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ESTATE PLANNING IN COLORADO FOR FAMILIES WITH SPECIAL NEEDS
By, John J. Campbell, JD, CELA
Introduction
Traditional estate planning goals include tax planning, asset preservation, and the administration and distribution of property after death. However, when the client or a member of the client’s family is disabled, the client’s goals are often significantly more complex.
A client or family member may be severely disabled and may require significant attendant or custodial care. In addition, the disabled individual may only receive a limited monthly disability income benefit; or may currently rely on means tested public benefits, such as Supplemental Security Income (SSI) or Medicaid, to pay for his or her support and medical care.
The eligibility criteria for SSI and Medicaid are complex; and estate planning techniques designed to preserve these benefits may clash with those designed to achieve more traditional estate planning goals. It is vital in these types of cases to employ a holistic approach to estate planning to ensure that the disabled client or family member will not lose the ability to access all public benefit programs for which the individual may need to qualify.
This article will begin with a discussion of the features and eligibility criteria applicable to the 2 most relevant means tested public benefit programs: Medicaid and SSI. Next, this article will discuss special issues and strategies that often arise in the context of estate planning for families with special needs.
Medicaid
Medicaid is a means tested medical assistance program cooperatively funded by the federal and state governments. The criteria for Medicaid eligibility are governed under both federal and state law, so these criteria differ somewhat from state to state. Further, different criteria apply to Medicaid benefits received in the community than to Medicaid benefits for long term care or Home and Community Based Services (HCBS) programs.
Medicaid provides much more comprehensive coverage of medical costs than does Medicare. For instance, Medicaid beneficiaries are not required to pay deductible or co-insurance amounts. Medicaid will also cover a broader range of medical services. Most significantly, Medicaid, unlike Medicare, will cover unskilled attendant care and custodial care expenses, both in the home and in a long term care facility.
The Deficit Reduction Act of 2005 (DRA), was signed into law by President Bush on February 8, 2006. This legislation contains new and harsh restrictions on the treatment of transfers without fair consideration for the purpose of qualifying for Medicaid. The DRA also places a cap on the exempt equity value of a Medicaid recipient's principal residence; and changes the law on Medicaid's treatment of annuities and promissory notes.
In Colorado, individuals who qualify for SSI are considered categorically eligible for Medicaid. Therefore, the eligibility criteria for Medicaid in the community are generally the same as for eligibility under the SSI program. Eligibility for Medicaid long term care or HCBS benefits is governed by separate criteria.
To be eligible for Medicaid, an individual generally must pass three tests: the medical test, the income test, and the resource test. Further, each state has regulations regarding the treatment of trusts and transfers of assets by a beneficiary to achieve or maintain Medicaid eligibility.
The Medical Test
To be eligible for Medicaid in general, a beneficiary must be over age 65, blind or “disabled”, as that term is defined in §1382c(a)(3) of the Social Security Act, that is, an individual must have a diagnosed medical condition (including mental illness) that is expected to last at least 12 months or to result in death; and the individual must be unable to engage in substantially gainful activity due to his or her medical condition.
To be eligible for Medicaid long-term care or HCBS benefits, the beneficiary usually must also require a nursing home level of care. This is determined according to the beneficiary's ability to perform the following "activities of daily living" (ADL's):
Mobility;
Bathing;
Dressing;
Eating;
Toileting;
Transferring; and
Need for supervision.
Generally, if the person requires significant assistance with any two ADL's, or if the person has very significant need for supervision, he or she will be considered in need of a nursing home level of care. Whether the person requires assistance with the requisite ADL's is determined by a functional needs assessment.
The Income Test
For an individual to qualify for Medicaid in the community, the individual’s monthly income may not exceed the maximum SSI benefit ($623 for an individual or $934 for a married couple) plus any applicable SSI state contribution amounts. For Medicaid long term care or HCBS benefits, the income cap applicable to an individual beneficiary is 300% of the maximum SSI benefit ($1,869 per month). The income of the individual’s spouse is not counted in determining the individual’s eligibility for Medicaid long term care or HCBS.
If the individual’s monthly income exceeds $1,869 per month, his or her ability to qualify for Medicaid long term care or HCBS benefits will depend on whether or not the individual lives in an "income cap state." In income cap states, if the individual's income exceeds the income cap amount, but is still less than the state's applicable average monthly cost of nursing home care, he or she can still qualify for Medicaid by using an “Income Trust,” or "Miller Trust." In states which are not income cap states, the individual must spend his or her excess income down to the income cap amount on medical care each month to qualify.
For individuals with excess income in income cap states, like Colorado, all of the individual’s current monthly income will need to go into an Income Trust each month. From the trust, the trustee can pay the individual’s monthly income allowance (usually $50); any monthly amount payable to the community spouse under applicable spousal impoverishment protection regulations; minimal trust administration costs; and pre-approved Post Eligibility Treatment of Income (PETI) deductions (if any). The balance of the individual’s current monthly income will be paid from the Income Trust to the nursing home as the individual’s monthly patient contribution amount. The balance of the individual’s covered nursing home costs for the month will be paid by Medicaid.
The Resource Test
The general rule regarding resource eligibility is that a Medicaid recipient cannot have “countable” resources of more than $2,000. This figure may seem unrealistically low, but please keep in mind that the following are not countable resources:
1. Primary Residence. The Medicaid recipient's equity in his or her home is considered an exempt resource if the home was the Medicaid recipient’s principal residence; and (a) the recipient’s equity in the home does not exceed $500,000 or the recipient’s spouse or minor, blind or disabled child continues to live there; and (c) the recipient (or spouse) actually lived in the home immediately prior to being institutionalized and a spouse or dependent relative continues to live there; or (d) the recipient (or spouse) left the home before being institutionalized, but the recipient intends to return home. States are permitted, but not required, to increase the exempt equity amount to as high as $750,000. A reverse mortgage can be used to reduce the equity in the recipient's home to the applicable exemption amount.
2. Vehicles. The Medicaid recipient is entitled to one car if the car is used for obtaining medical treatment, is specially equipped for a handicapped person, or is used for employment.
