Demystifying Medicaid Planning

Posted on October 15, 2015

Originally published in October 2015

See also: How Do I Qualify for Medicaid?

Background

Medicaid vs. Medicare

Medicare. Medicare is a health insurance program that primarily covers seniors aged 65 and older (and disabled individuals of any age) who qualify for Social Security. Medicare is an entitlement program, and as such is not “means-tested”, but is instead based on an individual’s work history. An individual’s assets and/or income are irrelevant to qualifying for Medicare. Anyone who works 10 years or longer at a job that pays Medicare taxes will generally qualify for Medicare. Medicare generally does not cover long-term care.

Medicaid. Medicaid is a health insurance program that is designed to help cover medical costs for people with limited income and financial resources. Medicaid is “means tested”: An individual must have limited resources (assets) and income in order to qualify for Medicaid. Medicaid generally does cover long-term skilled nursing care. (NOTE: In Pennsylvania, Medicaid funding is referred to as “Medical Assistance”, and so throughout this outline, references will at times be made to “Medical Assistance” or MA, both of which are synonymous with Medicaid in Pennsylvania.)

Medicare Coverage of Long-Term (Skilled) Care: Medicare has very limited application to skilled nursing care. In order to qualify for any Medicare coverage at all, a patient must meet certain requirements, including:

Three (3) day in-patient hospital stay
Discharge to a long-term care facility
Participation and benefit from therapy

Medicare will only pay for up to one hundred (100) days of skilled nursing care. The first 20 days are completely (100%) covered. The next 80 days are covered subject to a $147 deductible.

Levels of Long-Term Care

Assisted Living. Assisted Living, which is predominately custodial in nature, is not covered by Medicaid. Assisted is more in the nature of apartment-like living.

Skilled Nursing Care. Skilled nursing care entails ongoing daily medical supervision, and, if all of the requirements are met, skilled nursing care is covered by Medicaid.

Methods of Financing Long-Term (Skilled) Care

Long-Term Care Insurance. If an individual has a long-term care policy in place that will presumably be the first source they would look to in order to pay for the costs of long-term care. Long-term care policies vary widely in terms of what they cover and in terms of what they cost.

For example, some long-term care insurance contracts cover only skilled nursing care services, while others may also cover assisted living services. They may be written to cover the care for a single person only or for more than one person (spouses). The costs of a particular long-term care policy will be affected by many different factors, including (a) the age of the policyholder at the time the policy is purchased, (b) the maximum amount that the policy will pay per day, (c) the maximum number of days (or years) the policy covers, (d) the number of days before long-term care benefits will commence, and (e) optional benefits (e.g., whether benefits will increase with inflation and by how much).

Client’s Sources of Income. After taking into account proceeds from any long-term care insurance policies, a long-term care recipient would typically next utilize any sources of income to help pay for the costs of long-term care. Sources of income could include Pension Benefits, Social Security Benefits, and Income generated on investments.

Client’s Personal Resources (Assets). After exhausting all sources of income, a long-term care recipient will typically need to pay for their long-term care by expending (or borrowing against) their underlying resources (assets). A long-term care recipient could try to utilize the value of assets by borrowing against the assets (e.g., reverse mortgages) or by selling assets and using the proceeds to pay for long-term care.

Medicaid. From the government’s standpoint, Medicaid is the source of “last resort”. The government will not subsidize an individual’s long-term care unless certain requirements are met that insure (a) that the individual is physically in need of skilled nursing care and (b) that the individual lacks the resources to pay for it themself.

Importance of Qualifying for Medicaid

Reasons Why Qualifying for Medicaid can be Important

Medicaid Coverage of Long-Term Care Costs. The most obvious reason for the importance of MA qualification is that it is the only ongoing source of public assistance to pay for the costs of long-term care; and that once an individual qualifies for MA, the Department of Human Services (“DHS”) – the agency that administers Medicaid in PA – generally covers all of the costs of long-term care throughout the individual’s lifetime (assuming of course that the individual continues to qualify for MA for the rest of their life).

Limitation on Nursing Home’s Right to Collect for Services. Another reason that MA qualification can be critically important to applicants and their families is that it limits the nursing homes’ right to collect from others for services rendered to a nursing home resident. In other words, as a condition to the nursing home’s right to receive MA funding from the Commonwealth, the nursing home cannot also collect against a qualified MA applicant or members of the applicant’s family. The importance of MA qualification is therefore underscored by the existence and enforcement of Filial Supports Laws (discussed below).

Filial Support Laws

“Filial Support” refers to the legal obligation of certain adult family members to care for one another (as distinguished from the duties of “spousal support” or “child support”). As used in an elder law context, however, the term is most often used to refer to the obligation of adult children and others to provide support for an indigent parent.

