The eligibility rules for Medicaid's old-age and nursing home coverage can affect the validity of some asset transfers, impoverishing you or your loved ones. Knowing the do's and don't of asset transfers is essential.
When developing a comprehensive plan to avoid challenges to asset transfers, don't forget about the federal government and its ability to challenge transfers when administering Medicaid benefits.
Often, transfers of assets also are used to protect assets from the extreme expense of nursing home care. Nursing home care costs $80,000 a year or more in many parts of the country. Therefore, you should be aware of some of the basic issues involved in asset transfers relating to nursing home care.
Just as a creditor can challenge transfers of personal or business assets, the government may challenge transfers of assets if you apply for Medicaid benefits.
Before transferring any assets, you should always seek professional advice from an attorney or financial advisor. The following information should be used strictly as a guideline. Exemptions can be different depending on the state you're in and are subject to change. The consequences of making transfers that are not eligible for exemption can be severe and include rendering the applicant ineligible for Medicaid.
What is Medicaid?
Medicaid is the federal program that pays for long-term nursing home costs. Don't confuse Medicaid with Medicare. Medicaid is a social welfare program available only to individuals with extremely limited means. Basically, under Medicaid, a single individual can only have $2,000 in assets and $75 per month in income in order to be eligible for benefits.
In contrast, Medicare is the federal program that everyone, regardless of income or assets, qualifies for at age 65 by paying Social Security taxes when they were working. Unfortunately, Medicare only pays for the first 100 days of a stay in a nursing home, and then only when skilled nursing care is medically required.
When this period expires, or if nursing home care is needed to provide help with daily living activities, the individual must begin personally paying the $80,000 (or higher) per year bill or qualify for Medicaid.
This expense would quickly consume most families' personal wealth. Accordingly, Medicaid-qualifying asset transfers are an important asset protection strategy. However, such transfers, with some exceptions, will be effective only if they are executed well in advance of the need for long-term nursing home care. Unfortunately, the first time most individuals consider such transfers is when they realize Medicare will only pay a few months of bills. At this point, planning may be too late.
Timing of transfers under Medicaid is essential
When determining whether certain transfers invalidate eligibility for Medicaid, federal law provides that all transfers–whether from an individual or to an individual or from a trust or to a trust–have a 60-month (five year) look-back period. Although mandated by federal law, each state was required to opt-in to make the extended lookback period operational.
As of January 1, 2013, nearly all have done so, although a few retain the prior law distinction. Under prior law, there was a 36-month "look-back" period for transfers made to individuals; the 60-month period applied only for transfers into a trust.
Although most states have moved to the 60-month lookback period, there are still a few that have not. Moreover, the timing of when the lookback period starts varies from state to state. It is essential that you work with an attorney who is well-versed in this area and up-to-date with the latest law changes.
This period of ineligibility is referred to as the "penalty period" and the length varies based upon the amount transferred and the average monthly private-pay rate for nursing home care in the state or in the community (based upon the state's rules.)
Some time ago, transfers into a trust for the benefit of the applicant were acceptable planning tools. However, federal law has been changed to make trusts largely ineffective here. To be effective, the transferor must relinquish all control, interest and incidents of ownership in the property transferred to a trust. This, coupled with the longer look-back period, may make transfers to individuals the better alternative.
Transfers to individuals during the three-year period do not automatically disqualify the applicant from qualifying for Medicaid benefits. Certain transfers are exempt, and others, because of their limited size, may result in no or a short, disqualifying an applicant only for a limited period of time of less than three years. Certain amounts of income are also exempt.
Transfers more than five years prior to an application for Medicaid will escape scrutiny entirely. This is the best course of action, when planning can be done that far in advance, and the transferor is amenable to parting with some assets in favor of children or other relatives.
What assets are exempt under Medicare?
Before becoming eligible for Medicaid, a person has to use ("spend-down") all of his or her assets in excess of the exempt amounts to pay the costs of nursing home, home care or medical care. The assets of a married couple are combined in determining eligibility, as an individual is legally liable for the nursing home costs incurred by his or her spouse. However, the exemptions for a married couple are accordingly larger than what are available for a single applicant.
