Click on link below to view an answer
to your question:
* The Need for Planning
* Medicare
* Medicaid
* Transfers
* Trusts
* Protection of the house
* Spending down
* Immediate annuities
* Increase CSRA
* Spousal refusal
FAQ's:
The Need for Planning
ANSWER: One of the greatest fears of older
Americans is that they may end up in a nursing home. This
not only means a great loss of personal autonomy, but also
a tremendous financial price. Depending on location and
level of care, nursing homes cost between $35,000 and $150,000
a year.
Most people end up paying for nursing home care out of
their savings until they run out. Then they can qualify
for Medicaid to pick up the cost. The advantages of paying
privately are that you are more likely to gain entrance
to a better quality facility and it eliminates or postpones
dealing with your state's welfare bureaucracy--an often
demeaning and time-consuming process. The disadvantage is
that it's expensive.
Careful planning, whether in advance or in response to
an unanticipated need for care, can help protect your estate,
whether for your spouse or for your children. This can be
done by purchasing long-term care insurance or by making
sure you receive the benefits to which you are entitled
under the Medicare and Medicaid programs. Veterans may also
seek benefits from the Veterans Administration.
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Medicare
ANSWER: Medicare Part A covers up to 100
days of "skilled nursing" care per spell of illness.
However, the definition of "skilled nursing" and
the other conditions for obtaining this coverage are quite
stringent, meaning that few nursing home residents receive
the full 100 days of coverage. As a result, Medicare pays
for only about 9 percent of nursing home care in the United
States. Check out the Medicare section of this site for
tips on making sure you receive the nursing care benefits
to which you are entitled.
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Medicaid
ANSWER: For all practical purposes, in
the United States the only "insurance" plan for
long-term institutional care is Medicaid. Lacking access
to alternatives such as paying privately or Medicare, most
people pay out of their own pockets for long-term care until
they become eligible for Medicaid. Although their names
are confusingly alike, Medicaid and Medicare are quite different
programs. For one thing, all retirees who receive Social
Security benefits also receive Medicare as their health
insurance. Medicare is an "entitlement" program.
Medicaid, on the other hand, is a form of welfare -- or
at least that's how it began. So to be eligible for Medicaid,
you must become "impoverished" under the program's
guidelines.
Also, unlike Medicare, which is totally federal, Medicaid
is a joint federal-state program. Each state operates its
own Medicaid system, but this system must conform to federal
guidelines in order for the state to receive federal money,
which pays for about half the state's Medicaid costs. (The
state picks up the rest of the tab.)
This complicates matters, since the Medicaid eligibility
rules are somewhat different from state to state, and they
keep changing. (The states also sometimes have their own
names for the program, such as "MediCal" in California
and "MassHealth" in Massachusetts.) Both the federal
government and most state governments seem to be continually
tinkering with the eligibility requirements and restrictions.
This has most recently occurred with the passage of the
Deficit Reduction Act of 2005 (the DRA) which significantly
changed rules governing the treatment of asset transfers
and homes of nursing home residents. The implementation
of these changes will proceed state-by-state over the next
few years. The rules for gaining eligibility to the program
are explained in detail in the Medicaid section of this
site. But to be certain of your rights, consult an expert.
He or she can guide you through the complicated rules of
the different programs and help you plan ahead.
Those who are not in immediate need of long-term care may
have the luxury of distributing or protecting their assets
in advance. This way, when they do need long-term care,
they will quickly qualify for Medicaid benefits. Giving
general rules for so-called "Medicaid planning"
is difficult because every client's case is different. Some
have more savings or income than others. Some are married,
others are single. Some have family support, others do not.
Some own their own homes, some rent. Still, a number of
basic strategies and tools are typically used in Medicaid
planning. These are described below.
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Transfers
ANSWER: As explained in the Medicaid section
of this site (see The Transfer Penalty), Congress has established
a period of ineligibility for Medicaid for those who transfer
assets. This period of ineligibility is determined by dividing
the amount transferred by what Medicaid determines to be
the average private pay cost of a nursing home in your state.
The DRA significantly changed rules governing the treatment
of asset transfers. For transfers made prior to enactment
of the DRA on February 8, 2006, state Medicaid officials
will look only at transfers made within the 36 months prior
to the Medicaid application (or 60 months if the transfer
was made to or from certain kinds of trusts). But for transfers
made after passage of the DRA the so-called “lookback”
period for all transfers is 60 months.
