Medicaid Planning in Colorado Under New Federal Law-Law Offices of John J. Campbell, P.C.

MEDICAID ELIGIBILITY AND PLANNING IN COLORADO UNDER THE NEW FEDERAL LAW

By John J. Campbell, CELA

Introduction

The Deficit Reduction Act of 2005[1] (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; changes the law on Medicaid's treatment of annuities and entry fees for Continuing Care Retirement Communities (CCRCs); and permits all states to adopt Long Term Care Insurance Partnership Programs.

These changes under the DRA became effective in Colorado as of February 8, 2006, the effective date of the act,[2] except for (1) the imposition of the cap on home equity, which applies to all Medicaid applications filed on or after January 1, 2006;[3] and (2) the new rules on treatment of promissory notes, the mandatory imposition of the “income first” rule, the combining of transfers, the mandatory counting of fractional penalty period and the transfer exemption for certain purchases of life estates, which are effective April 1, 2006. While some states may take advantage of a grace period to come into compliance with the new provisions in the DRA, this grace period will not apply in Colorado, since state legislation will not be needed to conform to the DRA's new requirements.[4] Colorado Medicaid regulations are being amended to comply with the provisions of the DRA, so practitioners will need to plan according to the DRA provisions, as those provisions are incorporated into the state regulations.

This article discusses the basics of Medicaid eligibility and planning in Colorado under federal and state law, now that the DRA has been enacted. Further, this discussion applies to Medicaid eligibility and planning for both elderly individuals and disabled individuals under age 65.

Medicaid Basics

Medicaid is a financial needs based medical assistance program cooperatively funded by the federal and state governments.[5] The criteria for Medicaid eligibility are governed under both federal and state law, so these criteria differ somewhat from state to state.[6] 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.[7]

Medicaid provides much more comprehensive coverage of medical costs than does Medicare.[8] For instance, federal Medicaid law does not require beneficiaries to pay deductible or co-insurance amounts. Medicaid will also cover a broader range of medical services.[9] 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.[10]

In Colorado, individuals who qualify for SSI automatically qualify for Medicaid.[11] The eligibility criteria for Medicaid in the community are the same as for eligibility under the SSI program.[12] However, there are different criteria for long term care or HCBS benefits.[13]

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.[14]

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.[15] To be eligible for Medicaid long-term care or HCBS benefits, the beneficiary usually must also require a nursing home level of care.[16] 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.[17]

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.[18] Whether the person requires assistance with the requisite ADL's is determined by a functional needs assessment.

Treatment of Assets: The Income and Resource Tests

Assets consist of income and resources. Assets are considered income in the month they are received. Assets held beyond the month in which they are received are considered resources.

Income and resources are either considered available if they are actually received; or if the Medicaid recipient has a legal interest in the income or resource and the recipient has the actual ability to make the income or resource available for maintenance and support.[19] Otherwise, the income or resource is considered unavailable and is not counted in determining Medicaid eligibility.

Available income and resources are either considered countable or exempt. Generally, all available income and resources are considered countable, unless they fit into one of the specific exempt categories provided under the law.[20]

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 ($603 in 2006) plus any applicable SSI state contribution amounts.[21] The first $20 per month in unearned income is exempt; as is the first $65 per month in earned income and one-half of earned income above $65 per month.[22] Certain small and infrequent amounts received by the individual may also be exempt.

For Medicaid long term care or HCBS benefits, the income cap applicable to an individual beneficiary is 300% of the maximum SSI benefit ($1,809 per month in 2006).[23] The income of the individual’s spouse is not counted in determining the individual’s eligibility for Medicaid long term care or HCBS.[24] Reverse mortgage payments are not counted as income,[25] but may be considered resources if they are held over to the month after they are received. Payments to the nursing home from long term care insurance policies are also not counted as income.[26]

If the individual’s monthly income exceeds $1,809 per month, but is still less than the state's applicable average monthly cost of nursing home care, he or she can still qualify for Medicaid in Colorado by using an “Income Trust,” or "Miller Trust."[27] 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-$60); any monthly amount payable to the community spouse under applicable spousal impoverishment protection regulations; trust administration costs of no more than $20; and pre-approved Post Eligibility Treatment of Income (PETI) deductions (if any).[28] 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.

