2006 Medicaid Rules Changes. What You MUST Know About the 2006 Federal Deficit Reduction Act

Transcription

1 2006 Medicaid Rules Changes What You MUST Know About the 2006 Federal Deficit Reduction Act

2 Published by: Phylius Press 5021 W Oak Highland Dr Nashville, TN (888) by K. Gabriel Heiser, J.D. All rights reserved. No part of this book may be reproduced in any form, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system, without prior written permission from the copyright owner unless as allowed by federal law. For additional copies:

3 Table of Contents Introduction... 2 Lookback Period... 2 Penalty Period... 4 Home Equity Limit... 7 Annuities... 7 Life Estate Purchase... 9 Rounding and Multiple Transfers Documentation of Citizenship Summary Next Action Step by K. Gabriel Heiser 1

4 Introduction The federal Deficit Reduction Act was signed into law on February 8, It made massive changes to the rules affecting qualification for the Medicaid program. That s the federal program administered by the 50 states that pays the entire cost of a long-term stay in a nursing home, if you know how to qualify! This report will outline the major changes in the Medicaid rules that affect qualification for nursing home Medicaid. Lookback Period Old Rule: When you went to apply for Medicaid, the state caseworker would ask you if you made any gifts within the last three years. That three-year period is known as the lookback period. If you answered Yes, then they would look at the value of the gifts you made, the dates you made them, and calculate the penalty period (see next section for an explanation of penalty periods). The bottom line was, if you made a gift of any amount more than three years before you applied for Medicaid, it was off the table, and could not count against you. NOTE: The only exception to the above is if you transferred assets into certain types of trusts, in which case the lookback period could be five years by K. Gabriel Heiser 2

5 New Rule: For any gift made on or after February 8, 2006, the Medicaid lookback period is extended from three to five years (whether made to an individual or to a trust). Now here s where it gets confusing. Say you made a gift on January 1, That s before the change to the new rules, obviously. So the three-year lookback period applies, not the five-year lookback period. But when you apply for Medicaid, the form may simply ask if you ve made any gifts within the last five years. If you go back five years from today (2006), you d have to include that 2003 gift. But that s wrong! Remember, the five-year rule only applies to gifts made on or after 2/8/06, so that gift made in 2003 cannot be counted against you. Be sure you understand this, so that you do not get tricked by the caseworker or worry unnecessarily over old gifts. As a matter of fact, this change really will have no effect until more than three years have gone by, i.e., after February 8, At that point, the lookback period will be extended one month for each month that passes. In other words, for an application made on 12/8/09, the lookback period will be three years, 10 months (i.e., only back to 2/8/06) by K. Gabriel Heiser 3

6 Penalty Period A penalty period is the period of time that the state will not cover a person who applies for Medicaid for nursing home expenses, because the person made a gift. The idea is to punish (or penalize ) a person who gives away all their money and then turns around and applies for Medicaid, claiming to be broke! So the government has a rule: you are allowed to make a gift, but they will not cover you for a certain period of time because of that gift. Here s how the states calculate the penalty period: Take the value of the gifted property and divide by the average cost of a nursing home in your state. Each state sets its own figure, and it changes year-to-year, to keep up with inflation. So let s say your state penalty divisor is $5,000. If you make a gift of $50,000, you simply divide that amount by $5,000 and you come up with 10, so the penalty is 10 months. Old Rule: Under the rules in effect prior to February 8, 2006, the penalty period began to run the minute you made the gift. So in the above example, if you gave away $50,000, that 10- month penalty period began on the date you made that gift. So if that gift left you impoverished, you would not be eligible for Medicaid coverage for 10 months from the date of the gift. The nice thing about this rule is that you were able to make gifts to children before you needed nursing home care, and then if you needed care later, you could get Medicaid assistance immediately, once the penalty period had expired. That no 2007 by K. Gabriel Heiser 4

7 longer works, under the new rule! Let s take a look at why that is. New Rule: For all gifts made on or after February 8, 2006, the starting date of the penalty period is changed from the date you made the gift to the date you would otherwise be eligible for Medicaid coverage had you not made the gift. Example: On July 1, 2006, you made a gift to your children of $50,000. Your state s penalty divisor is $5,000, so there s a 10- month penalty. It s now a year later, and you need to move into a nursing home. When you apply for Medicaid, the caseworker will tell you, I m sorry, but because you made a gift of $50,000, you are disqualified from Medicaid coverage for 10 months, starting today! In other words, the clock does not start ticking until you apply for Medicaid. You got no credit for the full year that already passed, after you made that gift. This is a huge difference from the old rule! In most cases, the reason for the gift is irrelevant: if you made charitable donations, or gifts to grandchildren for college, etc., all such gifts can cause a penalty period if you later need to apply for Medicaid within five years of the gift. Lookback vs Penalty Period: It s easy to get the lookback period confused with the penalty period. Say you made a gift of $20,000 on July 1, That gift will be within the threeyear lookback period if you apply for Medicaid before July 1, So are you in trouble? No, not at all! The reason is that 2007 by K. Gabriel Heiser 5