Another significant change in the treatment of transfers
made by the DRA has to do with when the penalty period created
by the transfer begins. Under the prior law, the 20-month
penalty period created by a transfer of $100,000 in the
example described above would begin either on the first
day of the month during which the transfer occurred, or
on the first day of the following month, depending on the
state. Under the DRA, the 20-month period will not begin
until (1) the transferor has moved to a nursing home, (2)
he has spent down to the asset limit for Medicaid eligibility,
(3) has applied for Medicaid coverage, and (4) has been
approved for coverage but for the transfer.
For instance, if an individual transfers $100,000 on April
1, 2006, moves to a nursing home on April 1, 2007, and spends
down to Medicaid eligibility on April 1, 2008, that is when
the 20-month penalty period will begin, and it will not
end until December 1, 2009. How this change will be implemented
from state-to-state will be worked out over the next few
years.
Transfers should be made carefully, with an understanding
of all the consequences. People who make transfers must
be careful not to apply for Medicaid before the five-year
lookback period elapses without first consulting with an
elder law attorney. This is because the penalty could ultimately
extend even longer than five years, depending on the size
of the transfer.
One of the prime planning techniques used prior to the
enactment of the DRA, often referred to as “half a
loaf,” was for the Medicaid applicant to give away
approximately half of his or her assets. It worked this
way: before applying for Medicaid, the prospective applicant
would transfer half of his or her resources, thus creating
a Medicaid penalty period. The applicant, who was often
already in a nursing home, then used the other half of his
or her resources to pay for care while waiting out the ensuing
penalty period. After the penalty period had expired, the
individual could apply for Medicaid coverage.
Example: Mrs. Jones had savings of $72,000. The average
private-pay nursing home rate in her state is $6,000 a month.
When she entered a nursing home, she transferred $36,000
of her savings to her son. This created a six-month period
of Medicaid ineligibility ($36,000 ÷ $6,000 = 6).
During these six months, she used the remaining $36,000
plus her income to pay privately for her nursing home care.
After the six-month Medicaid penalty period had elapsed,
Mrs. Jones would have spent down her remaining assets and
be able to qualify for Medicaid coverage.
While you could generally give away approximately half
your assets, the exact amount depended on a variety of factors,
including the cost of care, the transfer penalty in your
state, income, and possible other expenses. One of the main
goals of the DRA was to eliminate this kind of planning.
To determine whether it is still an available strategy in
your state as it implements the DRA, you will have to consult
with a local elder law attorney.
Any transfer strategy must take into account the nursing
home resident's income and all of her expenses, including
the cost of the nursing home. Also, be very, very careful
before making transfers. Also, bear in mind that if you
give money to your children, it belongs to them and you
should not rely on them to hold the money for your benefit.
However well-intentioned they may be, your children could
lose the funds due to bankruptcy, divorce or lawsuit. Any
of these occurrences would jeopardize the savings you spent
a lifetime accumulating. Do not give away your savings unless
you are ready for these risks.
In addition, be aware that the fact that your children
are holding your funds in their names could jeopardize your
grandchildren's eligibility for financial aid in college.
Transfers can also have bad tax consequences for your children.
This is especially true of assets that have appreciated
in value, such as real estate and stocks. If you give these
to your children, they will not get the tax advantages they
would get if they were to receive them through your estate.
The result is that when they sell the property they will
have to pay a much higher tax on capital gains than they
would have if they had inherited it.
Transfers should be made carefully, with an understanding
of all the consequences. In any case, as a rule, never transfer
assets for Medicaid planning unless you keep enough funds
in your name to (1) pay for any care needs you may have
during the resulting period of ineligibility for Medicaid;
and (2) feel comfortable and have sufficient resources to
maintain your present lifestyle.
Remember:
You do not have to save your estate for your children.
The bumper sticker that reads "I'm spending my children's
inheritance" is a perfectly appropriate approach to
estate and Medicaid planning.
Even though a nursing home resident may receive Medicaid
while owning a home (the DRA has restricted Medicaid eligibility
for some homes; click here for more information), if she
is married she should transfer the home to the community
spouse (assuming the nursing home resident is both willing
and competent). This gives the community spouse control
over the asset and allows him or her to sell it after the
nursing home spouse becomes eligible for Medicaid. In addition,
the community spouse should change his or her will to bypass
the nursing home spouse. Otherwise, at his or her death,
the home and other assets of the community spouse will go
to the nursing home spouse and have to be spent down.
Permitted Transfers
While most transfers are penalized with a period of Medicaid
ineligibility of five years, certain transfers are exempt
from this penalty. Even after entering a nursing home, you
may transfer any asset to the following individuals without
having to wait out a period of Medicaid ineligibility:
* Your spouse (but this may not help you become eligible
since the same limit on both spouse's assets will apply)
* Your child who is blind or permanently disabled.