3. Personal Property. Personal property, wedding and engagement rings and any items required by a physical condition are exempt.
4. Life Insurance. If the total face value of all life insurance policies the Medicaid recipient owns does not exceed $1,500, then the policies are exempt regardless of their cash surrender value. If the face value of all policies exceeds $1,500, then the total amount of the cash surrender value is countable toward the $2,000 resource limit. Term life insurance policies are always exempt, regardless of face value.
5. Burial Insurance. Irrevocable burial insurance is exempt regardless of its dollar value. Revocable burial insurance is exempt to a maximum of $1,500, but this exemption is reduced on a dollar for dollar basis to the extent that the person has life insurance, other than term life insurance, that was exempt under the rule described above. Also, the value of burial spaces and grave markers for the applicant and immediate family are exempt.
6. Retirement Accounts. Self-funded retirement accounts of the Medicaid recipient are countable, but may be reduced for taxes and other penalties that will be charged upon withdrawing the funds. Self-funded retirement accounts of the recipient's spouse are usually not counted. However, in some states, the community spouse’s self-funded retirement accounts are countable for long term care or HCBS benefit eligibility only.
7. Annuities. A commercial, irrevocable and non-assignable, actuarially sound annuity that pays substantially equal payments of the annuitant’s lifetime (i.e., an immediate annuity) is considered an available resource until it is annuitized. Once annuitized, payments from the annuity are considered income in the month received.
8. Promissory Notes. An actuarially sound promissory note that requires substantially equal payments over the term of the note and that does not permit cancellation of the note upon the death of the payee is not a countable resource if the note was created after April 1, 2006 and before March 1, 2007.
Spousal Impoverishment Protections
In the case of a married couple, when one spouse is applying for Medicaid long term care or HCBS benefits and the other spouse is not, federal law provides special resource and income protection for the spouse not applying for benefits. Under these Spousal Impoverishment Protection rules, the spouse who will receive Medicaid long term care or HCBS benefits is called the "institutionalized spouse;" and the spouse not receiving benefits is called the "community spouse."
Resource Protection: The Community Spouse Resource Allowance (CSRA)
The community spouse can retain a certain amount of countable resources without affecting the institutionalized spouse’s Medicaid eligibility. The amount retained is called the Community Spouse Resource Allowance (CSRA). The CSRA is in addition to both the $2,000 the institutionalized spouse is entitled to retain and the exempt resources discussed above.
The minimum and maximum CSRA amounts are typically adjusted annually on the first of the year. The CSRA is equal to of one-half of the couple’s non-exempt resources, or a minimum of $20,328, whichever is greater. The maximum CSRA is $101,640. In Colorado, the maximum CSRA of $101,640 is always permitted, regardless of the total amount of the couple’s assets. The institutionalized spouse will be eligible for Medicaid when the couple’s total countable resources are equal to or less than the CSRA plus the $2,000 the institutionalized spouse is entitled to retain.
Income Protection: The Minimum Monthly Maintenance Needs Allowance (MMMNA) and the Monthly Income Allowance (MIA):
The MMMNA is the amount of monthly income the community spouse needs to pay for his or her basic needs within the community. Medicaid sets limits on this amount, which are adjusted on July 1 each year. The current MMMNA amount limits are:
Basic Allowance $1,650
Plus Excess Shelter Allowance
House Payment/Rent plus Maintenance Fee
plus Insurance plus Taxes plus Utilities
(actual or $209, whichever is larger),
minus $495 equals Excess Shelter Allowance
Equals the MMMNA
(But the MMMNA cannot exceed $2,541 in 2007)
The MIA is the amount of the institutionalized spouse’s income that is contributed to the community spouse if his or her income does not equal the MMMNA (MMMNA – the community spouse’s income = MIA).
If the MIA amount is not sufficient to increase the community spouse's income to the MMMNA amount, the community spouse may request an increase in his or her CSRA. The institutionalized spouse's income must be applied first to determine if there can be an increase in the CSRA. This “income first” rule is now mandated in all states under the DRA.
The amount of the increase in the CSRA is measured by the cost of a commercial, irrevocable, immediate annuity that will make monthly payments equal to the amount by which the community spouse's monthly income, after inclusion of the MIA, falls short of the MMMNA. However, the community spouse is not required to use the increase in the CSRA amount to actually purchase such an annuity.
Transfers of Assets
Medicaid imposes an ineligibility period for an institutionalized individual who disposes of assets for less than fair consideration at any time during the “look-back” period. The look-back period is the sixty-month (five-year) period prior to the application for Medicaid for outright transfers and for certain transfers into or out of a trust. (For transfers that were completed before February 8, 2006, the look-back period for outright transfers is only thirty-six months.) The term “assets” includes all income and resources of the individual.
Upon application, the county will determine if an applicant transferred resources without fair consideration within the five-year period prior to filing his or her Medicaid application.
The period of ineligibility is calculated as the amount of the transfer divided by the average cost of nursing home care in the state ($5,388 in 2007). Under the DRA, states are now required to impose partial months of ineligibility; and may no longer "round down." Therefore, if this calculation is not a whole number, then the decimal amount is multiplied by 30 days to determine the additional daily penalty period. For example, if a penalty period is calculated at 4.2 months, this would amount to a penalty period of 4 months and 6 days (30 days x .2 = 6 days).
The DRA also permits states aggregate all transfers during the five-year look-back period in calculating a single penalty period, based upon the total amount of all such transfers.
Under the old Medicaid rules, the penalty period began running on the first day of the month in which the transfer was made. However, under the new law applicable to transfers made on or after February 8, 2006, the penalty period does not begin until that later of the first day of the month in which the transfer was made; or the first day the applicant is receiving services in a nursing home or under HCBS and the applicant is eligible for Medicaid but for the transfer. Eligibility but for the transfer must be based on a submitted Medicaid application. This means that, before the penalty period begins to run, the applicant's resources must already have been spent down to eligibility levels and a Medicaid application must be filed and approved, but for the applicable transfer penalty.
There is no limit on how long the penalty period can be. Any transfer that occurred during the five-year look-back period will be imposed in full.
