Category Archives: Protecting the Home

Using Long Term Care Insurance to Cover the Medicaid Disqualification Period

by: Brian E. Barreira, Esq.

Many persons do not become aware of long-term care financing issues (including Medicaid transfer restrictions and the lack of coverage of long-term health care by Medicare and other health insurance) until it is too late to engage in anything other than choosing among bad options.  Some persons, however, have the foresight to engage in advance planning, but cannot afford long-term care insurance, so that need to resort to Medicaid planning.  They often are middle-class persons who own a home and limited funds that they need to live on, and typically their primary concern in engaging in Medicaid planning is to preserve their home for eventual inheritance by their children without losing the right to occupy their home.

Long-term care insurance is often the best solution to the long-term care problem, but if it cannot be afforded on a long-term basis, the only way to preserve the home is to transfer it.  (If the home is not transferred, it can still be deemed exempt upon a Medicaid application, but only during the applicant’s lifetime.  After the death of a Medicaid recipient who was a homeowner, however, an estate recovery claim for reimbursement can be made by the state Medicaid program.)

No matter how the transfer is structured, unless it is made to one of the limited number of permissible transfers under federal Medicaid law and state Medicaid regulations, a 5-year (or, in some cases, greater) period of Medicaid disqualification will result, beginning in the month of the transfer.  For example, suppose an unmarried person transfers a home worth $630,000.00 in a state where the average nursing home cost is $7,000.00. If a Medicaid application is made within 5 years of the transfer, the disqualification period would be 90 months, beginning at the time of the application.  If the application is made more than 5 years after the transfer, under federal Medicaid law no disqualification period would exist.

If the need for a nursing home stay became necessary during the Medicaid disqualification period, private payment of nursing home costs will be necessary, unless the transaction is undone at that point; this process is known in Medicaid parlance as a “cure.”  Since a cure will sometimes result in gift tax complications, it may not be advisable from a tax standpoint.  Further, unless a cure is made, the spouse of an institutionalized person may end up spending all of his/her liquid assets, and thereby become impoverished.

For example, suppose an unmarried person transfers a home worth $270,000.00 in a state where the average nursing home cost is $9,000.00. Medicaid law would then provide for a maximum disqualification period of 30 months if a Medicaid application were filed within 5 years of the transfer. If the transferor needs nursing home care after 5 years have passed, the transferor will be eligible for Medicaid. If the transferor required a nursing home stay after 50 months had passed, he or she would be disqualified for the remaining 10 months of the lookback period. The transferor’s monthly income would pay for part of each month’s cost during the lookback period, but the transferees would have to either undo the transaction or pay for the remaining 10 months, an amount of $50,000.00 in this example.

If the transferees in this example were at all able to pay for the remaining disqualification period, they have a great deal to gain. If they were unable or unwilling to cover nursing home costs during this time and were required to make a full cure of the disqualifying transfer, the transferor would be revested with the $270,000.00 home, and a new plan would be needed to attempt to save something.

One way around these problems would be for the person to purchase long-term care insurance at the time of the transfer. While insurance premiums can be very expensive for people in their 70′s and 80’s, the policy could merely be purchased to eliminate the downside risk discussed above. Thus, the person would purchase the policy with short-term interests in mind, and obtain the smallest benefit necessary to cover nursing home care during the disqualification period.

The transferor’s income and other assets would factor into the determination of the amount of insurance to be purchased. As time went on, the transferor could drop the daily amount of the policy to fit his or her needs, and may even choose to get rid of the policy before the disqualification period expires. Once the disqualification period expires, however, the policy would likely be dropped (unless Medicaid laws had changed and it would be advisable to maintain the policy).

Many persons reject long-term care insurance as a long-term planning measure because the premiums are very expensive, and many persons reject the insurance as a short-term measure for the same reason. If someone is balking at the cost of the insurance, or if they are so concerned about the Medicaid disqualification period that they do not wish to make any transfer, it would perhaps be advisable to involve the transferees in the discussion, as it is their eventual inheritance that is at stake here. When the transferees learn how the Medicaid disqualification period works, they may find it is in their best interests to pay the premiums for the transferor. The transferor may not like the idea of others paying the premiums, but since without this insurance the purpose of the transfer can end up being frustrated by fate, payment by the transferee(s) should at least be considered.

Problems with Outright Gifts in the Medicaid Planning Context

by: Brian E. Barreira, Esq.

An irrevocable trust is often a better planning maneuver than an outright gift.  There are several problems with outright gifts in the Medicaid planning context that can lead to the recommendation of the use of an irrevocable trust. Below are a few of these problems.

