Transferring assets improperly can be extremely costly! There are very strict rules prohibiting the transfer of assets to qualify for Medicaid Eligibility.
“Gifting” Or Transferring Of Assets
Let it be understood at the beginning of this section that there are two types of “transfers of assets”…..Valid Transfers of Assets, and Invalid Transfers of Assets. We will attempt to cover both of these important aspects of your Medicaid eligibility. Simply stated, a Valid Transfer of Assets is any transfer that was made WITH fair market value received. An Invalid Transfer of Assets is any transfer that was made WITHOUT fair market value received. Example: A quit claim deed to transfer a home to a child for $1.00 would be an Invalid Transfer of Assets, because fair market value was not received. On the other hand, a specific Contract which allows for the child to perform services in exchange for a pre-determined amount of money, is considered a Valid Transfer of Assets.
Medicaid considers any change in the ownership of an asset for less than fair market value as a “transfer” or “gift”. Gifts of excluded assets are allowed other than homesteads or real property, (real property can be excluded due to a boneafide effort to sell.) Unlimited gifts are allowed between spouses without penalty; however, gifts of countable assets to anyone else are subject to the “look-back” period, (as of the date of this writing it is still 36 months, unless it involves a gift to an irrevocable trust). There is no period of ineligibility if the gift is returned.
It is false information to believe that ALL gifting is not allowed in the process of qualifying for Medicaid benefits. Gifting IS allowed….however, be prepared to “wait out” the penalty period for some gifting. The Deficit Reduction Act of 2005 specifically states that the “old rules” will be replaced with “new rules” regarding gifting. Under the “old rules”, a person can “gift” monies to someone, and then apply for benefits once the penalty time frame was satisfied. The penalty began the day you gifted the money. Therefore, let’s say that you “gifted” someone $100,000 in January, 2005. The State has determined that the “average” cost of a month’s stay in a nursing home in Florida is $5,000. To determine your penalty period, you divide $5,000 into $100,000 and the result is 20 months of penalty. From January, 2005 to August, 2006 would be 20 months. You could have applied for benefits in September, 2006, and been eligible.
Under the “new rules” the penalty period will begin the day you apply for benefits. The State NOW has a “look back” period of 3 to 5 years (depending if a trust is involved). In the same scenario as above, a gift of $100,000 (if the new rules were in effect) in January, 2005 would have been within the 5-year look back period. If you were to apply for Medicaid benefits during the new rules, you would be facing a lengthy “waiting period” before benefits could begin. If skilled nursing is absolutely necessary for you or your loved one today…this penalty period could be devastating. (And under the new rules, once enacted, the look-back period will increase to 5 years.)
One strategy to overcome the penalty period in the above scenario would be to have the recipient “give back” the gift. All too often, however, the gift has been used for some expenditure. If the gift could be “given back”, the monies could be repositioned, and protected for the family.
There is a strategy available that is called “half a loaf”. This means that the recipient of the gift begins to “give back” the gift in increments. The AMOUNT of the gift then decreases…example: Mary gifted her daughter $100,000 in January, 2005. Now Mary needs the daughter to return that money because Mary doesn’t qualify for Medicaid, and doesn’t have the funds for private pay, either. Between Mary’s Social Security and a small pension, she has a short-fall of about $2,000 a month to meet her patient responsibility at the nursing home.
Mary’s daughter begins “returning” $2,000 a month to her mother, to make up the short-fall at the nursing home. This first month “give back” now reduces the daughter’s indebtedness to $98,000. Recalculating the penalty period each month causes the “ineligibility time frame” to be reduced. In the long run, Mary’s daughter gets to keep ½ of the money gifted, and Mary’s nursing home bill is paid by the “give back”. At the end of the time frame, Mary would be qualified for Medicaid because she would have satisfied the penalty period. However, in Florida we have access to other strategies that are far more desirable.
The other example of the above “give back” would be for Mary’s daughter to just “give back” $50,000 to Mary, and have Mary private pay her nursing home costs from the $50,000. The time frame for Mary to be ineligible based on her “gifting” would be shortened. Mary would have enough money to private pay for that length of time, with some money left over that could be repositioned.