Statutory Law. Pennsylvania’s filial support laws are set forth at 23 Pa.C.S.A. §4601, et seq. Under Pennsylvania’s filial support statute, the following individuals have a legal obligation to care for and maintain or financially assist an “indigent person”:

The spouse of the indigent person
The child of the indigent person.
A parent of the indigent person.

Court cases applying Filial Support Laws. There are appellate court cases in Pennsylvania in which a nursing home has used the filial support laws to hold an adult child legally responsible for the long-term care costs incurred by the child’s indigent parent. In those cases, the parent for one reason or another did not qualify for (or did not apply for) MA, and so the nursing home was not restricted from pursuing legal recourse against the nursing home resident’s adult children.

The “Pittas” Case. In Health Care & Retirement Corporation of America v. Pittas, the Pennsylvania Superior Court sustained a lower court ruling holding an adult child responsible for his elderly mother’s skilled nursing care. In the case, the mother (“Mrs. Pittas”) was transferred in late September 2007 to an HCR facility for skilled nursing care and treatment after sustaining injuries in a car accident. Mrs. Pittas resided in the facility and was treated by HCR until March 2008, at which time she withdrew from the facility and relocated to Greece. A large portion of the fees Mrs. Pittas incurred and owed to HCR went unpaid.

As a result, in May 2008, HCR instituted a filial support action against her son, John Pittas, pursuant to 23 Pa.C.S.A. §4603, in which it sought to hold him liable for the outstanding debt incurred as a result of his mother’s treatment and care. At the trial court level, the court returned a verdict against John Pittas in the amount of almost $93,000. The defendant, John Pittas, appealed the trial court ruling on various grounds but was unsuccessful. Among the arguments John Pittas made on appeal was that the trial court erred in failing to consider alternate sources of support, including his mother’s other two grown children, and her application for medical assistance, which was pending on appeal at the time of the lawsuit. The Pennsylvania appellate court rejected all of the arguments made on behalf of Mrs. Pittas’ son, John, and held him liable for $93,000 of her nursing care debts.

The ruling in the Pittas case underscores the fact that qualifying an applicant for MA in timely fashion can be very important not only for the applicant but also for the applicant’s family.

Medicaid Estate Recovery

What is Medicaid Estate Recovery?

One of the requirements for any state to receive Medicaid funding from the federal government is that, when the person receiving Medicaid benefits is no longer living, the state must seek repayment of the amounts paid (by Medicaid) on the Medicaid recipient’s behalf during the time they were alive. The process by which state governments seek to obtain repayment from a deceased person’s estate is generally known as “Estate Recovery”.

Although Medicaid Estate Recovery is required by federal law, states are given a certain degree of latitude in terms of the specific manner in which they pursue recovery. Accordingly, although Medicaid Estate Recovery is in an ultimate sense a creature of federal law, it is nevertheless shaped to a significant extent by state law.

Limits of Estate Recovery

The federal statute requires that states attempt to recover, at a minimum, those assets of a deceased Medicaid recipient that would pass to their heirs as part of their “probate” estate – in other words, those assets that would pass to heirs under the terms of their Will or (if they died without a Will) under the provisions of the state intestacy statute.

The federal statute permits (but does not require) states to expand Estate Recovery to also include “non-probate” assets – i.e., those assets that would otherwise pass to heirs outside of the estate administration. Such “non-probate” assets include jointly titled assets, retirement plan accounts, IRAs, and accounts that pass through beneficiary designations. To date, Pennsylvania’s Estate Recovery has been limited to a decedent’s probate assets.

Pennsylvania Authority

The Estate Recovery statute in Pennsylvania is set forth at 62 P.S. §1412. The Pennsylvania statute directs the Department [of Human Services] to establish a program that seeks recovery of Medical Assistance benefits paid to persons who were least fifty-five (55) years of age at the time the MA benefits were received.

The Pennsylvania statute requires that Estate Recovery be pursued against those assets that are part of the deceased MA recipient’s probate estate, and it also authorizes the Department, with the approval of the Governor, to expand Estate Recovery by regulation to also include assets of a decedent that pass outside of probate. However, to date, Pennsylvania has not sought to expand Estate Recovery to include non-probate assets.

Assets Subject to Estate Recovery

Because MA generally requires that an individual have minimal resources in order to qualify, Estate Recovery is for the most part limited to those assets that are not otherwise counted in determining a individual’s eligibility for MA – in other words, exempt or non-countable resources. As a practical matter, in most cases, the primary asset – often, the only asset subject to Estate Recovery will be the decedent’s residence, which is a non-countable resource for MA eligibility purposes.

Impact of Estate Recovery on Non-Countable Resources

Because certain assets (such as a residence) that are not otherwise counted for MA eligibility purposes are eventually subject to Estate Recovery if they remain in the MA recipient’s name at the time of their death, it is important to determine how a MA applicant’s assets (including non-countable assets) are titled.

