Category Archives: Gifts & Disqualifying Transfers

What Is the Difference Between the MassHealth Lookback and Disqualification Periods?

by:   Brian E. Barreira, Esq.

The MassHealth lookback period is not the same thing as the MassHealth disqualification period. The MassHealth lookback period is a flat five (5) year period. When a MassHealth application is filed, the state MassHealth agency looks back at financial transactions for the five (5) years preceding the application date. Based on whatever the state MassHealth agency finds in the lookback period, a disqualification period can be imposed by the agency.

The MassHealth disqualification period is not five (5) years, but rather is calculated by the state MassHealth agency based on the facts of the application. The disqualification period is based on how much was given away during the lookback period, and is also based on how much the average Massachusetts nursing home costs at the time of the MassHealth application.

When a MassHealth application is filed, the lookback period is created. In some cases, there is a lengthy MassHealth disqualification period that could be avoided if the filing of the MassHealth application were delayed. Thus, a thorough understanding of the interaction between the MassHealth lookback and disqualification periods is needed before deciding when to file a MassHealth application.


What Is Considered to Be a Cure or Partial Cure by MassHealth?

by:   Brian E. Barreira, Esq.

When a disqualifying transfer (such as a gift) is made, a period of ineligibility from MassHealth can be caused. If the transfer is undone, and assets are returned, the period of ineligibility goes away. The return of gifted assets is known under federal Medicaid law and MassHealth regulation as a “cure.” If only part of what was given away is returned, that return of gifted assets is known as a “partial cure.”

Since the lookback period when filing a MassHealth application is five (5) years, any gift or below-market sale is not safe for the following five (5) years. Therefore, no gift or below-market sale should be made without considering whether a cure will be possible during that timeframe.

Under a peculiar wording of the MassHealth regulation that allows cures, there is a possibility that a cure or partial cure to a married couple can be done the wrong way. The regulation states that the return of the assets must go to the MassHealth applicant. A return of assets to the community (i.e., at-home) spouse can therefore be treated as an invalid cure, even if it was the community spouse who originally made the gift.

When Can Spouses Make Gifts to Each Other without Causing a MassHealth or Federal Gift Tax Problem?

by:   Brian E. Barreira, Esq.

Under federal Medicaid law and MassHealth regulations, spouses have the right to transfer assets to each other at any time without causing a period of ineligibility from MassHealth. The purpose of the gift is not scrutinized by MassHealth, and the 5-year lookback period does not apply to possibly cause a MassHealth disqualification period. Gifts between spouses can even occur after a nursing home stay has begun and after a MassHealth application has been filed. If one spouse is not a United States citizen, however, a federal gift tax problem can arise.

For federal gift tax purposes, spouses who are both United States citizens can make gifts of any amount to each other at any time without causing any gift tax issue, and without even causing any need to file a federal gift tax return. Gifts to a spouse who is not a United States citizen, however, are limited by federal tax law to $143,000 in 2013, and any gift above that amount would require the filing of a federal gift tax return. For most married couples, however, exceeding that amount would not pose any tax problem, since any gift in excess of $143,000 would not cause an immediate tax; rather, the amount of the gift in excess of $143,000 would merely use up some of the gift-giving spouse’s federal estate and gift tax exemption, which is $5,250,000 in 2013.

Should You Prepare and File a MassHealth Application on Your Own?

by: Brian E. Barreira, Esq.

Many people can file a MassHealth application on their own, but sometimes it makes sense to get help. The more complicated the applicant’s financial situation, the more it makes sense to get help from an independent professional.

For a person who is under age 65 and not in need of nursing home care, MassHealth eligibility is mostly based on the person’s income, so that type of MassHealth application process is usually fairly easy. If the MassHealth applicant is not under age 65, or if long-term care is needed, getting help is often necessary. In many cases, getting the assistance of an elder law attorney can be important.

A MassHealth applicant is limited to $2,000 in countable assets for some programs, and while it may be possible to transfer assets above that amount in order to become eligible, the transfer could make the applicant ineligible for nursing home coverage for 5 years. Thus, elder law advice can be important due to the mishmash of MassHealth programs that have different rules.

Elder law advice can also be important due to confusion about MassHealth rules among facilities and home care agencies. For example, the GAFC program that can help pay for assisted living can be accessed with a 6-month income deductible period, yet many assisted living facilities seem not to know about that possibility.