The harsh treatment of transfers under the DRA makes gifting under the traditional half loaf strategy very dangerous if not done correctly. Since all non-exempt resources of the applicant must be spent down to the $2,000 level before the penalty period starts to run, the applicant could be left in a nursing home with no means of payment during the penalty period.
For example, assume an applicant had $80,000 in resources, over and above her $2,000 exemption amount. If she transferred $40,000 on April 27, 2007, her penalty period would be seven (7) months and thirteen (13) days, since $40,000 divided by $5,388 equals 7.42 months ($40,000 ) $5,388 = 7.42). (Once again, the .42 is multiplied by 30 days to determine the additional days of ineligibility (30 days x .42 = 12.6 or 13 days).) However, her penalty period would not yet begin to run, since she is not in a nursing home and she still has $40,000 in excess resources.
If she entered a nursing home the following year, on April 1, 2008, her penalty period would still not begin to run until her remaining $40,000 in excess resources have been exhausted. Let us assume that the applicant's nursing home expenses at that time are $6,000 per month; and she has income from Social Security of $1,000 per month. This would still leave $5,000 per month that she must cover from her own resources. The applicant would have to spend her entire $40,000 in excess resources over the first 8 months to become eligible for Medicaid, but for the transfer.
The penalty period would begin after 8 months of paying privately; and the applicant would then have to wait out an additional 7 months and 13 days (the penalty period) before Medicaid would begin covering her nursing home expenses. However, since she now would have exhausted her $40,000 in excess resources, she would have no means to cover the $5,000 per month in nursing home costs not paid for by her monthly income during this 7 month and 13 day penalty period. Unless her family is able to pay for her care, she may be forced to leave the nursing home.
There is no limit on how long the penalty period can be. Any transfer that occurred during the five-year look-back period will be imposed in full. For transfers of more than $323,280, the penalty period would last longer than the five-year look-back period. Therefore, if the total amount transferred exceeds $323,280, the applicant must not apply for Medicaid until five years (60 months) after the transfer.
Exempt Transfers
The following specific types of transfers will not incur a penalty period:
1. Transfers between spouses.
2. Transfer of the home to either (a) the Medicaid recipient’s child who is under 21, blind, or permanently and totally disabled, (b) the recipient’s sibling who has an equity interest in the home and who was residing in the home for at least one year immediately before the date the individual entered the nursing home, or (c) the recipient’s son or daughter who was residing in the home for at least two years immediately before the date the individual entered the nursing home and who provided care that permitted the individual to reside at home rather than in an institution. Applicants are required to obtain letters from their doctors stating that the care that the son or daughter provided allowed the individual to remain at home instead of in a nursing facility.
3. Transfer of any assets (other than the home) (a) either directly or to a trust established solely for the benefit of the Medicaid recipient’s child who is under age 21 or is blind or permanently and totally disabled, or (b) to a trust established solely for the benefit of an individual under 65 years of age who is disabled.
4. Transfers of assets into a Medicaid exempt Special Needs Trust or Pooled Trust, so long as the transfers are completed before the beneficiary reaches age 65; and transfers of income into a Medicaid exempt income trust.
5. Transfers where the individual can justifiably show that either (a) the Medicaid recipient intended to dispose of the assets, either at fair market value or for other valuable consideration; (b) the assets were transferred exclusively for a purpose other than to qualify for Medicaid; or (c) all assets transferred for less than fair market value have been returned.
The DRA adds or revises three additional categories of exempt transfers:
1. Transfers to purchase Medicaid-exempt, irrevocable and non-assignable, immediate annuities payable to the Medicaid recipient, if the state is named as death beneficiary, at least up to the amount of Medicaid benefits paid during the annuitant's lifetime. The state may be named as a second death beneficiary behind the annuitant’s surviving spouse or minor of disabled child.
2. Transfers as loans for notes or mortgages if the repayment term is actuarially sound; payments are in equal amounts for the life of the note or loan (no deferrals or balloon payments); and there is no provision for cancellation on the death of the lender.
3. Transfers to purchase a life estate in another person's home if the purchase actually lives in the home for 1 year after the purchase.
Estate Recovery
The State of Colorado through its Medical Assistance Estate Recovery Program can seek recovery for the amount of medical assistance provided to an individual over age 55 or provided to an individual in an institution, regardless of age. The State of Colorado is an interested party in that individual's estate because of the assistance it provided to him or her. After the individual dies, the state must be notified of the death and be given notice of the individual’s estate proceedings. The state will then try to assert a lien against individual's estate to obtain reimbursement for the assistance it provided to him or her. The state will file a claim against the individual's estate to obtain the equity in the home and any other assets owned by the individual.
The State of Colorado can recover for the individual's Medicaid only to the limit of his or her equity or interest in the home and any other property in the individual's estate. The state cannot recover against any other owners of the property, including a trust. Further, life estates and joint tenancy interests owned by the individual cease at the moment of death and are not considered part of the individual's estate, so these interests cannot be reached by a lien or estate recovery claim.
The fact that a Medicaid recipient may own property in joint tenancy with another person does not necessarily mean the property is “safe” from Medicaid estate recovery liens. When real property is held in joint tenancy and one joint tenant dies, the property automatically reverts to the other joint tenant outside of the decedent’s estate.
The only protection provided against estate recovery liens to a Medicaid owning property under joint tenancy with another person is when the Medicaid recipient dies first. In that case, the property automatically reverts to the other joint tenant and Medicaid cannot place an estate lien on the property. However, if the other joint tenant dies first, the residence passes to the Medicaid recipient through joint tenancy. Medicaid may still consider the property to be exempt as the recipient’s principal residence, but the home would then be vulnerable to estate recovery liens.
Another danger of holding property in joint tenancy is that the property will be subject to claims, judgments or liens by the other joint tenant's creditors.
To avoid the possibility of a Medicaid lien in a situation where the married couple owns the home in joint tenancy, it is advisable to transfer ownership of the residence to the community spouse exclusively. The community spouse can then provide for proper distribution of the residence through his or her will. The transfer to the community spouse will not incur any penalty periods, since transfers between spouses are exempt.
