September 05, 2018
Author: Amy E. Dougherty
Organization: Bluegrass Elderlaw, PLLC
I. MEDICAID ELIGIBILITY
Most people cannot pay for their nursing home stay without government assistance. In fact about, 70% of people who live in nursing homes in Kentucky have a portion of their bill paid by Medicaid.
Eligibility requirements to receive Medicaid assistance: 1) the individual must be in a nursing home; 2) the individual must need skilled or intermediate nursing care; 3) the individual must meet specific financial requirements regarding income and resources.
The individual must be a nursing home facility – assisted living does not meet this criteria. The individual must need a certain level of care. This care must be skilled or intermediate nursing care. The level of care is defined by regulation. See 907 KAR 1:022, section 4. Essentially the level of care is determined by your inability to accomplish at least two of six activities of daily living. The activities of daily living are eating, walking, bathing, dressing, toileting, and transferring. You must have been in a facility for 30 days or longer. You must be in a Medicaid eligible bed. The Commonwealth of Kentucky grants certificates of need to facilities designating the quota of Medicaid beds.
The final criterion for Medicaid eligibility is financial. The Medicaid office will review separately your income and your resources, which are normally called assets.
A. Income Allowance for Single and Married Individuals
1. What is Income?
What does the Medicaid office consider income? The Medicaid office will consider all income, whether earned or unearned, including lump sums of money. This includes gross wages, net self-employment, Social Security payments, pension payments, IRA mandatory withdrawals, and Roth IRA withdrawals. Interest, dividends, annuity proceeds, gifts, and rental property income will also be included.
Medicaid does not consider the following to be income: Equity loan proceeds, reverse mortgage money taken as monthly income, any transfers between spouses, credit card cash advances, war reparations, or $90 of veterans administration pension benefit.
2. Allowed income
An institutionalized person may have income of $2163 or less per month. This is three times the rate of the federal maximum SSI, supplemental security income, level. The person’s income will be paid to the nursing home every month for the care received.
For a single person, the allowed income may cover, other than the nursing home tab, health insurance premiums and other health related needs, and $40 to cover personal needs such as haircuts.
3. Income for the Community Spouse
If an institutionalized person is married and their spouse does not need nursing home care, this person is referred to as the community spouse. The Community Spouse may keep his or her income with no contributions required to be made to the institutionalized spouse. Thus, if community spouse makes $4000 a month income, she may keep all of this income for herself.
On the other hand, if the community spouse makes less than $1938.75 per month gross income in her own name, then the institutionalized spouse’s income may be transferred to the community spouse to bring her income to that level. This is called the community spouse income allowance or the minimum monthly maintenance needs allowance.
This income allowance includes a presumption that shelter costs $581.63 a month. To the extent that shelter costs actually exceed this amount, the income allowance for the community spouse may be raised up to a maximum of $2931 a month. To calculate the shelter expense, add the community spouse’s rent or mortgage, property taxes, homeowners insurance, utilities expenses, and $34 or actual telephone expenses. This shelter expense is most useful where a community spouse resides in assisted living. Otherwise, it is unlikely that these expenses will exceed $581 per month and there will be no upward adjustment to the community spouse income allowance.
4. Excess Income & Qualified Income Trusts
For persons with more income than the maximum $2163 per month to be eligible for long term care Medicaid, his or her excess income must be placed in a qualified income trust, also referred to as a QIT or a Miller Trust. Thus, a person who would have too much income to qualify for Medicaid will use this legal fiat to separate from himself the income which would otherwise make him ineligible. The QIT has several requirements: 1) It may only contain income (no resources); 2) it must be irrevocable; 3) it may only terminate at the death of the resident; 4) it must be placed in a separate bank account using the resident’s Social Security number; 5) no child support, alimony or home maintenance expenses may be paid out of the QIT; 6) the portion due to the nursing home for the patient’s charges must be paid before administrative costs; 7) lastly, the Department of Medicaid Services must be the named beneficiary. The grantor and the trustee in the presence of a notary must sign these documents. The resident’s agent normally signs for the grantor. Elder law practitioners routinely provide QIT documents for clients. Many practitioners will share their document template request.