* Into trust for the sole benefit of anyone under age 65
and permanently disabled.
In addition, you may transfer your home to the following
individuals (as well as to those listed above):
* Your child who is under age 21.
* Your child who has lived in your home for at least two
years prior to your moving to a nursing home and who provided
you with care that allowed you to stay at home during that
time.
* A sibling who already has an equity interest in the house
and who lived there for at least a year before you moved
to a nursing home.
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Trusts
ANSWER: The problem with transferring assets
is that you have given them away. You no longer control
them, and even a trusted child or other relative may lose
them. A safer approach is to put them in a living (or "inter
vivos") trust. A trust is a legal entity under which
one person -- the "trustee" -- holds legal title
to property for the benefit of others -- the "beneficiaries."
The trustee must follow the rules provided in the trust
instrument. Whether trust assets are counted against Medicaid's
resource limits depends on the terms of the trust and who
created it.
A "revocable" trust is one that may be changed
or rescinded by the person who created it. Medicaid considers
the principal of such trusts (that is, the funds that make
up the trust) to be assets that are countable in determining
Medicaid eligibility. Thus, revocable trusts are of no use
in Medicaid planning.
Income-only Trusts
An "irrevocable" trust, on the other hand, is
one that cannot be changed after it has been created. In
most cases, this type of trust is drafted so that the income
is payable to you (the person establishing the trust, called
the "grantor") for life, and the principal cannot
be touched during your life. At your death the principal
is paid to your heirs. This way, the funds in the trust
are protected and you can use the income for your living
expenses. For Medicaid purposes, the principal in such trusts
is not counted as a resource, provided the trustee cannot
pay it to you or for your benefit. However, if you do move
to a nursing home, the trust income will have to go to the
nursing home.
You should be aware of the drawbacks to such an arrangement.
It is very rigid, so you cannot gain access to the trust
funds even if you need them for some other purpose. For
this reason, you should always leave an ample cushion of
ready funds outside the trust.
You may also choose to place property in a trust from which
even payments of income to you or your spouse cannot be
made. Instead, the trust may be set up for the benefit of
your children, or others. These beneficiaries may, at their
discretion, return the favor by using the property for your
benefit if necessary. However, there is no legal requirement
that they do so.
One advantage of these trusts is that if they contain property
that has increased in value, such as real estate or stock,
you (the grantor) can retain a "special testamentary
power of appointment" so that the beneficiaries receive
the property with a step-up in basis at your death. This
will also prevent the need to file a gift tax return upon
the funding of the trust.
Remember, funding an irrevocable trust can cause you to
be ineligible for Medicaid for five years.
Testamentary Trusts
Testamentary trusts are trusts created under a will. The
Medicaid rules provide a special "safe harbor"
for testamentary trusts created by a deceased spouse for
the benefit of a surviving spouse. The assets of these trusts
are treated as available to the Medicaid applicant only
to the extent that the trustee has an obligation to pay
for the applicant's support. If payments are solely at the
trustee's discretion, they are considered unavailable.
Therefore, these testamentary trusts can provide an important
mechanism for community spouses to leave funds for their
surviving institutionalized husband or wife that can be
used to pay for services that are not covered by Medicaid.
These may include extra therapy, special equipment, evaluation
by medical specialists or others, legal fees, visits by
family members, or transfers to another nursing home if
that became necessary. But remember that if you create a
trust for yourself or your spouse during life (i.e., not
a testamentary trust), the trust funds are considered available
if the trustee has the ability to use them for you or your
spouse.
Supplemental Needs Trusts
The Medicaid rules also have certain exceptions for transfers
for the sole benefit of disabled people under age 65. Even
after moving to a nursing home, if you have a child, other
relative, or even a friend who is under age 65 and disabled,
you can transfer assets into a trust for his or her benefit
without incurring any period of ineligibility. If these
trusts are properly structured, the funds in them will not
be considered to belong to the beneficiary in determining
his or her own Medicaid eligibility. The only drawback to
supplemental needs trusts (also called "special needs
trusts") is that after the disabled individual dies,
the state must be reimbursed for any Medicaid funds spent
on behalf of the disabled person.
Supplemental needs trusts are usually created by a parent
or other family member for a disabled child (even though
the child may be an adult). Or, the disabled individual
can create the trust with his or her own money, provided
the trust meets certain requirements. These latter trusts
are sometimes called "(d)(4)(A)" trusts, which
refers to the authorizing statute.