Medicaid's Treatment of Annuities
The state regulations on treatment of annuities are found in Section 8.110.55 & 8.110.56, Volume 8 of the Colorado Department of Health Care Policy and Financing Medicaid Staff
Manual, 10 C.C.R. 2505-10. In that section, an annuity is now defined as:
“. . . a contract between and individual and a commercial company, in which the individual invests funds and in return is guaranteed fixed substantially equal installments for life or a specified number of years.”
Under Colorado Medicaid regulations, once an annuity has been annuitized and the annuitant is receiving regular distributions, the annuity is no longer considered an available resource for purposes of determining Medicaid eligibility. Instead, the monthly distributions are considered income to the annuitant in the month received.
Treatment of Annuities Purchased Prior to April 1, 1998
The regulations governing treatment of annuities purchased prior to April 1, 1998
distinguish further between annuities purchased before or after July 1, 1995.
Any annuity purchased prior to July 1, 1995 by the applicant or the applicant’s spouse will be considered a countable resource to the Medicaid applicant only if it has not been annuitized. If the annuity is annuitized and the annuitant is receiving regular returns, the funds received will be considered income to the annuitant in the month received.
The only limitation imposed on annuities purchased before July 1, 1995 is that the annuity must meet the definition of “annuity”. That is, it must be: 1) a contract between and individual and a commercial company; 2) the annuity must provide a guaranteed income stream that is in fixed substantially equal installments (e.g., not a balloon or deferred lump sum annuity); and 3) the annuity period must be for life or a specified number of years.
For annuities purchase after July 1, 1995, the regulations provide four additional restrictions. If the annuity does not fit within all of the additional restrictions, the entire purchase price of the annuity is considered a transfer of assets without fair consideration and would trigger a period of ineligibility. In order to avoid the transfer penalty, the annuity must meet the following criteria, in addition to those applicable to annuities purchased prior to July 1, 1995:
1. The annuity must have been purchased from a life insurance company or other commercial company that sells annuities as part of its normal course of business;
2. The annuity must be annuitized for the applicant or the community spouse;
3. The annuity must have been purchased on the life of the applicant or the community spouse; and
4. The annuity must provide payments for a period not to exceed the projected life of the annuitant (as determined by use of the appropriate life expectancy table -- male or female -- contained in the regulations).
Treatment of Annuities Payable to the Community Spouse and Purchased on or after April 1, 1998
Annuities purchased on or after April 1, 1998 are governed by the regulations which
became effective on that date. The effect of these regulations is to impose limitations on the amount of assets in excess of the CSRA that can be converted into an annuitized income stream to the community spouse. The April 1, 1998 regulations do not affect the treatment of annuities payable to the institutionalized spouse; or to a single person applying for Medicaid.
If annuitized regular payments from an annuity, purchased with assets in excess of the CSRA, cause the community spouse’s monthly income to exceed the MMMNA, a transfer penalty will be imposed. Also, if the monthly payments from the annuity are not “substantially equal” over the life of the annuity, as would be the case with a balloon or deferred lump sum annuity, the entire purchase price of the annuity will be considered a transfer for less than fair consideration and a penalty period will be imposed.
Any “transfers” which could be deemed to have taken place under the regulations are subject to the 36-month look-back period for annuities purchased before February 8, 2006; and the 60-month look-back period for annuities purchased on or after February 8, 2006. That is, if the annuity was purchased more than 36 months prior to the filing of the Medicaid application (60 months if purchased on or after February 8, 2006), any penalty period will be treated as having expired. This means the monthly annuity payment, regardless of whether it causes the community spouse’s monthly income to exceed the MMMNA, would be treated as income in the month received and there would be no transfer penalty imposed, so long as the institutionalized spouse does not apply for Medicaid until the look-back period expires.
The regulations are troublesome. The MMMNA is typically not determined until a Medicaid application is filed for the institutionalized spouse. Since the MMMNA can range from the base amount (currently $1,650) up to a maximum MMMNA (currently $2,541), depending upon the existence and amount of excess shelter costs to the community spouse, the new regulation creates some uncertainty for planning purposes. If an annuity is purchased today, how much can it pay out without the community spouse’s monthly income exceeding the MMMNA that will be calculated for him or her upon the filing of a future Medicaid application? This leaves people in the process of Medicaid planning in the position of having to base their annuity purchase decision on the base MMMNA then in effect, if they are to be sure of avoiding any transfer penalties.
In the Medicaid planning context, it is necessary, as a practical matter, to assume a conservative application of the terms of the regulations. That is, projections of possible transfer penalties which may be triggered by annuity income must be based upon a presumption that the minimum current MMMNA amount would apply. This means that the projected benefit from purchase of an annuity will usually need to be measured against the fact that annuity payments up to the amount of the MMMNA will essentially represent a replacement of the MIA. Usually, this will still weigh in favor of an annuity purchase, since the source from which the MIA will be paid, (e.g. an institutionalized spouse’s pension), may not survive the death of the institutionalized spouse.
The annuity payments may be based upon the life expectancy of the community spouse. Thus, the annuity would continue to pay out to the community spouse for the remainder of the annuity period, avoiding impoverishment of the community spouse upon the death of the institutionalized spouse. In addition, upon the death of the community spouse, the community spouse’s children could be designated to receive the balance of any annuity payments remaining (e.g., in the case of a "period certain" annuity based upon the community spouse's life expectancy), if the annuity was purchased before February 8, 2006. If purchased on or after February 8, 2006, the state of Colorado may have to be named as death beneficiary, at least up to the amount of Medicaid benefits paid to the annuitant. However, if the community spouse is the annuitant and never receives Medicaid benefits, the community spouse’s children would still be able to receive the death benefit as secondary beneficiaries. Thus, there are some advantages to purchasing an annuity for the community spouse over merely relying on the MIA.
Often, even the maximum MMMNA will not be sufficient for the community spouse to pay his or her monthly obligations and living expenses; or will not allow the community spouse to continue living the lifestyle to which he or she has become accustomed. In these cases, it may be worth incurring a transfer penalty to purchase an annuity that will provide a sufficient supplement to the community spouse's income to meet his or her ongoing needs.