Submitting a MassHealth application to help cover nursing home costs without elder law advice can often be a bad idea. I often describe the MassHealth application process for nursing home care as “guilty until proven innocent.” MassHealth applications are closely scrutinized, with a lookback period of 5 years on all financial records. Gifts, below-market sales and unexplained financial transactions can cause problems; any unexplained or poorly-explained expenditure can be treated as a disqualifying transfer of assets, delaying MassHealth eligibility at a time when there are no remaining funds to pay for nursing home care. Trusts are often rejected without explanation. The application process can take several weeks or even months, while the MassHealth eligibility worker keeps asking questions and demanding further verifications.

Many elder law attorneys offer assistance with MassHealth applications as part of their services. Going this route can help you deal with difficult eligibility problems that can come up along the way and allow you to get advice on how to obtain MassHealth as quickly as possible. Payment for the elder law advice is often made with funds that would otherwise have been paid to the nursing home, so there is often no net loss to the family, and, in some cases, the elder law attorney can point out exceptions in the MassHealth law that allows assets to be preserved for the MassHealth applicant and the family.

Some nursing homes offer free help with the MassHealth application, or refer families to non-lawyers or companies that offer help for a fee. In those cases, you should not expect that the matter will be handled appropriately in all situations. One of my clients used a company that was referred by the nursing home, and learned that the company saw a problem with the application and overreacted; the company called the nursing home administrator, who then immediately sent out a discharge (i.e., eviction) notice to the nursing home resident who was not in debt and had enough funds to pay for a few months.

How Does MassHealth Treat a Sale of a Life Estate in 2013?

by: Brian E. Barreira, Esq.

When a person who has a life estate wants to sell the real estate, the life tenant is legally entitled to a share of the proceeds.  The amount of the proceeds that the life tenant is supposed to receive is based on his/her life expectancy and interest rates at the time of sale.

To calculate the value of the life estate, you must first determine what the applicable interest rate is.  The interest rate in the month of the sale can be found at  Once you have this figure, you then go to IRS Book Aleph at and look in Table S for the page displaying tables with that interest rate.  Looking up the life tenant’s age on that page will get you the breakdown between the life tenant’s percentage interest in the proceeds and the other parties, who on that page are referred to as the “Remainder.”  For further explanation, including an example, see MassHealth Eligibility Operations Memo 07-18.

If the interest rates required to be used are below 2.2, different IRS tables need to be looked at, so in that situation go to

The life tenant’s share of the proceeds can be eligible for the $250,000 capital gains exclusion under Internal Revenue Code Section 121, but often the persons receiving the remainder do not live there and their proceeds are subject to capital gains taxation without the ability to use that exclusion.  Thus, it can often be advisable to wait until the life tenant’s death before selling real estate, so that the real estate will receive a step-up in basis under Internal Revenue Code Section 2036.

Note that the failure of the life tenant to receive the life tenant’s full share of the sale proceeds is considered a disqualifying transfer of assets under federal Medicaid law and MassHealth regulations, and is subject to the 5-year lookback period.

Case of Nina Kaptchuk v. Director of the Office of Medicaid Shows that MassHealth Fair Hearing Appeals Should Not Be Treated Lightly

by: Brian E. Barreira, Esq.

In the 2013 Massachusetts Appeals Court case of Kaptchuk v. Director of Office of Medicaid, a MassHealth denial was upheld. An application for MassHealth benefits for Nina Kaptchuk had been denied due to “disqualifying transfers.” A “fair hearing” had been requested, and the denial was not overturned. A so-called 30A appeal was filed with the Superior Court, and the judge there did not overturn the denial. On this further appeal to the Massachusetts Appeals Court, the denial remained in effect.

The Superior Court and the Massachusetts Appeals Court only reviewed the facts presented at the fair hearing to see if the hearing officer analyzed the facts fairly. Unfortunately, new or better facts cannot be presented after a fair hearing. The Massachusetts Appeals Court suggested that the preparation for the fair hearing was inadequate. Transfers to or for the benefit of a disabled person can be treated as non-disqualifying, but the lawyer handling the appeal apparently did not introduce evidence proving that the daughter who received amounts of money from Nina Kaptchuk was mentally ill.

The point that should be taken from this case: Do not treat any fair hearing lightly. Any point you want to make should be proven from every possible angle, and do not presume common sense. Most especially, do not assume that you will get another chance to explain the facts as you see them.

What Is a Pooled Trust?

by: Brian E. Barreira, Esq.

A pooled trust is a special needs trust where the funds of many people are pooled in one account for investment purposes. The overall goal of a pooled trust is to provide financial security to all people with disabilities, and a higher quality of life. A pooled trust can provide for the future needs of disabled persons while allowing them to remain eligible for government benefits such as MassHealth and Supplemental Security Income (SSI). Placing money into it is not considered to be a disqualifying transfer under MassHealth or SSI law, and a pooled trust account can be funded even after a MassHealth application has been filed.

