As people age, disability can strike with little to no warning, leaving scant time for individuals and families to craft a financial plan. In such cases, Medicaid can cover necessary costs of care, but only if the individual qualifies. The author details qualification strategies for individuals whose assets might otherwise place them beyond Medicaid coverage. Though they are not without some risk, such strategies can be crucial in preserving those assets for spouses and other family members against the costs of long-term care.
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Anyone who has practiced in elder law for a certain length of time has experienced some version of the following scenario: A 55-year-old calls seeking advice about his 80-year-old parent who has recently been diagnosed with Alzheimer’s disease, Parkinson’s disease, or some other equally debilitating condition that will require extensive long-term care sooner rather than later. The parent has typically has a retirement plan worth $350,000, a brokerage account and certificates of deposit (CD) worth $250,000, and a primary residence worth around $500,000.
The caller inquires whether the parent can receive government assistance for long-term care costs through Medicaid. The standard advice of having the affected parent transfer assets either directly to relatives or to a Medicaid Qualifying Irrevocable Trust (MQIT) will not help, because these transfers will typically make the parent ineligible to receive institutional Medicaid for the next five years, known as the “lookback” period [42 USC 1396P(c)]. With these diagnoses, there is generally no realistic possibility that the parent can go five years without requiring institutional care.
With average nursing home costs in New York currently approximately $400 per day (or $12,000 per month), there seems to be little hope of this parent passing her hard-earned assets on to her loved ones. This article addresses certain strategies that might be employed to help that parent hold on to all, most, or at least some of those assets and still qualify for Medicaid under current law. For purposes of this article, the laws and rates of New York will be used; those in similar situations should consult the laws of their own state.
There are ways to either “spend down” or “transfer out” certain assets without incurring a disqualification period.
Converting Nonexempt Assets to Exempt Assets
While it is true that in order to qualify for Medicaid, an applicant can have no more than $15,150 in countable (nonexempt) resources in 2018, there are ways to either “spend down” or “transfer out” certain assets without incurring a disqualification period:
- Pay off credit card bills; prepay mortgages, auto loans, or insurance.
- Make repairs or renovations to the applicant’s primary residence.
- Purchase a new primary residence, car, household furnishings, personal jewelry, or other exempt asset (within reason).
- Make prepaid burial arrangements for the applicant, the applicant’s spouse, children, and children’s spouses.
- Make a transfer between spouses, which is exempt when made any time before applying for Medicaid as long as the community spouse does not subsequently transfer the asset received from the applicant spouse.
- Make a contribution to a retirement plan, if eligible, as assets within a retirement plan are not countable as long as the plan is in mandatory payout status (generally when the recipient is 70½ or older), although any required minimum distribution (RMD) must be used to pay for long-term care.
- Make a transfer to a disabled child, although this may jeopardize that child’s eligibility for government benefits.
Any disqualifying transfers made within the lookback period may be transferred back to the applicant [referred to as “return of gift”; New York Social Services Law (NYSOS) section 366(5)(d)(3)(iii)]; this strategy is advisable provided that the retransfer would not increase the applicant’s nonexempt resources over the $15,150 limit.
While an applicant’s primary residence is considered an exempt asset (up to $858,000 of value in excess of any mortgages in New York for 2018 [42 USC 1396P(f); New York Social Services Law (NYSOS) section 366(2)(a)(1)(ii)]), the government is allowed to place a lien on the premises for recovery unless the applicant expresses an “intent to return home” [42 USC 1396P(a)(1)(B)(ii); NYSOS section 369(2)(a)(ii); NYCRR 5360-7.11(a)(3)(ii)]. This intent may be expressed in a letter or affidavit signed by the applicant, or by written statements of relatives or friends who have personal knowledge of the applicant’s intent to return home. For this purpose, a subjective intent to return home controls, even if there is no reasonable expectation that the applicant will be discharged and return home. If an institutionalized person is not reasonably expected to return home, the home loses its exempt status. In order to prevent that possibility, there are certain limited “exempt transfers” that may be made, including—
- to the applicant’s spouse;
- to the applicant’s minor child (under age 21);
- to the applicant’s disabled child (which, as discussed above, may affect eligibility for government benefits);
- to the applicant’s adult child care-giver, so that the applicant may reside in the community for at least two years prior to entering a nursing home facility (such care may include supervision of home aides); and
- to the applicant’s sibling who has resided in the home for at least one year prior to the applicant entering a nursing home facility and has an equity interest in the premises. This interest may be as simple as paying for ongoing maintenance costs associated with the premises; in other words, the sibling does not need to have to be a title-holder [42 USC 1396P(2); NYSOS section 366(5)(d)(3)(i); NYCRR Sec 360-4.4(c)(2)(iii)(b)].
