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Articles & White Papers
Estate Planning and Administration

MEDICAID REFORM & PLANNING: A PRIMER FOR ESTATE PLANNERS--PART ONE
 
May 12, 2003
 

Many estate planners tend to become disengaged when the topic of Medicaid and Medicaid planning arises, but it has become an increasing issue with a number of clients whose needs have been met by a growing number of attorneys, primarily those who have categorized themselves as being engaged in the practice of "Elder Law." While some may have read adverse stories in the mainstream press and concluded that there was something inappropriate about "Medicaid planning," there are many circumstances in which knowledge of this area is important, even for those who do not view themselves as "Elder Law attorneys."

  This article provides an overview of Medicaid planning for the estate planner who has not focused on the area previously. This month, Part One reviews the issues that have arisen as various states try to carve out exceptions to the federal Medicaid system, and then reviews the Medicaid eligibility and transfer rules, particularly the rules governing asset and income limitations and the ways in which those limitations can be satisfied through certain permitted transfers. Next month, Part Two will deal with various Medicaid planning considerations, particularly focusing on asset transfers, methods of converting assets to income, insuring assets or spending them. In both Parts, numerous examples are used to clarify this area and help those unfamiliar with the concepts to better understand them. Indeed, the overall purpose of the article is to provide in a single source the information that all planners should know if the issue arises, although each state's specific requirements may necessitate either involving an Elder Law specialist or specific research by the estate planner into the nuances of the specific state's requirements.

STATES MAY OPT OUT OF FEDERAL MEDICAID REGULATIONS

  On April 20, 2002, nearly 40 national organizations sent a letter to Tommy Thompson, Secretary of the Department of Health & Human Services in Washington, DC, requesting a rejection of the State of Connecticut's request for a waiver from the Medicaid Transfer of Asset rules under 42 U.S.C.A. § 1396p. [FN1] This letter marked a line drawn in the sand between organizations representing the elderly and disabled and many state governors (48 participating) who in February of 2001 reached a consensus on implementing Medicaid reform at a National Governors Association meeting. [FN2] It also marked the solidification of a trend among state governments and state courts to hold back the tide of Medicaid planning, which has been growing since 1987 with the founding of the National Academy of Elder Law Attorneys.

  Initially introduced as part of President Johnson's "War on Poverty," Medicaid was designed to be a federal safety net for low income individuals, so that they would have their basic medical needs furnished, notwithstanding their inability to pay. The legislation permitted states to apply for exceptions to the federal rules, initially with the intention that such states would be providing more extensive coverage than the minimum set forth in the Federal Medicaid Regulations. As state treasuries have become more bare, these requests for waivers have actually sought ways by which the state could provide less than the federal minimum. The resulting controversy between elder advocacy groups and the states has been exacerbated by some sensationalist reporting regarding the activities of some attorneys to qualify their clients for these programs.

  These battle lines were further sharpened as a result of a Newsweek article on January 27, 2003, titled "Cheating Uncle Sam for Mom & Dad." Bernard A. Krooks, Esq., an estate planner and President of the National Academy of Elder Law Attorneys (NAELA), sent a terse letter to the editor of Newsweek defending the work done by NAELA's over 3,000 member attorneys. Krooks said "Medicaid is the product of our nation's unwillingness to treat health care -- including long-term care -- as a basic human right. If we did, we would embrace some system of universal access to care, whether it be a social insurance model or a private model with guaranteed access. In a universal model, everyone pays a fair share, and everyone receives coverage." [FN3]

  Krooks further outlined the public policy issues related to the Medicaid program when he explained, "Paradoxically, we do give seniors virtual universal coverage for meeting their acute care needs. Heart bypass surgery, costing tens of thousands of dollars, will not impoverish any senior, because Medicare will cover it. And we all pay our fair share for that coverage. But if we are inflicted with a chronic illness such as Alzheimer's disease, then we are left to fend for our care on our own, until we are officially impoverished under Medicaid criteria. Is this an ethical social policy that puts mom and dad into a lose-lose corner? First they lose their health; then they lose their financial solvency? Is it a surprise to anyone that mom and dad will look for legal ways to preserve what they can of the fruits of their lifetime in order to protect each other's solvency and leave some legacy to family? That's not cheating. That's preservation of one's dignity and self-worth. The ethical scandal here is our public policy, not mom or dad's avoidance of poverty. Moms and dads everywhere are willing to pay their fair share. We just don't give them a system to do it in." [FN4]

  Unfortunately for the elderly and disabled, that system may soon be in place and it may well be a private pay system that is a backlash to the nearly two decades of aggressive Medicaid planning around the country. A recent article in the Wall Street Journal pointed out that many of the practices labeled Medicaid planning are getting greater scrutiny as states face their worst fiscal crisis in decades, especially since they pick up roughly half of the costs of the federal Medicaid program. It cited the Connecticut waiver request as the beginning of a new trend for a program that pays nearly $50 billion each year for nursing home costs alone. [FN5]

  Connecticut has proposed a transfer of assets Medicaid waiver. It does not propose to increase access to the federal program or expand the number of persons on the program that has been the basis for most state waivers. Instead, it is designed to encourage the purchase of long-term care insurance and move long-term care costs to a private pay system. The proposal is designed to discourage people from giving away their assets in order to qualify for Medicaid nursing home benefits. Under the proposal, Connecticut wants to impose a prospective penalty period beginning on the date when the applicant would otherwise be eligible for Medicaid coverage instead of a retroactive penalty period which begins on the date a transfer or gift was made. Connecticut also wants to impose a five-year penalty for the transfer of a principal residence.

