Posts Tagged ‘Trusts generally’

Coastal Senior is a Georgia monthly periodical covering the South Carolina and Georgia low country.  Bob Mason is its legal columnist.

Vacation property and “second homes” – whether in the mountains or at the beach – present a number of legal and tax planning opportunities.

First, consider probate avoidance, particularly if the property is located in a state other than the owner’s primary residence. The problem arises when the owner dies with title to the property in her name.

In addition to a probate proceeding in the owner’s state of residence, there will need to be an “ancillary probate” proceeding in the state of the second residence. A Big Hassle.

A fairly simple revocable trust, or living trust, could completely avoid the probate process in the second state. Before the “owners” death the trust owns the property. After the “owners” death, the trust continues as the record owner. Thus, no probate.

Even Fancier

Certain types of trusts can be created that protect the property for the family after the incapacity of the principal owner. If the trust is irrevocable and correctly designed, the property will not count for Medicaid purposes. Start early, however, because it’ll take five years to completely protect the home for Medicaid.

While in the trust, the property will also be immune from the liabilities of the children the owner may have originally been thinking of transferring the property to.

Tax Smart

Further, if the property is transferred directly to the children, the parent’s “tax basis” also transfers to the children. Tax basis is simply the floor value used for calculating the “profit” that someone will realize if they sell the property.

In the hands of the person who bought the property, tax basis will be what he paid for the property. In the hands of a person who inherited the property, basis will be whatever the property was worth when the person inherited the property. Importantly, in the hands of a person who received the property as a gift, basis will be the same as the basis of the person who made the gift.

What difference does this make? Say Jack’s basis in Palm Isle is $25,000 because that is what he paid for it or because that is what dad’s basis was when he gave it to Jack. Later Jack sells the property for $100,000. His “gain” or profit is $75,000. Uncle Sam and most states are keenly interested in gain, because they tax it!

On the other hand, if Jack put the property in a properly designed trust that provided his children would receive the property on Jack’s death, and on Jack’s death the property is worth $100,000, that will be the basis in the hands of the children. If they sell the property for $100,000 there will be no (as in zero) taxable gain. Not too shabby.

Wait, there’s more. If the property is Jack’s principal residence and the trust has been properly designed, the trust will qualify for the capital gains tax exclusion that would apply if Jack directly sold his residence. To use a South Carolina term, that is “elegantly shabby”.

A Special Needs Trust, also referred to as a Supplemental Needs Trust, is a trust specially designed to hold assets on behalf of a disabled individual in a manner that will benefit the individual without jeopardizing that individual’s SSI, Medicaid or other government benefits. Further, transfers in to a properly designed Special Needs Trust (also referred to as an “SNT”) will not be a disqualifying or sanctionable transfer for the person transferring assets in to the trust.

Before discussing SNTs further, however, having a basic understanding of what a trust is will be helpful.

What Exactly is a Trust?

A trust is a separate legal entity that results from an agreement between someone who sets up the trust (variously called a settlor, donor, or grantor) and a trustee who administers (conserves, invests and expends) the property in the trust for the benefit of a third party (called the beneficiary.

Almost any sort of property can be held in trust. This includes real estate, stocks, bonds, cash, mutual funds or insurance policies. In order to get the property in to the trust, however, someone must transfer the property to the trustee. In the case of real estate, for example, the settlor (or other property owner) simply prepares a deed naming the trustee as the grantee (and legal owner) of the property. Similarly, the settlor can change the name of the ownership on a bank or investment account. Finally, the trustee establishes a checking account to which parties can make deposits and from which the trustee can make distributions. In summary, one client asked me how to transfer assets to a trust, and I told her that basically it was done in the same way she would transfer assets to an individual. While the trustee becomes the legal owner of the property, the law holds the trustee accountable for the property and the trustee must hold (or distribute) the property according to the terms originally put in the trust agreement by the settlor.

A trustee is what is known as a fiduciary. This means the trustee must use the property only for the beneficiary. The trust agreement (or trust document) should explain how the settlor wants the trustee to use the property for the beneficiary. Sometimes the trustee is given discretion to make decisions as to how the trust fund should be used.