Some governmental benefit programs, including MassHealth, will only pay for a person’s primary living needs, such as food, housing, and basic medical care. Where MassHealth only allows a nursing home resident to keep $2,000 in assets, it can be difficult to maintain a dignified lifestyle in the nursing home. A pooled trust account can be used to pay for extra things for the nursing home resident.

A person with a disability who receives even a modest amount from a gift, inheritance or court settlement may no longer be eligible for MassHealth or other government benefits, but if those funds are quickly placed into a pooled trust, those government benefits can be preserved.

After the pooled trust account is funded, it is then the responsibility of the trust to ensure that the funds will not be spent in a way that could jeopardize the beneficiary’s eligibility for government benefits. The pooled trust can provide a source of funds that can be used to pay for supplemental needs. Some of the types of special, supplemental, non-support disbursements that are appropriate can be: health and dental treatment and equipment for which there are not funds otherwise available; rehabilitative and occupational therapy services; medical procedures, even though not medically necessary or lifesaving; medical insurance premiums; supplemental nursing care; supplemental dietary needs; diapers; eyeglasses; travel; entertainment; companionship; private case management; cultural experiences; vacations; movies; telephone service; television and cable equipment and services; radios; stereos; training and education programs; and reading and educational materials.

When is a Community Spouse Allowed to Make Disqualifying Transfers of Assets without Adversely Affecting the Institutionalized Spouse?

by: Brian E. Barreira, Esq.

Under federal Medicaid laws and MassHealth regulations, disqualifying transfers of assets (which are usually gifts or below-market sales) disqualify not only the person who makes those transfers, but also that person’s spouse. A prenuptial agreement or postnuptial agreement has no effect on the required disqualification imposed on MassHealth applicants under federal Medicaid law.

Any disqualifying transfers of assets made by a person are problematic because they can disqualify that person’s spouse for the next 5 years, which is the lookback period currently in effect for MassHealth. Therefore, gifts should not be made if a nursing home stay and MassHealth application are likely in the near future, and should especially not be made during the MassHealth application process.

The month after a MassHealth approval for an institutionalized spouse, however, a different set of rules applies. At that point, whatever the community (i.e., at-home) spouse does with real estate and other assets is not treated as having been done by the institutionalized spouse. This letter I received in 2000 from the federal government agency overseeing the Massachusetts MassHealth agency Medicaid letter post eligibility transfer by spouse confirms that a community spouse may transfer assets the month after MassHealth approval of the institutionalized spouse.

Proper Medicaid Planning May Permit Keeping the Home in the Family

by: Brian E. Barreira, Esq.

(Note to reader: This article was published in the April 2001 issue of Estate Planning.  The Medicaid lookback period and disqualification laws changed to 60 months on 2/8/06, after this article was published; otherwise, the rest of the article remains valid.)

Many aging clients are concerned that, after a lifetime of hard work to acquire and maintain the family home, the house could be lost if they are among the unfortunate but growing number of persons who spend the final months of their lives in nursing homes. The urgency of transferring the home well in advance of institutionalization became an issue with the implementation of the Medicare Catastrophic Coverage Act of 1988 (MCCA) and has grown with each change in the law.

In general, any transfer to a person within 36 months of applying for Medicaid and any transfer to or from a trust within 60 months could disqualify a Medicaid applicant. Further, OBRA ‘93 authorized states to disqualify persons for transfers not only for the portion of Medicaid that pays for nursing home care, but also for home health care, personal care services, or community supported living arrangements.(1) Safe harbors, however, have been created for four categories of transfers, and other categories may exist under state regulations or practice. Due to the disqualification period, these alternatives should be considered before more creative planning techniques are explored.

Estate planning and elder law attorneys can sometimes be confronted with clients whose sole wish is to preserve the home for others, to the exclusion of self-protection concerns. Moreover, elderly persons sometimes consult lawyers who do not specialize in estate planning and elder law, but who nevertheless comply with the client’s wishes to place the home in someone else’s name with little or no advice about the Medicaid or tax ramifications. Proper professional counseling involves much more than simply deeding away the client’s home when the client requests it, as clients are often unaware of all the tax issues involved or their own future options or needs, such as home care or assisted living.

In advising clients regarding transfers designed to permit clients to become eligible for Medicaid, attorneys face section 4734 of the Balanced Budget Act of 1997 as a possible problem. That law makes giving advice about Medicaid planning a crime if the disposition results in a period of Medicaid ineligibility.