Normally, when a person qualifies for Medicaid in the nursing home or for HCBS, that person also will be entitled to full Medicaid coverage for hospitalizations, doctor visits and other expenses not necessarily associated with long term care. However, if a person's income exceeds the income cap for long term care benefits or HCBS and the individual must use an Income Trust to qualify, Medicaid will only cover that individual's long term care or HCBS expenses.[29] If, for example, that person needs to go into the hospital, those additional expenses would not be covered by Medicaid.

For individuals who qualify for both Medicare and Medicaid, Medicaid will no longer pay for prescription medications covered under Medicare Part D. This is true, even if the individual elects not to enroll in Medicare Part D![30]

Individuals who qualify for Medicare and who will require an Income Trust to qualify for Medicaid long term care or HCBS benefits should maintain their coverage under Medicare Part A and Part B to cover other medical expenses; and these individuals should enroll in and maintain their coverage under Medicare Part D to cover their prescription medications. Further, if any individuals have a Medicare supplemental, or "Medigap" policy, or access to coverage under a group health plan, they should continue to pay the premiums to keep those policies in effect, even after they go on Medicaid. Otherwise, a hospital visit, a routine doctor's visits outside the nursing home or the need for prescription medications could present an unexpected and significant expense that Medicaid will not cover.

The Resource Test

The general rule regarding resource eligibility is that a Medicaid recipient cannot have

“countable” resources of more than $2,000.[31] 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, unless the recipient's spouse or minor, blind or disabled child continues to live there; and (b) 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 (c) the recipient (or spouse) left the home immediately 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.[32]

2. Vehicles. The Medicaid recipient is entitled to one car having a market value of $4,500 or less. This dollar limitation is eliminated if the car is used for obtaining medical treatment, is specially equipped for a handicapped person, or is used for employment. A letter will need to be obtained from the recipient's physician or employer to establish this. There is no limit on the value of one vehicle where spousal impoverishment protection rules apply.[33]

3. Personal Property. Personal property is exempt to a total value of $2,000. Wedding and engagement rings of any value are exempt, as are any items required by a physical condition. This personal property limit is removed for married couples where spousal impoverishment protection rules apply.[34]

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.[35]

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.[36]

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 for Medicaid benefits due to SSI eligibility. However, the community spouse’s self-funded retirement accounts are countable for long term care or HCBS benefit eligibility.[37]

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. Colorado’s state regulations provide that such an annuity may be considered a transfer without fair consideration under certain circumstances when the annuitant is the community spouse.[38]

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 executed after April 1, 2006 and before March 1, 2007.[39]

The DRA provides that entry fees paid to a Continuing Care Retirement Community (CCRC) are now considered countable resources, to the extent that these fees are refundable upon death or the termination of the CCRC contract; these fees are available to pay for the resident's care when his or her other resources are no longer sufficient; or these fees do not confer an ownership interest in the CCRC.[40]

Under the DRA, all states are now permitted to institute Long Term Care Insurance Partnership Programs (LTCIPPs). Under a LTCIPP, a state must disregard a portion of an individual's resources for purposes of Medicaid long term care eligibility. The amount of resources disregarded will be equal to the total amount of long term care benefits that are payable from the individual's long term care insurance policy. The policy must be considered a qualified long term policy under Section 7702B(b) of the Internal Revenue Code; and must comply with the long term care model regulation and model act.[41] If Colorado institutes a LTCIPP, the purchase of long term care insurance will become an even more important Medicaid planning tool than it is.

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.[42] 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."[43]

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).[44] The CSRA is in addition to both the $2,000 the institutionalized spouse is entitled to retain and the exempt resources discussed above.