(1) Appreciated Assets

Clients are often concerned about leaving behind the greatest possible inheritance, yet they are unaware of the consequences of making gifts of appreciated assets. Upon a gift, the transferees receive a carryover basis (i.e., will be treated for capital gains tax purposes upon a subsequent sale as if the transferees had purchased the asset for the same price at which the client had purchased it, plus capital improvements, if applicable). Thus, any gift of appreciated assets is also a gift of a possible capital gains tax. If a trust is structured so that the assets of the client are subject to estate taxation, the transferees would then receive a step-up in basis (i.e., the transferees would be treated for capital gains tax purposes, upon any sale occurring after the death of the client, as if the transferees had purchased the asset from the estate at its fair market value as finally determined for estate tax purposes). Thus, by use of a trust which causes assets to be subject to estate taxation, the transferees would in all likelihood not be liable for any capital gains taxes upon a sale immediately after the death of the client. This result will occur even if the client’s gross estate is less than $1,000,000.00 and no federal or Massachusetts estate taxes would thereby be due. Further, this result is often of greater benefit to the transferees than the avoidance of a minimal level of estate taxation.

(2) Fear of Loss of Control

The most obvious situation where an outright gift would not be feasible is where the client does not wish to lose control over the assets, due to the desire to maintain control over his or her own destiny. If the lawyer begins with the premise that estate taxation is not undesirable, the trust can be drafted to give the Donor a great deal of control.

(3) Transferees of Unequal Financial Abilities

The client may wish to treat all of his or her children (or other transferees) equally, and may not wish to make any gifts unless treatment is exactly equal. The problem the client may have is that either the investment prowess of the transferees or their ability to segregate and maintain the transferred assets may be questionable. The issue of a transferee’s spouse meddling into these affairs can also be a concern in this regard. With such client concerns, a trust would be appropriate in that one or more of the transferees who will handle investment and managerial responsibilities better than the others can become the trustee(s). By use of the trust, then, the client can feel secure that the assets will be managed properly and for such person’s benefit during such person’s lifetime, and after such person’s death whatever assets remain will be distributed equally to all of such person’s children.

Upon a conveyance of real estate subject to the Donor’s reserved life estate, any attempted sale, mortgage or other conveyance of the real estate would require the signature of the life tenant, or someone acting in a fiduciary capacity or under a durable power of attorney on behalf of the life tenant. Further, a particular person would not be empowered to make any decisions or expend any funds with regard to upkeep of and improvements to the property. By way of contrast, placing the home into a trust could allow the trustee to take any action with respect to the property without any action required by the Donor or someone acting on behalf of the Donor and without obtaining the agreement of all of the remainderpersons.

(4) Possible Bankruptcy of or Other Lawsuit Against Transferee

The client may be concerned that if the transferees are sued for any reason, the assets could be lost. Such a concern can be especially valid where one or more of the transferees own their own businesses or otherwise engage in risky endeavors. Whereas an outright gift could thereby cause the assets to be lost, a properly drafted trust would shield the assets from the bankruptcy, or any lawsuit against, any transferee, even if the transferee is a trustee of the trust.

A transferee may have marital problems, and the client may be concerned that a divorce is imminent. In such a case the client is often concerned that the assets will become part of the marital estate for purposes of equitable division. The use of a trust will obviate the possibility of the assets being treated as part of the marital estate of a transferee, even if the transferee is a trustee.

(5) Possible Death of Transferee

The client may be concerned that if one of the transferees dies before the client, the assets will end up being inherited by others who would not feel morally compelled to use these assets for the benefit of the client. Due to this concern, gifts can create a need for the transferees to have their wills redrafted. The intention of such redrafted wills may not be fulfilled if the will is successfully contested or a disgruntled spouse files a waiver of it. The client could therefore be left with little or nothing back from a predeceased transferee. The use of a trust obviates this problem, and may be more economical where several transferees exist.

A further problem which could be caused by a transferee predeceasing the client is that gifted assets would be taxable in the estate of the transferee, and estate taxes may be payable out of these transferred assets. A properly drafted trust obviates this problem also.

(6) Income Taxation

Because a client who is concerned about nursing home costs is usually retired, he or she is often in a lower income tax bracket than his or her children. A gift, then, could cause the income from the transferred assets to be subject to a higher level of income taxation, as well as lose capital gains tax benefits which the client might have had upon a later sale of the home.

