Appendix M.

Medicaid and Estate Planning

Available Topics:

What can Medicaid do for me?

Do I Qualify for Medicaid?

What can I do to Qualify for Medicaid?

Who Can I Contact for More Information?

What can Medicaid do for me?

A substantial proportion of people in nursing homes today were not poor before they entered but became impoverished by the cost once they did. Two-thirds of nursing home residents now rely on Medicaid to pay for their care, which for each person typically costs between $30,000 and $50,000 or more annually.

Medicaid provides medical assistance, including prescription drugs and long-term nursing home care, to financially needy persons regardless of age. By contrast, Medicare covers most senior citizens but is not needs-based. Medicare will not pay for intermediate level nursing care, however, which leaves a large gap in coverage for elders who need only limited assistance. While Medicare only rarely pays for such care for elders, Medicaid will if the individual qualifies. Consequently, while Medicare covers only about 2 percent of all nursing home costs, Medicaid pays more than 42 percent.

Although Medicaid rules require beneficiaries to use up most of their assets paying for nursing facility care before Medicaid begins, there are ways to preserve many of those assets. Each option has some drawbacks, however, and not all of them will be available for everyone. Different methods pertain to unmarried people and to couples; some require advanced planning and probably the assistance of a lawyer or other professional adviser. But in most cases, including Medicaid in strategic care planning can help an elderly person and his or her family reduce the burden of nursing home costs.

Qualifying For Medicaid Benefits

In general, for Medicaid to cover long-term care, one must meet income and asset requirements that vary from state to state. Some clients will be ineligible because their incomes exceed the limits allowed under Medicaid.

In order to qualify for Medicaid benefits for nursing home care, a recipient must:

• Be in a Medicaid approved nursing home under a physicianís orders;
• Have medical and nursing home expenses that exceed income; and
• Have no more than $2,000 in non-exempt assets.

The following assets are exempt from treatment as countable resources:

• Personal residence or life estate in a residence;
• One automobile;
• Up to $2,000 in a prepaid irrevocable funeral contract;
• A life insurance policy to cover funeral expenses (available through most funeral homes);
• Up to $1,500 as a burial fund for such things as embalming, flowers and funeral services;
• Life insurance having a face value of no more than $1,500;
• A burial space for applicant, his spouse, and immediate family members;
• The assets of certain trusts which include the Medicaid recipient as a beneficiary (current regulations involving such trusts are very complex, however, and in some circumstances will require that the assets of the trust be used to repay Medicaid after the death of the Medicaid recipient); and
• The value of income producing property if the annual income after expenses yields a 6 percent return (income from the property must be used for your nursing home care, however).

Under current Medicaid rules, it is possible to convert non-exempt assets into exempt assets by, for instance, paying cash to put a new roof on oneís personal residence. One may also use non-exempt assets to pay bills, including any home mortgage debt.

If a nursing home stay meets the strict requirements for Medicare coverage, the full cost is paid for the first 20 days and there is a sizable copayment for the next 80 days. Although some Medicare supplement policies will cover the copayment, they cease coverage when Medicare stops at the 100th day.

Income which you receive from Social Security, retirement plans, interest, dividends and rent must be used for the recipientís nursing home care. Medicaid allows a recipient to keep only $30 per month for personal needs, plus an amount equal to any premium on Medicare supplemental insurance and medical expenses not covered by Medicaid (such as eyeglasses and dentures).

Medicaid Planning Tips

Under current Medicaid regulations, any assets not given away within a period of 36 months (called the "lookback period") will be treated as countable resources. This will include any assets, including a home, which is transferred for less than its fair market value. The term used by the Medicaid program for such tranfers is divestment. The period of ineligibility for Medicaid begins on the date the transfer is made. The number of months a person is ineligible is determined by dividing the fair market value of the transferred property by the actual monthly cost of skilled nursing care in the area where the person resides. Transfers to a spouse will not make one ineligible as long as the spouse does not re-transfer the property to a third party for less than fair market value.

Obviously, if assets are given away for purposes of qualifying for Medicaid, one must be sure that sufficient assets are available to pay the cost of nursing home care during the period of ineligibility. It is also important to realize that simply making a child or other person the joint owner of an asset will not prevent the asset from being treated as a countable resource. In order to prevent the asset from being treated as a countable resource, the Medicaid recipient must retain absolutely no ownership or control over the asset.

Because Medicaid rules often exempt a home of any value from asset eligibility limits, concentrating assets in a home is a good way to protect them. This is useful for both unmarried individuals and for couples, but the rules are different for each and must be carefully followed. Assuming there are no other immediate needs for savings or investments, a person could put those assets into a home by:

• Paying off the outstanding mortgage;
• Making home improvements or certain types of building additions, such as those which have a special medical or health justification;
• Buying a new home or condominium for more money than the present home is worth (for the home to be protected, though, the recipient or spouse must live in it);
• Exempting a child or sibling (if an adult child or brother or sister lives in the home and would qualify the home as an exempt asset, further investments in the home may be desireable);
• Transferring to a non-exempt adult child.

The benefit of transferring a home to a child comes from not having to sell the home to pay nursing facility bills. By transferring the home more than 36 months before applying for Medicaid or enter a nursing facility, the value of the home will not affect Medicaid eligibility at all. If it is transferred within 36 months of entering a nursing facility, eligibility will be delayed for a period equal to the value of the home divided by the average monthly cost of a nursing facility in the state. Thus the crucial importance of planning and knowing the right steps.