In 1997, in response to a lawsuit filed by the New York State Bar Association, the U.S. Attorney General indicated that the Department of Justice would not defend the constitutionality of the law or enforce it.(2) The final judgment entered in that case declaring the law unconstitutional applies only to a limited number of attorneys. Thus, the possibility of the enforcement of this law remains, although the likelihood appears remote. That such a law was enacted in a bill that also provided tax deductions for long-term care (LTC) insurance should be sufficient notice that Congress discourages transfers of assets and encourages the purchase of LTC insurance.

Long-term care insurance

A growing number of estate planning and elder law attorneys believe that the issue of long-term care is first and foremost an LTC insurance issue, and that the insurance should be explored before legal maneuvers are contemplated.

Persons with Alzheimer’s disease who can no longer remain at home run the risk of an extended nursing home stay, reportedly averaging eight to nine years. With such a potential long-term care cost, how can thoughtful tax planning ever be done without factoring LTC insurance into the process? It is difficult for a client to make large gifts if the remaining assets will possibly be insufficient to meet the client’s foreseeable needs. Unfortunately, many persons rationalize not purchasing LTC insurance because of the possibility that the insurance may never be needed.

In the states of Connecticut, New York, Indiana and California—under a national program called the Partnership for Long-Term Care which was initiated by the Robert Wood Johnson Foundation—various amounts of assets are exempt for Medicaid purposes for persons who have LTC insurance policies that meet state certification standards.(3) Accordingly, persons in those states should have ample reason to look at insurance as a way of preserving their homes. Further, in Massachusetts, particular LTC insurance policies exempt the home from the imposition of a lien when an application for Medicaid is made; the same policies also exempt the home in Massachusetts from an estate recovery claim after the applicant’s death if the Medicaid application is handled properly.

For persons who do not have sufficient LTC insurance, Medicaid transfer restrictions can adversely affect the home of an elder who does not wish to give up any current control. The risk of making a transfer that allows a return of the asset to the original transferor is that the law will change retroactively and eliminate the efficacy of the transfer. This result has occurred twice in the trust area.

Transfers to revocable trusts

In recent years, many persons have been sold (literally, in the case of many trust mills) on the notion of placing their homes in revocable trusts to avoid probate. Although a home is normally considered an exempt asset for Medicaid purposes, the transfer of a home to a revocable trust can be worse than taking no action at all, because any asset in a revocable trust (including a home) is treated as a countable asset that must be sold and its proceeds spent. In addition, a transfer to others from a revocable trust would be subject to a five-year lookback period, but a transfer from the client directly would be subject to only a three-year lookback period. For these reasons, elder law practitioners often find themselves in the position of revoking trusts that were sold without full explanation of how the trust would be treated for Medicaid purposes.

The transfer of a home to a revocable trust would be advisable if a person has already been receiving Medicaid benefits for which a state claim for recovery of amounts paid would be made after the person’s death against the probate estate. Avoiding probate in this situation may avoid the estate recovery claim in some states, because if there is no probate estate, there is no estate recovery.

Upon applying for Medicaid, the fact that the home can be returned from a revocable trust to the client is fatal. To be protected, the home must not be returnable to the client. While many of the transfers that accomplish such protection are subject to a period of Medicaid disqualification, some transfers to spouses, children, and siblings can be made even after a nursing home stay has begun.

Permissible transfers to the spouse

The first and most commonly-used safe harbor is a transfer of the home to the person’s spouse. A jointly-owned home would be considered an exempt asset if one spouse applies for Medicaid. It is usually advisable, though, not to leave the home in joint names when one spouse enters a nursing home, for if the community spouse (i.e., the non-institutionalized spouse) were to predecease the institutionalized spouse, the home would end up in the institutionalized spouse’s probate estate and would be subject to an estate recovery claim.

The transferor-spouse could reserve a life estate in the deed, but such a reservation could unduly complicate any sale of the home which the non-institutionalized spouse might wish to make during the transferor’s incompetence. Not only would the signature of the transferor (or someone acting in a fiduciary capacity for the transferor) be required, but the transferor could be legally entitled to a portion of the sale proceeds based on the actuarial value of the life estate. It would seem, then, that a full transfer should often be made to the person’s spouse if a nursing home stay has begun or appears imminent.

A gift to a spouse is free of gift tax with one notable exception: if the transferee is not a U.S. citizen, a gift in excess of $117,000 (as of 2005) results in a federal gift tax. Under IRC Section 1041, the transferee receives the transferor’s basis, and no gain or loss is recognized on the transfer, except if the spouse of the individual making the transfer is a nonresident alien.

