Medicaid eligibility rules.

• Author: Knoepfle, Terry W.
• Position: Lomg-term care in nursing homes - Part 1

Approximately half of all long-term care in nursing homes is financed through Medicaid, but an individual's eligibility is governed by a maze of Federal and state laws, regulations and interpretations. This two-part article provides a road map to current Medicaid eligibility law for those who counsel the elderly. Part I includes a detailed analysis and discussion of the critical rules on timing the Medicaid application, transferring assets to preserve family wealth, using trusts under Medicaid provisions and understanding the tax consequences of asset transfers and the potential liability of the Medicaid applicant's adviser.

Medicaid is a cooperative Federal-state government program that pays for medical care and long-term care (LTC) for those who cannot afford it. The Medicaid program is administered by the states under state law. As long as state law conforms to Federal requirements, the Federal government will make substantial payments to fund the state programs. Because Federal Medicaid law gives some latitude to the states, each state may have slightly different rules.

The elderly are prime candidates for Medicaid, because they are caught between a rock (fixed retirement income) and a hard place (growing medical costs and the specter of nursing home care). For those who turned 65 in 1990, men had a 33% chance and women had a 52% chance of entering a nursing home sometime before death. (1) Given the statistics, many individuals and their children will likely turn to their tax advisers for counsel on protecting family assets as the prospect of LTC approaches. (2)

This two-part article provides an analysis of Medicaid eligibility rules and planning techniques. Part I analyzes and discusses the critical rules on timing a Medicaid application, transferring assets to preserve family wealth, using trusts under Medicaid provisions and understanding the tax consequences of asset transfers and the potential liability of the Medicaid applicant's adviser.

The Medicaid Planning Environment

In 1997, Congress passed a law attempting to reduce government spending on Medicaid by deterring professionals from incorporating Medicaid eligibility considerations into their client's overall estate plans. Generally, anyone who counsels an individual for a fee to dispose of assets in a manner that results in imposing an ineligibility period for Medicaid is guilty of a misdemeanor. (3)

This law has been held unconstitutional in one Federal court, (4) but has not yet been formally repealed. Various professional groups who represent the elderly (including bar associations) continue to lobby Congress to repeal this law. Nevertheless, because the law could theoretically result in a prosecution, those who counsel the elderly as to their Medicaid rights should consider several safeguards up front.

First, advisers should disclose to clients that the law exists, but that the courts and the Department of Justice consider it unconstitutional. Thus, it is very unlikely that the law will ever be enforced. Second, advisers should document that they have so advised their clients. They should also inform clients about options that do not involve a planned asset transfer, such as properly timing the application for Medicaid assistance in light of past asset transfers.

In addition, advisers should counsel clients to consider several other LTC alternatives. (5) For example, LTC insurance has become more attractive after legislation permitting partial deductibility, of premiums. (6) For some families, in-home care provided by family members may be another alternative.

Advisers should inform clients that Medicaid may limit their choices, as nursing homes in some states allocate only a percentage of their available beds to Medicaid-eligible residents. (7) Private-pay residents and those who carry LTC insurance generally have the most freedom to choose among nursing home alternatives. In this context, elderly family members might have interests that conflict with other family members (8) and should consider separate representation.

Medicaid Eligibility

Before Medicaid will cover an individual's medical expenses, 42 USC Section (Section) 1396a(b) requires that he or she must:

* Be a U.S. citizen or resident alien;

* Reside m a state that provides Medicaid benefits;

* Be 65 or older, blind or disabled and eligible for the Supplemental Security

Income (SSI) program, or meet other state Medicaid requirements; (9) and

* Have limited resources and income (the limits vary considerably from state to state).

In general, under Section 1396a(a) (17)(D), the families of the elderly cannot be required to pay for their medical expenses, including LTC. Likewise, states cannot consider the financial resources of family members (other than an individual's spouse) in determining Medicaid eligibility. The latter prohibition prevents states from being reimbursed by family members for services provided to an individual.

Recovery of Benefits

Definition of estate: Under Section 1396p(b)(4), for Medicaid purposes, the term "estate" means the probate estate, as defined under state law. At the state's option, the term may also include assets conveyed through joint tenancy, tenancy in common, survivorship, life estate, living trust or other such arrangements. Advisers should determine the specific rules in their home states.

Although the statute also refers to "assets in which the individual had any legal title or interest at the time of death (to the extent of such interest)" state law generally provides that the holder of a life estate has no legal interest at the time of his or her death. Also, a joint tenant or a trust beneficiary (when the beneficiary is not the grantor) does not have any such legal interest on his or her death. Thus, the language is either meaningless or contradictory on its face.

Persons subject to estate recovery: Under Section 1396p(b)(1), states must attempt to recover benefits from the recipient's estate or front the sale of property subject to a Medicaid lien (discussed below) if the recipient falls into one of the following groups:

* Recipients who received services in a medical institution (e.g., a hospital or a nursing home) and who were required to expend substantially all of their income for such services, if the state determined that the recipient could not reasonably expect to be discharged and return home.

* Recipients who were 55 years old or older when they received benefits for nursing facility services, home and community-based services and related hospital and prescription drug services (the state can expand its estate recovery to cover expenses for other services).

* Recipients who received Medicaid benefits for nursing facility and other LTC services and covered under a LTC insurance policy issued pursuant to a program that disregards assets and resources for...