It is important to state here that confusing the IRS rules with Medicaid rules is a trap. “Gifting” occurs when one transfers assets to another individual without receiving fair market value for the transfer. There is no transfer penalty for gifts between spouses. However, it is imperative that you seek the counsel of a qualified tax advisor or attorney regarding the IRS implications of the gift.
The Angel Solutions employs Senior Tax Advisors to counsel our clients on IRS rules and regulations regarding the gifting of monies. This service is included in our total Medicaid Eligibility planning package.
Transferring assets improperly is definitely a RED FLAG, and can be extremely costly. There are very strict rules prohibiting the transfer of assets to become eligible for Medicaid benefits. If you plan appropriately, and do not apply for benefits during your period of INELIGIBLITY (because of a “gifting” penalty), you will never find yourself on the wrong side of the law.
Various Methods To Reduce Assets
As mentioned earlier, Burial Contracts and Funeral Expense accounts are great ways to liquidate some funds. You can easily remove a minimum of $2,500 per spouse from your asset base with these acceptable purchases.
Other ways include repairs to, or refurbishing your home. You might pre-pay some insurance policies, such as Homeowner’s, or automobile, up to one year. Pay off credit card debt, if you have any, and also your mortgage. You could construct an addition to your home, have a new bathroom installed, or a garage. Repave the driveway, install new flooring, purchase a new car! All of these options should be considered before an application is made to Medicaid if you have excess assets. You may also apply funds to the cost of maintenance and upkeep of any other assets, and for your own care, if appropriate. Payment for any services rendered to you, such as housekeeping, lawn care, home repairs, etc., are permissible.
Annuities
Recently, with the Deficit Reduction Act of 2005, the use of Immediate Annuities has changed. In the past, a balloon payment could be made to a designated beneficiary upon the death of the patient. In Florida, this ruling is still intact, but legislation is “on the table” that would replace your chosen beneficiary with the State as the beneficiary. For purposes of this guide, and at the time of this printing, the legislation is still allowing for designated beneficiary receipt of annuity funds upon the passing of the single (unmarried) patient.
What is an Immediate Annuity?
An immediate annuity provides a mechanism to qualify a person immediately for Medicaid benefits. If the person is single, and has assets over $2,000 he/she should purchase an Immediate Annuity. If the applicant is married, and the couple has assets over the limit of $103,640 (Community Spouse limit of $101,640 and Patient limit of $2,000) the annuity payment may be shifted to the well spouse. The immediate annuity legally converts countable assets to a non-countable asset which generates an income stream to either the applicant, or the applicant’s spouse. In the case of generating a stream of income to the applicant, this money would be considered “income” and would go directly to the nursing home, or travel through a QIT to the nursing home.
The annuity must follow certain requirements and must not be for more than the life expectancy of the applicant. The purchase of such an Immediate Annuity is highly specialized. Unfortunately, many people experience annuity salespeople who are UNFAMILIAR with Medicaid rules, and how they relate to Medicaid qualification. Also…annuities are not for everyone, and must be analyzed to see if it is appropriate in your particular situation.
The immediate annuity can be a great tool to qualify an individual for Medicaid, and preserve assets for the future. They can be purchased in varying amounts…however, there are many factors which should be considered and discussed with your attorney. Read the “guidelines” below to determine if this tool might work for your situation:
The immediate annuity must follow specific Medicaid guidelines for it to be considered an exempt asset. Some of these requirements are:
- It must be immediate and irrevocable
- It must be actuarially sound and must be for the a term less than the Annuitant’s life expectancy (as determined by Social Security Life Expectancy Tables)
- It must be written such that it cannot be assigned to another person.
- For a single person, the income generated by the annuity will be required to be paid to the nursing home.
- For a married couple, the annuity should be established with the community spouse as the annuitant. The
- Income generated will not count towards the applicant’s Medicaid eligibility, but may impact the well spouse’s MMMIA.
- Things to know about Immediate Annuities:
- The income generated may be taxable, to some extent.
- You lose the accessibility to the underlying principal.
- There is no adjustment for inflation or interest changes.
- Other factors should be discussed with your attorney as to the underlying law governing inclusion/exclusion, as well as the impact of Florida’s Medicaid Estate Recovery program.
