There is a subtle but important distinction between the Medicaid look-back rule and the ineligibility rule – while the look-back period is limited to five years, the ineligibility period is not.

Think about that.

If you file a Medicaid application, the state asks you to reveal any transfers of assets in the past five years. Any transfers made before that won’t count. So you might think that any transfers you have made shouldn’t make you ineligible for benefits beyond five years. But here is the tricky thing: the ineligibility period is unlimited.

Here is an example of how these two rules work.

Madge has modest means, but the vacation house her father left to her has greatly increased in value over the years. In February of 2007, when the property was appraised at $650,000, she transferred title to her three children. Since she spent every summer there with her children when they were young, Madge wanted to keep it in the family.

Now in January of 2012 she enters a nursing home. The value of her assets is such that she could qualify for Medicaid benefits to pay for her care in a month or two.

Her nursing home has a policy of routinely filing an application for every new resident that transfers from a hospital, as Madge did. The nursing home, understandably, wants to make sure that every resident who qualifies for benefits gets approved as soon as possible so that the nursing home can continue to get paid.

But look at Question 10 on the Pennsylvania’s Medicaid application:

Within the past 60 months, have you or your spouse closed, given away, sold or transferred any assets such as: a home, land, personal property, life insurance policies, annuities, bank accounts, certificates of deposit, stocks, IRA, bonds or a right to income?

If her application is filed in January, Madge must answer “yes” and list the transfer of title to her children.

The result? The state finds Madge ineligible for Medicaid benefits for 80 months, or more than 6 ½ years! (The ineligibility period comes from a formula based on the value of the property transferred: $650,000 ÷ $8,112.13 = 80.13.) Madge may have to have her children transfer the house back to her, sell it, and spend down much of the proceeds.

The sad part is that Madge wasn’t even eligible for benefits until March. Had she waited until then to file her application, the transfer of title to her children would not have counted because it would have occurred more than five years before.

So if you have made sizeable transfers of your assets, be careful about when you file a Medicaid application. Better planning can help you achieve your estate planning goals.

You may have heard that a Medicaid applicant becomes ineligible for benefits as a result of giving away assets.

But what are the details?

First let me give you the rule, then we’ll examine the parts.

Rule:  A Medicaid applicant will be found ineligible for benefits as a result gifts made during the look-back period. Calculation of the length of the ineligibility period (also called “penalty period”) depends on the amount of total gifts. That period begins to run when the applicant is otherwise eligible for benefits.

Gifts. If you’re a Medicaid applicant, the rules allow you to spend your money as long as you can show you received goods or services at a fair value in return. What gets penalized is a gift – that is, a transfer of assets for less than fair market value. Pennsylvania regulations define fair market value as the “price which property can be expected to sell for on the open market or would have been expected to sell for on the open market in the geographic area in which the property is located.” 55 Pa. Code §178.2.

Some people deed a house to one of their children for $1. If the house could be sold for $100,000, then Medicaid rules would count that transfer as a gift of $99,999.

Currently in Pennsylvania, no penalty period applies if total gifts in a calendar month were $500 or less. 62 P.S. § 441.5(a).

Some transfers are exempt from penalty, and therefore do not result in any penalty.

Look-back period. The rule applies only to gifts made during the look-back period, which you can read about here. Gifts made before don’t count.

Calculation. To calculate the period of ineligibility in Pennsylvania, the Department of Public Welfare divides the fair market value of the transferred property by the state’s penalty divisor (currently $266.70 per day, or $8,112.13 per month), a figure based upon the average statewide cost of nursing home care. Partial months are counted, but partial days are not. 

For example, if an applicant gave his son $30,000 during the look-back period, then the penalty period will be calculated to be 112 days ($30,000 ÷ $266.70 = 112.49, rounded down to 112).

Other states similarly divide the gifted amount by a regional penalty divisor to calculate the days of ineligibility, but the amount of the penalty divisor varies.

When the penalty begins.  The penalty period begins running when the transfer is made, or the date when the applicant would otherwise be eligible for benefits, whichever is later. For example, if an applicant gives his grandson $30,000 for college today, then applies for benefits four years from now, after suffering a stroke and spending down his other resources, the 112-day period of ineligibility will begin at the time of application.

But if a currently eligible Medicaid recipient deeds away his house today, the period of ineligibility would begin running today.

The take-away. Knowing the details of the ineligibility rules helps potential applicants make better planning decisions and (hopefully) avoid future ineligibility problems.

An applicant for Medicaid must report transfers of assets made in the five years (60 months) prior to applying.

This period of time is called the “look-back” period. Here are the basics of how it works in Pennsylvania.

When is it? In most cases, it’s the 60 months prior to making a Medicaid application. In Pennsylvania, caseworkers go by the date when the applicant signed the application.

