context, “actuarially sound” means that the term of the note must not exceed the lender’s life expectancy);
✔ Provides for payments to be made in equal amounts during the term of the loan, with no deferral of payments or balloon payments allowed; and
✔ Prohibits the cancellation of the balance upon the death of the lender. If a promissory note, loan, or mortgage does not satisfy all three requirements, the countable value of such note, loan, or mortgage will be the outstanding balance due as of the date of the individual’s application for medical assistance.
Asset Transfers Involving Life Estates
Life Estate with Retained Powers
A common asset transfer strategy for older homeowners has been to transfer their residence to their children while retaining the right to stay in the home until death. This retained interest is called a “life estate,” with the children being referred to as “remaindermen.” In addition to the basic retained right of possession, the homeowner could also retain the right to sell the property or to revoke or amend the remainder interest or re-designate the identity of the remaindermen. Every Medicaid applicant or recipient who owns a life estate in a residence or other property with the retained right to revoke or amend the remainder interest or re-designate the remaindermen will now be required to exercise those rights as directed by DHS. In effect, DHS will exercise the individual’s retained powers on his or her behalf so that the property will be retitled back to the individual’s sole name, to ensure that the Medicaid estate recovery program will reach the asset at the individual’s death.
Retained Power of Sale
It is noteworthy that a retained power of sale is not included in the retained powers proscribed by Pennsylvania law.
The federal Deficit Reduction Act of 2005 (“DRA”) also provides that the purchase of a life estate interest in another individual’s home will be treated as a transfer of assets, unless the purchaser resides in the home for a period of at least one year after the date of the purchase.
Planning Opportunity. At a minimum, in the situation where an older person who will not be in need of skilled nursing home care for the foreseeable future wants to move into a younger relative’s home, the DRA will allow the older person to essentially buy a life estate interest in the younger person’s existing home. To avoid any gift treatment, the purchase price for the life estate interest should be based on the older person’s life expectancy and a reasonable valuation of the property.
EXAMPLE. Alice, age 75, accepts her daughter Mabel’s invitation to come live with her and her family. Mabel and her husband own a home that has a fair market value of $100,000. Given Alice’s age and an assumed AFR of 1.0%, her life estate would have a value of $10,173. If Alice pays Mabel and her husband that amount in exchange for a life estate interest in their home and she lives in the home for at least one year, the $10,173 payment will be treated as an exempt transfer. If the applicable AFR would be 5% rather than 1%, the life estate’s value would be $38,940. From the above example, it is clear that the higher the applicable federal interest rate, the greater will be the amount that can be transferred with this technique.
In addition to the outright transfer of assets discussed in the preceding section, Medicaid rules also restrict the transfer of assets both to and from certain lifetime trusts, where the assets of the Medicaid applicant are used to form all or a part of the trust principal.
Rules Not Applicable to Third-Party Trusts. Except in limited circumstances, these restrictive rules do not apply to trusts created and funded by persons other than the Medicaid applicant, even if the applicant is a beneficiary of the trust.
Transfers To and From Revocable Trusts
Transfers TO a Revocable Trust
No transfer penalty will be imposed in the case of a transfer of assets to a trust created by the applicant in which he or she has reserved a right of revocation, because the trust assets will continue to be considered an available resource, and any payment to or for the benefit of the applicant will be considered countable income. In effect, there is no Medicaid advantage to transferring the applicant’s assets to a revocable lifetime trust of which the applicant is the settlor. The trust assets will be treated as if they had never been transferred in the first place.
Transfers FROM a Revocable Trust
Distributions made from a revocable trust to a person other than the applicant will be treated as a gift transfer for less than fair market value, and trigger the look-back rule.
Transfers To and From from Irrevocable Trusts
Transfers TO an Irrevocable Trust
The look-back rules will apply to transfers of the Medicaid applicant’s assets to an irrevocable trust if the trust instrument provides that there is any portion of the principal or income from which no payment can be made to the applicant under any circumstances. In this case, the date of the transfer is deemed to be the date of the establishment of the trust or, if later, the date on which payment to the applicant was foreclosed.
Transfers FROM an Irrevocable Trust
If there are any circumstances under which payment of principal or income can be made from an irrevocable trust to or for the benefit of the applicant, then such principal or income will be considered an available resource, and payments to or for the benefit of the individual will be treated as income. Under these rules it does not matter what degree of discretion is given to the trustee. No matter how restrictively the discretionary standards may be defined, the presence of any standards for the benefit of the applicant will result in the trust assets being treated as an available resource. This means that the trust property will remain a countable resource even after the look-back period would have expired. Payments made from the trust “for any other purpose,” such as distributions to beneficiaries other than the applicant, will be considered a transfer for less than fair market value, and will trigger 60-month look-back period.
