Issue #27      February 13, 2006
 

CHANGES TO MEDICAID UNDER THE NEW FEDERAL LAW

 

By John J. Campbell, JD, CELA, MSCC

 

Introduction

 

            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; 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.  Generally, these changes under the DRA are effective as of February 8, 2006, the effective date of the act.  However, some states will have a grace period to come into compliance with the new provisions of the DRA if the passage of state legislation is required to do so.

 

            This article discusses the basics of Medicaid eligibility and planning under federal 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.  

 

What is Medicaid?

 

            Medicaid is a financial needs based 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.

 

            In thirty-two states and the District of Columbia[1], individuals who qualify for SSI automatically qualify for Medicaid.  In seven other states[2], individuals who qualify for SSI will also qualify for Medicaid, but must file a separate application.  In these "SSI states," the eligibility criteria for Medicaid in the community are generally the same as for eligibility under the SSI program.  Further, criteria for long term care or HCBS benefits are fairly consistent among SSI states, but with some variations.

 

            However, there are eleven states[3] which are permitted to use criteria for Medicaid eligibility that are more restrictive than SSI criteria.  These states are commonly referred to as “209(b) states” because the statutory exception which allows these states to employ stricter Medicaid eligibility criteria is contained in §209(b) of the Social Security Act. 

 

            Since the criteria for Medicaid eligibility in 209(b) states are largely state-specific, this article will only discuss eligibility criteria generally applicable in SSI states under federal law following the enactment of the DRA.  Practitioners are strongly advised to consult with an attorney in the state where the plaintiff lives regarding the Medicaid eligibility criteria under that state’s regulations.

 

            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.  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.

 

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.  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.

 

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.  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.  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).  The income of the individual’s spouse is not counted in determining the individual’s eligibility for Medicaid long term care or HCBS.  Reverse mortgage payments are not counted as income, 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.

 

            If the individual’s monthly income exceeds $1,809 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, 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; 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. 

 

            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.  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!

 

            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 visit 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.  This figure may seem unrealistically low, but please keep in mind that the following are not countable resources:

 

                        1.         Primary Residence.  The first $500,000 of 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 (or spouse) actually lived in the home immediately prior to being institutionalized and a spouse or dependent relative continues to live there; or (b) 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 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.  There is no limit on the value of one vehicle where spousal impoverishment protection rules apply.

 

              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.

 

                        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. 

 

            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.

 

            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.  In states that institute LTCIPPs, the purchase of long term care insurance will be an important Medicaid planning tool.

 

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 $19,908 (in 2006), whichever is greater.  The maximum CSRA is $99,540 in 2006.  In some states, the maximum CSRA of $99,540 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                                                          $1,604

                                    (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

                    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).

 

            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 not 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.

 

Treatment of Trusts

 

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 ($1,809 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.”)

 

            When a Medicaid recipient's eligibility is based upon eligibility for SSI benefits, additional requirements must be met under Social Security's Program Operations Manual System (POMS) provisions for self-settled trusts to be exempt.  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; and

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).

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.

  

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 (or, at the state's option, in the region of the state in which the Medicaid applicant resides).  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.

 

            This harsh treatment of transfers makes gifting 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.  This could result in the applicant being discharged from the nursing home for non-payment!

 

            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, 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).)  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, 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 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 26 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 26 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.

 

            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 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.

 

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.

 

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.  Such a loan is not a “transfer of assets” but the fair market value of note or mortgage is countable resource.

 

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.

 

Conclusion: Medicaid Planning Under the DRA

 

            To become eligible for Medicaid, an individual must eliminate any resources in excess of resource eligibility levels.  This can be accomplished by "spending down" these excess resources; by making gift transfers of these excess resources; or by a combination of spending and gifting.

 

            Typically, an individual planning for Medicaid eligibility will want to preserve as many resources as possible, either for his or her family and loved ones or for his or her own supplemental needs, once Medicaid benefits begin.  For persons over age 65, Special Needs Trusts are not an available option; and funding a Pooled Trust Account will result in a transfer penalty.  Finally, even after "spending down" on services, exempt resources or payment of debts, most individuals will still be left with some excess countable resources.  Therefore, most Medicaid planning has traditionally involved making gift transfers.

 

            Making gift transfers for purposes of becoming eligible for Medicaid can be potentially disastrous under the new laws.  To avoid the harsh consequences of gifting, 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.  Medicaid planning has now become very difficult and dangerous, but it is not impossible.   

 

            A strategy is needed which will allow the penalty period to start running as soon as the individual enters the nursing home; and provide a means of private payment for the duration of the penalty period.  Finally, such a strategy needs to accomplish this while still preserving a portion of the applicant's resources according to the applicant's planning goals. 

 

            In some cases, a special trust, an annuity, long term care insurance, a reverse mortgage or some other strategy may be available to fill this need.  However, all of these strategies will not work in every situation.  This is why it is so important that an individualized Medicaid plan be formulated on a case-by-case basis to fit the exact circumstances of each individual; and that each individual's own Medicaid plan be followed exactly as written.