Understanding the Basics of Medicaid Planning
We work our entire lives to provide for ourself and our family. Most of us plan on retiring and have established various forms of income to provide for our later years. We hope (and probably expect) that our savings and social security benefits will be sufficient to sustain us for the rest of our lives.
However, as we become older, we may very well discover that our savings is not sufficient to meet our needs if long-term care is required. Simply put, the cost of nursing home care is exorbitant. Just look at the numbers. According to the federal government, the average cost for a nursing home room is $187 per day. This means you are looking at an annual expense of $68,255 and a bill of over $341,275 if a nursing home stay runs for five years.
Further, the number of people requiring long-term care is growing. According to the U.S. Department of Health and Human Services, 70% of the people who reach age 65 will need long-term care before they die.
Without proper planning, nursing home care can quickly eat through a lifetime worth of savings. One solution is to get private long-term care insurance. According to the 2011 Long-Term Care Insurance Price Index, an annual report from the American Association for Long-Term Care Insurance, a 55 year old individual can expect to pay about $1,500 annually for $170,000 in current benefits. A 55 year old married couple can expect to pay about $2,350 annually for $338,000 of current benefits. Obviously rates and types of coverage vary depending on a number of factors, including the insurer and the age and health of the insured.
For those who do not get or cannot qualify for private long-term care insurance, Medicaid planning may be an option to consider. Medicaid planning involves ensuring that a person qualifies for Medicaid coverage to pay for nursing home expenses. When this planning is properly implemented, more of a person's assets can pass to family members instead of being used to pay for long-term care expenses.
The purpose of this issue of e-Counsel is to provide a basic overview of Medicaid planning. Specifically, this brochure will discuss:
- What is Medicaid?
- The Medicaid Qualification Rules; and
- Strategies to Qualify for Medicaid.
Please note that Medicaid planning is a detailed and complex area of the law. In fact, books have been written on the subject. This newsletter is not designed to be comprehensive and only touches the surface of a few of the planning options available. The information provided in this newsletter is only intended to be educational and informative in nature and is not intended to give legal or other advice regarding any person's particular situation. If after reading this newsletter you have any questions, please do not hesitate to contact us.
What is Medicaid?
Unless a person has private long-term care insurance, the only real insurance plan for long-term care is through Medicaid. Medicaid is a joint federal-state program that provides medical assistance to individuals who could not otherwise afford it or to persons who qualify for coverage through proper planning.
Each state operates its own Medicaid system, although it must follow national guidelines to receive federal money to fund the program. In Missouri, the Medicaid system is called MO HealthNet. Because each state operates its own Medicaid program under a federal umbrella, the Medicaid rules vary from state to state with the federal government establishing minimum standards which all states must observe.
Once a person has been approved for Medicaid, virtually all of his or her medical bills will be paid by the program, although some coverage may overlap with other programs such as Medicare. Medical coverage under Medicaid includes inpatient and outpatient hospital services; physician services; medical and surgical dental services; nursing facility services; and home health care services.
Medicaid Qualification Rules
Qualifying for Medicaid is not automatic. This is because Medicaid is a means based program, unlike Medicare which a person is eligible for upon attaining the minimum age requirement to receive social securtiy. In order to qualify for Medicaid, there are three different tests or qualification rules which must be satisfied. These are:
- Medical qualification rules;
- Income qualification rules; and
- Asset qualification rules.
All of these qualification tests must be satisfied to be eligible for Medicaid. The essence of Medicaid planning is to provide a means for a person to "pass" these qualification tests so he or she can get coverage without having to use all or a substantial part of his or her life savings to pay for nursing home care.
Each of these qualification tests is discussed in more detail below.
1. Medical Qualification Rules. A person must meet medical qualification rules in order to be eligible for Medicaid. There is not much that can be done from a planning perspective to meet this test because it is based on a person's age and medical condition. In general, a person must be at least age 65, blind, or disabled in order to qualify for Medicaid. A person is disabled for Medicaid purposes if he or she is unable to do any gainful activity by reason of a physical or mental impairmment that can result in death or is expected to last for 12 months.