From a family standpoint, this transfer may end up being fruitless if the institutionalized spouse will receive the home under the community spouse’s will. The community spouse receiving the home should therefore execute a will that gives the transferor a life estate or the equivalent. To protect any income generated by the home during a stay by the transferor in a nursing home, the life estate could be limited to the right of occupancy.

Until recently, it was uncertain whether the community spouse could take any further steps to preserve the home, including making further transfers or limiting the institutionalized spouse’s inheritance rights. Under the recently disclosed national position of the Health Care Financing Administration (HCFA) in letters from regional offices to Medicaid administrators in Idaho and Massachusetts, the spouse remaining in the couple’s home is permitted to take any action with respect to the home and other assets beginning in the month following the institutionalized spouse’s eligibility for Medicaid.

For some married couples, sometimes both tax planning and Medicaid planning should be attempted, and it is desired to use the applicable credit amount of the institutionalized spouse. It sometimes can be advisable to make a transfer of the home to the institutionalized spouse prior to making a gift of the home to others. The possibility of interspousal transfers maintains the possibility of such tax planning.

The major step married couples should take in advance to keep transfer possibilities available is to execute durable powers of attorney with specific gift-giving powers, including the power to self-deal. Without such documents in place, a state court proceeding could be necessary to authorize gifts by an incompetent spouse.

Married couples where one spouse has a terminal illness should consider the use of a testamentary trust, which is exempted from the onerous Medicaid trust laws in many states. If the home is owned by the first spouse to die, and is left in a discretionary testamentary trust for the benefit of the surviving spouse, the home may then be preserved if the surviving spouse ever requires nursing home care.

Because Medicaid is a federal-state program, differences in state laws can cause different outcomes in almost any transfer suggested in this article. In the context of a discretionary testamentary trust for a surviving spouse, for example, two state law factors could minimize or eliminate its value. First, in a community property state, the surviving spouse may be deemed to own one-half of all of the married couple’s assets. Second, a state that has chosen to administer its Medicaid program under the so-called 209(b) option can use the more restrictive Medicaid eligibility requirements in effect prior to the implementation of the Supplemental Security Income (SSI) program.

In the case of a discretionary testamentary trust, IRC Section 1014(e) can become an important consideration. Although Section 1014(e) denies a step-up in basis for assets that are given to a person who then dies within one year of the gift, this prohibition is specific to situations where the assets must be returned to the gift-giver. The discretionary nature of the trust should allow a complete step-up in basis as of the deceased spouse’s date of death for capital gains tax purposes.

Often overlooked in the estate tax planning and probate avoidance processes is how a revocable trust established by a now-deceased spouse is viewed if the surviving spouse applies for Medicaid. A funded trust that avoided probate is considered completely available for the surviving spouse’s care. Consequently, funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if a testamentary trust had been established in the deceased spouse’s will and probate avoidance had not been accomplished.

Permissible transfers involving other family members

Permissible transfers to or for a blind, disabled, or minor child. The second safe harbor is a transfer of the home to a transferor’s child who is blind, disabled, or under age 21. If the child is a minor, however, probate problems could result if the child predeceases the transferor or if the family wishes to sell the home. If the child is blind or disabled and is receiving governmental or charitable benefits, the benefit program should be reviewed prior to any transfer of the home, to determine whether the child’s eligibility for the benefits could be adversely affected by receipt of the home. In particular, recent changes in the SSI law impose transfer disqualifications and thereby limit the ability of a recipient to receive the home as a gift and take further action to preserve this asset.

A transfer of the home can be made to a special needs trust for the sole benefit of the disabled child instead of directly to the child, so long as the trust provides for post-death reimbursement to the state for any Medicaid benefits furnished to the child. Given the vagaries of state administrative interpretations of federal Medicaid law regarding special needs trusts, it is essential that the state regulations, practices, and procedures be carefully reviewed.

Permissible transfers to a sibling. The third safe harbor is a transfer of the home to a sibling who has an equity interest in the home and who resided there for at least one year prior to the transferor’s institutionalization. This safe harbor may apply even if the sibling’s ownership interest emanated from the transferor after the institutionalization had occurred. It seems possible that even a negligible or contingent ownership interest, such as a vested remainder subject to divestment, could be treated as an equity interest.

Because of this safe harbor, siblings should consider co-owning and living in a multi-family house, which could qualify as each sibling’s home. Any sibling could then maintain ownership right up to the time a transfer becomes necessary or desirable, as long as the transfer is then made to the non-institutionalized sibling.