B. Resource Allowance for Single and Married Persons
1. What is a Resource?
A resource is any asset that an individual or couple own or have access to which may meet basic needs of food, clothing, and shelter. This includes all assets owned by a revocable trust. It also includes a disclaimed inheritance because the person would have a right to assert a claim.
Income is not an asset in the month of receipt. But if income is not spent in the first month then it becomes an asset the next month. Medicaid does not consider liabilities. The value of assets are not reduced by the person's debt. One exception is rental property. A mortgage debt will be subtracted from the fair market value of rental property. The Medicaid office will not reduce a person’s resources by the amount of his credit card debt, for example.
2. Single Persons
A person considered to be single by the Medicaid office is resource eligible when his or her countable resources are less than $2000. Medicaid considers a person single if the person has never married, is widowed, is divorced, or married to a person who was also in a nursing home.
3. Married Persons
If a spouse lives at home, with the child, in a personal care residence or an assisted living facility, the spouse is still considered a community spouse. Medicaid rules were drafted to protect community spouses. A community spouse may keep half of the couple’s countable resources up to a maximum of $117,240. This is called the community spouse resource allowance. For couples who have countable assets less than $23,448, the community spouse keeps all of the assets.
C. Exempt Resources
Resources that are excluded from consideration by Medicaid are homestead property and all contiguous property, one vehicle regardless of value, household personal effects, and qualified plans. For a single person, the home will lose its exempt status after the resident has lived in the nursing home six months. This exemption is not applicable for homes valued over $543,000. For a married person, the homestead is exempt as long as the community spouse resides in it.
A resident may own a life estate without any penalty to qualify for Medicaid. However, the Medicaid office will seek estate recovery up to the level as determined by the Medicaid tables.
The vehicle will be exempt if it can be used to obtain medical treatment for the resident. A letter from the family physician stating that the resident is capable of being transported in the vehicle is required for a single person. A vehicle owned by a community spouse is always exempt.
Pensions, IRA’s, Roth IRAs, 401K’s, and Keogh plans are exempt in Kentucky. Medicaid offices in Indiana consider qualified plans to be countable assets. Medicaid offices in Ohio only consider the community spouses plan to be excluded from consideration.
Also excluded is property that is essential for support for the individual or spouse and that is used in a trade or business. In Kentucky rental property is not considered a trade or business.
A life insurance policy valued up to $1500, if it is designated as a burial reserve, is also excluded.
And an irrevocable funeral contract up to $10,000 per person is an exempt resource. Larger amounts may be approved but the Medicaid office must review them in Frankfort rather than in the county where you apply.
Jointly held property will be considered a resource of the Medicaid applicant, unless that presumption is rebutted. The resident may show that he or she does not contribute to or withdraw from the jointly held checking, savings, CD, or savings bond. A written statement from account holders verifying their interest in the account may demonstrate ownership. Also, the resident’s name should be removed from the joint account. The resident can also show that litigation would be required to force the coowner to release his or her portion. This constitutes a co-owner’s refusal to sell.
D. Resource Assessment for Married Couples
A community spouse needs as much protection as possible from impoverishment that may be caused by the expenses of an institutionalized spouse. At the start of a continuous nursing home stay, the community spouse or someone on his or her behalf (with a proper POA) should visit the Medicaid office for a resource assessment. The form is referred to as a PA-22. This resource assessment is a calculation of the couple’s countable resources. Then that level of resources is compared to the Medicaid resource allowance to determine when the institutionalized spouse will be resource eligible for Medicaid.
The goal of the resource assessment is to permit the community spouse to keep half of her wealth. Converting countable resources that are over the community spouse’s share into exempt resources can maximize these assets for the couple. For example, a couple may own a home, one car, a savings account, a vacation cabin, IRAs and an insurance policy with a cash surrender value. Excluded from consideration by the Medicaid office will be the home, the car and IRAs. Included will be the savings account, the vacation cabin, and the cash surrender value of the insurance policy. The total value of the countable assets is added together. The community spouse keeps half of the value and the institutional spouse keeps $2000. The remaining must be spent down before the institutional spouse will be eligible for Medicaid. If half of the couple’s countable resources is more than $117,240, then the excess amount will also have to be spent down.
Instruct your client to never ever leave the Medicaid office without
a piece of paper in hand signed by the caseworker containing the listing
of countable assets in a resource assessment. The date is critical.
Anything spent for the couple after that date is considered part of the
spend-down to qualify the institutional spouse. Even if you are missing
items or have incorrect values, the paper is critical to lock in the date upon
which the couple can begin spending down their assets.
II. ESTATE RECOVERY
When a Medicaid recipient dies, the Medicaid office seeks to recover what has been paid for the recipient from the recipient’s expanded probate estate. With some exemptions, Medicaid will seek to recover assets conveyed to a survivor, heir or other assign of the deceased recipient through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement.
If there is a surviving spouse, a minor child, a disabled child of any age, or assets under $10,000, then there is no estate recovery. It is not possible to owe more than the expanded probate estate’s value. Also the family is not personally liable.
If the estate has liquid assets, executor’s fees and any documented estate expenses may be deducted, but the rest will have to be sent to the State Treasurer.
Kentucky does claim to recover from life insurance beneficiaries however this matter is usually not pursued.
For a home owned by joint tenancy with an adult child, the portion owned by the Medicaid recipient at the moment before death is subject to estate recovery. This is also true if the home is owned by the Medicaid recipient’s revocable trust or where the Medicaid recipient died owning a life estate. The Medicaid recovery may be discounted by 5% executor’s fee, 7% broker’s fee, and reasonable attorney’s fee. Also you may discount below the PVA value if the house is in poor condition that can be documented through an independent appraisal. Also it may be possible to discount for expenditures undertaken by family members to maintain the home if these matters have been fully
Where a Medicaid recipient dies owning an annuity, the state will receive the monthly checks. Usually the state will take the discounted present value of the remainder. For annuities on the life of the community spouse, the state will not recover payments unless the community spouse dies before the payments cease.
IRAs currently are exempt assets. At death they passed to the designated beneficiary. It is critical to make sure your clients name a beneficiary. If the proceeds are payable to the estate then they are subject to estate recovery. The value of life estates is recoverable in estate recovery. Medicaid values the life estate as of the moment before the recipient’s death. Because of this life estates are not a valuable Medicaid planning tool. It is best to transfer the home and then give the recipient a renewable lease or rental agreement.
III. MEDICAID ASSET PLANNING
Medicaid asset preservation and planning helps to preserve for the Medicaid recipient and the recipient’s family some hard earned wealth. Because the biggest risk to family assets for the middle class is end-of-life healthcare expenses, Medicaid planning really is estate planning for middle-class America. Planning is used to preserve monies for the institutional spouse, the community spouse, or the resident’s heirs. All of this planning is done in way that complies with Medicaid regulations. Medicaid planning focuses on complying with the federal law found at 42 USC Sect 1396 et seq. and state regulations implementing that law.
The amount of family wealth that can be preserved through planning depends on what type of assets are involved, what the family situation is, the proximity of the resident’s need for nursing home assistance, and how long the resident lives in a nursing home.
A. Who Gets to Keep What?
Some planning is done merely to increase the quality of life available to the institutional person. Medicaid does not pay for many things that one may consider essential and only allows $40 on month of the resident’s own money to be used for personal needs. Planning will often produce monies to be made available for the institutional person to have clothing, dental work, eyeglasses, hearing aids and batteries, toiletries, cable television and a telephone in his or her room. Many families plan in order to pay for a private nursing home room.
Some Medicaid planning is done to protect additional assets for the community spouse, so his or her life will be easier and more stable. Additionally, some Medicaid planning accomplishes the goal of an institutional person to leave something to their children.
B. Asset Preservation
1. Example #1
Let’s look at a simple example of asset preservation. Assume a married couple has $200,000. The couple needs to pay off debt ($10,000), buy a new car ($25,000), and pay for two funerals ($15,000).
The inappropriate way is to spend money on these items and then get a resource assessment. In this circumstance the community spouse would only retain half of the assets after these items have been purchased. She would retain $75,000.