Priority of Estate Recovery Claims

As already noted, one of the conditions to qualifying for MA benefits is that an individual have very limited (countable) assets. Consequently, estates subject to Estate Recovery claims will often be insolvent. The Department’s claims for Estate Recovery will in effect make the Department a creditor of the estate and therefore the priority of the Department’s Estate Recovery claim will be important. The specific priority of the Department’s claim for Estate Recovery claim depends upon when the services were rendered. If the MA benefits were provided within six (6) months of the MA recipient’s death, the Estate Recovery claim will be assigned a higher priority (class 3 priority) than if they were provided prior to that time (class 5.1 priority).

Medicaid Rules

Medicaid Eligibility (In General)

In general, a number of requirements must be met in order for an applicant to become eligible for Medicaid to pay for the applicant’s long-term care. They include requirements pertaining to an applicant’s categorization, citizenship, state of residence, health status, and financial state. Among the most important of these requirements are those pertaining to an individual’s medical condition and financial circumstances.

Categorical Eligibility

Medicaid only covers certain categories of individuals. Age is one of the covered categories. In Pennsylvania, individuals who are age 65 or older and who qualify for Supplemental Security Income (“SSI”) meet the categorical requirement. However, there are also other categories that apply to individuals who are determined to be “medically needy” and whose income is within defined thresholds.

Medical Eligibility (or "Nursing Facility Clinical Eligibility" - NFCE)

In order to be NFCE, an individual must be examined by a physician and diagnosed by that physician to have an illness, injury, disability or other medical condition that necessitates a level of care above that of “room and board”. Generally, the level of care required will be that of skilled nursing or rehabilitation services. In practical terms, this will entail examining the applicant and determining that their condition prevents them from engaging in certain activities of daily living (eating, bathing, dressing, toileting, transferring). As part of the eligibility requirement, the physician must certify that the individual is NFCE.

Financial Requirements

In order to qualify for Medicaid financing of long-term care services, an individual must also meet certain financial requirements. In general terms, the financial requirements limit the amount of resources (assets) and income that an individual can have and still qualify for Medicaid financing. The specific resource and income limits vary according to the specific “pathway” (category) through which the individual qualifies for Medicaid. However, the more generally important requirements are those limiting the applicant’s countable resources.

Resource Limits (Applicable to "Countable" Resources)

To qualify for Medicaid, an applicant's "countable" resources (assets) - i.e. those assets that are actually taken into account for Medicaid purposes - cannot exceed a stated limit. The applicable limit depends on the specific "pathway" (category) under which the individual seeks to qualify for Medicaid.

An individual (unmarried) applicant may not have countable resources in excess of $2,000, $2,400 or $8,000, depending upon the particular Medicaid eligibility pathway. In any case, the applicable resource limit for an unmarried Medicaid applicant is in all instances very low.

If a Medicaid applicant is married, then their spouse who is still living at home (the “Community Spouse”) is allowed to retain additional assets under a rule known as the “Community Spouse Resource Allowance” (or “CSRA”). The CSRA is one-half (1/2) of the spouses’ total assets, subject to a minimum amount (the “floor”) and a maximum amount (the “ceiling”), which are indexed for inflation.

Countable Resources

All resources that are not specifically excluded (exempt) are counted in determining an applicant's resource eligibility for Medicaid. In very general terms, if an asset can be easily reduced to cash, it is likely to be counted. Accordingly, a Medicaid applicant’s countable resources include, among other things:

Real estate (other than a principal residence);
All types of bank accounts and deposits;
All types of investment securities, including stocks, bonds, mutual funds, and most (but not all) types of annuities;
All types of retirement accounts, including (but not limited to) 401(k) accounts, IRAs, and Keogh accounts;
Other types of investment assets held jointly with others or through a revocable trust arrangement; and
The cash surrender value of life insurance policies in excess of certain (very low) limits.

Non-Countable (Exempt) Resources

In order not to be counted for Medicaid purposes, an asset must either be specifically excluded by statute or otherwise unavailable. If an asset is specifically excluded, it is said to be “non-countable”. Non-countable resources include the following:

Primary Residence. Generally speaking, an applicant’s primary residence is a non-countable (exempt) resource. The exemption of the residence applies so long as the applicant, the applicant’s spouse, or a dependent relative lives in the home. Temporary absences from the home for such things as trips and hospitalizations do not affect the exclusion of the home if the applicant intends to return to the home. An absence from the home of more than six (6) months may be an indication that the home is no longer the applicant’s primary residence. However, the home of an institutionalized applicant/recipient that had been used as their principal place of residence before they were institutionalized will be excluded as a resource if the institutionalized applicant/recipient states in writing that it is their intent to return to the home or if the home remains the principal place of residence for their spouse or dependent relative. If the person is incapable of providing the information, statements of intent to return from a person with authority to act on behalf of the institutionalized spouse (e.g., an agent under a power of attorney) are acceptable.