As a practical matter, almost any purchase of an annuity for Medicaid planning purposes will involve an expenditure of assets in excess of the CSRA. As a result, there will usually be the potential for the imposition of a transfer penalty, depending on the effects on the community spouse’s income upon annuitization. Therefore, an essential part of the decision to purchase an annuity is the computation of the expected penalty period.
The regulations do not set forth the mathematical formula for calculating the penalty period, but they do provide that the transfer will consist of that portion of the monthly income in excess of the MMMNA which is caused by the purchase of the annuity from funds in excess of the CSRA. Knowing this, the formula, which can be deduced algebraically, is as follows:
[(TI - MMMNA) AI] x EA = PP
ACNC
Where: TI = Total monthly income to community spouse, including annuity payment
MMMNA = Minimum monthly maintenance needs allowance
AI = Total monthly income from the annuity
EA = Excess assets above the CSRA used to purchase the annuity
ACNC = The average cost of one month of nursing home care in Colorado
PP = The penalty period in months
For example: Assume that a couple has $140,760.00 in non‑exempt assets. The community spouse=s total monthly income is her social security benefit of $800.00. Institutionalized spouse=s monthly income is less than $1,869.00, so that he is income qualified for Medicaid benefits. The couple needs to spend down $39,120.00 in order to reduce their total non‑exempt assets to the CSRA of $101,640.00. If they purchase an annuity, the annuity payment over the annuity period (based upon the remaining life expectancy of the institutionalized spouse) will be $1,500.00 per month. The community spouse=s total income from social security and the annuity payment will be $2,300.00. The projected penalty period will be calculated as follows:
[(2,300 - 1,650) ) 1,500] x 39,120 = 3.144
5,388
$2,300 ‑ $1,650 = $650
$650 ) $1,500 = .433
.433 x $39,120 = $16,938.36 (The amount transferred for less than fair consideration)
$16,938.36 ) $5,388 = 3.144 or 3 months and 5 days of ineligibility
As you can see from the above example, the penalty period would be significantly less than that which would be imposed on an outright transfer of $39,120. ($39,120 ) $5,388 = 7.26 or 7 months and 8 days of ineligibility). The more that annuity income would raise the community spouse=s monthly income over the MMMNA, the longer the transfer penalty will be; and the closer the period of ineligibility would be to that resulting from an outright gift transfer (e.g. to the couple=s children) of the amount used to purchase the annuity. Therefore, the use of annuities would make the most sense in situations where the community spouse has a small monthly income.
If the annuity purchased does not cause the community spouse=s monthly income to exceed the MMMNA, there will be no transfer for less than fair consideration. Also, if the annuity is purchased at a time when the couple=s assets do not exceed the CSRA, no penalty period will be imposed, regardless of the monthly income resulting. Finally, if a Medicaid application is not filed until 36 months after the purchase of the annuity (60 months if the annuity was purchased on or after February 8, 2006), there will be no transfer penalty, regardless of the amount of excess assets used to purchase the annuity or the amount of income paid out each month by the annuity.
Treatment of Annuities Purchased on or after February 8, 2006
As stated earlier, the above rule only applies where the annuitant is the Medicaid recipient's community spouse. Purchasing an annuity which will make monthly payments to the Medicaid recipient will not result in a transfer penalty, regardless of the size of the annuity payment, so long as the annuity meets the following criteria contained in the DRA:
1. The annuity must have been purchased from a life insurance company or other commercial company that sells annuities as part of its normal course of business;
2. The annuity must be annuitized to the Medicaid recipient; AND
3. The annuity is irrevocable and non-assignable;
4. The annuity must be "actuarially sound," meaning it must be designed to pay out completely during the Medicaid recipient's remaining life expectancy (as determined by the appropriate life expectancy table -- male or female – issued by the Office of the Chief Actuary of the Social Security Administration); and
5. The annuity must make substantially equal payments over the entire period of the annuity; OR
6. The annuity is a qualified individual retirement annuity under IRC §408(b) or (q), or the annuity is purchased from a qualified individual retirement plan under IRC §408(a), (c), (p) or (k) or IRC §408A; OR
7. The annuity must name the state as death beneficiary, at least up the amount of Medicaid benefits paid to the Medicaid recipient during his or her lifetime. The state must be named as first death beneficiary unless the recipient has a spouse or a minor or disabled child, in which case that spouse or child may be named as first death beneficiary, with the state as second beneficiary if the spouse or child disposes of his or her remainder interest without fair consideration.
SSI
Supplemental Security Income (SSI) is a financial needs-based public benefit program which provides income to persons age 65 or older or who are blind or disabled. SSI is federally funded and governed solely by federal law.
SSI does not pay for medical care. However, in Colorado, SSI beneficiaries will also qualify for Medicaid.
Disability for an adult is determined under the same criteria applicable to general Medicaid. A child under age 18 will be considered disabled for SSI purposes if the child has a diagnosed medical condition (including mental illness) that is expected to last at least 12 months or to result in death; and the child’s medical condition results in marked and severe functional limitations. An individual applying for SSI must also meet strict income and resource tests to qualify.
The Income Test
The monthly income limits for SSI are identical to the maximum federal SSI benefit ($623 for an individual and $934 for a married couple) plus any state SSI contribution amount which may apply. Generally, any asset that is spent or disposed of by the individual in the same month as it is received is considered “income.” Income under SSI regulations consists of both earned and unearned income.
Earned income consists of wages and net earnings from self-employment, such as a sheltered workshop. Unearned income consists of income from other sources, including support and maintenance furnished in cash or in kind; payments from an annuity; worker’s compensation payments; old-age, survivors and disability insurance payments; unemployment benefits; payments occasioned by the death of another (which would include payments from an inheritance, payments from a life insurance policy, or payments from a wrongful death action); support and alimony payments; and earnings of and additions to the corpus of a non-exempt trust of which the individual is a beneficiary.