Note: Immediate Annuities are available through The Angel Solution. Contact our Medicaid Professional for counsel on whether an immediate annuity is your proper asset preservation.
There are various ”OTHER” strategies that can be used to reposition “countable assets” into “non-countable” or “excluded” assets. Most of your assets can be protected in some form prior to applying for benefits. The sooner you begin to prepare, the more options you have available. Two examples of Asset Protection Strategies are described below and are offered as EXAMPLES ONLY. They do not represent all the possible methods which can be used to preserve assets. WE STATE AGAIN, EXPERIENCED MEDICAID PLANNERS SHOULD BE CONSULTED PRIOR TO REPOSITIONING ANY ASSET.
In order to ensure eligibility, the implementation of each particular strategy must be done correctly.
For The Married Person
As stated earlier, for the married person, all assets are considered “joint” for purposes of completing the application….even those that may have been “given” to just one partner, such as an inheritance.
Under the current Medicaid rules, the Nursing home patient may keep $2,000 in assets, but the Community Spouse may retain up to $101,640, excluding the homestead and other exempt items. If the couple is OVER this amount, they may consider “transferring” some of the assets to each other, such as individual stock certificates, etc. There is NO penalty in transferring assets between spouses. Other transfers could involve a situation in which the applicant or the well spouse transfers assets to someone OTHER than the spouse, without receiving a fair consideration for the transfer. As stated earlier, the most common example of this is a “gift”. If the applicant OR the well spouse transfers assets to someone else, the applicant will be ineligible for Medicaid for a period of time. We have already discussed the negative ramifications of “gifting” inappropriately. There are other methods for transferring assets which do not have the implications of penalties involved.
The principal exceptions are: Transfers to a spouse, or to a third party for the sole benefit of the spouse, transfers by a spouse to a third party for the sole benefit of the spouse, transfers to certain disabled individuals, or to a trust established for those individuals, transfers for a purpose other than to qualify for Medicaid, and transfers where imposing a penalty would cause undo hardship.
Allowable Transfers of the Homestead are:
- to a spouse, to a child under 21 years of age,
- to a blind or permanently disabled adult child who receives SSI,
- to a sibling of the individual who has an equity interest in the home and was residing in the home for at least one year immediately before the individual became institutionalized,
- an adult son or daughter of the individual who was residing in the home for at least two years immediately before the date the individual became institutionalized and who provided care to the individual that delayed the individual’s institutionalization.
Examples of Transfers between Spouses
Joe was admitted to a nursing home recently. It became a very stressful time for Julia, his wife, and their adult children. Joe’s cost of care was going to be very high, and Julia was concerned about how they would manage with the added financial pressures. They had saved a considerable amount of money to leave to their children, and now it appeared that it would all be lost.
This is how their financial situation looked:
Because they did not have any burial accounts, we advised them to purchase two irrevocable burial contracts, at $2,500 each for a total of $5,000. (A burial contract can be for any amount of money, as long as it’s irrevocable.) Medicaid requires that you file a copy of the actual burial contract with your application paperwork.
Plus, we had Julia set up a Funeral Expense Account at her local bank with a deposit of $1,500. This money can be used for any purpose as long as it is stipulated that it is for Funeral Expenses. Further asset preservation was necessary, therefore we suggested that Julia should cash in the some of the jointly-owned CD’s, and purchase a Medicaid Annuity for $56,000. Julia was listed as the owner and annuitant of the annuity which meant she would receive the payout plus $10.00 in principal from it, and not the nursing home, and the children are listed as beneficiaries. Julia “owns” the annuity, therefore no “gifting” of assets took place, and the penalty period does not apply. In a few years, Julia will receive a balloon payment for her $56,000, minus the interest and principal that had paid out over those few years. Julia was also able to receive a portion of Joe’s income as a “spousal diversion” to meet her monthly expenses.
Joe was approved immediately for Medicaid, and they were able to preserve virtually all of their assets. Julia receives a payout from the annuity each month, as well as some of Joe’s diverted income.