Dollar Limitation on Home Equity. If the applicant is the only person living in the residence, there is now effectively a dollar limitation on the amount of home equity that is excludable. The dollar limitation is $500,000, indexed for inflation, beginning in 2011. However, the dollar limitation on home equity does not apply if the applicant has a spouse, child under age 21, or a child who is blind or disabled who resides in the home.

Household Goods and Personal Effects. Household goods and personal effects are resources that are not counted (are excluded) for the purpose of determining Medicaid eligibility. Personal effects include, but are not limited to, clothing, jewelry, items of personal care, recreational equipment, musical instruments and hobby items.

Motor Vehicle. One motor vehicle for an applicant and/or their spouse is excluded. Other motor vehicles are counted at their equity value.

Burial Spaces and Irrevocable Burial Reserves. Burial spaces and irrevocable burial reserves are generally excluded resources for determining Medicaid eligibility. Burial spaces for the applicant and their immediate family are excluded. Irrevocable burial reserves are excluded, provided that the funds for the burial reserve are 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.

Life Insurance Policies. Life insurance owned by the applicant, up to a maximum face value of $1,500 for each insured person, is excluded. If the life insurance of an insured person has a total face value in excess of $1,500, then only the cash surrender value in excess of $1,000 shall be considered a countable resource to the owner.

Property Essential to Self-Support. Property (whether real or personal) used in a trade or business by the recipient, as an employee, which is essential to self-support, regardless of value, is excluded.

Asset Transfers

Rationale for Asset Transfer Penalty

If applicants were able to meet the resource limits for Medicaid simply by divesting their assets (e.g., gifting assets to family members) immediately prior to applying for Medicaid, it would be very easy indeed for applicants to qualify for Medicaid, and it is doubtful that many people would ever use any portion of their own resources to pay for long-term care. With that concern in mind, the Medicaid laws have for many years sought to limit applicants’ ability to transfer assets in order to meet the resource level required for Medicaid eligibility.

Asset Transfer Penalty

In order to discourage applicants from artificially impoverishing themselves (through gifting) to qualify for Medicaid, a penalty is imposed on transfers for less than fair consideration that occur within a defined time period generally referred to as the “look-back period”. Although the length of the look-back period has changed over time, it currently runs for a period of sixty (60) months dating from the time of the transfer. If assets are transferred for less than fair value at any time during the look-back period, a penalty is imposed in the form of a period of time during which the applicant will be ineligible for Medicaid. If assets are transferred at different times, then each of the asset transfers would be subject to separate look-back periods.

Calculation of Penalty Period (Ineligibility Period). The period during which the Medicaid applicant will be ineligible for Medicaid (the “penalty period”) by reason of an undercompensated transfer during the look-back period is calculated under a formula that is mandated by federal law. Specifically, the ineligibility period is calculated by dividing (i) the uncompensated value of the transferred asset by (ii) the average monthly cost of skilled nursing care to a private payment patient throughout the state (also known as the “penalty divisor”).

When does the Penalty Period start? It is critically important to understand not only how the Medicaid ineligibility period is calculated, but also when it begins to run. The penalty period does not start to run until the applicant is otherwise eligible for Medicaid long-term care. In other words, the applicant must otherwise meet all of the other financial requirements (e.g., resource eligible) and medical eligibility requirements (e.g., a demonstrated need for skilled nursing care) before the ineligibility period will commence. For that reason, if an asset is transferred within the look-back period, it is important that the applicant apply for Medicaid and attempt to meet the other requirements as soon as possible thereafter.

Fully compensated transfers not subject to transfer penalty. It is important to keep in mind that fully compensated transfers (i.e., transfers for full and adequate consideration) are not subject to the transfer penalty, i.e., they do not create a period of ineligibility for Medicaid.

Exempt Transfers (Not Subject to Penalty)

Not all transfers are subject to the Medicaid transfer penalty. As just noted, transfers for “fair value” are not subject to the transfer penalty. In addition, certain types of transfers are in effect “exempt” and therefore not subject to the penalty even if they are for less than full and adequate consideration. The following types of asset transfers will not create a period of Medicaid ineligibility without regard to whether fair consideration was received:

Intent to receive fair market value. If the applicant can demonstrate that, in making the transfer, he/she intended to receive fair consideration for the transferred asset, the transfer will not create an ineligibility period.
Purpose other than to obtain Medicaid benefits. If the applicant can demonstrate that the asset was transferred exclusively for a purpose other than to qualify for Medicaid, the transfer will not create an ineligibility period.
Transfers to a spouse. Transfers to a spouse or to another person for the sole benefit of the transferor’s spouse are not subject to the transfer penalty.
Transfer to a minor or disabled child. A transfer to a child of the applicant who is under twenty-one (21) years of age or to a child of any age who is blind or totally and permanently disabled (based on SSI criteria) does not create a period of Medicaid ineligibility.
Undue hardship. If the Department of Human Services (DHS) determines that imposition of a period of ineligibility for Medicaid would cause an undue hardship to an applicant, then the DHS will waive its right to impose the ineligibility period on the applicant.
Returned gifts. If an asset that was transferred for less than fair consideration is returned to the applicant, then the return of the asset to the applicant will in effect “cure” the transfer penalty and end the ineligibility caused by that transfer.