Was the look-back period always 5 years? No. The look-back period used to be only 36 months for transfers made to an individual. Under the federal Deficit Reduction Act, adopted in February of 2006, the look-back period for such transfers gradually increased to 60 months between February 2009 and February 2011. For transfers made to a trust, the look-back period has long been 60 months.

What has to be reported? Pennsylvania’s current Medicaid application for long term care contains the following questions:

Within the past 60 months, have you or your spouse closed, given away, sold or transferred any assets such as: a home, land, personal property, life insurance policies, annuities, bank accounts, certificates of deposit, stocks, IRA, bonds or a right to income?

Within the past 60 months, have you or your spouse transferred any assets into a trust?

If yes to either question, explain circumstances…

Note that the law requires disclosure of transfers made by the applicant or his or her spouse.

Does every transfer during the look-back period make me ineligible? No. Whether you will be ineligible for benefits depends on a number of things such as the amount of the transfer and to whom it was made. We will explore this issue in more detail in a future blog post.

You may be surprised to learn that Pennsylvania law provides that the spouse, parent, or child of an indigent person has “the responsibility to care for and maintain or financially assist” that person, and that this responsibility applies “regardless of whether the indigent person is a public charge.”

(There are two exceptions. A child is not liable for support of a parent who abandoned the child for 10 years while the child was a minor. No person is liable under this law if there is a financial inability to pay support.)

Before you panic, though, keep in mind that the state of Pennsylvania does not generally bring support actions against family members whose relatives have run out of money and qualify for benefits. (Whether the law would even be enforceable for that purpose is questionable.) Medicaid, veterans benefits, and other public benefits regularly assist in paying for long term care for seniors who lack the ability to pay.

But Pennsylvania’s support law has been used by nursing homes and assisted living facilities to hold family members responsible for the cost of care in certain circumstances.

One important factor is whether Mom or Dad reside in a nursing facility that is certified to receive Medicare or Medicaid reimbursement. Under the federal Nursing Home Reform Act, such a facility may not require someone other than the resident (such as a family member) to guarantee payment. A facility may require someone who has access to the resident’s income or resources to sign a contract to make payment from the resident’s assets, but such a person incurs no personal financial liability.

Facilities that are not certified for Medicare or Medicaid, such as personal care or assisted living facilities, have successfully sought payment from family members. In 2009, for example, Allegheny County Judge Stanton Wettick allowed an assisted living facility to bring a lawsuit against a son of one of its residents for payment under Pennsylvania’s support law. (To read opinion, click here and find page 284.)

Another important factor is whether a family member has signed any kind of agreement to be a “responsible party” (or some similar term) for payment. Such agreements are not always enforced by the courts, but facilities sometimes use them to insist on payment from the signer.

When helping a relative with admission to a long term care facility, be sure you understand your possible liability to help make payments. An elder law attorney can help you review admission contracts and discuss the financial responsibility you may incur.

Several figures used to calculate income for spouses of Medicaid applicants have risen slightly, the Pennsylvania Department of Public Welfare announced.

When calculating a spouse’s monthly maintenance needs allowance, the Department uses standard utility figures. The heating standard is used when the spouse’s heating and cooling costs are billed separately from rent or mortgage costs. When the spouse pays separate utility costs other than phone, but not heating or cooling costs, the Department applies the non-heating standard. When the spouse’s only separate utility cost is for phone charges, the telephone standard is used.

The latest figures are:

Heating: $536/month

Non-Heating: $278/month

Telephone: $33/month 

These figures are all part of a formula used to determine the needs allowance. Though announced recently, they are effective back to October 1, 2011.

You can always find the most current Medicaid numbers at this page of our website.

There’s a right way and a wrong way to do everything, as your mother always told you.

The same holds true in qualifying for Medicaid.

Today I’ll pass on a true story about a client of mine who (with our help, naturally) qualified her husband for Medicaid, while protecting assets and putting herself in a better position, by buying an exempt resource.

(If you don’t know about exempt resources, click here.)

I’ll call her Mrs. Walker. While she was walking across the street after church one evening, a motorist struck her. A period of painful physical therapy ensued, after which Mrs. Walker got around on two canes. The stairs in Mrs. Walker’s house became dreaded obstacles.

Around that time, Mrs. Walker’s husband suddenly – but permanently – required full-time care in a skilled nursing facility to the tune of about $8,000 a month.

We crunched the numbers and found that Mr. and Mrs. Walker owned about $150,000 too much in resources to qualify for Medicaid benefits. But one simple strategy solved two of their problems.

Mrs. Walker sold her old three-story house and combined her proceeds with the couple’s extra $150,000 to buy a newly constructed ranch condo. She loved having everything all on one floor, and Medicaid benefits started paying for the cost of her husband’s care.

