Medicaid eligibility rules. .

• Author: Knoepfle, Terry W.
• Position: Part 2

This two-part article provides a road, map to current Medicaid eligibility law. Part II, below, describes a variety of planning strategies and opportunities to help a tax adviser counsel elderly individuals and married couples, as well as concerned members of their families. It also discusses various pitfalls, including state law variations to which advisers must be attuned.

This two-part article provides an analysis of Medicaid eligibility rules and planning techniques. Part I, in the May 2003 issue, examined the critical rules on timing a Medicaid application, transferring assets to trusts to preserve family wealth and understanding the tax consequences of asset transfers and the potential liability of the Medicaid applicant's adviser. Part II, below, considers several other strategies available to protect an individual's assets in the event of Medicaid assistance, and a number of additional techniques particularly suitable for married couples.

Planning Techniques for Singles

Converting to Exempt Assets

By converting nonexempt assets (such as cash) into exempt assets, an individual can protect his or her assets from being deemed "resources" that will restrict Medicaid eligibility. Under 42 USC Sections (Sections) 1396r-5(c)(5) and 1382b(a), an individual's exempt assets include, among other items:

* A residence;

* Household goods;

* Personal effects;

* An automobile;

* A burial space;

* Tools of wade;

* Certain resources of a blind or disabled person; and

* Insurance policies with a cash value of less than $1,500.

Exempt assets are categorized by both Federal and state law, so the specific exemptions and amounts vary from state to state.

An individual can convert liquid assets into an exempt residence asset without having to buy a more expensive new home. For example, he or she can improve a residence by installing a new roof, heating or air conditioning system, kitchen or bathroom. He or she can also make repairs or pay down the mortgage.

In addition, the individual can purchase other exempt property (e.g., an automobile or a burial plot). Some states, however, limit the value of the exempt automobile to a set amount. Also, an individual can prepay bills (e.g., expenses for estimated income taxes, real estate taxes, insurance premiums or utilities). However, the true value of exempt property is reduced by the real possibility of collection by the state from a Medicaid recipient's estate.

Using a Split Transfer

A split transfer (a "50/50" split) offers a way for an individual to shorten his or her ineligibility period without having to gift away all of his or her property before the 36-month lookback period. Because most individuals cannot anticipate that they will need nursing home care 36 months in advance, they do not want to make large gifts based on the mere possibility of a need for future nursing home care. More commonly, individuals discover that they need Medicaid assistance when they have fewer than 36 months in which to accomplish their Medicaid planning.

Under the 50/50 split-transfer strategy, the prospective Medicaid applicant gifts half of his or her property during the 36-month lookback period, and retains the other half. The gift counts toward calculating the ineligibility period. The applicant then "spends down" the retained assets. In most cases, the ineligibility period will be half of what it would have been had the applicant gibed his or her entire property.

Example 1: L lives in a state in which the monthly cost for a nursing home is $4,000. He has $240,000 in assets. He made a gift to his daughter, M, of $120,000 on June 1, 2002. L applied for Medicaid on May 1, 2003. The gift to M is within 36 months, and counts in calculating L's ineligibility period, which is $120,000/$4,000 = 30 months from June 1, 2002. L uses the remaining $120,000 of his assets to pay for his nursing home care during the 30-month ineligibility period.

Example 2: The facts are the same as in Example 1, except, on June 1,2002, L spent the remaining $120,000 to pay off his mortgage. L executed a will leaving his house to M. He applied for Medicaid on May 1, 2003. The gift to M is within 36 months, and counts toward his ineligibility period, which is $120,000/$4,000 = 30 months from June 1, 2002. When L dies, M will inherit the house without any mortgage.

If L had instead gibed $240,000 to M on June 1, 2002, his ineligibility period would have been $240,000/$4,000 = 60 months from June 1, 2002, and M would have inherited a house subject to a $120,000 mortgage. M's net inheritance is the same, because the mortgage liability offsets the extra funds. By using a split transfer, L can cut his ineligibility period in half. From the $120,000 M received, she pays for L's nursing home care only during the period of ineligibility, through Nov. 30, 2004 rather than May 31, 2007.

The split-transfer technique is a conservative approach that offers a substantial savings in assets (net of medical care expenses) available to pass on to heirs. However, the 50/50 formula will often need to be adjusted to account for increases in nursing home costs and other factors, including any income an individual receives.

Compensating Family Members for Caregiving

Many families try to shift assets from the prospective Medicaid applicant to other family members as compensation for prior services (such as providing care). An individual can pay reasonable compensation to family members for providing care, but the debt must be a valid one. A New York court (16) denied the expense when a debt was a sham arrangement to transfer funds away from the Medicaid applicant, and it did not have the indicia of a bona fide loan. However, a Connecticut court permitted an expense when the individual and his relative had a valid written agreement to pay for the care. (17)

Generally, such an arrangement is embodied in a written contract that may provide either for periodic payments or a lump-sum payment to a caregiver. A lump-sum payment under...