Permissible transfers to a caregiving child. The fourth safe harbor is a transfer of the home to a transferor’s child who resided in the home for at least two years prior to the institutionalization and provided care which allowed the parent to remain at home. The child must have lived in the home during this period, and the care must have been of the type that kept the client at home. Because the state is the arbiter of whether the child’s care prevented institutionalization, this transfer option cannot be relied upon fully without a thorough review of the facts of the case. The child would be well-advised to keep detailed records after moving in with the parent, and a prompt change of the child’s voter and automobile registration can later be helpful in proving residency.

Any state Medicaid regulations that may have been promulgated and the state agency’s practice should be carefully analyzed to determine what information the child will be required to prove. In Massachusetts, for example, the residency requirement is two years, but the care requirement can sometimes be less.

Children who move in with their parents frequently have a minimal amount of time, energy and intellectual capital for anything other than caregiving, but they should consult with an elder law attorney soon after they move in to learn what planning options exist in their circumstances, especially if the child is giving up significant employment income. In some situations, a written personal services or life care contract between the parent and the child may be appropriate, despite the income tax issues involved in the receipt of the home for future services.

Other transfers that may be safe
Despite the broad parameters of federal law, state Medicaid agencies are free to interpret the federal law. They are also free to misinterpret the law with impunity if HCFA, which supposedly oversees the implementation of Medicaid law by the states, chooses to look the other way.

Unfortunately, the U.S. Supreme Court recently eliminated the possible alternative of private plaintiffs filing qui tam actions against states in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens.(4) Therefore, the vagaries of state law, state regulations, and state practices and “policy” should always be a major consideration, and may present a fifth safe harbor. One such example is California, where a self-declared intention to return home somehow renders the home exempt from a disqualification period upon a subsequent transfer.

The state can also allow a transferor to become eligible for the Medicaid program if not doing so would “work an undue hardship.” When counseling a client who has been denied Medicaid benefits because of a disqualifying transfer, state regulations should be consulted.

Another safe type of transfer of the home is one in which fair market value is received in return for the home. Depending on state regulations, it may be possible to make a transfer of the home in exchange for a promissory note, private annuity, or self-canceling installment note.(5)

One other provision in the Medicaid law concerning transfers presents an attorney with ethical and practice problems. The provision states that a person shall not be ineligible for Medicaid to the extent that “a satisfactory showing is made to the State (in accordance with any regulations promulgated by the Secretary [of Health and Human Services]) that “the resources were transferred exclusively for a purpose other than to qualify for medical assistance.”

One possible reading of the law would allow any transfer of the home, as a person would “qualify” for Medicaid even if such person owned a home, and the transfer thus would not be necessary to qualify for Medicaid eligibility. Under this reading of the law, if the Medicaid issue was not brought up or thought about by the client or the attorney, this exception in the law could be used. This reading, however, appears to contradict other provisions of the law, which permit only certain transfers, and hence may never get off the ground, as the attorney would probably then be required to testify under oath about what would appear to have been irresponsible counseling or malpractice.

Transfers that cause disqualification periods

Any other type of transfer can temporarily disqualify a Medicaid applicant based on the amount transferred. This disqualification period will be short if the uncompensated value of the home (and other transferred assets) would have covered a short period of nursing home care. States are required to implement the disqualification period by calculating the average monthly cost of private nursing-facility services at the time of application, but HCFA has done little or no monitoring of state activity on this front, and states routinely ignore the literal requirements of federal law.

The disqualification period can extend indefinitely in some circumstances. One trap for the unwary is that filing a Medicaid application too early can result in a long disqualification period, whereas an application that is filed at the correct time can result in the transfer being disregarded. A transfer that falls outside the Medicaid lookback period, which is five years for many trusts and is three years for non-trust transfers, is safe.

The disqualification period begins to run on the date the assets are transferred beyond the reach of the transferor. The sooner any transfer is made, the greater its preservation value. The major risk inherent in the transfer is that the home may have to be sold by the transferees and the proceeds used for the moral obligation of paying for the costs of any care required during the disqualification period. If the transferor is not in failing health, however, it may be possible to avoid this risk by purchasing an LTC insurance policy which covers the disqualification period.

There is no reason that preserving the home need be an all-or-nothing proposition, even in late long-term care planning. Just as a partial amount of funds can sometimes be preserved, so too can a partial interest in a home. For example, a transfer of a home into the joint names of the current owner and another person may be deemed to be a transfer of only one-half of the value of the home. It may also be possible to apply valuation discounts in such a case on subsequent transfers.