Special Exemptions Applicable Solely to the Transfer of a Residence

The exemptions stated above apply to transfers of any type of asset. In addition to the transfers listed above, there are also other exemptions that apply solely to the transfer of an applicant’s residence. They include the following:

Transfer to a minor child or to a disabled child.
Transfer to a caregiver child.
Transfer to a sibling with an equity interest in the residence.

Medicaid Planning Techniques

Planning for Single Individuals

"Spend Down" (Deplete) Assets

One possible approach is to accelerate expenditures to reduce an applicant’s countable resources down to the required level in order to qualify for MA sooner. So, for example, an applicant might pay for a vacation or prepay a reasonable amount for funeral and burial services. An obvious limitation of this approach is that it does not preserve any of the applicant’s assets for their family, although the prepayment of funeral and burial expenses can be beneficial in that it pays for a cost that might otherwise have to be paid for by family members. In the case of a married couple, many practitioners recommend that some applicants wait until they enter the nursing home before paying for the funeral and burial in order to maximize the Community Spouse’s CSRA.

Family Caregiver Contracts

Another technique for “spending down” assets to accelerate qualification for MA is through the use of a “Family Caregiver Contract”. A Family Caregiver Contract is an agreement between a parent and another family member (typically an adult child) whereby the other family member agrees to provide personal care services to the parent in exchange for stated compensation. Because the caregiver is providing services, the amount(s) paid to the service provider is/are not considered a “transfer” subject to penalty, provided that the services rendered to the elderly parent are “fair value” for the amounts received by the caregiver. Family Caregiver Contracts are potentially subject to abuse, and therefore they raise various issues:

Value of Services Provided. The most obvious (and perhaps the most important) issue concerns the value of the services provided, as noted above. If the compensation provided to the family caregiver cannot be justified as reasonable in relation to the services provided, then family members can expect that the valuation of the services may become a point of contention when the applicant applies for MA. If the Department of Human Services determines that the compensation paid to the family caregiver reflected more than “fair value”, the DHS will likely argue that the payments were a disguised transfer and should therefore trigger a transfer penalty. To reduce the risk that the arrangement will be re-characterized at a later point in time, families should carefully determine the value of services to be rendered and document that any payments received are reasonable in relation to the services provided. Outside sources should be consulted as useful guides in determining the value of any services. For example, declarations from professional caregiver agencies can be used to justify value. Market surveys are another potential source to consult in setting the value of services.

Documentation. Another important issue in connection with family caregiver contracts is that of documentation. Compensation arrangements should be determined in advance of rendering the services and should be set forth in a formal written agreement. It is also recommended that cancelled checks be maintained and that a log be kept documenting the dates and hours worked by the family member providing the services.

Form of Payment. Another potential issue is the form of payment. For example, will the care provider be paid in installments (e.g., hourly fee for services) over time or in a lump sum in advance? Although a lump sum format is not per se prohibited, it will naturally draw closer scrutiny and would presumably be more easily characterized as a disguised transfer. The preferred form of payment may hinge on the types of assets the applicant has and how readily marketable those assets are. For example, if an applicant’s only significant asset is a difficult-to-sell physical asset or a contingent legal claim that is, by definition, not in the applicant’s physical possession, a lump sum transfer may for practical reasons be the only (or perhaps the most logical) option. In such cases, some practitioners suggest that the asset be transferred to a third party under an escrow arrangement such that the service provider’s entitlement to the escrowed asset is earned over time as services are rendered.

Taxes. Because a family care contract is, in essence, an employment contract, the parties must comply with all of the various laws pertaining to employers and employees, including payment of taxes. Accordingly, it may be necessary to withhold for income, social security and other forms of taxes. At a minimum, family care providers should understand that the amounts they received in exchange for services will be subject to taxation in the same manner as any personal services.

Convert Assets into Exempt Resources

A third technique for accelerating an applicant’s qualification for MA and/or preserving family assets is to convert assets that would otherwise be counted toward the MA resource eligibility limits (“countable assets”) into non-countable (or exempt) resources. In most instances, this involves purchasing non-countable assets. Since the applicant typically expends cash (a countable resource) and in return receives full value (in the form of the non-countable asset), no transfer penalty is triggered by the exchange.

There are a number of ways to convert countable assets into non-countable form. Some examples include:

Purchasing a new or more expensive personal residence.
Making home improvements or repairs to an existing personal residence.
Buying (and/or trading in an existing motor vehicle for) a more expensive motor vehicle.
Purchasing household goods and/or home furnishings.