(7) Capital Gains Taxation on Sale of Home

Under Internal Revenue Code section 121, a homeowner can sell his or her home and pay no capital gains tax on the first $250,000.00 of appreciation. A gift to the children results in their having ownership interests that do not qualify for this capital gains exclusion, whereas a transfer of the home to a properly drafted irrevocable trust can result in the retention of the ability to use this exclusion.

Five Issues in Massachusetts Medicaid Planning

by: Brian E. Barreira, Esq.

Most Living Trusts Sold at Seminars Don’t Work for MassHealth Purposes

Often overlooked in the estate tax planning process is that a funded trust that avoids probate is often considered available by MassHealth (i.e., Medicaid) to pay for the surviving spouse’s nursing home care. Thus, funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if probate avoidance had not been accomplished.

Testamentary Trusts
There is one type of trust that spouses can establish for each other that meets the criteria established under both federal law and Massachusetts regulations for being considered unavailable to a MassHealth applicant: a discretionary testamentary trust. Under a federal Medicaid law that has been in effect since 1985, an unfunded trust that was funded by the deceased spouse’s will is not considered available for payment of the nursing home care of the surviving spouse to the extent that distributions are discretionary.

Irrevocable Trusts Also Allow Capital Gains Tax Planning

Irrevocable trusts are subject to a 5-year lookback period, and can sometimes place an elderly person in a worse position when applying for MassHealth than other types of gifts. Since an irrevocable trust is effective only if its principal cannot be distributed to the person who established it, attempting to preserve the use of the principal to pay for home care or assisted living is not possible. An irrevocable trust can be drafted, however, to allow principal distributions from the trust to others who can opt to pay for the home care or assisted living. If the irrevocable trust triggers the grantor trust rules as to the trust principal, such as by the reservation of a special power of appointment, the grantor can maintain use of the $250,000.00 capital gains exclusion upon a sale by the trust.

Long-Term Care Insurance Policies Can Preserve the Home

If a person ever received any type of MassHealth benefits, a post-death estate recovery claim for reimbursement can be made against the person’s probate estate. Under current MassHealth regulations, a 2-year, $125.00 per day long-term care insurance policy can exempt the home from post-death estate recovery for MassHealth long-term care (but not community care) benefits. This regulation replaced the prior requirement of $50.00 per day, which was grandfathered for individual long-term care insurance policies issued before March 15, 1999.

Immediate Annuities As a Last-Minute Option for the At-Home Spouse

The purchase of an immediate annuity can place a community spouse in a worse financial position than going through the MassHealth appeal process. In cases where the MassHealth appeal process would not preserve all assets, an immediate annuity can help, but the MassHealth appeal process is financially preferable because it can preserve not only all assets but also some or all of the institutionalized spouse’s income for the benefit of the community spouse. The payout period of the annuity cannot exceed MassHealth’s determination of the life expectancy of the community spouse. Under the immediate annuity route, however, MassHealth eligibility is not effective until the date the annuity is irrevocably purchased, so it is important that a qualified elder law attorney make a determination of which is the better route as early in the planning process as possible.

Despite Medicaid Transfer Restrictions, Some Transfers of the Home are Always Safe

by: Brian E. Barreira, Esq.

A person’s home can sometimes be given away without penalty or disqualification from MassHealth even after a nursing home stay has begun.

While many transfers of the home are subject to a period of disqualification from payment of nursing home costs by the state Medicaid program, some transfers can be made even after a nursing home stay has begun, and are immediately safe under federal law. (Other exceptions, especially in California, may apply under state interpretations of the federal law.)

One such permissible transfer is to the elder’s spouse. If one spouse becomes institutionalized, the home could probably be deeded to the spouse remaining in the couple’s home. This plan may not be very helpful to the family if the spouse who is institutionalized later receives the home back by will. Married couples that wish to have such action taken in case one of them becomes incompetent should have durable powers of attorney empowering each other to transfer the home.

Another permissible transfer is to (presumably reward) a child who spent no less than the 2 years immediately prior to the client’s institutionalization living in the client’s home and who took care of the client in the client’s home. The care must have been of the type which kept the client out of a nursing home. Since the state Medicaid program makes the decision as to whether these requirements were met, the child would be well-advised to keep detailed records during this period.

Another permissible transfer is to a child who is a minor or who is blind or disabled, or to an irrevocable for the benefit of a disabled child.

Finally, a transfer could also be made to a sibling who has an equity interest in the home and who has lived there for no less than one year prior to the client’s institutionalization; this exception could arguably apply if the client and sibling were co-owners of a multi-family home.

Even if the exceptions outlined above do not apply to the situation, in some cases there may be other steps that can be taken even after a nursing home stay has begun.