A lawyer drafting documents that effectuate a transfer of the client’s home should always remember that it is the client who is supposed to be represented, not the transferred asset. If a transfer causes a Medicaid disqualification period, the drafter should always analyze how to undo the ineligibility or how to finance the private payment of nursing home costs during such time. If a partial cure of ineligibility may not be possible in a particular situation, then the initial plan should include transfers of partial interests or LTC insurance.

Transfers with reserved or retained life estates

If Medicaid concerns are present, one of the most common types of transfers is a deed of the home subject to a reserved life estate. In such a case, IRC Section 2036 will unquestionably apply. For many families, this tax result would be beneficial because the home would be includable in the transferor’s gross estate upon death and would receive an accompanying step-up in basis for capital gains tax purposes under IRC Section 1014. Consequently, any appreciation in the value of the home from the date of its purchase to the date of the transferor’s death would escape capital gains taxation in the hands of the transferees.

If a married couple were to transfer their home and retain a joint life estate, under IRC Section 2036 each spouse should be treated as a 50% owner of the transferred property. Accordingly, a joint transfer may result in minimizing estate or inheritance taxes while allowing the transferees to receive the desired step-up in basis.

Because a life estate could be valued actuarially and treated as an asset of a transferor for purposes of Medicaid eligibility, another option that merits consideration is an unrecorded use and occupancy agreement. Such an agreement may not fully protect the transferor’s right to live in the home, but it should achieve the same estate tax and capital gains tax results as a reserved life estate.

If the transferor makes an outright gift of the home and continues to live there without paying rent, the IRS can treat it—under IRC Section 2036—as includable in the transferor’s gross estate as a life estate retained via agreement.(6) The transferees should always consider taking this position upon a post-death sale. Unfortunately, a departure by the transferor from the home could be deemed a release of that life estate, and under Section 2035 the step-up in basis would be available only if the transferor died within three years of this deemed release.

The transfer of a home subject to a life estate is a disqualifying transfer of the remainder interest for Medicaid purposes. Despite the requirement of a federal gift tax return under Chapter 14 of the Internal Revenue Code reporting the full fair market value of the home as a taxable gift, a discounted gift is deemed made for Medicaid purposes based on actuarial values.(7) For this reason, as well as for the capital gains tax ramifications, a transfer of the home subject to a reserved life estate is often a much better move than is an outright deed.

The additional advantage of a reserved life estate is that the transferor would be assured of having a home despite anything the transferees might do or in spite of any other occurrence, such as the death, divorce, or bankruptcy of one or more of the transferees. In case the transferor requires a long-term stay in a nursing home, the transferor may wish to limit the life estate to the right of occupancy, so that during that time rental income from the home could be collected by and for the benefit of the transferees. If the life estate is not limited in this way, any rental income would be deemed to be the transferor’s property; it would then have to be spent for the transferor’s care under the spend-down provisions of the Medicaid program, and would therefore effectively be lost.

State law should be reviewed to determine if a life estate can be the subject of partition proceedings, as well as if sale proceeds must be divided based on the actuarial life estate and remainder values. Under Massachusetts law, for example, a petitioner could intervene on behalf of the life tenant and petition the court for a sale so that the income from the invested proceeds could be used for the support of the life tenant.(8) Presumably, any deed creating a life estate could specify such a result upon a sale during the life tenant’s lifetime.

The reserved life estate method vests the remainder interest in the transferees, and the transferor will have no further control over who will eventually inherit the home. Three problems exist with this loss of control. First, if one of the transferees were to predecease the transferor, the remainder share of that transferee in the home would end up passing under the transferee’s will or by intestacy. If, under the will or applicable intestacy laws, the transferee’s share of the home then returns to the transferor, the transferor would then be required to take further action, which would begin the running of another possible period of disqualification from the Medicaid program. This problem can sometimes occur if a transfer is made to children as tenants-in-common, and one of them who has no spouse, no issue and no will predeceases the transferor.

Second, the transferees may simply give away their share, by deed or will, to someone to whom the transferor may not have wished to make any gift. Third, a transferee’s ability to ultimately receive the benefit of the remainder interest may be adversely affected by such person’s bankruptcy, disability, or divorce during the transferor’s lifetime.

Transfers with special powers of appointment

To eliminate such problems inherent in any deed of a remainder interest with a reserved life estate, the transferor may wish to include in the deed the retention of what is known as a “special power of appointment” (SPA). By use of the SPA, each transferee would have a vested remainder subject to divestment. Under the SPA, the transferor would be able to redistribute the remainder interest among a group of identified beneficiaries. Under IRC Section 2038, such an ability to redetermine the transferees would receive the same estate and capital gains tax treatment as under IRC Section 2036, although it does not eliminate the need to file a gift tax return.