Trusts may be either revocable or irrevocable. If it is revocable, it means that the trust may be amended, changed or revoked by the settlor. If the trust is irrevocable, it means that the settlor cannot revoke or modify the trust. Some trusts, especially SNTs, can contain language that allows the trustee or some other special person known as a “trust advisor” to amend the trust if it becomes necessary to do so because of changed circumstances. Nevertheless, the settlor would not be able to make those changes. For example, it might be necessary to amend the trust to comply with changes in state or federal law.

Why a Special Needs Trust?

As noted above, an SNT is a special type of trust designed to supplement benefits received by the beneficiary (such as SSI or Medicaid) without disqualifying the beneficiary for those benefits.

Disabled individuals often receive government assistance to help them maintain themselves. Of course, the most common of these programs are Supplemental Security Income (SSI) and Medicaid. Both of those programs require a person to be impoverished in order to receive benefits. If a person has too many assets or income that is too high, then he or she will not qualify for SSI benefits even if disabled. Further, in North Carolina, he or she will be ineligible for at least one type of Medicaid. However, with an SNT, the assets being held in the trust will enable the person to continue to qualify for those programs.

Parents with disabled children also use SNTs to their advantage. Many are concerned that if they leave assets directly to their children who are disabled, the disabled children will fail to qualify for most government benefit programs and will quickly spend through whatever inheritance they receive. Some parents, often unwisely, try to work around this problem by leaving their entire estates to their non-disabled children with the hope that the non-disabled children will care for their disabled sibling. This does not always work.

An SNT can allow a person with disabilities to receive government benefits and continue to have a source of funds to pay for other goods and services that the government programs will not provide. Common examples are specially equipped vans with lifts, certain medical procedures that are not covered, travel to visit relatives in distant parts of the country, and various types of entertainment. These all enhance the quality of life of the disabled individual.

A disabled person can also fund an SNT for himself or herself. These sorts of trusts can hold a person’s assets (for example, an inheritance, a significant settlement from an injury or some sort of retroactive award of benefits). These will be discussed further below.

How Does an SNT Work?

As discussed above, the trustee is the person who makes distributions from the trust according to the instructions that are contained in the trust agreement. In this case of an SNT, the trust agreement must specify that distributions will be made in a way that does not jeopardize the beneficiary’s entitlement to SSI, Medicaid or other public benefits. All of these programs have stringent rules about how distributions from an SNT could affect the beneficiary’s eligibility for continuing benefits.

As discussed above, the assets contained in a properly drafted SNT will not “count against” the beneficiary for continuing benefit eligibility. On the other hand, if the trustee makes a cash distribution directly to the beneficiary, that payment will be considered income to the beneficiary which could jeopardize his or her continuing eligibility for benefits. Also, there are very complex rules regarding payments for food and shelter which are considered under SSI to be “in-kind support and maintenance”. This sort of income could reduce the beneficiary’s SSI benefits . . . or potentially eliminate them all together. Accordingly, it is extremely important the trustees be careful not to distribute any money in a way that will cause a problem with SSI or any benefit programs.

Some SNTs, however, might be drafted in such a way that a trustee could distribute money even if it eliminates the beneficiary’s public benefits. For example, the trustee may determine that the beneficiary’s needs for housing outweigh his or her needs for continuing SSI. In any event, the importance of adequate advice available to the trustee cannot be stressed too much.

What are the Different Types of SNTs?

Generally, there are two basic types of SNTs. First, there are self-settled trusts, and second, there are third party trusts.

As the name implies, a self-settled trust is set up using the disabled beneficiary’s own assets. For example, a disabled person who receives an inheritance or has some other property that disqualifies him for public benefits might have the property transferred in to a self-settled trust for his own use. Of course, a self-settled trust established to obtain SSI must meet stringent requirements. First, it must be irrevocable. That means the settlor cannot cancel or amend it. Also, the trust must be established by a parent, grandparent, legal guardian or a court (do not ask why, it is a strange quirk in the law and makes no sense). Notwithstanding the term “self-settled”, the beneficiary cannot establish the trust for himself. Quite often seeking the appointment of a guardian who can establish the trust becomes necessary. Finally, the trust must contain a Medicaid “payback” provision, which will be discussed further below.