2. Income Qualification Rules. A person must also meet income qualification rules in order to be eligible for Medicaid. If a person has too much income, he or she will not qualify. This means that person will have to use income and/or assets to pay for nursing home expenses until qualificaiton can be achieved. Unlike the medical qualification rules, much planning can be done to help a person qualify who would otherwise fail to pass the income qualification test.
The income qualification rules are different depending on whether the Medicaid applicant is married or unmarried.
a. Unmarried Medicaid Applicant. An unmarried individual may not have more than a minimal amount of income per month (generally around
$1,000). The definition of "income" for Medicaid purposes includes both "earned" income (wages) and "unearned income" (interest and dividends).
Although states differ, in general, if a person's income exceeds the monthly base, that person is permitted to spend down his or her monthly income on medical expenses with Medicaid paying for the shortfall. In other words, so long as the income of the Medicaid applicant is less then the actual cost of the nursing home, the applicant can qualify for Medicaid under the income test.
b. Married Medicaid Applicant. The income qualification test for a married couple when one spouse (the "Medicaid Spouse") needs nursing home care and the other spouse (the "Community Spouse") does not is more complicated. This is because of various attribution rules relating to which spouse has to count the income as his or her own and the ability to shift income from the Medicaid Spouse to the Community Spouse. Because of these attribution rules, many planning opportunities are available.
With married couples, it must be determined who "owns" the income. In general, the title on the asset which generates the income determines whose income it is. For example, if a Medicaid Spouse owns stock in his or her sole name, any dividend generated from the stock is the Medicaid Spouse's income. If assets are owned jointly, then subject to proving otherwise, the income belongs 50% to each spouse.
The reason it is important to know what income is attributable to each spouse is because the Community Spouse is not required to contribute any portion of his or her income toward the Medicaid Spouse's nursing home bill. Further, it may be possible for the Community Spouse to receive some the the Medicaid Spouse's income. This is because the Community Spouse is entitled to minimum monthly income of between $1,821 and $2,739 (depending on the state). This amount is commonly referred to as the "Minimum Monthly Maintenance Needs Allowance" or "MMMNA." If the Community Spouse's income is less than the MMMNA, then a portion the the Medicaid Spouse's income can be allocated to the Community Spouse to allow the Community Spouse to reach the MMMNA.
3. Asset Qualification Rules. A person must also meet asset qualification rules in order to be eligible for Medicaid. In other words, there are limits on the amount of money or property a person can have and still qualify for Medicaid. As with the income qualification test, there are many planning opportunities available to help a person qualify for Medicaid who would otherwise fail to pass this test because the value of his or her assets exceed the threshold amount required for Medicaid qualification.
a. General Rules.
i. Single Person. In general, a unmarried person applying for Medicaid cannot have more than a minimal amount of countable assets (generally around $1,000). "Countable assets" is a term of art for Medicaid purposes and is discussed in more detail below.
ii. Married Couple With Only One Spouse in Need of Nursing Home Care. For a married couple where one applies for Medicaid (Medicaid Spouse) and the other does not (Community Spouse), special rules apply. In this situation, the Community Spouse is allowed to own a certain amount of assets that do not count against the assets that the Medicaid Spouse is permitted to own. This protected amount is generally referred to as the "Community Spouse Resource Allowance" or "CSRA." The CSRA varies from state to state. In Missouri, the CSRA is approximately 50% of the value of the couples' assets, however the minimum CSRA is approximately $22,000 and a maximum CSRA is approximately $110,000.
iii. Married Couple With Both Spouses in Need of Nursing Home Care. If both spouses are in need of long-term care (in other words the couple consists of two Medicaid Spouses and no Community Spouse) then there is no CSRA.
b. What Assets Are Counted? Basically, all assets that a person owns are countable assets for Medicaid qualification purposes unless the asset is exempt. Countable assets include:
- Cash, savings and checking accounts;
- Certificates of deposit;
- IRA's, 401(k)'s, 403B's and other profit-sharing plans;
- Stocks, bonds and mutual funds;
- Automobiles (except for one car which can be an excluded asset as noted below);
- Trucks and boats;
- Real estate (except as noted below); and
- Certain trusts.