SSI exempts the first $20 per month of unearned income; and the first $65 of earned income plus one-half of monthly earned income over $65. In some states, SSI beneficiaries will also receive state benefits in addition to their federal SSI benefits. These state payments are also exempt, as are certain other types of income enumerated in the regulations. These exemptions are often referred to as “income disregards.”
Distributions of cash to the individual will be counted as income on a dollar-for-dollar basis. Distributions for the beneficiary’s support, other than distributions of cash to directly to the beneficiary, (i.e., distributions to third parties to purchase the beneficiary’s food or shelter, including essential utilities, such as gas, electric, water and sewer services), will be treated as in-kind income.
SSI regulations provide that the value of in-kind income for support will be determined either under the “one-third reduction rule”[1] or the “presumed value rule.”[2] Generally, the reduction in the beneficiary’s SSI benefits will be exactly the same, whether the individual receives $5000 or $500 of in-kind income each month. However, if the value of in-kind income received by a beneficiary each month is less than the benefit reduction calculated under the one-third reduction rule or the presumed value rule, whichever is applicable, the beneficiary’s benefit will only be reduced by the actual value of the in-kind income received.
If an individual on SSI is living in another person’s household and receives both food and shelter from that person, the value of in-kind income for support provided to the individual will be computed according to the “one-third reduction rule.” However, if the individual lives in his or her own household, or in the household of another person, but does not receive both food and shelter from that other person, the “presumed value rule” applies.
Income can also be “deemed” under SSI regulations. That is, an individual living at home with his or her ineligible spouse will be deemed to have access to a portion of the spouse’s income. Generally, an individual under age 18 living with his or her family will also be deemed to have access to a portion of his or her ineligible parents’ incomes. However, for individuals who do not live in the same home as their families, the income of a spouse or parent is not deemed available.
With some exceptions, individuals qualifying for SSI must have nonexempt income below $623. Income from other sources, after income disregards, will offset an individual’s SSI benefit. An offset for other income that reduces an individual’s SSI benefit to $0 will render the individual ineligible.
The Resource Test
The regulations also place restrictions on resources. “Resources” are assets consisting of cash or other liquid assets that could be converted to cash and which are not spent or disposed of in the month received.
The resource rules for SSI are essentially the same as the pre-DRA resource rules for Medicaid. Certain exempt resources, such as a house (regardless of equity value), a car, personal property, household goods, a burial space or agreement, and certain other limited exempt resources are not counted. Non-exempt resources are restricted to a total of no more than $2,000 for individuals and $3,000 for married couples.
Transfers Without Fair Consideration
Like Medicaid, SSI imposes penalty periods for certain transfers without valuable consideration during the “look back period” prior to the filing of the SSI application. For SSI, the “look back period” is 36 months; and the penalty period starts the first day of the month following the transfer. During a penalty period, the individual may not qualify for SSI.
To calculate the penalty period for any transfers of resources, the total, uncompensated value of all transfers made during the look back period is divided by the maximum SSI benefit plus any corresponding state payment. This differs from Medicaid law, under which the penalty period is calculated by dividing the uncompensated value of the transfer by the average monthly cost of nursing home care for an individual in the state in which the individual lives.
The average monthly costs of nursing home care for an individual in every state will substantially exceed the maximum SSI benefit. Thus, any transfer without fair consideration will usually result in a longer penalty period under SSI law than that which would be calculated under state Medicaid regulations. However, the SSI transfer provisions, unlike the Medicaid transfer provisions, state that no penalty period can exceed 36 months.
While transfers of resources are generally penalized under SSI law, the following transfers of resources will not incur a penalty period:
(1) Transfer of the home to a) the transferor’s spouse; b) the transferor’s child who is under 21 years old, blind or disabled; c) the transferor’s sibling who has an equity interest in the home and resided in the home for 1 year immediately before the transferor becomes institutionalized; or d) a child of the transferor who resided in the transferor’s home for 2 years immediately before the transferor becomes institutionalized and who provide care to the transferor which permitted him to reside at home rather than in an institution or facility;
(2) Resources transferred to a) the transferor’s spouse or to another for the sole benefit of the transferor’s spouse; and b) from the transferor’s spouse to another for the sole benefit of the transferor’s spouse;
(3) Transfers of any assets (a) either directly or to a trust established solely for the benefit of the Medicaid recipient’s child who is under age 21 or is blind or permanently and totally disabled, or (b) to a trust established solely for the benefit of an individual under 65 years of age who is disabled;
(4) Transfers which were a) intended to be made at fair market value or for other valuable consideration; or b) exclusively for a purpose other than to qualify for SSI benefits; or c) where all resources transferred have been returned to the transferor; and
(5) Transfers in cases where the Commissioner determines that denial of benefits would work an undue hardship.
Treatment of Trusts
Medicaid
Self-Settled Trusts under OBRA '93
The Omnibus Budget Reconciliation Act of 1993 (OBRA `93) established new Medicaid rules for treatment of both revocable and irrevocable trusts created after August 10, 1993. These rules are codified under federal law at 42 U.S.C. §1396p(d).
The general rule, as set forth in 42 U.S.C. §1396p(d)(3), is that, in determining an individual's eligibility for Medicaid benefits, trusts "established by such individual" (sometimes called "self-settled trusts") will be included in income or available resources. A trust is "established by such individual" if the individual's assets form all or part of the corpus of a non-testamentary trust settled by the individual, his or her spouse, or a third person with legal authority to act for the individual or the spouse, or who is acting at the direction or request of the individual or the spouse. In short, a trust created with the Medicaid applicant's funds generally cannot be used to keep the applicant under the income or available resource ceilings for Medicaid eligibility.
If a self-settled trust is revocable, its corpus is included in the individual's available resources. Payments from the trust to or for the individual's benefit are included in his or her income. If the trust is irrevocable, any portion of the trust corpus from which a payment could be made to the individual under any circumstances is included as an available resource. Any payment to the individual from the trust is included in his or her income. Any portion of the trust corpus that could not be made available to the individual and any payment to another person from the trust are considered to be transfers without fair consideration, resulting in a period of ineligibility.