The CSRA is equal to of one-half of the couple’s non-exempt resources, or a minimum of $19,908 (in 2006), whichever is greater.[45] The maximum CSRA is $99,540 in 2006. The minimum and maximum CSRA amounts are typically adjusted annually on the first of the year.[46] In Colorado, the maximum CSRA of $99,540 is always permitted, regardless of the total amount of the couple’s assets.[47] 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.[48] The current MMMNA amount limits are:

Basic Allowance $1,604

(This amount will increase

to $1,650 on July 1, 2006)

Plus Excess Shelter Allowance

House Payment/Rent plus Maintenance Fee

plus Insurance plus Taxes plus Utilities

(actual or $209, whichever is larger),

minus $468.38 equals Excess Shelter Allowance

Plus Family Allowance

Equals the MMMNA

(But the MMMNA cannot exceed $2,488.50 in 2006)

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).[49]

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.[50] The institutionalized spouse's income must be applied first to determine if there can be an increase in the CSRA.[51] This "income first" rule, which has long been applied in Colorado, is now mandated in all states under the DRA.[52]

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.[53] However, the community spouse is not required to use the increase in the CSRA amount to actually purchase such an annuity.[54]

Transfers of Assets

Medicaid imposes an ineligibility period for an institutionalized individual if the

individual or the individual’s spouse disposes of assets for less than fair consideration at any time during the “look-back” period.[55] 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.[56] (For transfers that were completed before February 8, 2006, the look-back period for outright transfers is only thirty-six months.[57]) The term “assets” includes all income and resources of the individual.[58]

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 Colorado ($5,092 in 2006).[59] Under the DRA, states are now required to impose partial months of ineligibility; and may no longer "round down."[60] (The imposition of partial months of ineligibility has been the practice in Colorado for several years.[61]) 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). A fractional number of days (e.g. 5.3 days) is rounded up to the next whole number of 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.[62]

Under the old Medicaid rules, the penalty period began running on the first day of the month in which the transfer was made.[63] 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.[64] Eligibility but for the transfer must be based on a submitted Medicaid application.[65] 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.[66] Any transfer that occurred during the five-year look-back period will be imposed in full.

When the amount transferred is large enough to trigger a penalty period of five years or more, the applicant must make certain to retain sufficient means to pay privately for nursing home care during the entire five-year look-back period. If the applicant does not apply for Medicaid until after the five-year look-back period has expired, no transfer penalty will be imposed.

Even when the amount transferred results in a penalty period of less than five years, it is important for the applicant to ensure a means to privately pay for his or her support and care during the penalty period. Prior to February 8, 2006, this was usually accomplished by employing a "half loaf" strategy.

The half loaf strategy essentially involved making a gift of a portion of excess resources, knowing that a penalty period would be imposed. Since the length of the penalty period could be determined in advance, and the penalty period always began to run as of the first day of the month in which the transfer was made, it was relatively simple to calculate how much the applicant could safely give away (the "transfer amount"); and the amount the applicant would require to hold back (the "hold-back amount") to pay for support and care during the penalty period.

The hold-back amount could simply be held in an interest-bearing account until needed. If the transfer and hold-back amounts were calculated correctly, the hold-back amount would be exhausted at the same time as the penalty period expired, allowing the applicant to qualify for Medicaid at that time.

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; and she had income of $1,000 per month. If she transferred $40,000 on January 27, 2006, her penalty period would be seven (7) months and twenty-six (26) days, since $40,000 divided by $5,092 equals 7.85 months ($40,000 ) $5,092 = 7.85). (Once again, the .85 is multiplied by 30 days to determine the additional days of ineligibility (30 days x .85 = 25.5 or 26 days).)

Under the rules applicable to transfers before February 8, 2006, the penalty period would have begun on January 1, 2006, and would expire seven months and twenty-six days later. Thus she could spend her $40,000 hold-back amount on her nursing home care during the penalty period and apply for Medicaid any time after August 27, 2006.

However, if the same applicant made her $40,000 transfer on April 27, 2006, the rules applicable to transfers on or after February 8, 2006 would apply; and her penalty period would not yet begin to run, since she would not yet be in a nursing home and she would still have $40,000 in excess resources.