It is important to understand that, although it is federal program, the Medicaid is administered through the states and each state has latitude in determining what assets are exempt, what income levels qualify and what services are covered. Federal and state laws exempt certain assets in determining an individual's eligibility for Medicaid. In other words, ownership of these assets will not affect an individual's eligibility, and timing these transfers is not a factor.
Certain assets, income are exempt from spend-down
The following assets generally are exempt from the Medicaid spend-down requirement:
- $2,000 in cash, stocks or property owned by the applicant ($3,000 for a married couple)
- If the Medicaid recipient is married, but the spouse is not on Medicare and continues to live in the couple's home, a "spousal impoverishment allowance" is exempt. The exact amount of the spousal impoverishment allowance is determined by the state. However, the federal government sets minimum and maximum limits.
- the Medicaid recipient's home (some states limit this to a particular amount, such as $500,000,) but only if
- the applicant is likely to return home or
- one of the following individuals continues to live in the home:
- the applicant's spouse
- a child under age 21
- a child over age 21 who is disabled
- a brother or sister who owns part of the house and has resided there for at least one year
- essential household items (furniture, appliances, etc.)
- personal effects (clothing, jewelry, etc.)
- burial plots
- burial funds of up to $1,500 each for a married couple, and up to $1,200 for a single applicant; for an irrevocable burial fund, these amounts are raised to $5,000 each for a married couple, and $2,500 for a single applicant
- one motor vehicle. Most states place a limitation on the fair market value, allowing up to $4,500, although some have an unlimited amount and others a lower amount. Some states permit the individual to keep one motor vehicle owned by either spouse, automatically, with no limit on the value; others can keep one motor vehicle, with no limit on value, only if the vehicle is used for any of the following reasons:
- transportation to and from employment
- transportation for medical treatment
- transportation of a handicapped person
- cash surrender value of life insurance, only if the face value of all polices is less than $1,500 (an unlikely occurrence); note that term life insurance does not have a cash surrender value and is, therefore, completely exempt
- the dollar amount of nursing home costs paid by a long-term care insurance policy.
In addition, certain amounts of income are exempt under Medicaid. Beyond these exemptions, the timing of any asset transfers, whether to individuals or into a trust, will be scrutinized and could result in ineligibility for Medicaid for some period of time.
The amounts and types of exemptions may vary from state to state! Use these exemptions only as guidelines. Check with the social service agency in your state for your current exemptions. Also, the Medicaid exemptions amounts are generally distinct from the normal asset protection exemptions.
What is exempt income under Medicaid
Certain income is exempt from consideration in determining the applicant's eligibility for Medicaid. Income that is not exempt must be used to pay nursing home costs. The following income is exempt:
- a monthly amount for "personal needs." The minimum is $30/month, but a state may permit a higher amount.
- a set amount per month, adjusted annually for inflation, earned by the applicant for support of the applicant's spouse, only if the applicant's spouse continues to reside at home; these amounts are the minimum and maximum for this exemption (This exemption is designed to allow the applicant to continue to make a contribution toward supporting the family home after entering a nursing home. A complicated formula is used to determine the exact amount. Basically, the applicant is allowed to add the excess costs of operating the home above $455 to the minimum exemption amount per month.)
In addition, certain amounts of assets are exempt under Medicaid. Beyond these exemptions, the timing of any asset transfers, whether to individuals or into a trust, will be scrutinized and could result in penalties or ineligibility for Medicaid.
You can appeal exemption determinations
An applicant who believes he or she should have been granted larger exemptions is allowed to request a hearing to present his or her case. Generally, an applicant should immediately seek legal advice in this situation, as the law requires that a request for a hearing be filed promptly or otherwise be barred by law, meaning the applicant would not be able to challenge the assigned exemptions later.
What asset transfers are permitted under Medicaid?
With careful planning, applicants can transfer assets before entering a nursing home, intending to protect those assets and make the applicant eligible for Medicaid. Transfers within five years of application can be very carefully drafted to fall within one of the permissible exceptions.
