Congress Reforms Medicaid Asset Planning Rules

Article written by Paula McCann, Esq.
Posted on Jun 30, 2011

By Paula J. McCann, Esq., and Ron R. Morgan, Esq.

The Deficit Reduction Act (DRA) of 2005 was passed by the US Congress and signed by the President on February 8, 2006. This law’s legal effect is tied up in a dispute between certain Democratic members of Congress and the Republican majority because it was not passed by both Houses in exactly the same terms. Nevertheless, on May 16, 2006, Vermont Medicaid authorities circulated draft amendments to its Medicaid Manual implementing certain DRA changes. The amendments are thought to be a “rough draft” meaning they are susceptible to change before becoming effective.

The following are the most important changes to be made to the Vermont Medicaid Manual that will affect whether and to what extent Vermont pays for an individual’s long-term care.

1. Home Equity. Under pre-DRA law in Vermont, it was not true that individuals had to sell their homes to pay for long-term nursing home care. Nevertheless, under the DRA, only $750,000 of the equity of an individual in his/her personal residence would be a non-countable resource for Medicaid long-term care purposes. At the option of the State, this amount could be as low as $500.000. The State of Vermont has elected this lesser $500,000 amount, and this change will apply to individuals who are deemed eligible for long-term care in an application filed on or after January 1, 2006. Reverse mortgages and a spend-down may be necessary to qualify for long-term care.

2. Annuities. The Deficit Reduction Act requires that long-term care applicants disclose annuities, and it makes more annuities subject to a transfer penalty. A transfer penalty is a time period during which the individual must pay for his/her own care despite the fact that s/he would otherwise qualify to have the state of Vermont pay for nursing home care. This rule will apply to transactions (including the purchase of an annuity) made on or after February 8, 2006. Any elder individual who intends to purchase an annuity should review such transfer with a lawyer conversant with Medicaid asset planning rules if their countable resources are in the $300,000 to $600,000 range. Many banks and brokers are not aware of how the Medicaid planning rules affect annuities. This is not a criticism of such financial professionals, but it is a nod to the astonishing complexity of Medicaid planning rules. Even the US Supreme Court has admitted that the Medicaid transfer penalty rules are bewitchingly complex.

3. Start of Five-Year Look-Back Period. This is the most draconian of any of the DRA 2005 rule changes. Formerly, the look-back period (which in general was three years) was measured from the date of the transfer. In the future, it will be measured from the date that the individual applies for Medicaid. For example, we have encountered many transactions where an elder widow has added her son or daughter to the deed to her residence. This is a disqualifying transfer, unbeknownst to many widows, and indeed a few lawyers in the State of Vermont who prepare such deeds without so informing the client. Formerly, provided that three years passed after the son or daughter was added as a joint tenant, the transaction had no effect on the widow’s application for Medicaid. The look-back period is now five years, and it runs from the date that the application for Medicaid assistance is made. In other words, for a transfer on or after February 8, 2006 from a Medicaid applicant to her daughter of a joint tenancy interest in the widow’s personal home, the five year look-back period will only expire five years after the date of the transaction, February 8, 2011. If the widow applies for Medicaid assistance within this five-year look-back period, the disqualifying period commences to run from the date of the application, and not from the date of the transfer, as was previously the case.

4. Life Estates. Many individuals use “Lady Bird Johnson deeds” to create an enhanced life interest in their personal residence, and a remainder to the children. This transaction is entered into because, although the transaction functions like a join interest (because the life interest is extinguished upon the death of the holder, and the remaindermen automatically graduate to full ownership of the residence) no penalty period attaches to this transfer. DRA redefines assets to include the purchase of a life estate in another individual’s home, a rather high-tech Medicaid planning device, which can now no longer be used. Under existing (and new) rules, the life estate deed should be drafted so that it qualifies properly under Medicaid transfer rules and provides for certain life contingencies.

Our Medicaid Planning staff, and in particular, Paula McCann, our Elder Law specialist, is available to help you with any of these transactions.

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