Although the principal residence exemption is limited to equity of $858,000 in 2018, advisors must remember that an equity interest depends upon whether the applicant owns the home individually or with someone else. If owned individually, equity interest is the entire equity value; if owned jointly, the equity interest is only half of the home’s equity value [42 USC 1396P(3)(C); NYSOS section 366(5)(d)(5)]. In addition, the home equity rule does not apply if the applicant’s spouse or a child who is under 21 or is blind or disabled lives in the home [42 USC 1396P(f)(2); NYSOS 366(2)(a)(ii)]. Finally, note that the recipient of an exempt transfer cannot retransfer the premises without rendering the transfer nonexempt.
Promissory Note Transfers
While uncompensated transfers will commence a period of ineligibility that will not begin until the applicant is “otherwise qualified” for Medicaid (i.e., the applicant’s nonexempt resources are less than $15,150 and total income is less than the monthly nursing home cost), there is a last-minute strategy that can be used to save part of the applicant’s savings. The applicant must make an uncompensated transfer of approximately 50% of her assets to a child or irrevocable trust, thus meeting the definition of “otherwise qualify” [42 USC 1396P(3)(B)]. Simultaneously, the applicant must transfer the balance of her assets to an individual in exchange for a promissory note, such that she will be compensated with an appropriate interest rate. The effect will be to convert this portion of the applicant’s resources into an income stream.
While it is true that the uncompen-sated transfer will disqualify the applicant from obtaining Medicaid benefits for the ineligibility period, nursing home costs during this period can be subsidized by the income stream from the promissory note payments. Once the ineligibility period is over, the applicant can reapply for Medicaid and should qualify. Whatever assets were transferred out in the uncompensated transfer will escape any government claims for Medicaid reimburse ment.
It is important to ensure that that the monthly promissory note payments, together with all other income payments combined, are less than the monthly nursing home payment. Otherwise, the ineligibility period will not start, as the applicant will not be deemed “otherwise qualified” to receive Medicaid benefits.
While uncompensated transfers will commence a period of ineligibility that will not begin until the applicant is “otherwise qualified” for Medicaid, there is a last-minute strategy that can be used to save part of the applicant’s savings.
The promissory note will only be respected by the government if it meets the following criteria:
- The note is actuarially sound; that is, the payout period (the number of months the payments will be made under the note) is proportionately related to no more than a person’s life expectancy. The administrative directive 06-AMD-05 provides that a promissory note is actuarially sound if it is calculated “in accordance with the actuarial publications of the office of the Chief Actuary of the Social Security Administration.” Generally, if the note is being used in a crisis situation, the payback period should be well within the period of the applicant’s life expectancy.
- Monthly payments must be equal during the entire term of the note.
- The note cannot be cancellable upon the applicant’s death. [42 USC 1917 (c)(1)(I); NYSOS section 366(5) (c)(3)(iii)]
In addition, it is advisable that the promissory note be made so that it is nonnegotiable. Negotiability of a promissory note will increase its value, which could make it an available nonexempt resource.
What is the appropriate rate of interest? Although there is no legal prescription, it might be advisable to ask the county where the nursing home is located. Many advisors use the short-or mid-term Applicable Federal Rate (AFR) supplied under the Treasury Regulations [Internal Revenue Code (IRC) section 1274]; others use the comparable CD rate for a similar term.