The Community Spouse Resource Allowance (not to be confused with the Community Spouse Diversion) calculated by DCF determines when the institutionalized spouse will become eligible for Medicaid, based on the assessment of the couple’s resources. Resources are combined and totaled, whether in the husband’s name only, in the wife’s name only, or in both names.
There is a maximum amount of resources that the community spouse is allowed to keep. This figure changes in January of each year. For the year 2007, this figure is $101,640. The assessment is based on the original date of nursing home admission, using the figures applicable at that time. This is called the Community Spouse Resource Allowance. If your resources as a couple are $103,640 or less (Community Spouse Resource allowance of $101,640, and Institutionalized Spouse Allowance of $2,000) you are under the allowable limit and hubby would qualify for benefits. An application should be started immediately, as soon as a facility is chosen. In this instance, an applicant would be considered “Medicaid Pending” by the nursing home when the application is made. Be certain to tell the Social Services Director that your loved one is “Medicaid Pending”. Most nursing facilities will accept the patient on that basis.
Most nursing homes will not require the full Patient Responsibility payment during the application process, until eligibility has been established. If there is a spouse at home, no payment will be required until the application is completed. There may be a retroactive patient payment due the nursing home once the application is completed, depending on the remainder income of the applicant after the monthly income allowance is paid to the spouse at home.
The nursing home does not HAVE to accept the “pending” status, and may require full payment until the application is approved. Once the individual is approved for Medicaid benefits, this advance payment may be refunded by the nursing home if Medicaid is determined to be retroactive to the date the application.
FACTS
Previous Marriages and Medicaid
All assets for a married couple are considered “Joint”, or Pooled assets.
This fact can be especially devastating to children of one spouse who may have brought considerable funds into the marriage. If the applicant is about to enter a nursing home, all the funds are Pooled, and the well spouse gets to keep $101,640 of the couple’s funds, regardless of who brought what into the marriage. A pre-nuptial or post-nuptial agreement has no bearing as far as Medicaid is concerned. The couple is married, and the funds are “joint”. It might be helpful to discuss this possibility with the children of both marriages to be certain that everyone is “on the same page” if care is needed for one parent.
Reverse Mortgage
A reverse mortgage is a loan given (usually) by a bank on the equity value of a person’s home. It is called a “reverse” mortgage because instead of taking a lump sum loan and then paying the lender back in installments (typically in monthly mortgage payments) over a number of years, it is just the reverse. The lender pays YOU monthly installments over a number of years. The lump sum of the reverse mortgage is then due at either the death of the individual, or sale of the home. Typically, this means a forced sale of the home on which the reverse mortgage was granted, and this is one of the problems.
Another problem is that while the monthly payments can, of course, help an at home spouse with little or no income, the effect of that is to reduce the income she might otherwise be granted as her MMMNIA, and also to expose that income to her costs of care if she should later enter a nursing home. Further, it ties up the home since no intra-family transfers could be made without paying off the mortgage. In short, while the reverse mortgage may be helpful in non-Medicaid situations, it is not an attractive strategy to be used in Medicaid Eligibility planning.
Rule Of Thumb
If you have “joint” assets, over the $103,640 limit, it would be to your advantage to contact The Angel Solution to ensure that these assets are protected. In every case, a Medicaid professional should be consulted before any transfers, gifts, or repositioning is effected. The incorrect handling of ANY of the above items could cost you the family fortune!
Living Expenses
In this section, we will discuss “living expenses”, and how they relate to the Community Spouse.
It is imperative that you list EVERYTHING…taxes, insurance premiums, monthly maintenance fees, etc. This listing will be utilized by DCF in computing your MMMIA for the Community Spouse.
For example, the “type of expense” requested would be:
“Utilities”. Under the “obligation” column would be “Mr. & Mrs. John Smith”. List the average monthly amount of your utilities, and the name of the utility provider. Give the date of the last payment made.
The next column speaks of “Medical expenses, and who received the Medical service”. List the name of the applicant, or spouse…whoever received the service, the amount of the bill, and the name of the doctor or medical facility to whom it was paid, and date.
If there is a balance owing, check “Yes” in the “still owed” column.
The form has a listing of the “standard” expenses owed by homeowners, but you may have more. If so, attach a sheet of paper and continue.