The SPA would allow the transferor the opportunity to redetermine who ultimately inherits the home. This flexibility would help eliminate the possibility that once an inheritance had been secured, one or more of the transferees would discontinue helping or visiting the transferor. More importantly, the SPA allows the transferor future flexibility to deal with the possible death, divorce, or bankruptcy of one or more of the transferees.

A meticulous conveyancing lawyer may require proof that the SPA was not exercised by will. In such a case, the transferor’s will may have to be probated, perhaps solely for this reason. This complication can be eliminated by language in the deed which causes a conclusive presumption of non-exercise of the power of appointment by will or codicil if notice of the establishment of probate proceedings is not recorded in the chain of title within a certain time frame after the transferor’s death.

At the time of executing any such deed, the transferor may also wish to execute a durable power of attorney under which one or more of the transferees could later release the transferor’s life estate or SPA. This power of attorney would allow a transferee whom the transferor does not wish to favor financially, but upon whose judgment the transferor relies, to step into the transferor’s shoes and take corrective action if necessary or desirable because of future changes in family circumstances or in federal or state law.

Other transfers

Transfers to irrevocable grantor trusts. All the transfers described so far do not allow the transferor to make full and unquestionable use of the transferor’s $250,000 capital gains exclusion under IRC Section 121. One commentator (9) has proposed that the retention of an SPA in a deed results in the power holder being treated as the owner of the premises for IRC Section 121 purposes, but there is an absence of case law directly on point.

With the limited amount of tax savings at stake, clients would likely be unwilling to finance litigation on this issue, or even seek a private letter ruling. Accordingly, if there is a possibility that the transferor may wish to move in the future, the lawyer should consider placing the home in an irrevocable grantor trust to increase the possibility of using the IRC Section 121 exclusion.(10)

If IRC Section 121 is a concern, the better planning choice would be an irrevocable trust that intentionally triggers the grantor trust provisions of the Internal Revenue Code. Because capital gains may be allocable to principal under state law, care should be taken to ensure that the trust is not deemed a grantor trust as to income only. A power over principal should be considered, such as a power to make distributions of principal to charity and/or issue. Administrative powers—such as borrowing without adequate security or the power to replace the home with assets of equivalent value—could also be considered, but could be misinterpreted by the state Medicaid agency, whose personnel often do not have the same level of trust training and sophistication as do IRS auditors.

One other way to preserve the home while doing estate and gift tax planning would be to transfer the home to a qualified personal residence trust (QPRT). Practitioners should not, however, recommend a QPRT with a very long term without taking into account the possibility that the client may leave the home to live with a relative or to reside in a nursing home. In such situations, the annuity provisions of the QPRT which would take effect would, in many cases, necessitate a sale of the home and cause the expenditure of much of the proceeds.

Additional transfer issues

The legal authority of someone other than the homeowner to make a transfer of the home is always an important issue to be addressed. In the absence of a durable power of attorney which contains explicit gift-giving provisions, a state court procedure may be available to obtain authority for a particular type of transfer.

Prior to any transfer, the governmental benefits other than Medicaid or homestead exemptions that the client may already be receiving or hoping to receive should be reviewed. Moreover, the lawyer should ascertain whether the transferor has retained a full insurable interest in the home. If not, the homeowner’s insurance policy and any other similar policy should be amended to ensure that the proper person or entity is named in the policy.

Upon any completed gift, a federal gift tax return must be filed on or before April 15th of the calendar year following the gift. Even when it seems clear that no completed gift has been made—such as when the transferor retains an SPA in a trust or deed—the taxpayer is usually required to file a gift tax return, and civil and criminal penalties could be imposed by the IRS if such a return is not filed.

When Are a MassHealth Applicant’s Intentions Considered in Determining Whether a Disqualifying Transfer Occurred?

by: Brian E. Barreira, Esq.

There are many exceptions to disqualifying transfers in federal Medicaid law that the MassHealth program has been required to implement.   If a potential disqualifying does not fit into the categories of permissible transfers, then MassHealth is required to determine what the MassHealth applicant’s intentions were when the transfer occurred.

One exception to a disqualifying transfer occurs when the MassHealth applicant had made the transfer exclusively for a purpose other than obtaining MassHealth eligibility.  This one situation where ignorance of the law can be an excuse for what was done.  Unfortunately, anybody can claim that he/she didn’t know about the law, so hearing officers expect a compelling case to be made, and if there is even a hint of MassHealth planning or knowledge, they can easily rule against the MassHealth applicant.

Another expectation to a disqualifying transfer involves an attempt to receive fair market value or other valuable consideration.