c. What Assets Are Exempt? Exempt assets are not counted for Medicaid qualification purposes. Although state rules differ, exempt assets generally consist of:
- Principal residence or certain amount of equity in residence depending on the state (discussed in more detail below);
- Normal personal belongings and household goods;
- One car or truck;
- Income producing real estate;
- Funeral and burial funds and spaces;
- De Minius life insurance (usually around $1,500).
d. How Are Countable Assets Valued? Net asset value on an asset by asset basis determines the value of a counted asset. In other words, the value of an asset is its fair market value less encumbrances associated with the asset.
Strategies to Qualify for Medicaid
Medicaid planning is very individualized because each person's situation is different. Usually, a person's facts and circumstances dictate what planning options are available. A person's facts and circumstances can differ in a number of ways, including:
- Age, health and life expectancy of the potential Medicaid applicant;
- Marital status of the Medicaid applicant;
- If married, the age, health and life expectancy of the potential Medicaid applicant's spouse;
- Type of assets held in the name of the Medicaid applicant (and spouse, if any):
- Is there a home?
- Is there a farm?
- Is there a family business?
- Are there IRAs or other retirement assets?
- Total amount of assets held in the name of the Medicaid applicant (and spouse, if any);
- Total amount of income, including pensions and social security, of the Medicaid applicant (and spouse, if any);
- Number of children in the Medicaid applicant's family;
- Family dynamics; and
- Other unique factors.
We have found that clients who engage in Medicaid planning generally fall into one of two categories. The first category is clients who are in a crisis mode ("Crisis Planning Clients"). These clients did not do any planning at all, have no long-term care insurance and now need to go into a nursing home immediately. The second category is clients who plan well before the need for nursing home care arises ("Long-Term Planning Clients").
The reason we divide clients into Crisis Planning Clients and Long-Term Planning Clients is because the planning options for Crisis Planning Clients is much more limited. This is because the Medicaid rules have restrictions on transferring assets and provide look back rules and penalty periods if a potential Medicaid applicant tries to "give away" assets in order to qualify for Medicaid.
1. Medicaid Look Back Rules and Penalty Periods. Generally, any asset transferred by a Medicaid applicant to a third party for less than its fair market value within 60 months of the submission of the Medicaid application is considered an asset owned by the applicant at the time of the application. This 60 month period is normally referred to as the "look back period."
If a transfer is made for less than fair market value during the look back period, a Medicaid applicant will be penalized. The penalty is that the Medicaid applicant will not be eligible for Medicaid for a period of time. This period of time is normally referred to as the "penalty period."
The length of the penalty period is dependent on the value of the gift made during the look back period. The penalty period is calculated by taking the value of the gift and dividing it by the state's average nursing home cost.
Example 1: Assume a person makes a gift of $40,000 to a child. Also assume the average nursing home cost in the state is $5,000 per month. The person making the gift would be ineligible for Medicaid assistance for 8 months ($40,000 /$5,000) if they applied for Medicaid within 60 months of making the $40,000 gift.
There is no limit on the penalty period. That is, the greater the value of the gift, the longer the penalty period.
Example 2: Assume a person makes a gift of $1,000,000 to a child. Also assume the average nursing home cost in the state is $5,000 per month. The person making the gift would be ineligible for Medicaid assistance for 200 months ($1,000,000/$5,000) if they applied for Medicaid within 60 months of making the $1,000,000 gift.
Generally, for any transfers after February 8, 2006, the penalty period begins on the date the Medicaid applicant would have been eligible to receive Medicaid coverage but for the imposition of the penalty. This means that the penalty period does not begin to run until a person applies for Medicaid. Accordingly, in Example 1 above, if that person made the $40,000 gift and 4 years later applied for Medicaid, the 8 month penalty period would not start until the application is made. In other words, the 8 month penalty period is not measured from the date of the gift.