Using the information in the first paragraph of this article (i.e., $250,000 of nonexempt assets), an applicant gifting one-half of assets to children and entering into a promissory note in exchange for the other half would be ineligible for 11 months using New York City nursing home rates. Using the short-term AFR of 1.67% (as of January 2018), a $125,000 promissory note payable over 11 months would require a monthly payment of $11,459. Assuming that the actual nursing home cost is $12,500 per month and the applicant’s Social Security and retirement payments equal $2,500 per month, this calculation would yield a payment that, when added to the other income streams, would be in excess of the cost of care. Therefore, the applicant would not be deemed otherwise qualified to receive Medicaid benefits, and the ineligibility period would not begin to run.
Even using the maximum amount that could be gifted while preserving the 11-month ineligibility period ($12,319 × 11 = $135,509) would require a promissory note of $114,491. Using the same 1.67% AFR, the necessary payment of $10,495 per month would still be too high; therefore, it appears that the amount gifted will have to incur a 12-month ineligibility period.
In the event that the applicant is married to a spouse with no long-term care needs, that spouse has certain rights to the marital income and resources.
A gift of $134,000 would create such a period, as promissory note in the amount of the remaining $116,000 at 1.67% over 12 months would yield a monthly payment of $9,754, which, when added to the $2,500 of other payments, would be less than the payment for monthly care. Of course, the family would have to pay the monthly difference of $246 for her care over the 12-month ineligibility period.
How much of the $250,000 of nonexempt resources would be saved for the family under this plan? Keeping the applicant in the facility at private pay rates for 12 months would cost the family $10,000 per month over and above the applicant’s Social Security and retirement benefit, for a total cost of $120,000, thereby preserving the remaining $130,000 for the family.
In the event that the applicant is married to a spouse with no long-term care needs (i.e., community spouse), that spouse has certain rights to the marital income and resources.
Community spouse’s right to income.
The community spouse is entitled to a Minimum Monthly Maintenance Needs Allowance (MMMNA), which in New York is currently $3,090 per month [42 USC 1396r-5(d), (g); NYSOS section 366-c.2(h)]. If the total income of the community spouse is less than the MMMNA, that spouse is entitled to an amount of the income of the spouse in the nursing home (i.e., institutionalized spouse) sufficient to raise the community spouse’s total income to the MMMNA amount. In addition, if the community spouse can show a need to keep additional income in order to avoid exceptional circumstances resulting in significant financial distress, a court may allow such additional income [42 USC section 1396r-5(e)(2)(B); NYSOS section 366-c.8(b)]. The New York Court of Appeals has determined that “exceptional circumstances resulting in significant financial distress” must mean “true financial hardship thrust upon the community spouse by circumstances beyond his or her control” [Gomprecht v. Sabol, 86 N.Y. 2d 47 (1995); Scachner v. Perales, 85 N.Y. 2d 316 (1995)]. Some of these exceptional circumstances may include medical costs, expenses to maintain or repair the principal residence, or costs to preserve certain income producing assets (e.g., rental real estate) [18 NYCRR 360-4.10(A)(10)].
Community spouse’s right to assets.
The community spouse is entitled to retain a Community Spouse Recourse Allowance (CSRA), the amount of which is set by the state and adjusted annually for inflation [42 USC 1396r-5(c); NYSOS section 366-c(2)(d)]. The valuation date is the first day of the month in which the institutionalized spouse commences a nursing home stay that is likely to last more than 30 consecutive days [42 USC 1396r-5(c)(1)(B); NYSOS section 366-c(7)]. In New York, once the couple’s total combined assets are determined, the community spouse will be entitled to keep the greater of 1) $74,820 or 2) one-half of the couple’s combined resources not to exceed $123,600, regardless of which spouse owns the assets [NYSOS section 366-c(2)(d)].