For more on supplemental needs trusts, click here.
For more on trusts in general, see the Estate Planning
section of this site.
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Protection of the House
ANSWER: As explained in the Medicaid section
of this site, after a Medicaid recipient dies, the state
must attempt to recoup from his or her estate whatever benefits
it paid for the recipient's care. This is called "estate
recovery." For many people, setting up a "life
estate" is the most simple and appropriate alternative
for protecting the home from estate recovery. A life estate
is a form of joint ownership of property between two or
more people. They each have an ownership interest in the
property, but for different periods of time. The person
holding the life estate possesses the property currently
and for the rest of his or her life. The other owner has
a future or "remainder" interest in the property.
He or she has a current ownership interest but cannot take
possession until the end of the life estate, which occurs
at the death of the life estate holder. As with a transfer
to a trust, the deed into a life estate can trigger a Medicaid
ineligibility period.
Example:
Jane gives a remainder interest in her house to her children,
George and Mary, while retaining a life interest for herself.
She carries this out through a simple deed. Thereafter,
Jane, the life estate holder, has the right to live in the
property or rent it out, collecting the rents for herself.
On the other hand, she is responsible for the costs of maintenance
and taxes on the property. In addition, the property cannot
be sold to a third party without the cooperation of George
and Mary, the remainder interest holders.
When Jane dies, the house will not go through probate,
since at her death the ownership will pass automatically
to the holders of the remainder interest, George and Mary.
Although the property will not be included in Jane's probate
estate, it will be included in her taxable estate. The downside
of this is that depending on the size of the estate and
the state's estate tax threshold, the property may be subject
to estate taxation. The upside is that this can mean a significant
reduction in the tax on capital gains when George and Mary
sell the property because they will receive a "step
up" in the property's basis.
Life estates are created simply by executing a deed conveying
the remainder interest to another while retaining a life
interest, as Jane did in this example. Once the house passes
to George and Mary, the state cannot recover against it
for any Medicaid expenses Jane may have incurred.
Another method of protecting the home from estate recovery
is to transfer it to an irrevocable trust. Trusts provide
more flexibility than life estates but are somewhat more
complicated. Once the house is in the irrevocable trust,
it cannot be taken out again. Although it can be sold, the
proceeds must remain in the trust. This can protect more
of the value of the house if it is sold.
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Spending down
ANSWER: Spending Down
Applicants for Medicaid and their spouses may protect savings
by spending them on noncountable assets. This may include:
* paying off a mortgage,
* making repairs to a home,
* replacing an old automobile,
* updating home furnishings,
* paying for more care at home, or even
* buying a new home.
In the case of married couples, it is often important that
any spend-down steps be taken only after the unhealthy spouse
moves to a nursing home if this would affect the community
spouse's resource allowance.
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Immediate Annuities
ANSWER: Immediate annuities can be ideal
planning tools for spouses of nursing home residents. For
single individuals, they are less useful. An immediate annuity,
in its simplest form, is a contract with an insurance company
under which the consumer pays a certain amount of money
to the company and the company sends the consumer a monthly
check for the rest of his or her life. In most states the
purchase of an annuity is not considered to be a transfer
for purposes of eligibility for Medicaid, but is instead
the purchase of an investment. It transforms otherwise countable
assets into a non-countable income stream. As long as the
income is in the name of the community spouse, it's not
a problem.
In order for the annuity purchase not to be considered
a transfer, it must meet three basic requirements: (1) It
must be irrevocable--you cannot have the right to take the
funds out of the annuity except through the monthly payments.
(2) You must receive back at least what you paid into the
annuity during your actuarial life expectancy. For instance,
if you have an actuarial life expectancy of 10 years, and
you pay $60,000 for an annuity, you must receive annuity
payments of at least $500 a month ($500 x 12 x 10 = $60,000).
(3) If you purchase an annuity with a term certain (see
below), it must be shorter than your actuarial life expectancy.
(4) Under the DRA, the state must be named the remainder
beneficiary up to the amount of Medicaid paid on the annuitant’s
behalf.
Example:
Mrs. Jones, the community spouse, lives in a state where
the most money she can keep for herself and still have Mr.
Jones, who is in a nursing home, qualify for Medicaid (her
maximum resource allowance) is $99,540 (in 2006). However,
Mrs. Jones has $208,280 in countable assets. She can take
the difference of $111,000 ($212,540 minus the sum of $99,540
and the $2,000 Medicaid recipients are allowed to retain)
and purchase an annuity, making her husband in the nursing
home immediately eligible for Medicaid. She would continue
to receive the annuity check each month for the rest of
her life. (In certain states, following the death of the
community spouse the state may be able to recover what's
left of the annuity as reimbursement for Medicaid expenditures
to the institutionalized spouse; see Estate Recovery under
the Medicaid section of this site.)