How will anyone ever find out if a person made a gift? When a person applies for Medicaid, one to the questions asked is whether the applicant made any gifts within the last 5 years. If a gift was made over 5 years from the application date, the gift should not disqualify the applicant (no matter how large the gift). If the gift was within the 5 year look back period, there will be a period of disqualificaiton. Being dishonest when completing a Medicaid application is fraudulent and constitutes a crime.
2. Strategies to Qualify for Medicaid in General. Simply put, and as noted above, Medicaid planning involves ensuring that a person meets the income and asset qualification tests to be eligible for Medicaid without being subject to an unplanned penalty period. When properly implemented, whether for Crisis Planning Clients or Long-Term Planning Clients, more property can be passed to other family members. This planning can involve (i) converting countable assets to non-countable or exempt assets, or (ii) spending down or transferring assets to qualify for Medicaid.
3. Converting Countable Assets to Exempt Assets. There are many ways to convert countable assets (such as cash) into non-countable or exempt assets. This is obviously beneficial because having too many countable assets may make a person ineligible for Medicaid. Some ways to convert countable to non-countable assets include:
a. Planning With a Home or Residence. Since a home is an excluded asset, any improvement made to the home would also be excluded. Repairing the roof, finishing the basement or redoing the kitchen are all things that can take cash (which is countable) and convert it into something that is exempt or not countable. An alternative to improving a home is to sell it and move into a more expensive home, although there are equity limits.
b. Planning With Automobiles. Since one car is exempt, money spent on a new or more expensive car would also convert a countable asset into a non-countable asset.
c. Personal Property. Since personal property is generally excluded, a person can buy clothes, appliances, computers and the like. However, be careful not to get carried away. Buying expensive artwork, for example, can be considered an investment and therefore a countable asset.
d. Funeral/Burial Expenses. Paying up front for funeral or burial expenses also converts countable assets to non-countable assets. If a person spends down all of his or her funds to qualify for Medicaid without paying for these expenses, then the person's family will have to pay for his or her funeral bills. Therefore, it makes sense to prepay these items.
4. Spending Down or Transferring Assets to Qualify for Medicaid. There are many ways to spend down or transfer assets so a person can become eligible for Medicaid. The key is to avoid an unplanned for penalty. Some tecniques to consider include:
a. Outright Gifting. Outright gifts can be made to reduce a person's assets to an amount which, at a future date, could qualify that person for Medicaid. However, because of the look back rules and penalty periods, extreme caution should be exercised before any gifting strategy is implemented. Any gift made within 5 years of applying for Medicaid may give rise to a penalty period based on the value of the amount gifted.
Example 3: Chad has $100,000 in countable assets and thinks he might need to move into a nursing home in a few years. Chad makes a $50,000 gift to his child in 2008 and another $50,000 in 2009. In 2011, Chad has to move into a nursing home. At this time he has no countable assets because he gave them all to his child. Ordinarily, Chad would qualify for Medicaid, but because of his gifting within the look back period, a penalty period will apply. The two cash gifts would be added together and treated as if he made them on the date he applied for Medicaid. Assuming the monthly nursing home rate is $5,000, Chad's penalty period would be 20 months ($100,000/$5,000). Therefore, if Chad applied for Medicaid on January 1, 2011, he would not be eligible for Medicaid until September of 2012.
If a person is not a Crisis Planning Client, it is possible to plan ahead by making gifts, but holding assets back to sustain the individual for 5 years after which he or she can apply for Medicaid. Since 5 years would have passed before the Medicaid application is made, there would be no gifts within the look back period and therefore no penalty. Determining how much to gift and how much to hold back should be determined with the help of a professional advisor.
Example 4: Assume the same facts as in Example 3 above except Chad only gifted $50,000 in 2008. Chad's social security benefits and the other $50,000 was projected to be sufficient to pay for Chad's living expenses for 5 years. At the end of this 5 year period, Chad should have no assets. At this time, Chad could apply for Medicaid and he has removed $50,000 (plus any appreciation on the $50,000) from his countable assets which went to his child as opposed to paying for a nursing home. If Chad did not make any gifts, he would have had to deplete all but $2,000 of his assets before he is eligible for Medicaid and his child would have got nothing.
b. Transfers in Trust. Sometimes people are rightfully hesitant about gifting property away. For these people, a trust may make more sense.