Even if she entered a nursing home the following year, on April 1, 2007, 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 would be $6,000 per month. This would still leave $5,000 per month that she would have to 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 finally begin to run after 8 months of paying privately; and the applicant would then have to wait out an additional 7 months and 26 days (the penalty period) before Medicaid would begin covering her nursing home expenses. However, since she would have exhausted her $40,000 in excess resources after the first 8 months, she would have no means to cover the $5,000 per month in nursing home costs not paid for by her monthly income during the ensuing 7 month and 26 day penalty period. Unless her family would be able to pay for her care, she may be forced to leave the nursing home.

To avoid the harsh consequences of gifting under the DRA, some means must be used which will both: 1) provide for private payment during the penalty period; and 2) not be considered an available resource that will delay the start of the penalty period past the date on which long term care services begin. Using a strategy that would meet these new requirements could still allow for half loaf planning, if the hold-back amount could be structured in such a manner as to avoid being considered an available resource.

Further, other gifting strategies, even those involving transfers of the "whole loaf," may now be more attractive, so long as there are sufficient means for private payment during the penalty period or look-back period; and any penalty period would not be delayed beyond the point when the applicant actually begins receiving long term care services.

Exempt Transfers

The following specific types of transfers will not incur a penalty period:[67]

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 an actuarially sound, 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 to the annuitant. The state may be named as a second death beneficiary behind the recipient’s surviving spouse or minor of disabled child.[68]

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.[69]

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.[70]

"Spending Down"

An individual will only incur a transfer penalty if the individual transfers assets without receiving fair consideration in return.[71] Therefore, an effective and safe method to reduce excess resources to Medicaid eligibility levels involves "spending down" at least a portion of excess resources. Spending down involves one of three strategies: 1) convert non-exempt resources into exempt resources; 2) convert non-exempt resources in to exempt income; or 3) transfer non-exempt resources for valuable consideration that would not be considered a resource or income.

Under the first strategy, the individual might use excess cash resources to make home improvements and repairs; purchase a new vehicle; purchase new furniture and appliances for the family home; purchase an irrevocable burial plan; or fund a Medicaid-exempt trust. Under the second strategy, the individual could use excess resources to purchase long term care insurance or a Medicaid-exempt annuity. Under the third strategy, the individual might use excess resources to pay off a mortgage or other debts; pay for travel; hire a care manager; pay fees for attorney's or other professionals to assist with Medicaid planning, disability planning or estate planning; or to purchase other services.

For some individuals, gift transfers may not be necessary to achieve Medicaid eligibility levels after spending down. However, many individuals will still have excess resources after spending down and may need to proceed with some gifting as part of their plan to achieve eligibility.

Medicaid 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.[72] The State of Colorado is an interested party in that individual's estate because of the assistance it provided to him or her.[73] 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.[74]

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.[75] The state cannot recover against any other owners of the property, including a trust. Further, a life estate or joint tenancy interest owned by the individual ceases 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.

If the property is still under a mortgage, the couple considering this type of transfer should investigate possible retitling restrictions or penalties imposed by the mortgage company.

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.”[76]

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.[77]

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.[78]

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.[79]

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.[80] 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).[81]

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.[82] 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.[83] 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.[84]

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[85]; and the 60-month look-back period for annuities purchased on or after February 8, 2006.[86] 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 $1,604) up to a maximum MMMNA (currently $2,488.50), 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.[87] 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.[88] 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 $1,804.00, so that he is income qualified for Medicaid benefits. The couple needs to spend down $41,220.00 in order to reduce their total non-exempt assets to the CSRA of $99,540.00. 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 - 1,604) ) 1,500] x 41,200 = 3.756

5,092

$2,300 - $1,604 = $696

$696 ) $1,500 = .464

.464 x $41,220 = $19,126.08 (The amount transferred for less than fair consideration)

$19,126.08 ) $5,092 = 3.756 or 3 months and 23 days of ineligibility

As the above example illustrates, the penalty period would be significantly less than that which would be imposed on an outright transfer of $41,220. ( $41,220 ) $5,092 = 8.095 or 8 months and 3 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 resulting monthly income to the community spouse. 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:[89]

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 retirement annuity under IRC §408(b) or (q), or the annuity is purchased from a qualified 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.