Except in the case of clients with substantial savings,
the purchase of an annuity should wait until the unhealthy
spouse moves to a nursing home. In addition, if the annuity
has a term certain, the term must be shorter than the life
expectancy of the healthy spouse. Finally, where the healthy
spouse has a relatively low income, the annuity may provide
little benefit since it will only supplant income that he
or she would be entitled to from the unhealthy spouse.
Annuities are of less benefit for a single individual in
a nursing home because he or she would have to pay the monthly
income from the annuity to the nursing home.
In short, immediate annuities are a very powerful tool
in the right circumstances, but of little or no use in other
cases. They must also be distinguished from deferred annuities,
which have no Medicaid planning purpose.
(The use of immediate annuities as a Medicaid planning
tool is under attack in some states. Be sure to consult
with a qualified elder law attorney in your state before
pursuing the strategy described above.)
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Increased CSRA
ANSWER: In some states, community spouses
whose own income is less than their MMMNA (see discussion
under Medicaid section of site) have an alternative to receiving
the shortfall from the income of the nursing home spouse.
These community spouses can petition the state Medicaid
agency for an increase in their standard resource allowances
(called the community spouse resource allowance, or CSRA)
so that the additional funds can be invested in order to
generate income to make up the shortfall in the MMMNA. This
often permits the community spouse to retain a substantial
level of savings above the state's standard resource allowance,
while maintaining eligibility for the nursing home spouse.
Example:
Mrs. Henderson's husband moves to a nursing home. Prior
to his illness, the Hendersons have been living on his income
of $1,500 a month, Mrs. Henderson's income of $500 a month
and income from their investments, which total $220,100.
On applying for Medicaid to cover her husband's nursing
home care, the state Medicaid agency informs Mrs. Henderson
that her MMMNA is $1,700 and that the Hendersons must spend
down their savings to $97,100 -- $2,000 for Mr. Henderson
and $95,100 for Mrs. Henderson. Once they have spent down
to $99,540 (in 2006), Mrs. Henderson will be entitled to
$1,200 of her husband's monthly income in order to make
up the difference between her own income of $500 a month
and her MMMNA of $1,700.
Mrs. Henderson decides to appeal this determination, arguing
that she would prefer to keep enough funds invested to generate
the difference between her income and her MMMNA rather than
receive $1,200 a month from her husband. On appeal, the
hearing officer estimates that she should receive $200 a
month from her standard $99,540 (in 2006) resource allowance,
bringing her income up to $700 a month and her shortfall
down to $1,000 a month. To generate $1,000 a month at an
interest rate of 6 percent, Mrs. Henderson would have to
have $200,000 invested. Since $200,000 plus $99,540 exceeds
Mr. and Mrs. Henderson's savings of $220,100, Mr. Henderson
is determined to be eligible for Medicaid.
Before pursuing this increased resource allowance strategy
you need to check on how it is applied in your state. Some
states permit this approach only if both spouses' combined
income falls below the community spouse's MMMNA.
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Spousal Refusal
ANSWER: Federal Medicaid law states that
the community spouse can keep all of his or her assets by
simply refusing to support the institutionalized spouse.
This portion of the law, known as "just say no"
or "spousal refusal," is generally not used except
in New York, where the state has adopted the federal law
in this area. In New York, if a spouse refuses to contribute
his or her income or resources toward the cost of care of
a Medicaid applicant, the Medicaid agency is required to
determine the eligibility of the nursing home spouse based
solely on his income and resources, as if the community
spouse did not exist. In addition, in 2005 a federal appeals
court upheld the right of the wife of a Connecticut nursing
home resident to refuse to support her husband. The husband
was able to qualify for Medicaid coverage, and assets that
he had transferred to his wife were not counted in determining
his eligibility.
After awarding Medicaid benefits to the institutionalized
spouse, the Medicaid agency then has the option of beginning
a legal proceeding to force the community spouse to support
the institutionalized spouse. However, this is not always
done, and when such cases do go to court, courts in New
York generally allow the community spouse to keep enough
resources to maintain her former standard of living. If
the Medicaid agency chooses not to sue the community spouse
for support, it can file a claim for reimbursement against
the community spouse's estate following his or her death.
The "just say no" strategy sometimes is used
in states other than New York in second-marriage situations,
where the healthy spouse truly refuses to support the nursing
home spouse.
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