EXAMPLE 1

  Under current federal rules, a gift of $7,000 in Connecticut would result in a disqualification for Medicaid benefits for one month beginning at the time of the transfer. Under the waiver provision, the $7,000 gift would result in a disqualification for Medicaid benefits for one month, beginning at the time a person medically and financially qualifies for benefits. Because the elder or disabled person would have no assets, they would either need long-term care insurance to cover the cost of that prospective month of ineligibility or family members would have to pay for the care.

  The concept of increased state control of Medicaid is not something new. For instance, 36 states have implemented 46 Medicaid waivers dealing with behavioral and mental health issues alone; and the Balanced Budget Act of 1997 dramatically expanded the authority of the states to provide covered health services through managed care organizations without seeking a waiver. [FN6]

  Many states are actively seeking to limit the benefits of their Medicaid programs. [FN7] The question remains, "Will Connecticut Kill Medicaid Planning?" as posed by John W. Callinan, Esq., who points out that the largest class of Medicaid planning clients comes from the lower-middle class and working class. [FN8]

  During the Clinton Administration, many waivers were denied. Under the Bush Administration, they are being encouraged. The Connecticut proposal, however, is not consistent with the original intent of Congress regarding waivers. Timothy L. Takacs, Esq., a practitioner in Tennessee has explained that when Medicaid became part of the War on Poverty in the 1960s, the concept of waivers was to encourage states to experiment for the purpose of increasing access or covering more persons under the program. For instance, Tennessee has had a Medicaid waiver program since 1994 called TennCare, which was designed to meet the means tests imposed by the federal Medicaid program and to provide benefits to state residents who were not insurable under the private pay system. [FN9]

  While the debate about Medicaid reform continues, practitioners are still able to recommend a vast array of planning strategies that allow a person to qualify for the federal Medicaid program. These techniques include gifting outright or into trust, protecting the principal residence, and shifting assets and/or income to a spouse who is living in the community from the spouse who is institutionalized and needs care. Many of the rules that allow such transfers have been designed to protect the community spouse from catastrophic financial loss as a result of the other spouse needing long-term care; they are not always intended to benefit heirs, although that can be the ultimate consequence of such planning.

MEDICAID ELIGIBILITY AND TRANSFER RULES

  Background

  For many elders, the prospect of long-term care in a nursing home is unpleasant, especially because elders are also often concerned that the cost of long-term care will deplete their estate. The cost of nursing home care in many states is estimated at between $60,000 and $70,000 per year, which only serves to compound these fears.

  Many elders receive assistance from the federal Medicare program to help pay some medical expenses and some short-term nursing home care. Medicare, however, does not pay for extended nursing home care. Medicaid, on the other hand, is a joint federal-state program that pays for nursing home care for elders (age 65 or over) who meet the financial eligibility rules. (Medicaid is also available to blind and disabled individuals who meet the eligibility guidelines.)

  In determining the financial eligibility of an applicant (an individual applying for Medicaid), Medicaid looks at the applicant's assets and income. The assets considered include cash, mutual funds, cars, real estate; the income considered includes Social Security, dividends, pensions, and annuity payments. [FN10]

  Asset Limitations

  Medicaid places a limit on the amount of assets an applicant can own and still be eligible for Medicaid. Currently, the asset limitation is usually $2,000, although it can vary from state to state. [FN11] Medicaid divides an applicant's assets into three categories: (1) non-countable assets; (2) inaccessible assets; and (3) countable assets. Non-countable assets, as the name implies, are not included in the calculation of an individual's assets in determining Medicaid qualification. These excluded assets include: (a) personal belongings such as clothing and jewelry; (b) burial plots for the applicant and members of his or her family; (c) pre-paid burial contracts; (d) a $1,500 burial account for miscellaneous funeral and burial expenses; (e) life insurance with a face value up to $1,500; and (f) one automobile for use by the applicant or his or her family. [FN12]

EXAMPLE 2

  Richard owns a house worth $150,000, a car worth $4,000, and mutual funds worth $50,000. Medicaid does not consider the value of Richard's house (if he intends to return home) or car when calculating Richard's countable assets. Medicaid does consider the $50,000 Richard owns in mutual funds as countable assets.

  Special Rules For The Principal Residence. Medicaid will only categorize an applicant's home as a noncountable asset if any one of the following conditions is met: [FN13]

  (1) an applicant living in a nursing home intends to return to the home; (2) the applicant owns a long-term care insurance policy mee