The rather uncharitable provisions of §1396p(d)(3) are ameliorated somewhat by the exceptions contained in §1396p(d)(4) (the "(d)(4) exceptions"). Under the (d)(4) exceptions, the treatment otherwise accorded to self-settled trusts does not apply to:
(A) A trust containing the assets of an individual under age 65 who is disabled (as defined in §1382c(a)(3) of the Social Security Act) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual by the state.
(This exception codified into law what is commonly known as a “Special Needs Trust,” “Supplemental Needs Trust” or “Disability Trust.”);
(B) A trust established in a State for the benefit of an individual if the trust is composed only of pension, Social Security, and other income to the individual (and accumulated income in the trust), and the individual’s income exceeds the income cap ($1,737 per month), but does not exceed the average cost of nursing home care in the region in which the individual will be receiving nursing home care, if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual by the state.
(This exception codified into law what is commonly known as a “Miller Trust” or “Income Trust” and can only be used in income cap states to qualify for Medicaid long term care or HCBS benefits. These trusts may not be used to qualify for SSI.); and
(C) A trust containing the assets of an individual who is disabled (as defined in §1382c(a)(3) of the Social Security Act) that meets the following conditions: (i) The trust is established and managed by a non-profit association; (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts; (iii) Accounts in the trust are established solely for the benefit of individuals by the individual, by the individual’s parent, grandparent, or legal guardian, or by a court; and (iv) To the extent that amounts remaining in the beneficiary's account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary by the state.
(This exception is commonly known as a “Pooled Trust.”)
Trusts Not Subject To The Strict Laws On Self-Settled Trusts
There are two types of trusts which are excepted from the provisions of OBRA '93 applicable to self-settled trusts. The first exception is for trusts created by a will. These trusts are commonly known as “Testamentary Special Needs Trusts.” Such trusts are commonly created in the will of a spouse, family member or friend of the Medicaid beneficiary.
The second exception is for trusts that are not self-settled trusts at all, but rather are created and funded solely with property not belonging to the beneficiary or the beneficiary’s spouse. Such trusts are permitted and will not be considered an available resource to the beneficiary for purposes of determining the beneficiary’s eligibility for Medicaid. However, the trust must be created and funded fully by a third party. If the trust ever accepts funds that are property of the beneficiary or the beneficiary’s spouse, those funds will either be considered an available resource or will constitute a transfer without fair consideration and will trigger a Medicaid ineligibility period.
Both Testamentary Special Needs Trusts and Third Party Supplemental Needs Trusts must meet the following conditions to be considered exempt as a resource:
1. The beneficiary must have no authority to compel distributions from the trust or to exercise any powers of ownership over assets in the trust;
2. The assets in the trust must be used only for the beneficiary’s supplemental needs and not for support – otherwise, payments from the trust for support will be treated as income to the beneficiary;
3. The trust may only have one lifetime beneficiary; and
4. The trust must be irrevocable.
SSI
FCIA Supplemental Needs Trusts and Pooled Trusts: SSI Requirements Under 42 U.S.C. §1382b(e)
In December of 1999, Congress passed the Foster Care Independence Act (FCIA),
containing new anti-fraud provisions applicable to the SSI program. The FCIA enacted all new provisions regarding treatment of trusts for SSI eligibility purposes. These provisions are contained in 42 U.S.C. §1382b(e).
The FCIA generally disfavors trusts established by individuals with their own funds and treats the corpus of these trusts as “available resources” to the individual. The FCIA provides that an individual is determined to have established a trust if any assets of the individual are transferred to the trust. Trusts created in a will are exempt from the provisions of the FCIA.
Under the FCIA, the corpus of a revocable trust established by the individual is considered an available resource. In the case of an irrevocable trust established by the individual, that portion of the corpus that could be distributed to or for the benefit of the individual or the individual’s spouse in any circumstance is also considered an available resource. Further, distributions from the corpus of any of these trusts, other than to or for the benefit of the individual, will incur a transfer penalty, (as will foreclosure of the ability to make distributions from the corpus of these trusts to or for the benefit of the individual altogether).
The FCIA specifically exempts OBRA ‘93 supplemental needs trusts and pooled trusts from being considered available resources and provides that transfers to fund such trusts by individuals under age 65 will not incur a penalty period. Thus, the FCIA provides that a trust will be exempt from the general rules regarding self-settled trusts if it complies with all of the criteria in 42 U.S.C. §1396p(d)(4)(A) or (C) applicable to OBRA ‘93 trusts for Medicaid. Income trusts under 42 U.S.C. §1396p(d)(4)(B) are not exempt for SSI purposes.
Even a trust that complies with all of the requirements of 42 U.S.C. §1396p(d)(4)(A) might not be recognized as a valid exempt trust for SSI purposes if it does not also comply with Social Security Administration policies, some of which are not enumerated in the FCIA. These policies are embodied in the Program Operations Manual System (POMS) at POMS SI 01120.203. In particular, the trust must comply with all of the following key requirements, as summarized in POMS SI 01120.203.D.1:
1. The trust will be established with the assets of the beneficiary, who is under age 65;
2. The beneficiary is disabled as that term is defined in the Social Security Act;
3. The beneficiary is the sole beneficiary of the trust. (Further, the trust does not allow any Prohibited Expenses or Payments under POMS SI 01120.203.B.3);
4. The trust was established by the beneficiary’s parent, grandparent, legal guardian or a court, if the beneficiary is a minor. If the beneficiary is not a minor, the trust was established by someone who has legal authority to act with regard to the beneficiary’s assets, as required by POMS SI 01120.203.B.1.e, which would mean that the trust must have been established by the beneficiary’s legal guardian or a Court, or by the individual in the case of a pooled trust account;
5. The Trust provides specific language providing that, upon the death of the beneficiary, the trust must first reimburse the State for medical assistance paid for the beneficiary;
6. The Trust will be fully funded before beneficiary reaches age 65;
7. The Trust is irrevocable. (The Trust must contain a specific provision making the Trust irrevocable; and the Trust must name specific individuals as contingent beneficiaries upon the beneficiary’s death, after repayment to the State for medical assistance benefits paid).
