Since few people have long-term care insurance or can afford to pay the high cost of nursing home care out-of-pocket, most people eventually qualify for Medicaid. By default, it has become the primary source of funding for nursing home care and the long-term care insurance of the middle class. This makes Medicaid planning important for nearly every family.
Although their names are confusingly alike, Medicaid and Medicare are quite different programs. Medicare is an “entitlement” program, meaning that everyone who reaches age 65 and is entitled to receive Social Security benefits also receives Medicare. Medicaid, on the other hand, is a form of welfare – or at least that’s how it began. To be eligible for Medicaid, you must become “impoverished” under the program’s guidelines. Also, unlike Medicare, which is totally federal, Medicaid is a joint federal-state program. Each state operates its own Medicaid system, but this system must conform to federal guidelines in order for the state to receive federal money, which pays for about half the state’s Medicaid costs. (The state picks up the rest of the tab.)
This complicates matters, since the Medicaid eligibility rules are somewhat different from state to state, and they keep changing. (The states also sometimes have their own names for the program, such as “Medi-Cal” in California and “MassHealth” in Massachusetts.) Both the federal government and most state governments seem to be continually tinkering with the eligibility requirements and restrictions. This most recently occurred with the passage of the Deficit Reduction Act of 2005 (the “DRA”), which was enacted on February 8, 2006, and significantly changed the rules governing the treatment of asset transfers and homes of nursing home residents. The implementation of these differs from state to state. To be certain of your rights in your particular state, consult an elder law attorney to discuss Medicaid planning. He or she can guide you through the complicated rules of the different programs and help you plan ahead. It is also worth noting that, spurred by incentives from the federal government, state programs are spreading that are aimed at keeping Medicaid longterm care recipients in the community and out of nursing homes for as long as possible.
Qualifying for Medicaid
While two-thirds of nursing home residents are covered by Medicaid, at root it is a health care program for the poor. The definition of “poor” has become quite complex in the area of nursing home coverage. In order to be eligible for Medicaid benefits, a nursing home resident may have no more than $2,000 (in most states) in “countable” assets. The spouse of the nursing home resident – called the “community spouse” – is limited to
All assets are counted against these limits unless the property falls within the short list of “noncountable” assets. These include:
- Personal possessions, such as clothing, furniture, and jewelry.
- One motor vehicle of any value as long as it is used for transportation.
- The applicant’s principal
residence,provided it is in the same state in which the individual is applying for coverage. In most states, the home has not been considered a countable asset for Medicaid eligibility purposes as long as the nursing home resident intended to return home. Under the DRA such houses may be deemed noncountable only to the extent their equity is less than $585,000, with the states having the option of raising this limit to $878,000 (figures rise with inflation). In all states and under the DRA, the house may be kept with no equity limit if the Medicaid applicant’s spouse or another dependent relative lives there.
- Prepaid funeral plans (many states limit the value), up to $1,500 set aside in a specified burial account, and a small amount of life insurance.
- Assets that are considered “inaccessible” for one reason or another.
- Business property that produces income essential for self support.
Medicaid’s treatment of income
The basic Medicaid rule for nursing home residents is that they must pay all of their income, minus certain deductions, to the nursing home.
Medicaid pays nursing home costs that exceed the resident’s income. But in some states, known as “income cap” states, eligibility for Medicaid benefits is barred if the nursing home resident’s income exceeds $2,313 a month (for 2019), unless the excess above this amount is paid into a “(d) (4)(B)” or “Miller” trust. If you live in an income cap state and require more information on such trusts, consult an elder law specialist in your state.
For Medicaid applicants who are married, the income of the community spouse is not counted in determining the Medicaid applicant’s eligibility. Only income in the applicant’s name is counted. Thus, even if the community spouse is still working and earning, say, $5,000 a month, she will not have to contribute to the cost of caring for her spouse in a nursing home if he is covered by Medicaid. In some states, however, if the community spouse’s income exceeds certain levels, he or she does have to make a monetary contribution
What if most of the couple’s income is in the name of the institutionalized spouse, and the community spouse’s income is not enough to live on? In such cases, the community spouse is entitled to some or all of the monthly income of the institutionalized spouse. How much the community spouse is entitled to depends on what the Medicaid agency determines to be a minimum income level for the community spouse. This figure, known as the minimum monthly maintenance needs allowance or MMMNA, is calculated for each community spouse according to a complicated formula based on his or her housing costs. The MMMNA may range from a low of $2,057.50 to a high of $3,160.50 a month, and even higher in Alaska and Hawaii (for 2019; the first figure rises July 1, 2019). If the community spouse’s own income falls below his or her MMMNA, the shortfall is made up from the nursing home spouse’s income (but see a possible alternative under Increased Resource Allowance below).