8 the penalty period has run out long ago: Because the gift was made under the old rules, you take the amount of the gift ($20,000), divide by the state penalty divisor (assume it s still $5,000) and you get a penalty of four months. But because it was made before 2/8/06, that four months started running on the day you made the gift. Hence, it expired on November 1, Result: Yes, the gift was made within the lookback period, but no, it can no longer count against you, because the gift penalty expired long ago. What can you do if you made gifts and now need to apply for Medicaid coverage of your nursing home expenses? First of all, start by looking at the dates of all the gifts made by either you (or your spouse, if you re married). Next, determine if a gift is within the lookback period. If it s not, you can ignore it, no matter what it s value is. If it was made within the lookback period, the next step is to determine the value of the property that was given away. If it was cash, it s easy to value; if it was a house or stock or other asset, you need the fair market value on the date of the gift. Then you need to apply either the old rule (penalty period runs from date of gift) or the new rule (penalty period runs when you apply for Medicaid), depending on which applies. There are a number of exceptions that could get you off the hook if you find you are within a penalty period. These are discussed in my book, How to Protect Your Family s Assets from Devastating Nursing Home Costs-Medicaid Secrets by K. Gabriel Heiser 6

9 Home Equity Limit Old Rule: Your house and adjoining property is completely exempt, no matter how much it is worth. New Rule: For all Medicaid applications filed after 1/1/06, if your equity interest in your home and adjoining property exceeds $500,000, you are not eligible for Medicaid nursing home coverage. (Under the federal law, a state may increase that limit to as high as $750,000.) This is an all-or-nothing rule: if your equity in your home is worth even $1 more than $500,000, the entire home is no longer an exempt asset. Exceptions: The above limit will not apply if your spouse, dependent child under age 21, or blind or disabled child resides in the home. Annuities In essence, an annuity is a type of investment where you hand over a certain amount of money to an insurance company, and in exchange they promise to pay you a certain amount of money every month for the rest of your life (or for a certain number of months, depending on the deal). What do they have to do with Medicaid planning? Well, let s take a look 2007 by K. Gabriel Heiser 7

10 Old Rule: Prior to the new law, you could go out and purchase a certain type of annuity and it would immediately be a noncountable asset. That s right, the money effectively disappears for Medicaid purposes; only the monthly payments back to you are counted (as income). So, for example, if you only had $50,000 to your name, you could have purchased an annuity for $50,000 and immediately qualified for Medicaid. If you died a year later, the remaining annuity payments could go to your children, for example. Not a bad deal! New Rule: For all annuities purchased on or after February 8, 2006, the state where you live must be named as the beneficiary upon your death, for the total amount of Medicaid benefits paid on your behalf. So in my example above, if you purchased that annuity and immediately qualified for Medicaid payment of your nursing home bills, and died a year later, the state has to be repaid first, out of the remaining annuity payments, before your children get anything from the annuity. Exception #1: If you are survived by a spouse or minor or disabled child), the state must wait its turn. Only if the annuity is still paying out after those individuals are all deceased will the state be entitled to be reimbursed. Exception #2: The state does not have to be named as the beneficiary if the annuity is an Individual Retirement Annuity or annuitized proceeds of an IRA by K. Gabriel Heiser 8

11 Married Couples: In some cases, it is possible for the healthy spouse (that is, the one living in the community) to purchase a special type of annuity to protect virtually an unlimited amount of assets. Because of the complications of how to do this, I have devoted an entire chapter of my book to this topic, including numerous examples and calculations. As you can see, the use of annuities can be very powerful since it makes money disappear but because of all the rules, can also be very confusing. They must be handled very carefully to avoid you getting in trouble. My book, How to Protect Your Family s Assets from Devastating Nursing Home Costs-Medicaid Secrets, goes into the ins and outs of annuities in great details, with numerous examples, to help you understand how they work. Life Estate Purchase Old Rule: You could sell your home or simply take a big chunk of your savings, if you did not own a home and invest it in the home of one of your children. By writing the deed a certain way, you were then immediately eligible for Medicaid coverage should you have to move out of the child s home and into a nursing home, even if that happened the next day. Another benefit is that in most states, upon your death, the state will be unable to seek reimbursement of the Medicaid benefits it paid out on your behalf from your interest in the child s home by K. Gabriel Heiser 9

