Clients need you to help them
understand new Medicaid rules.
With nursing home costs running $80,000 or so
annually, even your affluent elderly clients could be forced to go
through a large chunk of their nest eggs. Lacking any long-term-care
insurance, their only option may be to apply for Medicaid, the state
and federally funded program that covers the poor.
But new Medicaid rules are so tough that some believe those needing Medicaid to pay long-term-care bills may turn to divorce to protect family assets. The National Academy of Elder Law Attorneys (NAELA) in Tucson, Ariz., says divorce could become just one unintended consequence of Medicaid reform contained in the Deficit Reduction Act of 2005.
To qualify for Medicaid, persons needing long-term care typically must "spend down" assets to $2,000. The "community spouse," who remains at home, generally is permitted to keep some $100,000 in resources.
Medicaid rules vary by state, and state rules under the Deficit Reduction Act (DRA) are being implemented at a wide range of speeds. At this writing, more than a dozen states were believed to have implemented rules under the act.
The new federal rules could result in some community spouses winding up with fewer assets in certain states. The NAELA questions whether this might prompt more elderly couples, faced with a spouse needing long-term care, to divorce. The rules make a discrete technical change to spousal impoverishment rules, which help protect the spouse at home financially when the other spouse enters a nursing home. Previously states could consider two methods, dubbed "income first" and "resource first," to determine whether the community spouse could exceed the community spouse resource allowance.
The new rules kill the so-called "resource first" option, which made it easier for a community spouse to petition to retain more assets. Now all states are required to use the "income first" method, which first allots the institutionalized spouse's income to the community spouse to help meet monthly expenses (see example in sidebar).
The change particularly stands to hurt nonbreadwinners in a marriage if a spouse goes into a nursing home, explains Gene Coffey, attorney for the National Senior Citizens Law Center, Washington, D.C. Not only will the healthy nonbreadwinner likely have to rely on an institutionalized spouse's income during that person's lifetime, Coffey notes; when the institutionalized spouse dies, the community spouse loses that person's income.
However, the impact on marriages may not be the harshest repercussion of the Deficit Reduction Act, which elder law attorneys have dubbed "The Nursing Home Bankruptcy Act." Worst is how Medicaid revised the penalty period during which a person is ineligible for Medicaid due to gifts and transfers valued at less than fair market value. Critics say the revision leaves patients confined to a nursing home with funds exhausted, but ineligible for Medicaid.
The new rules not only extend the "look-back period" for gifts or asset transfers to five years from three years in most cases, but starts the clock on the penalty period from the date the nursing home resident is eligible to receive Medicaid instead of from the date of the transfer.
The number of months in the penalty period generally is figured by dividing the value of assets transferred within the look-back period by the states' average monthly nursing home cost for a private patient. "Say 41/2 years ago, Joe gave $20,000 to a family member," says G. Mark Shalloway, president-elect of the National Academy of Elder Law Attorneys and West Palm Beach, Fla. elder law attorney. "He subsequently went into a nursing home and spent down his life savings over two years, and applied for Medicaid in January. Even though he's out of money, that earlier gift would trigger yet another four-month waiting period for Medicaid benefits. That's figured by dividing the $20,000 gift by the monthly cost of a nursing home, which Florida pegs at $5,000."
Here are some other key strategies used to preserve family assets by getting them out of a potential Medicaid recipient's ownership, and the impact of the new rules:
Annuities. Under new rules, for an annuity to not be a countable asset the state must be named as a "remainder beneficiary," so the state is reimbursed for medical assistance, long-term care and community services.
Loans, mortgages and promissory notes. The new federal rules require a loan's repayment term to be actuarially sound and made in equal amounts during the loan term, with no deferral of payments and no balloon payments. Cancellation of the loan balance upon the death of the lender is prohibited.
Life estates, representing the right to live in a property until death. New rules treat a life estate as a transfer of assets unless the person purchasing a life estate in another person's home lives there for at least one year after the purchase.
Homes. Although the home formerly was considered an exempt asset for Medicaid purposes, states now must consider an applicant's home equity in excess of $500,000. States are permitted to raise that threshold to $750,000.
Coffey and others agree it's too early to analyze the true impact of all these Medicaid reforms. But, the Center on Budget and Policy Priorities, a Washington, D.C., nonprofit research organization, says that based on data so far Medicaid enrollment already is down in at least six states. It attributes that decline to yet another new rule under the Deficit Reduction Act that states were required to implement last July.
Under that rule, all Medicaid recipients must show proof of citizenship, like a birth certificate, driver's license or passport, according to Coffey. Previously, they had to assert, under penalty of perjury, that they were a U.S. citizen or qualifying alien. Some have had trouble finding necessary documentation.
Nevertheless, Coffey notes that persons who enter a nursing home initially via Medicare are exempt from the new proof of citizenship requirement. So immigrant children and adopted children seeking Medicaid assistance are more apt to be affected than the elderly.
The Deficit Reduction Act presents new business opportunities for financial advisors working with elder law attorneys, NAELA's Shalloway says. It also can present a way for advisors to distinguish themselves from the herd by cultivating relationships with baby boomers who stand to inherit money.