Jerry and Stella have total combined resources of $125,000. If Jerry enters a nursing home and otherwise qualifies for Medicaid, Stella may retain $74,820 of their combined assets, because one-half of their combined assets is less than the minimum allowable amount ($125,000 × 50% = $62,500).
Lenny and Helen have combined total assets of $250,000. If Helen is admitted into a nursing home and otherwise qualifies for Medicaid, Lenny may retain $123,600 of their combined assets, because one-half of their combined assets exceeds the maximum allowable amount ($250,000 × 50% = $125,000).
Nick and Libby have total combined assets of $200,000. If Nick is admitted to a nursing home and otherwise qualifies for Medicaid, Libby may retain one-half of the combined assets ($200,000 × 50% = $100,000) since this amount is greater than the minimum allowable amount ($74,820) but less than the maximum ($123,600).
Remember that to be otherwise qualified for Medicaid, the institutionalized spouse must not have more than $15,150 of nonexempt assets in his name. Should he have nonexempt assets exceeding this amount, those excess funds should be spent down or transferred to the community spouse, as detailed above.
In certain cases, the community spouse might be able to show that the CSRA does not provide enough, when combined with the spouse’s other income, to generate the MMMNA. In these circumstances the community spouse can apply to receive an Enhanced Resource Allowance after a fair hearing [42 USC 1396r-5(e)(2)(C); NYSOS section 366-c(8)(c)].
This controversial strategy entails the community spouse refusing to support the institutionalized spouse with the community spouse’s own income or assets [42 USC 1396r-5(c)(3); NYSOS section 366-3(a)]. The institution alized spouse will qualify for Medicaid and must be covered as long as she assigns her right for spousal support to the government [42 USC 1396r-5(c)(3)(A); NYSOS section 366-c(5)(b)]. Furthermore, the institution al ized spouse must agree to cooperate in the state’s effort to collect spousal support from the community spouse [42 USC 1396k (a)(1)(B)].
Upon the community spouse’s refusal to support the institutionalized spouse, it is likely that the government will request a contribution of 25% of the community spouse’s excess income to pay for the institutionalized spouse’s nursing home costs [18 NYCRR 360-4.10(b)(5)]. Failure to comply might well lead to legal action against the community spouse. In the meantime, Medicaid must foot the bill for the nursing home costs [42 USC 1396r-5(c)(3); NYSOS section 366-3(a)].
The threat of legal action may be enough to dissuade the community spouse from pursuing a spousal refusal strategy. Nevertheless, couples should consider the following potential benefits associated with spousal refusal:
- Depending on the county, it is very possible that the government will not pursue its claim against the community spouse. A local attorney experienced with these types of claims in the county should be consulted.
- Once the institutionalized spouse qualifies for Medicaid, the nursing home must accept the Medicaid rate of pay, which is appreciably less than the private rate of pay. Federal law also mandates that the care provided for Medicaid patients be identical to the level of care provided to private pay patients [42 USC 1396r(c)(4)]. This means that even if the government successfully enforces its right to reimbursement from the community spouse, the reimbursement will only be at the Medicaid rate of pay. Once again, it would be advisable to consult an experienced local elder law attorney to ascertain the amount of the discount.
- It is quite likely that even if the government pursues its claim against the community spouse, it would be willing to negotiate a settlement with the community spouse for less than the Medicaid rate of pay in order to curtail the legal costs and potential bad public relations associated with the pursuit of the claim. This offers the family a second potential discount.
Once the institutionalized spouse qualifies for Medicaid, the nursing home must accept the Medicaid rate of pay, which is appreciably less than the private rate of pay.
Engage Elder Law Specialists
When implementing any of the strategies discussed above, it is imperative to secure the services of an experienced, competent elder law attorney. CPA financial planners who do not have colleagues ready to recommend to clients in need may want to contact the local bar association or the National Academy of Elder Law Attorneys (http://www.naela.org). When deciding amongst several elder law attorneys, potential clients should meet with them and establish their commitment to the area and their knowledge with regard to issues of particular concern.