The second type of SNT is a third party trust. As the name implies, these types of trusts contain assets that belonged to some other party at the time of transfer in to the trust. Of course, the main example of this type of trust is one established by a parent for a disabled child. A parent could establish such a trust either while alive or under his or her will or living trust. The main advantage to these types of trusts is that there is no requirement for a Medicaid “payback” provision. In other words, the trust may hold assets for the benefit of a disabled child until that child’s death or some future point in time whereupon the assets are distributed to the other children of the settlor.

What are Medicaid “Payback” Provisions?

Medicaid payback provisions are those provisions in certain types of SNTs that require any remaining funds in the trust upon the death of the beneficiary to be distributed to the state. As mentioned above, not all trusts require these provisions.

Usually the funds remaining in a self-settled trust (the first type discussed above) upon the death of the beneficiary must be used to repay the state for benefits that the state had paid out while the beneficiary was alive. Any funds remaining in the trust after paying back the state, however, may be paid to other people specified in the trust document. These people are usually other family members. If a self-settled trust does not contain these Medicaid payback provisions, it will very likely be considered a “countable” asset for the beneficiary.

As mentioned above, funds contained in a third party trust do not have to go to the state.

(Updated December, 2009)

Robert A. Mason, JD, CELA

CONTENTS

(Topics below are “hotlinked” for convenience)

INTRODUCTION

THE ASSET RULES

Real Property: The Home

Real Property: Tenancies-in-Common

Real Property: Life Estates

Real Property: Joint Tenancies

Personal Property: Household and Personal Effects

Personal Property: Automobiles

Personal Property: Insurance

Personal Property: Retirement Plans/IRAs

Personal Property: Burial Contracts

Personal Property: Annuities

Personal Property: Trusts

TREATMENT OF ASSETS FOR A MARRIED COUPLE

THE TRANSFER PENALTY

Old Rules

DRA Rules

Exceptions to the Transfer Penalty

Hardship Exception to Transfer Sanction

LIENS AND ESTATE RECOVERY

TREATMENT OF INCOME

Spousal Income

THE MEDICAID APPLICATION

SUMMARY

There can be no doubt but that the statutes and provisions in question, involving the financing of Medicare and Medicaid, are among the most completely impenetrable texts within human experience. Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.

Rehabilitation Ass’n of Virginia v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994) (Ervin, Chief Judge)

THE FOLLOWING SUMMARY IS MEANT TO BE FOR GENERAL INFORMATION. DO NOT RELY UPON THE FOLLOWING FOR DEFINITIVE LEGAL ADVICE.

INTRODUCTION

For all practical purposes, in the United States the only “insurance” plan for long-term institutional care is Medicaid. Medicare only pays for approximately 7 percent of skilled nursing care in the United States. Private insurance pays for even less. The result is that most people pay out of their own pockets for long term care until they become eligible for Medicaid. While Medicare is an entitlement program, Medicaid is a form of welfare – or at least that’s how it began. So to be eligible, you must become “impoverished” under the program’s guidelines.

Despite the costs, there are advantages to paying privately for nursing home care. The foremost is that by paying privately an individual is more likely to gain entrance to a better quality facility. The obvious disadvantage is the expense; in North Carolina, nursing home fees average $5,500 or so a month. Without proper planning nursing home residents can lose the bulk of their savings.

For most individuals, the object of long-term care planning is to protect savings (by avoiding paying them to a nursing home) while simultaneously qualifying for nursing home Medicaid benefits. This can be done within the following rules of Medicaid eligibility.

In North Carolina, Medicaid is administered by the Division of Medical Assistance of the Department of Health and Human Services (the “DMA”). Across the state, the county Departments of Social Services (“DSS”) assist the DMA in Raleigh with local program management. However, in order to qualify for federal reimbursement, the state program must comply with applicable federal statutes and regulations. So the following explanation includes both North Carolina and federal law as applicable.

Early in 2006 Congress passed, and on February 8, 2006, President Bush signed, the Deficit Reduction Act (“DRA”), which made a number of dramatic changes to nursing home Medicaid benefits.  The basics of North Carolina nursing home Medicaid benefits and the changes made by DRA will be discussed further in this booklet.

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THE ASSET RULES

The basic rule of nursing home Medicaid eligibility is that an applicant, whether single or married, may have no more than $2,000 in “countable” assets in his or her name.

If the applicant is married, the spouse is called the Community Spouse, and there are rules concerning how many countable assets the Community Spouse may keep. Those rules will be discussed further below.