12 New Rule: You must live in the child s home for at least a year after you invest in the child s home, before you move into a nursing home. If you move out before the year is up, your purchase will be treated as a gift to the child with huge penalty consequences: you will be ineligible for Medicaid for many, many months, probably for years. Deed Language: The actual wording of the deed, and the calculations involved in figuring the percentage ownership, are critical. This is all discussed in my book, How to Protect Your Family s Assets from Devastating Nursing Home Costs Medicaid Secrets. Rounding and Multiple Transfers Old Rule: As discussed above, making a gift causes a penalty period, depending on the size of the gift. So a gift of $10,000 in a state with a $5,000 penalty divisor would cause a twomonth penalty. What if you gave away $9,999? Under the old rules, many states would round down any gift that was equal to less than a single month s penalty divisor. Accordingly, you could give away $9,999 and only incur a penalty of one month, since it is slightly less than two-months penalty. Some attorneys recommended that clients do this every month, effectively doubling what they could give away, over time. New Rule: Game over.! States are no longer permitted to round down or avoid any fractional penalty period. So in the 2007 by K. Gabriel Heiser 10

13 above example, a state can now round the gift up $1 and the gift-giver would face a two-month penalty. All Gifts Added Together. In addition, all gifts made within the lookback period are added together, so there really is no benefit to making a series of small gifts, anymore. Example: You make a gift of $5,000 today, $5,000 next month, and $5,000 the month after that. Under the old rule, all of those gifts expired at the end of the month in which they were made. Now, however, if you apply for Medicaid within 5 years, the gifts are simply totaled up ($15,000), and the resulting penalty period (3 months, in our example) starts running on the date you applied. So, as you can see, whether you made one large gift of $15,000 or three smaller ones really made no difference! Documentation of Citizenship Beginning July 1, 2006, anyone applying for or receiving Medicaid (at time of redetermination) will need to prove that they are either a U.S. citizen or national, or a qualified alien. Such proof may only be made by one or more of the following: U.S. passport U.S. birth certificate Certificate of Naturalization (Form N-550 or N-570) Certificate of U. S. Citizenship (Form N-560 or N-561) A valid state-issued driver s license or i.d. document but only if the state requires proof of U.S. citizenship prior 2007 by K. Gabriel Heiser 11

14 to issuance or obtains and verifies the individual s Social Security Number Such other documentation as the Secretary of Health and Human Services may allow, by regulation. As of this writing, such regulations have not yet been published. Because it may take some time to obtain the above documentation, the family should assist the prospective Medicaid applicant in getting this documentation as soon as possible. Summary Bottom Line: There are added complexities in planning to maximize the amount of assets a family unit can retain and still qualify for Medicaid coverage in a nursing home. Every situation is different, both because of the asset mix and values, the life expectancy and health of the client/applicant, and the family situation. However, there are still many powerful and effective techniques available to preserve and protect the family assets. Anyone who is in a nursing home and paying privately for such care, or a family member who is facing the reality of seeing another family member heading toward the nursing home, should be encouraged to meet as soon as possible with a knowledgeable elder law attorney who specializes in Medicaid planning. It is almost never too late to save the family money! 2007 by K. Gabriel Heiser 12

15 Next Action Step To learn all the tricks and secrets of the best elder law attorneys in the U.S., be sure to obtain your copy of How to Protect Your Family s Assets from Devastating Nursing Home Costs Medicaid Secrets. For example, my book will answer the following questions: How can you make gifts that incur no penalty period, even if made within the lookback period? How can you reduce your home equity if you are over the $500,000 limit without incurring a penalty? Why is a reverse mortgage not a good way to do this? Who should be the owner of the annuity? Who should be the annuitant? When is a promissory note superior to an annuity? How should you structure the promissory note so as not to run afoul of the new federal rules? When should you use a life estate purchase and what technique is better and avoids the one-year residency requirement? When should you use a trust for purposes of making gifts? Visit today to find the answers to all these questions, so you can begin to protect your family s assets now! 2007 by K. Gabriel Heiser 13