Purchase Joint or Life Estate Interest in Child's Home

Another possible technique to accelerate an applicant’s qualification for MA and potentially preserve assets involves the planned purchase by the applicant of a life estate interest (or possibly an interest as joint tenant with rights of survivorship [“JTWROS”]) in the home of a child. If the parent/applicant pays not more than fair value for the life estate interest (or joint interest), the payment of the purchase proceeds for full and fair consideration is arguably not a “transfer” that triggers a penalty for MA purposes. Also, because the parent’s life estate interest (or JTWROS interest) terminates at death, there is no asset in the parent’s estate that is subject to estate recovery (at least in those states, like Pennsylvania, that do not expand estate recovery to include non-probate assets).

However, as with most other elder care strategies, important limitations apply.

One Year Residency Requirement. In 2006, Congress, as part of the Deficit Reduction Act of 2005 (“DRA”), enacted a requirement that an individual purchasing a life estate interest in the home of another person must reside there for a period of at least one (1) year after the date of the purchase in order to be treated as an uncompensated transfer. If the one year of residence requirement is not met, then the payment made by the applicant in exchange for the life estate interest will be treated for MA eligibility purposes as a “transfer” of assets subject to penalty. Consequently, the purchase of a life estate interest could result in a period of ineligibility.

Valuing the Life Estate. In order to avoid a transfer penalty, the payment for the life estate interest cannot exceed the value of the life estate interest. That underscores the importance of properly valuing the purchased life estate (or joint) interest.

Estate Recovery. The effectiveness of this particular technique is based in part on an assumption that the purchased life estate interest will not be subject to estate recovery. As of the date of this writing, Pennsylvania does not pursue estate recovery against “non-probate” assets and therefore it would not be subject to estate recovery. However, if Pennsylvania law is at some future point modified in this respect, the viability of this technique would need to be re-visited and possibly abandoned altogether. Also, if the parent/applicant’s child lives in a different state, then the estate recovery rules in that particular jurisdiction should be considered in connection with this technique.

Income Tax issues. The impact on the child’s (or other family member’s) ability to exclude sale proceeds on the sale of his/her primary residence, pursuant to Internal Revenue Code (“IRC”) §121 should also be considered. The sale of the life estate interest (or other joint interest) to the parent could affect a child’s ability’s to later sell their interest in the home without recognizing capital gain tax.

Purchase of a Joint Interest in the Child’s Home. The DRA does not address whether a purchase of an interest in a child’s home as JTWROS is subject to the one year residency rule or even whether it is even considered a “transfer” for MA purposes. Presumably the one year rule does not apply and it would not be considered a “transfer” (if it is for fair value), but there’s no authority that directly addresses the point.

Asset Transfer Strategies (Transferring Assets to Family Members)

There is any number of ways in which assets can transferred from an applicant to other members of the applicant’s family for the purpose of accelerating the applicant’s MA qualification and/or preserving assets for family members. Transfers can be made directly to targeted individuals or they can be made to an irrevocable trust intended to benefit specified individuals. Additionally, as already noted, certain types of transfers are exempt for MA purposes, while others are not. Each of the various types of transfers offer potential benefits and involve different trade-offs.

Potential Benefits

Exempt Transfers. If assets are transferred in a transaction that that is exempt, then transferring the assets to/for the family member effectively preserves the value of the transferred asset in full.

Non-Exempt Transfers (outside the "look-back" period). If an asset transfer is not exempt, but the transfer is outside of the five (5) year look-back period (i.e., it occurs more than five (5) years prior to applying for MA), then the transferred assets will not be counted as “available” resources for MA and the value of those transferred assets will therefore effectively be preserved.

Non-Exempt Transfers (within “look-back” period). If assets are transferred within the five (5) year look-back period, the transfer will create a period of MA ineligibility. However, even if an asset transfer triggers a period of MA eligibility, it will often (though not always) still be beneficial because the income generated by the transferred asset during the period of ineligibility is received by (and therefore effectively preserved for) person(s) other than the applicant.

Types of Asset Transfers

Outright Transfers. Assets can be transferred directly to family members while still reserving (or not reserving) an ongoing interest on the part of the grantor (transferor) in the transferred assets. Reserved interests are most often associated with transfers of real estate. So, for example, an applicant could convey an immediate interest in fee simple (i.e., no rights reserved to the grantor) or could alternatively convey a remainder interest in property (life estate reserved to the grantor). In either case, the transfer would presumably be made with any eye toward the five (5) year look-back period, so that the asset might not be counted in determining the applicant’s eligibility for MA. Both types of transfers pose a number of very similar risks.

Those risks include (1) the grantor’s inability to take back the conveyed interest in the property should it become necessary to do so and (2) all of the risks related to the transferee’s ownership of the property, including the risks that the transferee might be sued, get divorced, become bankrupt, fail to pay taxes, or otherwise encumber the property in some fashion. Another potential problem is the lack of centralized decision-making concerning the property if an interest in the property is conveyed to multiple parties.