“Countable” assets generally include all belongings except for (1) personal possessions, such as clothing, furniture, and jewelry, (2) one motor vehicle, (3) the applicant’s principal residence, and (4) assets that are considered inaccessible for one reason or another. The asset rules are quite complex.

Keep in mind, the rules discussed in this part relate to qualifying for Medicaid and have nothing to do with transferring those assets or whether those assets might be subject to estate recovery upon the death of the applicant. Those rules will be discussed in detail below.

Real Property: The Home

A home with equity of less than $500,000 (until November 1, 2007, there was no limit) will not be considered a countable asset and, therefore, will not be counted against the asset limits for Medicaid eligibility purposes as long as the nursing home resident intends to return home or his or her spouse or other dependent relatives live there.

It does not matter if it does not appear likely that the nursing home resident will ever be able to return home; the intent to return home by itself preserves the property’s character as the person’s principal place of residence and thus as a noncountable resource.

Further, the $500,000 equity limit does not apply if the home is occupied by a spouse or other dependent relative of the applicant.

The “Home” also includes an unlimited amount of real property (subject to the $500,000 equity rule, if applicable). As a result, for all practical purposes, nursing home residents do not have to sell their homes in order to qualify for Medicaid.

Do keep in mind, that while the Home does not count for Medicaid qualification purposes, it may likely be subject to estate recovery later after the death of the Medicaid applicant and his or her spouse. Estate Recovery will be discussed further below.

Real Property: Tenancies-in-Common

A tenancy-in-common is a method of holding title to real property jointly with others. The percentages need not be equal. Each “tenant in common” has an equal right to use the real property. Upon sale of the real property, the proceeds are divided according to the percentage ownership interests. Each tenancy-in-common interest can be separately sold, transferred as a gift, and passed on under a Will.

Tenancy-in-common property is NOT countable property for purposes of Medicaid qualification. However, it is available for estate recovery and may raise transfer issues if later transferred.

Real Property: Life Estates

These are often referred to as “life time rights” or “life rights”. In this type of ownership, one owner is referred to as the Life Tenant, the other as the Remainder Interest.

The Life Tenant has a current ownership interest that brings with it the exclusive right to occupy and use the premises for the rest of her life. Life Tenants are legally obligated to maintain the premises, pay the taxes and keep it insured. The Remainder Interest holder has a current ownership interest, too, in as much as he may transfer that interest at anytime. The Remainder Interest holder does not have the right to use or occupy the premises, however, until the Life Tenant has died.

Once the life tenant has died, the property passes automatically to the Remainder Interests and free of liens the Life Tenant may have added to the property after the life tenancy was created.

Life Estates are not countable. They also have the added feature of not being available for estate recovery upon the death of the Life Tenant. For this reason, life estates have been a popular, sometimes abused, method of holding title to real property.

Real Property: Joint Tenancies

Joint tenancies in real property are somewhat similar to tenancies-in-common. As long as the joint tenancy exists, if a joint tenant dies, the surviving joint tenant or tenants take the deceased tenant’s interests automatically (in this way, a joint tenancy is similar to a life estate). Because of that feature, joint tenancy property will escape estate recovery.

Historically there had been much confusion with respect to whether the joint tenancy interests had to be equal. Fortunately, recent legislation clarifies that joint tenancy interests need not be equal. Setting up a joint tenancy with one share being 99% and another being 1% would be as valid as setting up two 50% interests.

Personal Property: Household and Personal Effects

Household furnishings, clothing, jewelry and other personal effects used by an applicant and spouse as such are non-countable. For example, clothing and furniture regularly used by an applicant or spouse will not count; clothing and furniture in a storage area (perhaps from a discontinued business) will count.

Personal Property: Automobiles

One automobile used to transport the applicant or a spouse is noncountable. The DMA manual instructs the caseworker to assume that is the case unless there is evidence to the contrary. If the applicant and a spouse own more than one automobile, then the most valuable auto does not count, but other autos will be countable.

Personal Property: Insurance

For purposes of Medicaid, two types of insurance are relevant: One type has no cash value or buildup (commonly called term insurance), the other type does have some sort of cash value or buildup (and comes under a variety of headings such as “whole” or “universal” or “variable” . . . the cash value is what is important for Medicaid purposes).