Payments To Children For Services

Unmarried individuals are at a disadvantage in trying to pass assets to their children or others. Because there is no spouse through whom assets can be transferred, many Medicaid exemption rules do not apply. One way around the 36-month transfer rule is not to transfer assets at all, but instead to pay a child or other person for services performed. Such services might be personal care or assistance, transportation, housekeeping, paperworkóalmost any reasonable service one would otherwise have to pay someone else to do. Because these are payments rather than transfers, they do not count as transferred assets. However, the Internal Revenue Service and state tax agencies consider these payments as income to the people receiving them, and may require payment of income tax on the amounts received.

Medicaid looks very closely at such arrangements. The services performed (and the payments) must be reasonable and there must be proof they were actually performed. Payment to an adult child or grandchild for regular housecleaning and maintenance, or for regular transportation, for example, might be acceptable if the amounts paid are within range of the amounts which would have to be paid to a private housecleaning service or for a taxi.

Irrevocable Trusts

Trusts (see Appendix J) enable a person to give up the legal right of ownership over assets but decide on the rules by which they are to be managed. One may even continue to receive income produced by the trust. Trusts can offer tax benefits and, as discussed below, protection against Medicaid asset rules.

If an irrevocable trust is established more than 60 months before applying for Medicaid, its assets do not count in determining eligibility for Medicaid. Trust assets will be used in accordance with the rules set up for the trustee. Only irrevocable trusts can protect assets from nursing facility costs.

Other Options If Contemplating a Nursing Home Stay

The prospect of nursing home care can be stressful, and the decision may place a significant financial burden on the patient and his or her family. A number of planning options should be considered prior to making the decision.

• Purchasing exempt assets and converting non-exempt assets into exempt assets. As noted above, spending funds on the payment of legitimate debts or make additions and improvements to a residence will reduce non-exempt assets and increase the value of exempt assets. The prepayment of mortgages, land contracts and other debts should be considered.
• Purchasing prepaid irrevocable funeral contract or funeral insurance. Most reputable funeral homes can review these planning options.
• Giving away funds and other non-exempt assets to your children or other loved ones. If these transfers are made beyond the 36 month lookback period, they will not be counted against the recipient. Even if the transfer takes place within the lookback period, a portion of the value of the asset may not be counted. Obviously, the decision to give away funds and other property involves the consideration of several factors other than Medicaid eligibility.
• Granting a durable power of attorney to a spouse or other responsible person to make divestment transfers and take care of other financial matters. It is important to pick either a person knowledgeable about elder law, or who will seek the advice of a professional. Improper decisions could endanger a recipientís Medicaid eligibility.

Many of these options involve permanent disposition of assets, while the rules governing Medicaid eligibility often change from year to year as well as from state to state. Professional advice may therefore be helpful in sorting through the array of alternatives and the complexity of the laws.

Conclusion

Planning for Medicaid qualification is difficult. Even if nursing home care is imminent, however, there are a number of planning options which should be considered. Early planning, when possible, will provide more options.

The Texas Department of Health is responsible for most of the Texas Medicaid program. To learn about how claims are processed, eligibility for kidney health care, Medicaid and Medicaid Reform Legislation, and other topics, visit their World Wide Web site at http://www.tdh.state.tx.us. The site includes a Frequently Asked Questions page about the program.

State Medicaid Contacts

Anne Dunkelberg

Center for Public Policy Priorities

900 Lydia St.

Austin, TX 78702-2625

E-mail: HN2960@handsnet.org

Laura Brown and Belinda Carlton

Coalition of Texans with Disabilities

316 W. 12th St., #405

Austin, TX 78701

Phone: 512-478-3366

FAX: 512-478-3370

E-mail: ctd@io.com

Charles Locklin (Independent Health and Human Services Consultant)

7507 Long Point Dr.

Austin, TX 78731

Fax: 512-418-9568

E-mail: locklin@ccsi.com

web site: www.ccsi.com/~locklin

The Texas Attorney Generalís Office has an Elder Law section to assist Texas seniors, which can be accessed in various ways:

via World Wide Web: http://www.oag.state.tx.us/website/consumer/eldehelp.htm

Adult Protective Services, toll-free 1-800-252-5400

Legal Hotline for Older Texans

in Austin: 477-3950

statewide: 1-800-622-2520

University of Texas Medical Branch (UTMB) web site http://www.utmb.edu/aging

References

Bonnyman, Gordon (Jr). 1990. "Don't Just Do Something--Sit There! Guiding the Elderly Through Medicaid's Serbonian Bog," Tennessee Bar Journal, vol. 26.

Burman, John M. 1990. "Paying for Nursing Home Care: Medicaid and Planned Poverty," Land and Water Law Review, vol. 25.

Editorial. 1997. "Rectifying a Legislative Blunder." New York Times (February 24).

Foster, Christine. 1997. "Jailhouse Grannies? (Kassebaum-Kennedy Health Reform Bill Makes it a Federal Crime to Transfer Assets to Qualify for Medicare)." Forbes, vol. 159, no. 7 (April 7).

McEowen, Roger A., and Neil E. Harl. 1991. "Estate Planning for the Elderly and Disabled: Organizing the Estate to Qualify for Federal Medical Extended Care Assistance," Indiana Law Review, vol. 24.

Severns, Scott R. 1989. "Medicaid Spousal Impoverishment Amendments Suggest a New Age in Estate Planning," Res Gestae, vol. 33.

University of Texas Medical Branch (UTMB) web site http://www.utmb.edu/aging/

Wiesner, Ira Stewart. 1995. "OBRA '93 and Medicaid: Asset Transfers, Trust Availability, and Estate Recovery Statutory Analysis in Context," Nova Law Review, vol. 19.