However, a warning is in order. This area is extremely complex and requires the advice of an attorney. Transfers outside an exception can result in a can result in a penalty that makes an applicant ineligible for Medicaid assistance for a period of time.
There are certain transfers are permissible, which will not trigger the lookback provisions. Among these are
- transfers of assets to the extent value was received in return; thus, payments by the applicant for goods and services purchased have no effect on eligibility, because the applicant receives equal value in return
- transfers into an irrevocable trust more than five years before application; generally, if trust assets or income are available to or under any direct control of the applicant, the trust assets or income would not be exempt (unless one of the other exemptions applied), so this type of trust usually has to be irrevocable, meaning it cannot be canceled or altered after it is created; further, this type of trust usually would require an independent trustee (someone other than the applicant or his spouse) and someone other than the applicant as the beneficiary (see below)
- any transfer to a spouse, but because the couple's assets are combined anyway, such a transfer does not serve a useful asset protection function
- any transfer to disabled child
- transfers of a home, only if the transfer was to one of the following individuals:
- the applicant's spouse
- a child under the age of 21
- a child over the age of 21 who is disabled
- any other child who was residing at the home at least two years immediately before the application and who provided care for the applicant during those two years
- a brother or sister who is part owner of the home and has resided in the home for at least one year.
Note that the home is exempt, as long as the other spouse continues to reside there. (A Medicaid lien may be placed upon the house however.) Thus, a transfer of the Medicaid recipient's family home is not necessary, in these circumstances.
However, a problem arises if the other spouse dies. This takes the home out of the exemption. One approach here would be for the spouse residing in the nursing home to transfer the interest in the home to another individual, who qualifies under the rules described above, such as an adult child who resided in the home with, and took care of, the applicant for the past two years. This must be done cautiously, if the other spouse continues to reside in the home, as such a transfer gives the transferee important ownership rights in the home. Always consult an attorney before making this or any type of transfer.
Using transfers in trust under Medicaid
When individuals choose to transfer assets as a pre-Medicaid planning tool, these transfers can be made outright to the recipient or in trust for the benefit of the recipient. However, the transferor must relinquish all rights in, and direct control over, trust assets, or the trust assets will be deemed owned by the transferor for Medicaid qualification purposes. In addition, the transfer must be outside of the five-year look-back period.
However, transfers in trust do have advantages. Transfers into a properly drafted irrevocable trust with an independent trustee, more than five years before application for Medicaid, would protect those assets by keeping them out of the reach of the applicant. Of course, to be effective, the transferor would have to relinquish all control, interest and incidents of ownership in the property.
With an irrevocable trust and an independent trustee, there is a loss of control over the assets, but to nowhere near the extent encountered with an outright transfer. With an outright transfer, the recipient is free to do whatever he or she wants with the property. With a trust, the transferor can set out conditions and restrictions concerning the beneficiary's use of the property and the income it may generate, formally writing these into the trust document. Control over the ultimate disposition of the property also can be ensured through a trust.
The cost of a trust must be weighed against the benefits. An independent trustee (someone other than you or your spouse) would be required. If other family members were unwilling or otherwise unable to serve as a trustee, the cost of a professional trustee would have to be taken into account. The trust would be an entity for tax purposes, meaning a tax return would have to be filed for it each year. However, with the cost of a nursing home around $90,000 per year, these costs may be very quickly recouped.
What asset transfers are penalized under Medicaid?
Because of complex Medicaid rules, you should seek legal advice before you make any transfer of assets. A transfer that is not exempt makes the applicant ineligible for Medicaid for a certain period of time.
The calculation of the ineligibility period is complicated and may vary from state to state. In many cases, the period of ineligibility is equal to the time period the nursing home costs would have been paid for, had the transfer not been made.
For example, assume a home with a value of $144,000 is transferred as a gift (with no value received in return) in a way that is not exempt. The applicant would be ineligible for Medicaid for a period of two years from the date of the transfer, assuming the average cost of a nursing home in that state was $6,000 per month ($144,000 divided by $6,000, the assumed average monthly cost of a nursing home, yielding 24 months, or two years of ineligibility).