Examine all life insurance policies. Do not count term insurance. If the total face value of any sort of “cash buildup” insurance is $10,000 or more, the total cash value of those policies is countable.

Example: Maude owns two whole life policies, and a term life insurance policy. One whole life policy has a face value of $7,000 and a cash value of $500; the other has a face value of $4,000 and a cash value of $2,500. The whole life policies exceed $10,000, so the total cash value of $3,000 is countable.  The term insurance does not count.

Instead say Maude owns a $7,000 face value policy with a cash value of $6,000 and a $2,500 policy with a cash value of $2,000. Because the face values total less than $10,000, the $8,000 total cash values will not count.

Personal Property: Retirement Plans/IRAs

Retirement plans and IRAs that are at all accessible are countable. The fact that accessing them may cause unpleasant tax consequences or surrender charges is irrelevant. On the other hand, an IRA that is paying a fixed, irrevocable annuity stream may not count as an asset.

Personal Property: Burial Contracts

Irrevocable burial contracts are not countable. Revocable contracts are countable. Note carefully, if an applicant does not have an irrevocable burial contract, $1,500 in otherwise countable resources may be earmarked for burial purposes and thus avoid classification as available resources.

Personal Property: Annuities

DRA made a number of very important changes in this area. If an annuity purchased on or after November 1, 2007, is either revocable or assignable it is a countable resource.

If the annuity is not a countable resource (because it is irrevocable and nonassignable), then the annuity must be analyzed to determine whether a transfer penalty will apply.

Transfer penalties will be discussed in much greater detail below. For purposes of this brief discussion, however, an annuity purchased (or a preexisting annuity that has any changes made) on or after November 1, 2007, will not be subject to a transfer of assets sanction if the State is named as remainder beneficiary to the extent of Medicaid benefits paid (the State may take second place behind a spouse and a minor child) and the annuity is expected to pay out in level payments over the actuarial life expectancy of the annuitant.

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Personal Property: Trusts

The Medicaid trust rules are extremely complex. Please do not rely upon this simple explanation for a definitive answer.

Was the trust was funded by the applicant or the applicant’s spouse?

General Rule: If an applicant is the beneficiary of a trust funded with his assets or the assets his spouse, the trust will be countable to the applicant. Of course, a number of significant exceptions apply.

Exception 1: Was the trust funded by a spouse’s will? If so, and if the trust was properly designed as a discretionary trust (meaning the trustee is not legally obligated to distribute anything at all to the beneficiary), the assets in the trust will not be countable.

Exception 2: If not funded by will, does the trust allow the trustee to distribute anything from any part of the trust under any conceivable circumstance? If the answer is “no” the trust is not countable. If the answer is “yes” with respect to any part of the trust, that part of the trust is countable.

A trust may have different parts. Part A or Part B. Perhaps parts for different beneficiaries. Importantly, most trusts have “income” and “principal”. A trust may prohibit distributions of principal under any circumstances but allow or require distributions of income. The “principal” would not be “countable” and the income, of course, would be.

Really Important Note: If an applicant or her spouse sets up an “Exception 2″ trust that prohibits any distributions to the applicant or the spouse, it may not be a countable asset, but the trust certainly will raise transfer of assets concerns when it is established, especially if the trust was set up within the last five years.

Exception 3: If the trust was funded with the applicant’s own assets and the applicant is under age 65 at the time the trust is set up, then the trust might qualify as a “self-settled special needs trust”. See a further explanation of special needs trusts on the Mason Law website by clicking HERE.

Was The Trust Funded By Someone Else?

If a trust set up by someone other than the applicant or her spouse, will the assets be counted? Answer: It depends.

General Rule: If a trust set up by someone other than the applicant or her spouse requires the trustee to distribute assets under certain circumstances, the assets that are required to be distributed will be countable if those circumstances occur.

Common Example: Mom sets up a trust for daughter that requires assets to be distributed for the “health, education and maintenance” of the daughter. The trusts assets will be countable if daughter needs to go into a nursing home.

Common Example: If the trust says my trustee may not distribute to daughter in any manner that would disqualify her for nursing home benefits under Medicaid, but may distribute for other reasons, the trust assets will not be counted. These types of trusts are commonly referred to as “third party special needs trust”.