So what’s the wrong way to qualify by buying exempt resources? Getting too cute and buying a Porsche with your extra dough is one example. Even if you don’t end up with a denial (and trying to explain the propriety of the purchase to an administrative law judge), you still have the problem of what to do with an asset that depreciates in value rapidly, may require expensive maintenance, and could be subject to Pennsylvania’s estate recovery program.

It’s always best to make sure your Medicaid qualification strategy fits in with your overall circumstances and estate planning goals. It should also make simple common sense.

Finally, keep in mind that when using this strategy to qualify for benefits, timing can be critical. (See example.) It’s best to have professional advice.

Wise use of an irrevocable trust can be a powerful way to protect assets as one gets older. One use is to avoid the need to spend down assets in order to qualify for certain benefits, such as veterans benefits and Medicaid.

But why use a trust? Why not just give the money away?

If a client is trying to protect assets and still qualify for government benefits, one strategy is to gift away excess funds to someone outside the household, typically children or other family members. The client then applies for veterans benefits, or in the case of Medicaid, waits five years before applying for benefits.

That strategy poses a number of significant risks. The person to whom it is gifted could die, become divorced, spend the money, invest the money in an unwise way, lose the money to creditors, and so on.

Even if the person making the gift were healthy when the gift was made, a health crisis could bring about the need for nursing facility care during the five years following the gift. If the gifted funds have been lost or spent, there could be no way to cure the gift. Without Medicaid benefits, there may be no way to pay for care.

An irrevocable trust has a number of advantages over an outright gift.

Control

Simply having the funds in a trust provides a superior amount of control over an outright gift.

In addition, the person who creates and funds an irrevocable trust (called the “grantor”) can make a number of important decisions about how the funds are held, managed, and disbursed.  The grantor can name trustees, and decide whether to have a single trustee, followed by successor trustees, or co-trustees. The grantor can name beneficiaries and retain the right to change beneficiaries through a power of appointment in the grantor’s will.

A trust protector can be named, with the power to approve or disapprove distributions during the grantor’s lifetime. The grantor can decide whether there will be one trust or a number of trusts, and can stipulate what assets will be used to fund each trust.

Income

The grantor can decide to receive income from the trust, even if there is no access to principal. Having income makes grantors feel as if the money is still theirs in some way, thereby easing some concerns about establishing an irrevocable trust in the first place.

Income can also help the client make it through a five-year look-back period by providing a means to help pay for care.

Protection from loss

By far one of the biggest concerns about gifting away funds is that the recipient (or “beneficiary”) will lose it in some way. With the right drafting, though, the funds placed into an irrevocable trust will not be available to be lost in a beneficiary’s divorce or bankruptcy proceeding.

Using a trust avoids the risk that a beneficiary will die and that the funds will be distributed to the beneficiary’s heirs.

Spendthrift language can help prevent the money from going to a beneficiary’s creditors, or from being squandered by a beneficiary who cannot handle money due to bad decision-making, gambling problems, addictions, or other reasons.

Tax advantages

An irrevocable trust offers some tax advantages over an outright gift, primarily in the area of capital gains tax. If the trust is structured as a grantor-type trust, then appreciated assets, such as a stock portfolio, can receive a favorable step-up in basis upon the death of the grantor. If such an asset were merely gifted, the recipient would have the same basis as the donor, and in many cases owe much more in capital gains tax.

Using a grantor-type trust provides a similar tax advantage for a homeowner’s principal residence. The estate can take advantage of the grantor’s capital gains tax exclusion under 26 U.S.C. § 121, which would not be available to heirs if the residence were gifted during the lifetime of the owner.

Weighing the options

Whether to create an irrevocable trust in any particular situation requires a careful assessment of the client’s objectives, assets, income, health and care needs, family dynamics, and other considerations. It can work well in the right circumstances, but it’s always best to consult with experienced legal counsel to make an informed decision.

You can download free, or buy copies of, a useful guide to nursing home problems produced by the National Senior Citizens Law Center. Just click here.

The guide covers problems in areas ranging from admissions and payment to care-related issues and evictions.

Each topic begins with “What You Hear” answered by a brief statement of “The Facts.” Here are a few examples:

What You Hear: “We can’t admit your mother unless you sign the admission agreement as a ‘Responsible Party.’” The Facts: A nursing home cannot require anyone but the resident to be financially responsible for nursing home expenses.

What You Hear: “Medicaid does not pay for the service that you want.” The Facts: A Medicaid-eligible resident is entitled to the same level of service provided to any other nursing home resident.

What You Hear: “You must leave the nursing home because you are refusing medical treatment.” The Facts: Refusal of treatment, by itself, is not an allowable reason for eviction.

Each topic then contains a detailed explanation of the law supporting the patient’s rights.

The guide is a highly readable resource for patients and their families. But as the guide cautions, it is “not a substitute for the independent judgment and skills of an attorney or other professional. If you require legal or other expert advice, please consult a competent professional in your geographic area.”