Interest in Fee. If the property is conveyed directly without any reserved interest on the part of the grantor, the property may not be subject to inheritance tax, so long as the grantor lives for at least a year after the property is transferred. However, other valuable income tax benefits (such as the exemption of gain realized on the sale of a primary residence, and the stepped-up basis for property received at death) may be lost. Also, insofar as the recipient has the full bundle of property rights, there is potentially a greater risk that the transferee could sell the property.

Reserved Life Estate Interest. If the grantor reserves a life estate interest in the property, the value of the property will be includable in the grantor’s estate for inheritance tax purposes. However, the grantee will take a stepped-up basis in the property for tax purposes when the grantor dies.

Transfers to an Irrevocable Trust. Instead of transferring assets directly to specified individuals, an applicant may instead decide to transfer assets in trust for the benefit of such persons. Trusts have become a popular vehicle for such transfers in part because of the various risks and problems associated with transferring property directly to individuals. Trusts created for the purpose of facilitating transfers for MA purposes hail by many different names, including “income only trust”, “Medicaid trusts”, etc.

While there is no single, uniform design, such trusts are necessarily irrevocable and have a number of common features, including: (1) irrevocability of the trust, (2) the grantor’s inability to take back or benefit from the trust principal, (3) the grantor’s right (sometimes subject to the trustee’s discretion) to trust income, (4) the grantor’s ongoing right to reside in any residential property conveyed to the trust, (5) the trustee’s right to re-direct the trust principal to persons other than the grantor, and (6) provisions for distributing the property at the grantor’s death.

Advantages of Medicaid Trusts

There are a number of advantages to utilizing a trust structure to make any non-exempt asset transfers, including the following:

Flexibility. One of the most important features of a well-designed Medicaid trust is the additional flexibility that structure potentially affords. If the Trustee is given discretion to re-direct assets away from the grantor, then in those families where the children (or other applicable family members) are entirely trustworthy and congenial to the grantor’s interests, it is possible to still use the trust assets for the grantor’s needs, if necessary. Of course, the use of trust assets for that purpose is at cross-purposes with the goal of preserving the assets for eventual distribution to the trust remainder beneficiaries. However, a prospective grantor may take some comfort in knowing that their children have the ability to utilize the trust assets for their benefit should the need arise.

NOTE: Advisors should of course inquire (and have some level of comfort) concerning the specific family dynamics before suggesting that any assets be transferred in trust, or otherwise.

Protection of Entrusted Assets. Another very important advantage of using a trust is that the trust can be drafted so that the entrusted assets are protected from the claims of creditors of the beneficiaries and other types of claimants (e.g., tort claimants) during the time that the assets remain in the trust.

Centralized Decision-making. By designating a trustee (or trustees), the grantor determines who will handle all aspects of administering the entrusted assets during the grantor’s lifetime. This is potentially advantageous in that it effectively narrows down the number of potential decision-makers with respect to the transferred assets.

Tax Benefits. Depending on exactly how the trust is drafted, the tax ramifications will differ. However, it is possible (and common) to draft the trust in a manner that effectively makes the trust “tax-neutral”, i.e., the tax results are no different than if the grantor owned the entrusted assets outright. Typically, that means that trust assets will be subject to inheritance tax at the grantor’s death, but it also means that the grantor’s exemption for the sale of a primary residence is preserved and that the asset bases will be “stepped-up” (or down) to fair value at the grantor’s death.

Planning for Married Applicants

Purchase Long-Term Care Insurance Policies

For those persons who are able to qualify for coverage and who can afford the cost of the premiums, long-term care insurance can be an important way to defray the economic impact of an applicant’s long-term care needs. For married couples, there is twice the risk of needing long-term care at some point, and so there is additional reason to consider this method. Long-term care coverage is a strategy that must be employed earlier on in the planning process – before the need for long-term care arises.

Issues to Consider in Selecting Long-Term Care Insurance. There are numerous factors to consider in reviewing long-term care insurance policies, including:

Costs of the coverage (premium costs).
Amount of the daily/weekly/monthly benefits.
Length of time that the benefits will be offered (e.g., Three years? Five years? Indefinitely?).
Exclusion period (How long before benefits “kick in”?).
Inflation protection (Do benefits rise over time?).
Shared coverage option (Can either spouse draw on the other’s benefit?).
Type of coverage offered (Does the policy cover skilled care only? Does the policy also cover Assisted Living?).
Financial health of the company offering benefits.

Shared Care Policies. Married couples who are considering purchasing long-term care insurance should also consider whether the policy includes a “shared care” insurance option. This feature allows one insured to draw on the benefits of the other insured if they need those additional benefits. This can effectively extend the insurance benefit period for a spouse (if the spouse is the first one to need benefits) at a relatively modest cost.