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TREATMENT OF ASSETS FOR A MARRIED COUPLE

Medicaid law provides special protections for the spouse of a nursing home resident, known in the law as the “community” spouse. Under the general rule, the spouse of a married applicant is permitted to keep one-half of the couple’s combined countable assets up to $109,560 (2009 and 2010). In addition, there is a minimum resource allowance for the community spouse of $21,912 (also 2009 and 2010). The protected amount is referred to as a “Community Spouse Resource Allowance” or “CSRA”.

The CSRA is calculated with respect to assets held by a married couple as of the beginning of the first continuous 30 consecutive day period that the applicant spouse has been confined to a hospital or nursing home or some combination of the two. For the sake of administrative convenience, DMA will actually measure the assets as of the close of the last business day of the preceding month. This is sometimes referred to as a “snapshot date”. It does not matter when the Snapshot Date occurred. It is not at all uncommon to have a Snapshot Date that was triggered several years before the date of a Medicaid application.

So, for example, if a couple owns $90,000 in countable assets on the date the applicant enters the hospital and stays in it or a nursing home for 30 days or more, he or she will be eligible for Medicaid once their assets have been reduced to a combined figure of $47,000 – $2,000 for the applicant and $45,000 (one-half of $90,000) for the at-home spouse. If the couple owned $220,000 in assets, the spouse in need of care would not become eligible until their savings were reduced to $111,560 ($2,000 for the nursing home spouse and the maximum $109,560 for the community spouse).

Often, it is advantageous for the couple to try to have as much money as possible in their names on the Snapshot Date up to $208,800 so that the amount the community spouse is allowed to keep will be as high as possible. Sadly, many couples believe they understand the rules and spend half of their assets before a Snapshot Date only to later discover they must reduce their assets by half again!

After a determination has been made as to the nature and extent of an applicant’s (and spouse’s) assets, and whether any of those assets will be protected, the next major inquiry involves whether any assets have been transferred before the application.

This concludes the discussion of the classification of assets for Medicaid eligibility purposes. We now turn our attention to the much misunderstood (but very harsh) Medicaid transfer penalties.

THE TRANSFER PENALTY

The other major rule of Medicaid eligibility is the penalty for transferring assets. Medicaid has always imposed some sort of restriction on transferring assets before entering a Medicaid application – were it not for such restrictions, anyone could qualify for Medicaid simply by giving assets away at the time nursing home entry became necessary.

Medicaid has (and continues) to restrict asset transfers by imposing a period of ineligibility for benefits called a Transfer Penalty. The idea is that the transferred assets could have been used to pay for nursing home care rather than having been gifted to others. Two concepts are always relevant with respect to a Transfer Penalty: (i) The length of the penalty in months, and (ii) The date the Transfer Penalty commences.

DRA mandates tough new restrictions on the transfer of assets made on or after the effective date of February 8, 2006.

The effects of DRA have been trickling down to the states and each of them has been grappling with how to implement DRA locally. North Carolina began enforcement of the new rules on November 1, 2007, and applies the new rules to transfers made on or after November 1, 2007. The older rules continue to apply to transfers made on or before October 31, 2007.

The remainder of this booklet will refer to November 1, 2007 (the date with respect to which DMA is applying the new DRA Rules) as the “Implementation Date”.

Because the pre-November 1, 2007, rules could continue to be relevant as late as October 31, 2010 for certain non-trust transfers and as late as October 31, 2012 for certain transfers to trusts, this booklet will discuss both the old transfer rules (“Old Rules”) and the new rules that were implemented in North Carolina on November 1, 2007 (“DRA Rules”).

Old Rules

Under the Old Rules DSS reviewed any transfer made within 36 months of the Medicaid application to determine if a Transfer Penalty (discussed below) should apply. On the other hand, if the transfer had been made to a trust, DSS would review transfers made within 60 months of the application.

If an applicant (or his or her spouse) transferred assets before the Implementation Date, that transfer will in no event incur a penalty if the transfer was made more than 36 months before the date of the Medicaid application.  On the other hand, if the transfer was into a trust the transfer will in no event incur a penalty if the transfer was made more than 60 months before the date of the Medicaid application.