By helping an older client in coordination with adult children, the children will appreciate an advisor looking into their parents' future. "Now you may be managing a share of the children's assets while held in the trust of the parents," he says. Children will be ingratiated.
With the Deficit Reduction Act changes, a reverse mortgage might prove attractive if a large part of a client's net worth is in real estate, Shalloway says. Also, a short-term home health-care policy, which generally costs less than long-term-care insurance, might be an option until a client qualifies for Medicaid.
Annuities, if structured properly, remain attractive for reasons other than tax-deferral. They could be placed in the deferred mode, and converted irrevocably to be Medicaid-compliant, he says. But Shalloway warns that advisors who attempt these strategies run the risk of running afoul of the rules. Among those: Annuities must be "actuarially sound." "Actuarial life expectancy tables are not those of the Internal Revenue Code or the Social Security Life Expectancy Tables," he says. A misstep could cost the client's eligibility for Medicaid.
For a higher-net-worth client with a spouse who must go into a nursing home, one option is a concept called "spousal refusal." This means the couple assigns assets to the healthy spouse, who refuses to make assets available to the ill spouse to pay for care. Laws vary on this, so don't necessarily expect Medicaid to jump in and pay for nursing home care, Shalloway says. But in the worst-case scenario, the couple at least may maneuver the same discounted nursing home rate that Medicaid would pay. This can result in a cost savings of 25% or more. "Precrisis planning," he says, "is a key theme that comes out of the new law."
While the Deficit Reduction Act rules are federal, experts warn that additional state laws may result in changes you might not consider. "Some of those states are saying the Deficit Reduction Act talks about whether purchasing an annuity is a transfer," says Harry Margolis, Boston elder law attorney and founder of Elderlawanswers.com. "Alabama says that's fine. We'll follow the Deficit Reduction Act. But we're still going to make an annuity countable."
"The state of Massachusetts is taking the most draconian interpretation of the Deficit Reduction Act that it can," he added. "Whether or not it's actually legal will be tested in court."
Under one Massachusetts interpretation, he says, a Medicaid penalty period could be extended to account for repayment of a loan.
And Florida, despite rapidly escalating real estate prices, had not extended the $500,000 home equity cap under Medicaid because it requires a legislative change. The state Agency for Health Care Administration, at this writing, had not yet decided to seek it.
Meanwhile laws keep changing, adding even newer wrinkles to Medicaid planning efforts. On the positive side, Margolis says, the law laid down rules for what's acceptable. "While we have this problem in Massachusetts with the act of lending money under a promissory note, if you follow their rules, it's now sanctioned."
The rules, he says, also sanction buying life estates and living in them for one year. But Julia Belian, visiting associate professor at University of Missouri-Kansas City School of Law, cautions against "Medicaid planning."
"One of the frightening aspects is it's just changing so rapidly. I don't know it's possible to predict where they will strike next," she says. "Different states give a different spin to different factual patterns. They base it on what walks through the door."
Courts, according to Belian, have gone so far as to issue rulings that interpreted actions that happened as long as 20 years ago to be transfers that happened within the last five years. "Courts are doing gymnastics about this stuff in order to reach the goal of imposing a penalty period on anyone they believe is trying to do Medicaid planning," she says.
Meanwhile, if you use an annuity for Medicaid planning, the annuity must be irrevocable and non-assignable. So if Congress changes Medicaid rules, Belian wonders whether you might have put your client in a set of chains that will prevent him or her from ever qualifying for Medicaid.
Income First vs. Resource First
Here is how the federally mandated, so-called "income first" approach to calculating Medicaid benefits can leave a spouse in a significantly worse financial position than the defunct "resource first" method.
Say Mr. Smith, who must go into a nursing home, has $3,000 in monthly income, while Mrs. Smith, the healthy community spouse, has just $1,000 in monthly income. Together, they have a combined $150,000 in cash assets.
Under Medicaid federal impoverishment rules, says Gene Coffey, attorney for the National Senior Citizens Law Center, Mrs. Smith is entitled to a minimum of $1,600 monthly, adjusted annually, of the couple's combined income.
Using the "income first" approach, when Mr. Smith finally dies, Mrs. Smith could wind up with her own $1,000 in monthly income and only $75,000 of the couple's liquid assets. That's because she's only entitled to keep one-half of the couple's $150,000 assets. Mr. Smith, though, is ineligible for Medicaid until he "spends down" his $75,000 share of assets to $2,000.
To meet the $1,600 federal minimum income Mrs. Smith is permitted under Medicaid, Mr. Smith makes available to Mrs. Smith $600 of his $3,000 in monthly income. But once he dies, she loses all his monthly income.
Under the "resource first" approach, however, the death of Mr. Smith would leave Mrs. Smith in a much better financial position. She'd still have the couple's combined $150,000 in assets, plus her own $1,000 in monthly income. The couple could have chosen for Mr. Smith to allow his wife to keep her $1,000 in income, but generate the other $600 in monthly income for herself by holding onto the couple's $150,000 in combined assets. If income from those assets was insufficient to meet her expenses, she still could have claimed additional income from Mr. Smith.