Changes in Medicaid Planning Under the Deficit Reduction Act of 2005

Changes in Medicaid Planning Under the Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (DRA) was enacted to limit the impact of Medicare and Medicaid programs on both the federal and state budgets. The legislation has brought about a number of revisions to the Medicaid rules concerning asset transfers and the treatment of other resources for individuals applying for long-term care services. This article will focus on the transfer of assets, home equity, treatment of annuities and the “income first” rule for community spouses.

The “Lookback” and “Penalty” Periods –These two terms can be confusing.

The lookback period is the period of time that Medicaid reviews the financial records of the applicant and the applicant’s spouse to determine eligibility. The penalty period is the period of time during which the individual transferring assets will be ineligible for Medicaid (in other words, the applicant will be required to pay privately for his or her care during the penalty period). This period is determined by dividing the amount of assets transferred by the average private-pay cost of a nursing home in your state, as stipulated by Medicaid.

– The lookback period for transfers made on or after Feb. 8, 2006, is increased to 60 months for individuals applying for Medicaid coverage in a nursing home facility. Previously, only trust-related transfers were subject to a 60 month lookback date.

– The transfer penalty period begins to run NOT in the month following the transfer of assets but when the individual actually enters the institution (e.g., nursing home) and applies for Medicaid. In other words, the penalty does not begin until (1) the individual has moved to a nursing home, (2) has spent down to the asset limit for Medicaid eligibility and (3) has applied for Medicaid coverage and been approved. This applies only to nursing home care. Individual states have the option to impose a penalty for home care or other community-based care.

If you are considering transfers, be careful not to apply for Medicaid before the five-year lookback period elapses and keep enough funds in your name to pay for any healthcare needs during the penalty period.

Home Equity
Previously a home was considered an exempt asset – regardless of its value – as long as an individual was residing there. Under the new DRA ruling, if a Medicaid applicant has equity in his or her home in excess of $500,000 (in some states the limit is $750,000), the difference must be counted as a resource on the Medicaid application. This does not apply if a spouse is residing in the home or the home is occupied by a child who is under age 21, blind or disabled. The equity value is determined by subtracting any encumbrances (liens, mortgages, etc.) from the fair market value. An individual can take a reverse mortgage or home equity loan to reduce the equity interest in the home. Individuals cannot reduce equity by spending on medical bills to obtain eligibility.

To protect the home from estate recovery (after a Medicaid recipient dies, the state must attempt to recoup whatever benefits it paid for the recipient’s care) an estate planning attorney may recommend the use of a life estate or transfer of the home into a irrevocable trust. As with any transfers, transfers into a life estate or an irrevocable trust can trigger a Medicaid ineligibility period. Any transfers of assets, particularly into a life estate or trust, should be accomplished with the help of an elder care attorney.

Annuities
Medicaid applicants who purchased annuities on or after Feb. 8, 2006, are now required to name the state as a remainder beneficiary in order to recoup medical costs once the recipient is deceased. The state must be named as a remainder beneficiary after the community spouse, minor or disabled child; otherwise the annuity shall be treated as a transfer of assets for less than fair market value and may delay Medicaid eligibility.

For an annuity purchase to be considered an appropriate transfer of resources under the new law, it must meet certain requirements:
1.) It must be irrevocable
2.) It must be non-assignable.
3.) It must be actuarially sound.
4.) It must have payments made in equal monthly amounts.
5.) It must exclude any deferrals or balloon payments.
6.) It must be purchased with retirement or IRA funds.

Income-First Rule for Community Spouses
Under the new law, where the community (that is, non-institutionalized) spouse’s income is less than the minimum, the community spouse must use all available income from the institutionalized spouse to subsidize their monthly income prior to getting an additional share of the couple’s assets. Before pursuing this increased resource allowance, please check on how it is applied in your home state. Previously, the law allowed the community spouse to obtain additional resources without taking income from the institutionalized spouse.

Planning for your care – either preemptively or in response to an unanticipated emergency – should be done very carefully. It is extremely important that if you are considering Medicaid eligibility that you consult with an elder-law attorney. Transfers of assets should be made carefully with a clear understanding of all the consequences involved. If you should need the services of an elder-care attorney in your area, please contact the National Academy of Elder Law Attorneys at (520) 881-4005, or on the Web at www.naela.com.

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