MEDICAID REFORM & PLANNING: A PRIMER FOR ESTATE PLANNERS--PART TWO
May 12, 2003
Editor's Note: Increasingly, estate planners are having
to focus more on Medicaid planning, if not for their own clients, then for
relatives of those clients. Certainly, this is an aspect of the practice for
those practicing "Elder Law," but it also arises even for those who only
practice at the high end of estate planning.
This article provides an overview of Medicaid planning
for the estate planner who does not focus on this area of the practice. Last
month, Part One reviewed the issues that have arisen as various states try to
carve out exceptions to the federal Medicaid system, and reviewed 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. A number of examples were used to
illustrate these areas. This month, Part Two completes the primer, by dealing
with various Medicaid planning considerations, particularly focusing on asset
transfers, methods of converting assets to income, insuring assets, or spending
them. The primer has been written in a general context, so someone dealing with
each state's specific requirements will need to look to that state's laws or
associate an Elder Law specialist in that jurisdiction.
MEDICAID PLANNING
CONSIDERATIONS
Medicaid planning can be classified into four general
techniques:
1. Transferring assets;
2. Converting assets to income;
3. Insuring assets; and
4. Spending assets (for instance, home repairs and
renovations are allowable).
As previously explained, transferring assets by gift or
to a trust -- the two most popular estate planning methods -- requires a waiting
period before the transferor is eligible for Medicaid. The waiting period is
based on the value of the asset transferred -- typically one day of
disqualification for each amount transferred that is equal to the average daily
cost of a nursing home in the state as determined by that state's agency (see
Part One).
Transferred assets are not reportable by a Medicaid
applicant once the reporting or look-back period has passed. The look-back
period is 36 months for outright transfers and 60-months for transfers to
certain trusts in which all or a portion of the trust cannot be disbursed to or
for the benefit of the applicant.
Many planners mistake the look-back periods as
disqualification periods. In fact, the look-back periods are simply regulatory
reporting periods under
42 U.S.C.A. § 1396. A transfer or gift that is reported during the look-back
period results in a separate disqualification period that is based on the value
of the asset transferred according to each state's average cost of nursing home
care (see Part One). The look-back period that applies to disbursements that
could be made to or for the applicant, but are made to another person or
persons, is 36 months; an example would be distributions from a revocable
grantor trust to someone other than the grantor. The penalty date is the
beginning date of each penalty period imposed, and is generally the first day of
the month in which the transfer was made, or (at the state's option) the first
day of the month following the transfer.
EXAMPLE 15 If a client provides $11,000 as an outright
gift, those monies would be reported as a transfer at any time the client
applies for Medicaid during the 366month period following the date of the gift.
If that same client provides $11,000 as an outright gift to a 2503(c) minor's
trust, those monies would be reported as a transfer at any time the client
applies for Medicaid during the 60-month period following the date of the gift.
If the client establishes a revocable trust for his benefit and allows
distributions to family members, a distribution of $11,000 will be reported
during the 36- month period. With all three gifts, the disqualification period
is based on the value of the amount transferred. (See next example)
EXAMPLE 16 Assume that in State B, the average cost of a
nursing home is $200/day or about $6,000 per month. A $6,000 transfer to anyone
other than the grantor on June 30 will result in a one-month disqualification
beginning on June 1. Alternatively, a $60,000 gift will result in a
disqualification of ten months. Similarly, an outright gift or transfer of
$216,000 will result in a three-year disqualification. An outright gift of more
than $216,000 will be capped at the three year mark if an application for
Medicaid is made after the 36-month look-back period. A large transfer (defined
as anything more than the state average disqualification rate resulting in a
three-year disqualification which matches the 36-month look-back period)
reported during the 36-month look- back will result in a disqualification based
on the amount transferred because it will be captured during the reporting
period. As a result, it is important to wait three years and one day to apply
for Medicaid when large transfers are made which in the case of State B would be
anything over $216,000.
EXAMPLE 17 Mom lives in State B, where the nursing home
costs are the same as in the previous example. If Mom transfers $240,000
outright and waits three years and one day to apply for Medicaid, the 36-month
look-back period will not catch the transfer to create a disqualification.
Similarly, if Mom gifted one million dollars and waited three years and one day
to apply for Medicaid, the 36-month look-back period will not catch the transfer
to create a disqualification.
EXAMPLE 18 In State B, Mom gifts $288,000 outright and
applies the next day for Medicaid. In this case, she will be disqualified for
four years ($288,000/ $6,000 per month), and during that time will require
private payment or long- term care insurance. Mom is disqualified for more than
36 months because she did not wait three years and one day to apply for
Medicaid.
EXAMPLE 19 Mom in State B gifts $288,000 to an
irrevocable trust for the benefit of her children. In this situation, there will
be a four-year disqualification period ($288,000/$6,000 per month) and a
five-year look back period because a trust was used. If a trust had not been
used, Mom would have avoided the 60-month look-back period for trusts.
The result in both of these examples--giving Mom a
four-year disqualification period--would have been avoided by using outright
transfers and waiting three years and one day to apply for Medicaid. It is
important to note that transfers under the Medicaid regulations are not always
treated as gifts under the tax code and that gifts under the tax code are not
always treated as transfe