Medicaid’s Asset Transfer Rules
Why not qualify for Medicaid coverage of nursing home care by simply transferring assets out of your name? Because 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 restrictions on the ability of people to transfer assets before applying for Medicaid coverage without receiving fair value in return. These restrictions, already severe, were made even harsher by
The restrictions impose a penalty for asset transfers –– a period of time during which the person transferring the assets (and his or her spouse) will be ineligible for Medicaid. The period of ineligibility is determined by dividing the amount transferred by what the state Medicaid agency determines to be the average private pay cost of a nursing home in your state. For example, if you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away property worth $100,000, you will be ineligible for benefits for 20 months ($100,000 ÷ $5,000 = 20).
However, for transfers made prior to enactment of the DRA on February 8, 2006, state Medicaid officials would 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.
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 20-month penalty period created by a transfer of $100,000 in the example 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 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) 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.
Even innocent transfers can create penalties
Transfers should be made carefully, with an understanding of all the consequences. Innocent gifts to grandchildren could, years later, result in extended periods without any long-term care coverage of any kind. 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
For instance, if an individual in our example transfers $100,000 on April 1, 2018, moves to a nursing home on April 1, 2019, and spends down to Medicaid eligibility on April 1, 2020, that is when the 20-month penalty period will begin, and it will not end until December 1, 2021. The implementation of this change has differed from state to state. In other words, the penalty period does not begin until the nursing home resident is out of funds, meaning she cannot afford to pay the nursing home. If the applicant is already in a nursing home, the facility itself would likely have to foot the bill for the resident’s care.
Here’s how that works: Say you purchased stock for $10 a share 30 years ago and today it’s worth $100 a share. The $10 purchase price is your basis. If you sell the stock today, you will have a capital gain of $90 a share, the difference between the basis and the selling price, on which you will have to pay taxes. If you give the stock to your children, they will have the same basis as you and have to pay the same taxes if they sell it. On the other hand, if they inherit the stock at your death, under current tax law the stock’s basis gets “stepped up” to the value on your date of death. If that is $100 and your children sell the stock for $100, then there’s no gain and no tax.
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 in doing it 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.
While most transfers are penalized with a period of Medicaid ineligibility, certain transfers are exempt from this sanction. Most Medicaid planning includes the use of permitted transfers. 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 asset limit on both spouses’ assets will apply);
- Your child who is blind or permanently disabled; or
- Into trust for the sole benefit of anyone under age 65 and permanently disabled.
- In addition, you may transfer your home to those listed above, as well as to the following individuals:
- Your child who is under age 21 (rather unusual for nursing home residents);
- 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 (often referred to as the “caretaker” child);
- 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.
Is Transferring Assets Against the Law?
You may have heard that transferring assets to achieve Medicaid eligibility is a crime. Is this true? No. But what about a professional advising someone to engage in asset transfers for Medicaid planning? That is a crime, at least in the statute books. However, it has been ruled to be an unconstitutional violation of the First Amendment. Nevertheless, it remains on the books.
As part of a 1996 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, then-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. Subsequently, a U.S. District Court judge in New York said that the law could not be enforced for the same reason. See New York State Bar Association v. Reno (N.D.N.Y., No. 97-CV-1760, April 7, 1998). Accordingly, the law remains on the books, but it will not likely be enforced. In theory, however, a federal prosecutor in any state other than New York could seek to enforce the law. Another attorney general could see things differently than Janet Reno did. No attorney, or client, has ever been in legal trouble by participating in Medicaid planning.
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 an irrevocable trust.
Whether trust assets are counted against Medicaid’s resource limits depends on the terms of the trust and who created it. Medicaid considers the principal of revocable trusts (that is, the funds held in the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
The funds in most irrevocable trusts are counted as available to the applicant for Medicaid if the trust was created by the applicant or his or her spouse. The funds in most trusts created and funded by someone else are not considered available. However, there are some exceptions to these general rules. For instance, Medicaid does not count the principal of an “irrevocable, income-only” trust as a resource, even if created by the Medicaid applicant or his or her spouse, provided the trustee cannot pay principal to or for the benefit of the nursing home resident or his or her spouse. That is, only the income from the trust is payable.