At first glance, it would seem futile to purchase such an annuity, since virtually all of the annuity payments after the Medicaid recipient enters the nursing home (or begins receiving long term care services at home) will be used to pay for long term care expenses. However, such an annuity could be a very effective planning tool whenever the Medicaid recipient makes gift transfers on or after February 8, 2006 to qualify for Medicaid.

The annuity would be purchased with all of the Medicaid recipient's excess resources remaining after completion of the recipient's "spend down" and other gift transfers (i.e., the hold-back amount in a "half loaf" gifting plan); and would be structured to pay out for a term not to exceed the penalty period from the transfers, or 60 months, whichever is shorter. Further, the monthly payments from the annuity would be designed to pay for the recipient's monthly long term care expenses in excess of the recipient's other income during the penalty period or look-back period. Finally, the annuity should not be annuitized until the recipient enters the nursing home or begins receiving long term care services at home.

Once annuitized, the annuity would no longer be countable as a resource and would not, by itself, delay the start of the penalty period once the Medicaid recipient is in a long term care setting and receiving services, since the recipient would have no more excess resources and would qualify for Medicaid, but for the transfers. The annuity payments could then provide for the Medicaid recipient's nursing home or other long term care expenses during the penalty period or look-back period. Once the annuity is exhausted and the penalty period or look-back period has expired, the recipient could begin receiving Medicaid long term care benefits in the nursing home or at home through HCBS.

Unfortunately, the only commercial annuities fitting these requirements are currently not available for a period certain of less than 2 years. Perhaps this will change if there is a great enough demand for a Medicaid-friendly annuity product of shorter duration. However, until a shorter term annuity product may become available, the use of an annuity to "bridge" the penalty period from gift transfers would usually not make sense unless the penalty period is approximately 24 months or more. Otherwise, a different strategy, such as a Medicaid-exempt promissory note, trust, reverse mortgage or long term care insurance, may be used.

Medicaid's Treatment of Trusts

On August 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 (“OBRA 93"). OBRA 93 is a massive piece of legislation affecting many federal programs and is codified in the United States Code at 42 U.S.C. §1396p. The following discussion is solely concerned with the provisions in 42 U.S.C. §1396p(d) affecting the treatment of trusts in connection with Medicaid eligibility.

For purposes of determining an individual's eligibility for Medicaid benefits, §1396p(d) applies to all or portions of a trust "established by such individual," subject to important exceptions that will be discussed below. There are two requirements for a trust to be considered "established by such individual" under §1396p(d)(2). First, the individual's assets must form all or part of the corpus of the trust. Second, the trust must be a non-testamentary trust established by either the individual, his or her spouse, a third person with legal authority to act for the individual or the spouse (including a court or administrative body), or a third person acting at the direction or request of the individual or the spouse.[90]

If such a trust is revocable, then, for determining Medicaid eligibility, the assets in the trust are considered available resources to the individual.[91] Payments from the trust to or for the individual's benefit are included in his or her income.[92] If the trust is irrevocable, then, for Medicaid eligibility purposes, any portion of the trust assets from which a payment could be made to or for the benefit of the individual, under any circumstances, is included as an available resource.[93] Any payment to the individual from the trust is included in his or her income.[94] Any portion of the trust corpus that could not be paid is considered to be a transfer without fair consideration, resulting in a period of ineligibility.[95]

The rather uncharitable provisions of §1396p(d)(3) are ameliorated somewhat by 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 section 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.[96]

(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 ($1,809 per month in 2006), 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.[97]

(This exception codified into law what is commonly known as a “Miller Trust” or “Utah Gap Trust”); and

(C) A trust containing the assets of an individual who is disabled (as defined in section 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. [98]

(This exception codified into law what is commonly known as a “Pooled Trust.” In Colorado, any funds transferred to a Pooled Trust account after the beneficiary reaches age 65 will result in a transfer penalty.[99])

In Colorado, similar provisions in the Colorado Probate Code allow income trusts, disability trusts and pooled trust accounts to be created in order to establish or maintain a person’s resource eligibility for medical assistance.[100] The Colorado statutes contain the same basic requirements as the federal statute. Further, the Colorado Medicaid Regulations mirror the treatment under federal law of all self-settled trusts.[101]