That is because under the Old Rules, Transfer Penalties began on the first day of the month of the transfer. The actual number of months of ineligibility was (and continues) to be determined by dividing the amount transferred by $5,000 (2009) and under the Old Rules rounding down to a whole number.

Example: If an applicant made a transfer totaling $400,000 he or she would be ineligible for Medicaid for 80 months ($400,000 ÷ $5,000 = 80) beginning on the first day of the month of transfer. Another way to look at this is that for every $5,000 transferred, an applicant would be ineligible for nursing home Medicaid benefits for one month.

There is no cap on the period of ineligibility. In the example above, if the transfer was made to trust more than 60 months before the application (but before the Implementation Date), there was no Transfer Penalty. If the transfer was made within 60 months of the application (say 59 months before the application and before the Implementation Date), there would be 20 months remaining on the Transfer Penalty.

Had the transfer been made directly to an in individual before the Implementation Date and at least 36 months before the application, there would be no Transfer Penalty because transfers older than 36 months would be irrelevant.

Important Reminder: The Old Rules apply only to transfers made before November 1, 2007.  If the transfer was made after that date, the transfer must be analyzed under the DRA Rules.

DRA Rules

One of the two most significant DRA changes is that Transfer Sanctions will not begin to run until both of the following conditions have been met: (i) the applicant is in a nursing facility with a physician’s formal approval and (ii) the applicant is otherwise financially qualified for Medicaid (other than the fact that there will be a Transfer Sanction). Also, rounding down no longer applies and fractional Transfer Sanctions will be in force.

The other significant change is that all transfers made within 60 months of application are relevant and could generate a Transfer Penalty.

Example: Same facts as above. A $400,000 transfer directly to an individual or to a trust (the difference no longer matters). The resulting Transfer Penalty would be 80 months ($400,000 ÷ $5,000 = 80). The applicant is both in a nursing home and financially qualified for Medicaid (except for the Transfer Penalty). Under the DRA Rules, if the applicant applies for Medicaid 59 months after the transfer (within 60 months) he will be ineligible for Medicaid for 80 months commencing on the date of application.

Change the facts. The applicant has $20,000 cash in the bank. To be eligible, he must have no more than $2,000 in countable assets. Four months later he has spent money and has $1,500 left.  Then (and only then) would the 80 month sanction begin to run.

Remember, DSS may only consider transfers made during the 60 months preceding an application for Medicaid, the “look-back” period. Effectively, then, there is a 60 month cap on periods of ineligibility as long as no application is made within the 60 months.

As a result of these rules there are two important considerations to keep in mind. Planning is tricky and should be undertaken only with expert guidance. Also, if a nursing home stay becomes necessary and there are potential issues with earlier transfers, expert guidance also is essential to repair the situation and devise a strategy.

Exceptions to the Transfer Penalty

Under DRA a Transfer Sanction will not apply if an applicant can prove “by the greater weight of the evidence” that the earlier transfer was made exclusively for reasons than to qualify for Medicaid. Note that the burden will be on the applicant, who may or may not be in any position to go through a hearing process and may well need to engage an attorney for assistance.

Very important planning exceptions are available. Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

(1) A spouse (or anyone else for the spouse’s benefit);

(2) A blind or disabled child;

(3) A trust for the benefit of a blind or disabled child; or

(4) A trust for the benefit of a disabled individual under age 65 (even for the benefit of the applicant under certain circumstances).

Special rules apply with respect to the transfer of a home. In addition to being able to make the transfers without penalty to one’s spouse or blind or disabled child, or into trust for other disabled beneficiaries, the applicant may freely transfer his or her home to:

(1) A child under age 21;

(2) A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or

(3) A “caretaker child,” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided such care that the applicant did not need to move to a nursing home.

As mentioned above, a transfer can be cured by the return of the transferred asset in its entirety.

Hardship Exception to Transfer Sanction

The General Assembly enacted “hardship rules” that would allow qualification of a person for Medicaid and allow a Community Spouse to retain a certain level of assets even if DSS imposes a transfer sanction on an earlier transfer.

The adopted Hardship Rule allows a Community Spouse to retain the previously protected income (see “TREATMENT OF INCOME” below), slightly more than $60,000 of Countable Assets, and a homeplace with equity of less than $500,000 . . . and still qualify for a finding of Hardship if other hardship conditions are met.