Another exception to the general rules, in the case of a trust created by someone other than the nursing home resident or his or her spouse, is when the trust document obligates the trustee to make distributions of trust property. In such a case, the trust funds will be considered available to the extent of such obligation.
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. Unlike a trust created during life for a 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 to the Medicaid applicant. While totally illogical, if one spouse creates a trust during his life for his spouse, the funds will be considered available should the wife apply for Medicaid benefits. On the other hand, should the first spouse create the same trust with the same funds, but through his will, the funds will be considered unavailable.
Therefore, these trusts can allow a healthy spouse living in the community (a “community spouse”) 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 becomes necessary. We have
Safe Harbor Trusts
The Medicaid rules provide for three “safe harbor” trusts that are exceptions to the general trust rules. The first, referred to as a “(d)(4) (A)” or “pay-back” trust, must be created by a parent, grandparent, guardian or court for the benefit of a disabled individual under age 65. It may be funded with the disabled individual’s own funds, and the trust property will not be considered available in determining the disabled individual’s eligibility for Medicaid benefits as long as the trust provides that at the beneficiary’s death the state will be reimbursed out of any remaining trust funds for Medicaid benefits paid on behalf of the beneficiary during his or her life.
The second safe harbor trust, often referred to as a “(d)(4)(B)”, “Miller” or “Income” trust, permits nursing home residents in states with an “income cap” to shelter excess income and still qualify for Medicaid benefits.
The third safe harbor, often referred to as a “(d)(4)(C)” or “pooled” trust, is similar to a (d)(4)(A) trust. The differences are as follows: (1) The trust must be administered by a not-for-profit corporation for the benefit of more than one beneficiary, though it can set up separate accounts for each beneficiary; (2) The disabled individual himself or herself may fund the trust, as well as his or her parent, grandparent or guardian, or a court; (3) An alternative to reimbursing the state for Medicaid expenditures made on the beneficiary’s behalf upon his or her death is to have the funds remain in the trust for the benefit of its other beneficiaries.
The rules described above limit who may receive Medicaid coverage of nursing home care. But they are not the whole story. Once someone receives Medicaid benefits, whether for nursing home care or for any other health care cost after the age of 55, the state will seek reimbursement from his or her estate after death. However, no recovery can take place until the death of the recipient’s spouse, or as long as there is a child of the deceased who is under 21 or who is blind or disabled. (How this deferral of estate recovery works in practice depends on the state in question.)
In most cases, Medicaid beneficiaries do not have any estate to speak of; otherwise they would not have been eligible for Medicaid in the first place. However, in many states, Medicaid beneficiaries can keep their homes. They also could inherit money unexpectedly (or through poor planning) or be the beneficiary of a personal injury claim, leading them to have money at the end of their life despite being impoverished before then.
In those cases, whether the state will successfully recover against the Medicaid beneficiary’s estate depends on how the property is held and on the particular state’s laws. All states seek recovery against the probate estate of the deceased Medicaid beneficiary. Some also seek recovery against non-probate property in which the deceased had an interest, such as jointly-held real estate, life insurance and trust property (see our separate Guide on The Probate Process for a discussion of the difference between the probate and non-probate estate). With proper planning, most individuals can avoid recovery against their estates.
Medicaid liens are often confused with estate recovery. While estate recovery only occurs at death, typically if the Medicaid beneficiary is permitted to keep his or her home the state will place a lien on it to be paid back if the house is sold while the beneficiary is alive. Exceptions to the lien exist, substantially paralleling the exceptions to the transfer penalty for giving away the home. Thus, no lien may be applied if a spouse, disabled or minor child, or caretaker child is living there. People often confuse these exceptions as protecting the house from estate recovery as well. They do not. To assume they will can be a costly error. While there is a deferral of estate recovery during the life of a surviving spouse or until a minor child reaches age 21, as described above, this only delays the estate recovery. States, however, are supposed to waive estate recovery in the case of “hardship,” which they are free to define.
Consulting an elder law attorney about Medicaid planning can reduce the fear and anxiety caused by placing a loved one in care and facing the loss of assets. You do not have to go through the process alone. Contact us for a free Medicaid planning meeting and find out the options available to you.