A trust is a legally entity created by a person (the "grantor" or "creator") for the benefit of a beneficiary. Assets held in a trust are invested and managed by a trustee. Almost any type of property can be transferred into a trust. In general, there are two basics types of trusts, those which are revocable and those which are irrevocable.
i. Revocable Trusts. A revocable trust is commonly used as part of a person's estate plan to among other things, avoid probate. With a typical revocable trust, a person creates a trust as the grantor, transfers his or her assets into the trust, and serves as both trustee and beneficiary of the revocable trust for his or her life. While the grantor is living he or she can change the terms of the trust at any time. At the grantor's death, the revocable trust states how the assets in the trust will be distributed. For Medicaid purposes, all assets in a revocable trust will be treated as countable assets. Therefore, revocable trusts do not assist a person to qualify for Medicaid although they do offer many other benefical features from an estate planning perspective.
ii. Irrevocable Trusts. An irrevocable trust cannot be changed once it is executed. Irrevocable trusts are often used for Medicaid planning purposes. Generally, if assets are transferred to an irrevocable trust and there is no possibility that the asset will come back to the creator or grantor of the trust, the transfer of the asset to the trust is considered a gift. This means that the assets in the trust are not counted for Medicaid purposes, although the look back period and potential penalty period may apply.
If both the creator of the trust and other people (such as the creator's children) have the right to distributions from the trust, then any distribution out of the trust to a beneficiary other then the grantor will be treated as a gift for Medicaid purposes.
If a person transfers assets to the right kind of trust and can wait out the look back period, then none of the assets in the trust, no matter what their value, would be counted for Medicaid purposes.
Irrevocable trusts can come in many forms. Income only trusts are trusts which provide that the grantor or creator of the trust can get income generated from the trust assets, but the underlying trust assets are not available to the grantor or creator. These underlying assets will at some point go to children or other family members. For Medicaid purposes, so long as you can only receive the income and the trustee can never distribute any part of the principal back to the grantor, then the income is countable as your income under the income qualification rules discussed above, but the principal of the trust is not countable as an asset for purposes of the asset qualificaiton rules.
Example 5: Jason transfers $50,000 to an irrevocable trust that provides he can get the income, but not the principal of the trust. The principal is distributed to Jason's children upon his death. The $50,000 transferred to the trust is a gift. Therefore the look back period will count the gift if Jason applies for Medicaid within 5 years of setting up the trust. The penalty period will be 10 months assuming the average monthly cost of nursing home care is $5,000 per month ($50,000/$5,000). Once the 5 year period expires, this gift will be ignored. Jason also has the benefit of the income from the trust for the rest of his life which was projected to be below the disqualification amount under the Medicaid income test.
Going through all of the different types of trusts that can be established for Medicaid planning purposes is beyond the general scope of this newsletter. Needless to say, trust planning provides significant opportunities to qualify for Medicaid while meeting a person's long-term goals and objectives.
c. Personal Services Contract. A child or other family member can enter into a contract to provide personal services and care for a parent. Payments to the child or other family member will reduce the parent's countable assets. The payments must be reasonable and in line with the going rate for similar services provided by commerical companies. To ensure that the contract is enforcable, it is advisable to (i) have a written personal services contract, (ii) detail in the contract the services to be performed, and (iii) keep an accurate and timely log of the services performed. It should also be noted that payments under the personal services contract will be taxable income to the recipent (child or other family member).
Some states permit a parent to pay a lump sum in advance for life care. These arrangements are generally referred to as "life care contracts." Life care contracts are a little more difficult to set up since the amount and duration of the care (and therefore the lump sum payment) will depend on the age, health and needs of the parent. However, the advantage of such an arrangement is that it permits the immediate depletion of a parent's countable assets without it being a penalty causing gift.
d. Long-Term Care Partnerships. A relatively new way to protect assets is to purchase a long-term care policy issued as part of a Long-Term Care Partnership program if your state allows it. Under these partnership programs an individual purchases a special type of long-term care policy from a qualified insurer. The policy provides an individual with the right to apply for Medicaid under a lower eligibility standard where certain assets that would otherwise be countable assets are disregarded. This allows a person to leave more assets to family members. The amount of the assets that are disregarded are generally equal to the benefits paid under the policy.