Failure of the trust to comply both with OBRA ‘93 and with any additional requirements in the POMS could result in trust assets being considered an available resource or in transfers to fund the trust being considered transfers without fair consideration, resulting in a penalty period.
Trusts Not Subject To The Strict Laws On Self-Settled Trusts
The FCIA, like OBRA ‘93, exempts Testamentary Special Needs Trusts and Third Party Supplemental Needs Trusts from the rules on treatment of self-settled trusts. To be exempt under the FCIA, Testamentary Special Needs Trusts and Third Party Supplemental Needs Trusts must meet the same criteria as applicable to these trusts for Medicaid purposes.
Testamentary Special Needs Trusts
Since Medicaid and SSI are both means tested programs with strict income and resource limits, an unexpected inheritance could cost a beneficiary the ability to qualify for these valuable benefits.
A trust created in a will is not subject to any of the OBRA ’93 or FCIA restrictions on self-settled trusts. Thus, a testamentary special needs trust is an important estate planning tool where the client’s spouse must maintain SSI or Medicaid eligibility. Similarly, a testamentary special needs trust for the benefit of the client’s child or grandchild who must maintain SSI or Medicaid eligibility is also exempt from OBRA ’93 or FCIA restrictions on self-settled trusts, since, from the beneficiary’s perspective, these testamentary trusts are not self-settled at all, but rather are considered third party trusts.
When a client wishes to leave an inheritance in his or her will to a disabled spouse, child or other individual, a Testamentary Special Needs Trust is often the best answer. Properly drafted, the trust will not be considered an available resource to the beneficiary; and, properly administered, the payments from the trust for non-support items will not be treated as income to the beneficiary.
When drafting a Testamentary Special Needs Trust for a surviving spouse, Colorado’s Medicaid regulations require the surviving spouse to receive at least the Spousal Elective Share, exempt property allowance and family allowance. Failure of the surviving spouse to receive these distributions outright from the decease spouse’s estate will result in a transfer penalty and ineligibility for a period of time. The will should provide that the Spousal Elective Share, exempt property allowance and family allowance be distributed outright to the surviving spouse, with the rest of the residuary estate going into the Testamentary Special Needs Trust. Alternatively, if all property is to go into the Testamentary Special Needs Trust, the trust provisions must allow for gifting, asset transfers and other Medicaid/SSI planning techniques to minimize the negative impact to the beneficiary.
Third Party Supplemental Needs Trusts and Sole Benefit Trusts
Third Party Supplemental Needs Trusts are excepted from the provisions of both OBRA '93 and the FCIA applicable to self-settled trusts, since these trusts are created and funded solely with property not belonging to the beneficiary or the beneficiary’s spouse. Third Party Supplemental Needs Trusts will not be considered an available resource to the beneficiary for purposes of determining the beneficiary’s eligibility for Medicaid or SSI.[3]
Generally, a “Sole Benefit Trust” is a special type of Third Party Trust that can provide great flexibility in settlement planning. It is not a countable resource of the beneficiary. Transferring assets to fund a trust for the sole benefit of a minor, blind or disabled child, or for the sole benefit of any disabled individual under age 65, will not incur a transfer penalty for purposes of the grantor’s eligibility for Medicaid and SSI. Finally, Sole Benefit Trusts do not need to be created by a court or a parent, grandparent or legal guardian of the beneficiary; and are not required to contain a “state pay-back” provision.
A Sole Benefit Trust must meet all of the conditions applicable to Third Party Supplemental Needs Trusts to be exempt as a resource to the beneficiary. A Sole Benefit Trust must also meet additional requirements.
For the trust to be considered for the “sole benefit of” the beneficiary, the trust must provide that the beneficiary is the only person who will benefit from funds in the trust, both at the present and at any time in the future. Thus, the trust must provide that the assets in the trust will be spent or distributed in a manner that is “actuarially sound.”[4] In other words, the trust must provide that the assets will be distributed each year in an amount that is calculated to deplete the trust within the beneficiary’s remaining life expectancy.
The trust can be funded with a lump sum or annuity. However the trust must be fully funded before the beneficiary reaches age 21 (in the case of a minor child who is not blind or permanently and totally disabled); or before the beneficiary reaches age 65 (in the case of any disabled beneficiary who is not a child of the grantor). If the beneficiary is a blind or permanently and totally disabled child of the grantor, trust funding can continue over the life expectancy of the beneficiary.
Once created and funded to preserve the beneficiary’s eligibility for public benefits, the trust must be administered as would any Third Party Special Needs Trust. In the context of an estate plan where the disabled client is concerned with providing for a blind or disabled child, a child under age 21 or another disabled person under age 65, a Sole Benefit Trust provides an almost ideal solution to maintaining Medicaid or SSI eligibility for both the client and the intended beneficiary.
According to both Medicaid and SSI law, the beneficiary need only be under age 21, blind or permanently and totally disabled, (in the case of a child of the grantor), or disabled, (in the case of any other individual under age 65), for the funding of the sole benefit trust to be exempt from any transfer penalties. As a result, Sole Benefit Trusts can also be useful where the grantor wishes to preserve his or her own Medicaid or SSI eligibility, regardless of whether the minor, blind or disabled beneficiary qualifies for Medicaid or SSI.
In situations where the beneficiary’s ability to qualify for Medicaid or SSI is not a concern, the Sole Benefit Trust can be administered to provide for the beneficiary’s general health, education, welfare, support, maintenance and comfort. So long as the trust is created for the grantor’s blind, disabled or minor child, or for any other disabled individual under age 65, and the trust meets the “sole benefit” requirements, the grantor’s transfer of assets to fund the trust will not subject the grantor to a transfer penalty under Medicaid or SSI law.
Use of Trusts In Estate Plans Involving SSI and Medicaid Eligibility Issues
To more fully understand how to coordinate the use of trusts in an estate plan involving multiple public benefit eligibility issues, it is necessary to understand Medicaid and SSI planning strategies involving the use of trusts. It is also necessary to understand the strategies regarding the use of different types of trusts often used in traditional estate plann