Exception to Trust Transfers Rules
Special Needs Trust
There are very limited exceptions to these trust transfer rules. The rules will not apply to certain trusts, including a Special Needs Trust established for a disabled person younger than age 65 with such person’s own assets, if the trust instrument provides that DHS will receive an amount from the trust at the disabled person’s death up to the amount of medical assistance that will have been paid by DHS on behalf of the disabled person. Only the trust assets, if any, in excess of DHS’s claim can pass to the disabled person’s family.
Special Needs Trust vs. Supplemental Needs Trusts
It is important to distinguish the Special Needs Trust described above from a Supplemental Needs Trust. The latter is a trust created and funded by a third party — not the disabled person — using the third-party’s assets, which authorizes the trustee to make distributions for the disabled person’s benefit, but it allows the trustee complete discretion as to the amount and timing of such distributions. The stated purpose of this type of trust must be that trust property should only supplement — but never supplant — the public benefits for which the disabled person may be eligible. Because the trust instrument does not mandate distributions, nor even establish a legally ascertainable standard by which distribution decisions should be made, the trust property will not be treated as an available resource for Medicaid or SSI eligibility purposes. For a more in-depth discussion of supplemental needs trusts, go to a related article.
As compared to planning for an individual applicant, Medicaid planning is more complex when dealing with a married couple where one spouse is institutionalized and the other spouse (referred to as the “community spouse”) intends to continue residing at home. Medicaid planning for such married couples must focus not only on the eligibility of the institutionalized spouse for Medicaid but also on ensuring that the community spouse can keep or acquire the largest amount of assets and income permitted by law.
TREATMENT OF RESOURCES: THE COMMUNITY SPOUSE RESOURCE ALLOWANCE
In the case of a married couple where one spouse is institutionalized, all property owned by the spouses, whether individually or in joint names, will be deemed an available resource for eligibility purposes, except that, in addition to the standard resource exemptions discussed in another section of this outline, the community spouse will be entitled to retain or acquire assets equal to the Community Spouse Resource Allowance (“CSRA”).
Definition of Community Spouse Resource Allowance
The CSRA is equal to one-half of the couple’s combined countable resources, valued once at the time the institutionalized spouse permanently enters the nursing facility. However, the CSRA cannot be more than a set amount, as adjusted annually for inflation (for 2017, $120,900), and it cannot be less than a fixed amount, also adjusted annually for inflation (for 2017, $24,180).
EXAMPLE: Betty’s dementia has reached the point where her doctors have recommended that she reside in a skilled nursing care facility. Betty and her husband, Mike, own countable assets totaling $300,000, consisting of several Vanguard and Fidelity mutual funds and Betty’s retirement account through work. In calculating his CSRA, Mike would start by taking one-half of their countable assets, or $150,000, but since that figure exceeds the maximum allowable amount, Mike’s CSRA would be limited to that maximum, or $120,900. The CSRA can be further enlarged if necessary to generate additional income to meet the spouse’s monthly maintenance needs allowance, discussed below.
The CSRA is calculated by taking a “snapshot” of the couple’s assets, referred to as the Resource Assessment, on the date the spouse is permanently institutionalized. It is to the community spouse’s advantage to have the resource assessment made as soon as possible after his or her spouse permanently enters the nursing facility, when records are still readily available. The resource assessment will benefit the community spouse by clearly fixing the amount that he or she will be entitled to exclude from the institutionalized spouse’s countable resources when the Medicaid application is ultimately made.
TREATMENT OF INCOME: THE MONTHLY MAINTENANCE NEEDS ALLOWANCE
Protecting the community spouse is concerned not only with maximizing the assets that can be acquired or retained, but also with maximizing the spouse’s monthly income. When one spouse is institutionalized, the community spouse can retain from his or her own income, or acquire from the institutionalized spouse’s income or from their joint income, a Monthly Maintenance Needs Allowance (“MMNA”) that is equal to the combination of the following:
Income Allowance, which is the monthly income that will increase the community spouse’s income to 150% of the federal poverty line for a couple, if the spouse’s own income is less than that amount, as adjusted annually (as of July 1, 2017, the Income Allowance is $2,030 per month).
Excess Shelter Allowance, which will be triggered if the community spouse’s housing and utility bills are sufficiently high. This allowance is based on the community spouse’s total housing expenses along with a utility allowance. If such expenses exceed 30 percent of the above-defined Income Allowance (or $609 per month, based on the current monthly Income Allowance of $2,030), the excess can be retained by the community spouse from the spouse’s own income or the spouse can claim it from the institutionalized spouse’s income or from their joint income.
Income Cap. Notwithstanding the above rules, the total amount that the community spouse can retain or acquire from the institutionalized spouse’s income, or from their joint income, cannot exceed a set amount, adjusted annually for inflation (for 2017 the cap is $3,022.50). A higher limit can be set pursuant to a fair hearing or court order.
Funding the Monthly Maintenance Needs Allowance
In funding the MMNA, the community spouse must first include all of his or her own income, such as Social Security, pensions, and any required minimum distributions from IRAs. In addition, DPW will consider that the community spouse’s CSRA is generating a monthly income calculated by multiplying the CSRA by 1.5% and dividing the result by 12. This amount will be imputed regardless of the actual amount of income that the assets comprising the CSRA may be earning. If the two above sources do not at least equal the MMNA, the community spouse can next take whatever amount of the institutionalized spouse’s income that is necessary to reach the MMNA. If the community spouse still needs additional income to reach the MMNA, he or she will be able to reach the institutionalized spouse’s countable assets.
However, rather than giving community spouses the freedom to invest such assets in the income-producing assets of their choice, DHS requires community spouses to use such additional assets to purchase an actuarially sound commercial annuity for a term certain (Lifetime Guaranteed Period Annuity) equal to the community spouse’s life expectancy. In addition, DHS must be named as contingent beneficiary if the community spouse dies during the guaranteed period certain up to the amount that Medicaid will have paid for the institutionalized spouse’s care.
What are some specific strategies that will comply with current Medicaid eligibility rules as discussed in the previous sections of this article?
Precaution on Asset Transfers
When considering a gift or exchange of assets as a Medicaid planning technique, keep in mind that the advisability of any such transfer will depend on a number of factors. Before a specific gift or exchange strategy is employed, it should be analyzed in light of the following questions:
✔ Would this donor (i.e., the person making the gift) transfer this particular property to these particular donees, and in this amount and at this time, if Medicaid eligibility were not a concern?
✔ Is the proposed gift consistent with the donor’s underlying estate plan (i.e., are the recipients of the lifetime gift the same people who would take under the donor’s Will at death)?
✔ If the proposed strategy involves expending countable resources, such as cash, in exchange for an exempt asset, such as a new residence or automobile, does the strategy make economic sense? Is it reasonable from any viewpoint other than Medicaid eligibility?
✔ How much of the individual’s cash or other liquid assets would be tied up in the proposed purchase of an exempt asset? Would the amount expended impair the individual’s ability to maintain a normal standard of living?
✔ What are the tax consequences of a proposed gift transfer? For example, there might be a large capital gains tax due upon the sale of an asset that was acquired by way of lifetime gift, as compared to receiving it after the donor’s death. The rush to transfer assets to gain Medicaid eligibility can create tax-traps for the unwary.
✔ What is the donor’s life expectancy? Is it likely that he or she will survive the resulting period of ineligibility?
Specific Asset Transfer Strategies
With these cautionary points in mind, the following are examples of asset transfer techniques that may have merit in the right situation:
➤ Transfer Assets to Third Party Without Consideration
If the donor is willing to engage in long-range eligibility planning, gift transfers can be made early to start the running of the 60-month look-back period. The real question here is how much to transfer, and how much to retain to pay for nursing home care during the 60-month look back period that the transfer will trigger. Be aware that too complete a divestment of the individual’s assets may limit the number of quality nursing care facilities that will be willing to admit the individual who is Medicaid eligible from the outset. If the individual appears at the nursing home door totally divested, and thus immediately eligible for Medicaid, will the desired nursing facility deny or delay his or her admission?
➤ Convert “Countable Resources” into “Exempt Assets”
Rather than transferring assets to a third party or a trust, or continuously spending down countable resources on nursing care costs, the donor or his or her spouse can remove countable resources by converting them into exempt assets. For example, if the community spouse could benefit from a new car, or if improvements are badly needed to the residence, countable assets could be spent on these items, both of which are exempt assets. In this case, it is essential that the transferor retain title to the exempt asset, to rebut any presumption of a gift to a third party. BUT – be aware of the limits to this technique under the Medicaid estate recovery program, discussed below.
➤ Purchase Annuity for Community Spouse
Using countable resources to purchase an annuity for the community spouse may still be beneficial, even though the state must be named as a residuary beneficiary after the community spouse’s death. The annuity will lock in an income stream with assets that otherwise would have to be spent on nursing home care for the institutionalized spouse.
➤ Transfer Property into Trust
A transfer of assets into certain kinds of irrevocable trusts may be a viable option for Medicaid eligibility purposes. Rather than making an outright gift to donees, the trust vehicle allows for greater protection of the property. While such transfer will trigger the look-back rule and will result in some period of ineligibility, after that period expires the trust principal will not be treated as an available resource.
➤ Make an Exempt Transfer
For a married couple where one spouse is institutionalized, it is usually beneficial to take advantage of the unlimited exemption for inter-spousal transfers. After a married individual is institutionalized, he or she (or an agent acting under a durable power of attorney) should transfer title to all assets in which he or she has sole or joint ownership to the community spouse, in order to avoid the Medicaid estate recovery program (see discussion below). Likewise, an applicant can transfer assets directly to a minor, blind, or disabled child (“disability” is based on SSI criteria), or to a trust “solely for the benefit” of the child or an adult beneficiary under age 65 who is also disabled.
➤ Pay Off Indebtedness
The resource test looks at gross values, and disregards the applicant’s liabilities. Thus it may be worthwhile to use countable resources to pay off the applicant’s outstanding debts that would otherwise burden him or her or the family, and be of no help in the application process. For example, the mortgage debt on the residence could be paid down or satisfied altogether. But look at what effect this technique will have on cash flow. Do not make the applicant or the community spouse cash poor. A married couple should delay paying off any indebtedness until after the spouse enters the nursing home, if such payments would reduce the CSRA that the community spouse would otherwise be entitled to. Use the institutionalized individual’s assets, not the community spouse’s, to pay off these liabilities.
The exempt character of resources as defined in prior sections of this article pertains only to eligibility for Medicaid during the recipient’s lifetime. However, these same assets will lose their exempt status if held until death, and may be liable at that time for reimbursement to the state for the covered medical assistance paid during the recipient’s lifetime, even if the assistance had been correctly paid. Pennsylvania’s Estate Recovery Program is administered by the DHS for the purpose of recouping medical assistance payments made to “covered recipients,” i.e. persons who were age 55 (not age 65) or older when the assistance was received, and who were receiving assistance for nursing facility services, home and community based services, and related hospital and prescription drug services.
Survey of Pennsylvania Estate Recovery Program
Source of Recovery
The only assets subject to estate recovery in Pennsylvania are “estate property,” i.e., the real and personal property of a decedent that is subject to administration by the personal representative of the decedent’s estate. (This type of property is also called “probate property.”) This limitation will exclude all types of non-probate property, such as:
✔ Assets jointly owned by the decedent and his or her spouse as tenants by the entireties or with others as joint tenants with right of survivorship,
✔ Totten trust (“ITF”) bank accounts,
✔ Beneficiary registered assets (“TOD” or “POD”), and
✔ All beneficiary-designation property (e.g., life insurance, retirement benefits, and annuities) that are payable to named beneficiaries rather than to the decedent’s estate.
Waiver of Recovery Rule in Undue Hardship Cases
DHS will waive its recovery claim in cases of undue hardship, including those involving the recipient’s:
✔ Primary Residence (including expenses incurred in maintaining the residence)
✔ Income-producing Assets
✔ Recovery will also be waived if the estate has a gross value of $2,400 or less and there is an heir.
Right to Postpone Payment of Claim
DHS has attempted to resolve the issue of how the state’s recovery claim will be handled if the individual dies survived by a spouse or by a minor or disabled child. Under federal law, the state’s right of recovery must be postponed until after the death of the recipient’s surviving spouse and until there is no child of the recipient who is disabled or under age 21. Under this rule, many years could possibly elapse between the recipient’s death and the date the state’s claim matures. DHS’s position is that the personal representative has a duty to protect the state’s claim during the postponement period. This duty will be deemed complied with if, after liquidating the assets as appropriate and paying all expenses of administration and superior claims of creditors against the estate, the personal representative takes one of several actions that are permitted by DHS regulations.
Planning in Light of Medicaid Estate Recovery Program
The effectiveness of any proposed lifetime Medicaid eligibility technique must be analyzed in light of the state’s post-death recovery right. Since probate assets will be subject to recovery, solely owned assets that are exempt during the recipient’s lifetime for Medicaid eligibility purposes will likely become subject to the state’s recovery right following death. The primary example of such an asset would be the individual’s solely owned principal residence, which is exempt during life but would be includable in the probate estate at death. Certain techniques are available that can effectively remove property from the potential probate estate but will not be deemed a disqualifying lifetime transfer under the Medicaid rules. Please consult Mr. Hagan for details.