Example 6: Emma purchases a long-term care partnership policy with a value of $150,000. Many years later, Emma needs to go into a nursing home and the policy pays benefits equal to $200,000 (the policy benefit adjusted for inflation). When the policy pays the maximum benfit, Emma still needs long-term care. She could apply for Medicaid and would be able to keep up to $200,000 without being disqualified, which is the paid benefit under the policy. If Emma did not have this special type of qualified policy, she would have had to spend down her countable assets to $2,000 before she could qualify for Medicaid.
People who should consider this type of policy are people who (i) are healthy enough to get the insurance; (ii) can afford to pay the ongoing premiums; and (iii) like the idea of leaving more assets to their family. This policy would obviously not work for a person who is a Crisis Planning Client because they need immediate nursing home care and would therefore be uninsurable.
e. Medicaid Annuity. Certain types of annuities are becoming increasingly popular for Medicaid planning purposes. These annuities, which are generally referred to as Medicaid Annuities, are purchased for a lump sum and provide a fixed payment over time. Once a Medicaid Annuity is purchased, it is no longer a countable asset. Therefore, the cash used to acquire the annuity, which would have been counted if the annuity had not been purchased, disappears for Medicaid qualification purposes under the asset test. The payments made to the annuity owner (Medicaid applicant) are counted as income. Among other rules, in order to qualify as a Medicaid Annuity, the annuity must be fixed, immediate, irrevocable and non-transferrable.
f. Medicaid Planning With a Home. For most people, their house is their biggest asset. For Medicaid purposes, the home is an excluded asset, but it becomes subject to estate recovery laws following the death of the Medicaid applicant. Under the estate recovery rules, after the death of the Medicaid applicant, the state must seek to recover the Medicaid expenditures made on the Medicaid applicant's behalf. This means that the state can take the house.
For Medicaid planning purposes, the goal is to make sure that the Medicaid recipient has no interest in the home upon death or at least an interest that cannot be reached by the estate recovery rules.
An outright gift of a home to a child or other family member can be made, but this gift will be a disqualifying transfer if it is made within 5 years of a Medicaid application and can therefore give rise to a penalty period. The penalty period would be based on the full fair market value of the house.
An alternative method to getting the house out of the Medicaid receipent's name is to have the Medicaid receipent retain a life estate, but give away the remainder interest in the home to either family members or a trust for the ultimate benefit of family members. The life estate gives the transferor the right to continue to live in and use the house for a period of time (perhaps for life). Since only a remainder interest is transferred, the value of the gift is less then the full value of the house. This means a shorter penalty period.
g. Loans and Promissory Notes. For Medicaid purposes, loans are generally disregarded. This means a person can loan money to another person (a family member, for instance) and take back a promissory note evidencing that the borrower owes the money. However, the Medicaid applicant's right to receive the loaned funds back is not a countable asset. For this type of loan to work, the loan must be evidenced by a written promissory note that meets certain specific requirements relating to the loan term, the loan payments, etc.
5. Multiple Planning Techniques. Usually an individual engaged in Medicaid planning uses a combination of planning tools, including, but not limited to those discussed in this newsletter. The planning tools which are ultimately utilized are based on that person's specific facts and circumstances and whether that person is a Crisis Planning Client or a Long-Term Planning Client.
For people who are concerned about how they could pay for long-term care expenses and still be able to leave property to family members, Medicaid planning should at least be considered. For those who plan sooner, more options are available. However, whatever your circumstance, it is probably at least worth finding out what options you have. If you have any questions regarding the contents of this issue of e-Counsel, please do not hesitate to contact us.
CIRCULAR 230 DISCLOSURE
Under U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of Helfrey, Neiers & Jones, P.C., (2) Helfrey, Neiers & Jones, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to Helfrey, Neiers & Jones, P.C. in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein.