Elder Law: Transfer of Assets to Qualify for Medicaid Benefits
Caution: Transferring assets to qualify for Medicaid has always been a sensitive topic. When a person qualifies for Medicaid in a shorter period of time the government, and thus taxpayers, will likely pay more; for that reason the government has imposed strict penalties (including disqualification periods) when transfers were made. These sanctions became more pronounced with the adoption of the Deficit Reduction Act of 2005 on February 8, 2006. What follows is meant to be a general description of the process for your information. This article is no substitute for your consultation with an experienced elder law attorney. The assets (both in total amounts and mix of investment types) and objectives of each client are different. There is truly no "one size fits all" advice that can be given.
Introduction
The escalating cost of medical care has placed many American elders in a position where they are unable to afford such care without the assistance of the government. However, in order to qualify for governmental assistance, applicants must meet certain standards of eligibility. For example, as an applicant's income or resources exceed a certain limit, that person will not be eligible to receive governmental assistance. This situation has prompted many elders to seek ways of divesting themselves of assets so that they may qualify for assistance. In response to this trend, the federal and state governments have enacted a series of laws restricting the practice and providing penalties for applicants who attempt to become eligible for medical assistance by transferring their assets to others.
These same laws also allow many applicants or their family members to preserve certain assets. Spouses and long-term caregivers are often eligible for protection. Often these rights are misunderstood.
For these reasons, it is important to seek an experienced elder law attorney or health law attorney who is versed in the area of Medicaid requirements either before attempting to transfer assets for the purpose of becoming eligible for benefits or before applying for benefits to determine what can be protected.
Transfer of Assets to Qualify for Medicaid Benefits
The Medicare program was created by the Social Security Amendments of 1965 to provide health insurance coverage for most individuals in the sixty-five and older age bracket. It is a federal program that is intended to cover acute short-term illnesses, some physician charges and most hospitalization costs. Medicare has uniform eligibility requirements and a standardized benefit structure for everyone in the county.
Medicaid, on the other hand, is a joint federal-state program that is intended to provide the poor and disabled with basic medical services, including mental health services and nursing home care. Medicaid is often referred to as a "means-tested" entitlement program, similar to the welfare system. In order to qualify for Medicaid, one must be 1) categorically needy, 2) optionally needy, or 3) medically needy. Medicaid applicants who are categorically needy fall under a prescribed ceiling of income and resources. Those who are medically needy have income and resources large enough to cover daily living expenses, but not to cover medical care. Optionally needy persons are those to whom the state can give assistance at its discretion.
Often, due to the escalating costs of health care, individuals who are not needy will be forced to spend so much of their income and resources on medical concerns that they finally fall into one of the three categories described above. This is called "spend down". At this point of impoverishment, they finally are able to receive Medicaid assistance. Thus, for some time, many individuals have used various methods designed to divest themselves of assets in order to qualify for medical care assistance - before they have depleted those resources in an effort to obtain medical care.
Before 1980, courts assisted individuals who transferred assets for less than market value in an attempt to qualify for Medicaid. They did this by preventing states from denying Medicaid benefits to these individuals. However, in response to the efforts of states and the insurance industry to curb such practices, Congress began to step in. In 1980, Congress prohibited the transfer of assets solely for the purpose of qualifying for benefits. In subsequent years, Congress passed other laws which attempted to curb the practice and provided penalties for applicants who had, in fact, divested themselves of assets at below-market value in order to qualify for aid.
On February 8, 2006 President George W. Bush signed the Deficit Reduction Act of 2005. Within its provisions many changes were made to the rules governing gifts, annuities, value of the residence and long term care partnership insurance policies. The law extended the "look back" period to 60 months from 36 months for most transfers. This law also significantly changed the calculation of penalty periods and the beginning date of penalty periods. The significant nature of these changes means that persons must be much more careful in making transfers to qualify for Medicaid or long term care assistance.
Congress has adopted laws declaring that a lawyer may be charged with a crime for advising a client how to transfer assets to qualify for Medicaid. While these laws might be unconstitutional, every lawyer must be aware that Congress frowns upon such "wholesale transfers" and Congress may try to impose new sanctions in the future.
When a person transfers assets to qualify for Medicaid, it is very likely that the taxpayers that fund Medicaid must "pick up the tab". An applicant must decide if it is moral to benefit some family members with these transfers so that the taxpayers must pay for care.
Other opponents of the practice of transferring assets include those in the insurance industry. They contend that individuals who transfer assets to qualify for medical assistance no longer have any incentive to purchase long-term health care. They claim that this causes a depletion in the insurance market that is harmful to the entire industry.
Qualifying for Medical Assistance in Illinois
This is a brief summary of the rules regarding the transfer of assets to qualify for Medicaid in Illinois.
I. Married Couples.
If one spouse is in a nursing home, the other spouse (called the community spouse) is allowed to keep certain assets and income. These include:
(a) The marital home (however, if the value of the home exceeds $500,000, part of that value may be considered as an available asset);
(b) Motor vehicle,
(c) Prepaid funeral plans for each spouse (some limitations may apply);
(d) Life insurance with a face value of $1,500 or less for each spouse;
(e) $113,640.00 in other assets (Community Spouse Resource Allowance, or CSRA for 2012);
(f) $2,841.00 in monthly income (Maximum Monthly Maintenance Needs Allowance, or MMMNA for 2012).
The spouse in the nursing home can keep his or her exempt assets. These include a prepaid funeral plan (which must be irrevocable and other limitations may apply), life insurance policies that have a total face value of $1,500 or less and no more than $2,000 of other assets. These exempt assets are in addition to the assets that the community spouse can keep.
Generally speaking, any assets or income that exceed these limits must be used or "spent down" for the nursing home spouse. After the couple reaches these limits, the Nursing Home Spouse will qualify for Medicaid.
If the social security, pension, interest, dividends and other income of the Community Spouse is less than the MMMNA ($2,841.00 for 2012), the Community Spouse may keep all or a portion of the income of the Nursing Home Spouse to reach this level. The Community Spouse may need a power of attorney signed by the Nursing Home Spouse or a court appointed guardianship over the Nursing Home Spouse to have authority to transfer this income.
When the combined income of the spouses exceed the MMMNA, the State of Illinois will ask the Community Spouse to contribute a portion of the excess income to the State.
The Medicaid program requires that the non exempt assets of the Nursing Home Spouse be removed from his or her name. Any non exempt assets that remain in the name of the Nursing Home Spouse must be used for his or her care. If the Nursing Home Spouse does not have the physical or mental capacity to sign the deeds or other documents transferring the property to the Community Spouse, a power of attorney or court appointed guardianship will be required.
If the savings and investments of a couple exceed the CSRA ($113,640.00 in 2012), they should consider paying their debts and make allowable purchases before applying for Medicaid. Examples include:
- Payoff of any mortgage.
- Payoff all other debts.
- Make all necessary improvements and repairs to the marital home. Besides a new coat of paint, it may be helpful to make the house handicap accessible.
- Purchase a new car, preferably one with a good long warranty.
- Complete any dental work or other medical treatment. (Medicaid rarely pays for dental work).
- Purchase items that will improve the quality of life of either spouse. This is particularly true for specialized wheelchairs or other items of medical equipment that may not be available at the nursing home.
The Nursing Home Spouse may have all or a great deal of his or her savings in a 401(k) plan, Individual Retirement Account (IRA) or other retirement plan. If this money is transferred to the Community Spouse, or anyone, income tax (and possibly penalties) will be owed. The couple should consider filing for a legal separation. If the money is transferred from the Nursing Home Spouse to the Community Spouse pursuant to a Legal Separation (or a Judgment of Dissolution of Marriage), the income tax consequences will not be triggered. It will be painful for many spouses to file for a Legal Separation. They should not delay too long, however, since Illinois law makes it difficult for a disabled spouse to participate in proceedings for a legal separation or dissolution of marriage.
If the couple has a combined monthly income that is less than $2,841.00 (MMMNA) but assets more than $113,640.00 (CRSA), they may be able to shelter some of the "excess" assets by obtaining a quote for an annuity that would bring the income of the Community Spouse to the MMMNA level.
If the couple has a combined monthly income that is more than the MMMNA ($2,841.00), they may be able to get a court order allowing them to keep the "excess" income.
When the assets and income are transferred to the Community Spouse, he or she may be required to set up new accounts in his or her name. If the Social Security or pension checks were electronically deposited into a joint account, it may be necessary to retain that account for the continued uninterrupted flow of the income of the Nursing Home Spouse. Each month the Community Spouse would withdraw all or most of money received and transfer it to the account of the Community Spouse. The Community Spouse would open a separate account for the direct deposit of his or her own Social Security, pension or other income.
II. Single Persons or Both Members of a Married Couple in the Nursing Home.
If the Husband and the Wife both require long term care, or if a single person requires placement in a nursing home, the law is much less generous with the income and assets that they are allowed to keep.
Basically, each person is allowed to keep:
- Up to $2,000.00 in a checking or savings account.
- A prepaid funeral plan (some limitations may apply).
- Life insurance with a face value of $1,500.00 or less.
- $30.00 per month from income.
All other income and assets must be "spent down" to provide for the nursing home resident.
Prior to applying for Medicaid, the client should consider paying off all other debts.
It is important, prior to applying for Medicaid, to purchase a prepaid funeral plan. Generally speaking, the money paid for this purpose must be irrevocable, if the person could demand its withdrawal, it would be considered as extra money available to the resident and subject to the $2,000.00 limitation described above. The funeral director should know that you are purchasing the burial plan for Medicaid purposes. The director can then conform to the Medicaid limits on their services.
When a life insurance policy has a face value that exceeds $1,500.00, the cash surrender value of that policy will be considered as if it were savings. On the other hand, if the face value of the policy is $1,500.00 or less, the cash value of the policy is disregarded. Many older clients have policies that were purchased long ago and allowed the dividends and earnings to accumulate. The cash value of the policy may greatly exceed the face value of the policy, even so the nursing home resident may be able to keep the policy and still qualify for Medicaid. If the resident does not have a $1,500.00 in life insurance, he or she may be able to purchase a policy in these small amounts without disqualifying themselves for Medicaid.
If a son, daughter or other agent has been caring for their loved one, they may consider being paid a "reasonable" sum for their services. The agent must report this as income.
III. Special Protection for the Home.
Many times a client will have a sibling, minor child or disabled child living with them. When a client enters a nursing home, the law recognizes that it would impose an extreme hardship upon that sibling, minor child or disabled child to force the sale of the home to pay for the nursing home. The law allows these persons to continue to live in the home. The law even allows for the transfer of the home to one of these protected persons without penalty to the nursing home resident. These same protections apply to an adult child who has resided with his or her parent for at least two years and as a result of that care delayed the parents' admission to the nursing home.
If the ownership of the home is not transferred to a protected person during the lifetime of the nursing home resident, the State of Illinois may seek to enforce a lien against the residence to recover the amount of the Medicaid benefits.
As with any transfer, the nursing home resident must have the mental or physical capacity to authorize that transfer. Otherwise, a power of attorney (with the power to make gifts) or a court appointed guardianship will be required.
IV. Penalties for Unauthorized Transfers.
The government believes that you should not give away your property or income to qualify for Medicaid. If you make a prohibited transfer, certain penalties will apply.
In extreme cases, if the transfer is for large amounts, without proper authority due to duress or fraud and not reported, the beneficiary can be criminally prosecuted for theft, perjury or other similar offenses.
The more common penalty is to deny the nursing home resident eligibility for Medicaid. The penalty period generally corresponds to the amount of care that could have been privately purchased with that money. For example, we will assume that $60,000.00 was given away and that the cost for private payment at a nursing home is $4,000.00 per month. This would have paid for 15 months of care ($60,000 - $4,000/mo. = 15 months). The penalty period is thus 15 months. Medicaid will not pay for care during the penalty period. For transfers that are made after November 1, 2011 the penalty period generally begins in the month that a person would otherwise be approved for Medicaid; in other words the penalty period begins in the month that the person is broke and has no money to pay their bills. For this reason transfers should not be made without the advice of a knowledgeable elder law attorney. There is no limit to the penalty period-thus if you give away $400,000 within the look back period, you would have 100 months of a penalty period.
If you fail to disclose the transfers, you may be prosecuted for perjury.
You can no longer place property in joint tenancy or convey property while retaining a life estate in yourself. Nor can you shield your assets in a revocable trust. With each of these transfers all, or most, of the value will be considered as within your control and thus available for your care.
In prior years you may have been able to purchase an annuity. This money would be paid back to you during your anticipated life (as determined by Medicaid tables). Each month these payments will be used for your care. If you die before the annuity is fully paid out, the balance can be paid directly to your heirs.
After February 8, 2006 annuities are no longer such a favorable option since most annuities will now require that the State of Illinois be named as the beneficiary. There are very limited exceptions to this rule.
V. Non-Financial Considerations
Before entering a nursing home, the financial and legal affairs of the person should be in order.
If possible, a durable power of attorney for health care and a durable power of attorney for property should be signed designating a trusted person as your agent. (Durable simply means that the power of attorney remains in effect even if you become disabled).
Unless the property power of attorney includes the power to make gifts, the agent can only sell your property for fair market value. Gifts to spouses or others may be a violation of the agent's fiduciary duty to you; other heirs may sue the agent. Illinois law allows court appointed guardians to make gifts, but this power is restricted if the money is needed for your support.
The health care power of attorney can include authority to deal with respirators and other end of life issues. Your wishes should be clearly reflected in your documents and clearly expressed by your agents.
The beneficiaries of life insurance and other payable on death benefits should be viewed and changed if appropriate. Under current law, if this money is paid directly to the beneficiaries, Medicaid cannot file a claim against those funds.
A proper will should be written, even if you have a very small amount of money.
If you are named as the beneficiary of someone else's will or trust, it may be wise for them to amend their will or trust. Unfortunately, in most cases, any inheritance will simply serve to "bump you off" the Medicaid rolls. When that money has been spent, you will again qualify for Medicaid without any improvement in your quality of life.
Long term care insurance should be considered while you are relatively healthy. The cost varies widely depending upon your age, the amount of the daily benefit, how long you must wait before you qualify for benefits, the number of months that you will receive benefits and whether you select a cost of living option.
Conclusion
In summary, whether the practice of transferring assets to qualify for aid is immoral or not is an ongoing debate. Clearly, it is not illegal. In addition, it is questionable whether it is illegal to counsel or encourage another to engage in a practice of asset transfer to attain eligibility. But again, the morality of the act is questionable. Thus, the issue remains: Should an individual be able to transfer resources gained throughout life to his or her friends and family members and then apply to the state to furnish medical assistance. Or, should an individual be required to spend what he or she has on medical care until the point where there is nothing left, before asking for governmental aid? The answer to these questions will inform any determination as to the morality of pre-application asset transfer. It is also important to know that the law recognizes that certain persons are entitled to protect their assets or income even if a spouse or other loved one needs medical assistance. In any case, it is best to consult with a legal advisor before making any asset transfer so as to fully comprehend any resulting consequences.
Leonard F. Berg, Elder Law Experience
Leonard F. Berg is a sole practitioner who believes in providing individual attention to his clients. While the rules of law are the same, the needs of each person are unique to that individual. Our office seeks to learn the objectives of each client and offer advice that is consistent with the needs and desires of that person. Mr. Berg is a member of the National Academy of Elder Law Attorneys, Special Needs Alliance, Illinois Guardianship Association, Academy of Special Needs Planners and a member of the Madison County and Illinois Bar Associations.
Mr. Berg is a 1977 graduate of Washington University School of Law in St. Louis, Missouri. He received his Bachelor of Arts degree from Knox College in Galesburg, Illinois.
At this time, a great portion of the practice is devoted to legal issues concerning elderly persons. Besides Medicaid planning these include powers of attorney, wills, trusts, guardianships and estate administration. Mr. Berg has also represented seniors in various cases of fraud and financial exploitation, including theft by family members and predatory loan practices. He served as a Madison County Assistant State's Attorney for 14 years and a Madison County Assistant Public Defender for 4 years.