Mason Law maintains that the Hardship Exception to the imposition of Transfer Sanctions should not be viewed as a pre-application planning opportunity. In other words, do not plan on transferring assets in excess of the Hardship levels outlined in the preceding paragraph and plan to argue “hardship”. While that tactic may work for a limited time, we believe it flaunts the spirit of the hardship rules (that they be reserved for unintentional cases of hardship) and would incur the wrath of legislators who had made a good faith effort to provide some relief to cases that warranted the relief.  We believe abuse of this exception would invite a legislative response.

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LIENS AND ESTATE RECOVERY

The state has the right to recover whatever benefits it paid for the care of the Medicaid recipient from his or her probate estate. Given the rules for Medicaid eligibility, the only property of substantial value that a Medicaid recipient is likely to own at death is his or her home. Under current law, the state may make a claim against the decedent’s home only if it is in his or her probate estate.

Property that is jointly owned with rights of survivorship, in a life estate, or in a trust, is not included in the probate estate and thus escapes estate recovery. Congress has given the states the right to seek estate recovery against such nonprobate property; so far, North Carolina has not definitely acted on this new provision.

Contrary to popular belief, there is no such a thing as a Medicaid or “nursing home” lien in North Carolina. Upon the death of a Medicaid recipient, and providing no exception ton to estate recovery applies (see below), DMA is a fifth class creditor against the probate estate of the deceased recipient – DMA “gets in line” with other creditors of equal rank.

The law also provides exceptions to estate recovery when hardship can be proven. In other cases DMA will completely forego estate recovery if the deceased is survived by a spouse or a minor or disabled child. You should always seek assistance from qualified counsel if facing estate recovery.

TREATMENT OF INCOME

The income eligibility rules are convoluted, but in summary, if the applicant’s income is in excess of the facility’s private pay rate, the applicant will not be eligible for Medicaid. When a nursing home resident becomes eligible for Medicaid, all of his or her income, less certain deductions, must be paid to the nursing home. The deductions include a $30-a-month personal needs allowance, a deduction for any uncovered medical costs (including medical insurance and Medicare supplemental plan premiums), and, in the case of a married applicant, an allowance he or she must pay to the spouse that continues to live at home.

As will be discussed a bit more below, Medicaid considers only the income of the applicant and not that of the community spouse (the spouse not being institutionalized). Medicaid uses a “name on the check” rule in determining income.

Spousal Income

In all circumstances, the income of the community spouse will continue undisturbed; he or she will not have to use his or her income to support the nursing home spouse receiving Medicaid benefits.

In some cases, the community spouse is also entitled to share in all or a portion of the monthly income of the nursing home spouse. DMA determines an income floor for the community spouse, known as the minimum monthly maintenance needs allowance, or MMMNA, which, under a complicated formula, is calculated for each community spouse based on his or her housing costs. The MMMNA may range from a low of $1,822 to a high of $2,739 a month (2009 numbers).   If the community spouse’s own income falls below his or her MMMNA, the shortfall can be made up from the nursing home spouse’s income.

Also, an additional allowance can be made for every dollar that certain housing costs such as taxes, mortgages and insurance exceed $525 (up to a maximum of $989 in shelter costs over $525) (2009 numbers).

THE MEDICAID APPLICATION

Applying for Medicaid is cumbersome and tedious. Every fact asserted in the application must be verified by documentation.

The application process can drag on for several months as the local DSS demands more and more verifications regarding such issues as the amount of assets and dates of transfers. If the applicant does not comply with these requests and deadlines on a timely basis, DSS will deny the application.

In addition, after Medicaid eligibility is achieved, it must be redetermined every six months.

Further, under the new DRA transfer sanction rules it may be necessary to file two Medicaid applications if a sanctionable transfer has been made under the new DRA Rules. The first application will be needed to establish that the applicant is both in a nursing home and is otherwise financially qualified. Without such an application it would be impossible to begin the running of a Medicaid transfer sanction.

Finally, a second application will be needed to establish that a sanction has run and that all other necessary requirements for an approved application continue to apply to the applicant.

SUMMARY

As you can see, the Medicaid rules are exceedingly complex and are becoming harsher. Nevertheless, many worthwhile planning opportunities exist that this rather “bare boned” summary cannot explore. We can help.

Call us today for a solution.  336-610-6000.

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