Hybrid Policies. There are now types of insurance policies that combine long-term care benefits with a guaranteed death benefit in the event that the purchaser of the policy never needs the long-term care benefits during their lifetime. These hybrid policies have elements of life insurance and long-term care insurance. The additional flexibility of such policies may be attractive to some clients who may be concerned about never actually benefitting from a long-term care policy (e.g., if they never need long-term care).

Maximize Retirement Assets of the Community Spouse

Because the retirement assets of the Community Spouse are not counted in determining MA eligibility, it makes sense to maximize those assets. That can be accomplished in different ways, such as maximizing contributions to such plans/accounts or minimizing withdrawals from such plans/accounts. So, for example, a married couple might consider converting a Community Spouse’s IRA to a Roth IRA in order to avoid the required minimum distributions (“RMD”) restrictions.

Pre-Nuptial (and Post-Nuptial) Agreements (including Elective Share Waivers)

Pre-nuptial and post-nuptial agreements should in certain circumstances also be considered for elderly couples facing the prospect of long-term care needs. Elective share waivers are a particularly important consideration, because the DHS will require an institutionalized spouse to exercise their “elective share” rights (i.e., statutory rights to elect to take a percentage share of their spouse’s estate), even if the Community Spouse for tactical reasons purposely excluded the Institutionalized Spouse from the dispositive provisions of their Will. Whether such agreements can effectively prevent elective share rights in a MA context has not yet been addressed by the courts. However, good sense dictates that such agreements be executed well in advance of the need for nursing care in order to maximize the likelihood that they will be honored for that purpose.

Have Community Spouse Execute "Elective Share" Will

If a spouse is anticipated to need long-term care in the near future, it will in many cases make sense for the other spouse to consider excluding that spouse (the soon-to-be “Institutionalized Spouse”) from their Will or otherwise giving to that spouse a share that is not more than they would be entitled to receive as part of their statutory “elective share”.

Re-Title Assets (from Institutionalized Spouse to Community Spouse)

In some cases, even something as simple as re-titling assets between the spouses can be very helpful when one spouse is facing imminent nursing care needs. For example, if, as is typically the case, a married couple’s personal residence is titled in the names of both spouses, and the Community Spouse dies first, ownership of the home will ordinarily pass automatically at the Community Spouse’s death to the Institutionalized Spouse. Although ownership of the residence in the institutionalized Spouse’s sole name will ordinarily not prevent the institutionalized spouse from qualifying for MA, it will nevertheless ordinarily be subject to MA Estate Recovery when the institutionalized spouse dies. Consequently, re-titling the property, such that the Institutionalized Spouse’s name is no longer an owner of the home can be a simple but very important way to protect the home from MA Estate Recovery by the DHS.

Transferring Assets to Other Family Members

All of the points made earlier about transferring assets to other family members (i.e., family members other than the spouse) also apply to married couples. As with single persons, making the transfer early enough in the planning process, so that the applicant can meet the five (5) year “look-back” requirements, is critical.

Purchasing DRA-Compliant Annuities

Another long-term care planning technique that can be used to expedite a married individual’s qualification for MA involves the use of what is known as a “Deficit Reduction Act (or DRA) Compliant Annuity”.

How the DRA-Compliant Annuity Technique Works. Unlike the rules regarding a married couple’s resources (which measure the married couple’s combined resources), a married person’s income is not imputed to their spouse for the purpose of qualifying for MA. Consequently, if a married person applies for MA, the income of their spouse (the Community Spouse) will not be considered in determining their eligibility for MA.

For that reason, if a married couple facing the prospect of long-term care is “over-resourced” (i.e., they have too many assets to qualify for MA), one particularly effective technique to qualify the Institutionalized Spouse for MA can be to use otherwise countable resources to purchase a particular type of annuity policy known as a “DRA-Compliant Annuity.” The annuity payments from the DRA-Compliant Annuity to the Community Spouse are treated as “income” (rather than as “resources”) received by the Community Spouse and they are therefore not considered in determining whether the Institutionalized Spouse qualifies for MA. This can expedite the Institutionalized Spouse’s qualification for MA and help to preserve a better standard of living for the Community Spouse during the time that their spouse is institutionalized.

Requirements for DRA-Compliant Annuities. Not all types of annuities can be used to expedite qualification for MA – only DRA-Compliant Annuities will work for this purpose. A DRA-Compliant Annuity is an immediately payable annuity that meets all of the following requirements:

The annuity must be irrevocable and non-assignable.
The annuity must be actuarially sound.
The annuity must provide for payments in equal amounts, with no deferral and no balloon payments being made.
In addition, the annuity must name the DHS as the remainder beneficiary in the first position (after the spouse and/or any child who is a minor or who is disabled) for at least the amount of medical assistance paid on behalf of the applicant/recipient.

Author: Jeffery D. Scibetta

Originally published in October 2015