The appropriate way to address these family needs is for the couple to obtain their resource assessment first. Community spouse will retain $100,000. Then these items can be purchased out of the spend-down required from the institutional spouse’s share. The remainder of the spend-down ($48,000) can then be spent on items to enhance the community spouse’s quality-of-life. This may include upgrades to the family home, or paying the couple’s legal bill.
Gifting, also called the transfer of resources, is a primary means to achieve Medicaid asset preservation. The Medicaid office will consider any transfer a gift if the Medicaid applicant did not receive fair market value in return. This ranges from a cash gift made to a child, the transfer of a home for less than its fair market value, or paying cash to an in-home sitter without contract to verify the employment.
a. The Five Year Look-Back & Penalty
All gifts made within the five years prior to applying for Medicaid are prohibited transfers and create a period of Medicaid ineligibility. The Medicaid office applies a transferred resource factor to the amount of gift to create the period of ineligibility. For 2014, this factor is $196.52 per day. Thus, a $200,000 gift creates a period of ineligibility of 1017 days (about 2 years and 9 months).
Critical to planning is to understand that this penalty period does not start until the Medicaid applicant is “otherwise eligible” for Medicaid but for having made the gift. That includes all of the criteria previously addressed.
An applicant must actually apply for Medicaid and be eligible in every way except for the gift before the clock starts running on the penalty period. Just like it is vital to obtain a written resource assessment signed by the caseworker for married persons, it is vital to obtain a Medicaid denial in writing which shows the starting date and the ending date for the period of ineligibility.
b. Curing a Transfer
How can you cure a transfer of resources? The resources could just be returned to the Medicaid applicant. Often, however, the recipient has used up the money or is unwilling to return it. The family could also merely wait for five years to expire. They will have to privately pay during this 60 months. For families with a lot of resources, any amount over that which is needed to fund five years of a nursing home stay could be gifted and then wait out the penalty period. For most families a combination of returning part of the gift and allowing the time to expire will cure a transfer of resources. This is called half-a-loaf gifting because the portions of the gift that are returned reduce the penalty period. Usually approximately half of the amount transferred can be preserved, but it depends on many factors. This is a complicated scenario.
3. Example #2
Let’s look at a couple of examples. Single Person. A single woman has a house worth $120,000 and $90,000 cash. She can transfer the cash to her child generating a transfer of resources penalty. Then she should sell her home and use the money from her home to pay for her nursing home stay through the penalty period. If the monies from her home plus her income will pay for the nursing home during the penalty associated with the cash gift, this mother has preserved assets for her heir.
Married Persons. For a married couple, a community spouse can increase the value of her wealth by moving to a higher priced home. This converts a countable asset (the money used to buy an upscale home) into an exempt asset (the upscale home).
Annuities can be used as a planning tool, but they must be Medicaid compliant. They have to be actuarially, to be irrevocable and nonassignable and pay out in equal installments. The State must be the first named beneficiary unless there is a community spouse or minor or disabled child. In that case, the State must be the second named beneficiary. The State will receive the proceeds up to the amount paid on behalf of the institutional individual or his spouse. In order to determine actuarial soundness you must use Medicaid's life expectancy table not that of the IRS. The annuity must be immediate, not deferred. The purchase of such an annuity converts a resource into an income stream and is useful when one spouse is healthy.
4. Promissory Notes
Another planning tool is promissory notes. For example, a parent could transfer money to a child and in return obtain a promissory note. The promissory note must be actuarially sound, irrevocable, non-assignable, and payout and substantially equal installments. There is no requirement to name the state as a beneficiary however self-canceling installment notes are not permitted.
Revocable living trusts are useless as a Medicaid planning tool. Because they are revocable the Medicaid applicant has access to the money and there is no asset preservation.
Irrevocable trusts are a valid planning tool but they generate a five-year period of Medicaid ineligibility since they are considered gifts. These trusts must prohibit the trustee from distributing any of the corpus to the grantor or spouse. If there is any discretion to do so, this trust will be considered revocable and not a transfer. See 42 U.S.C. 1396p.