By Jennifer B. Cona, Esq.
On Feb. 8, 2006, under the guise of "Medicaid Reform", President George W. Bush signed into law the Deficit Reduction Act of 2005. The federal law, purportedly aimed at reducing Medicaid fraud, severely restricts Medicaid eligibility for the elderly and disabled by drastically changing the Medicaid asset transfer laws. The new law, which is expected to save less than the cost of one week of the war in Iraq, will severely impact the most vulnerable of our population and creates a minefield for the unwary practitioner.
The Deficit Reduction Act of 2005 (S. 1932) (hereinafter "DRA") passed the United States Senate by a vote of 51 to 50, with Vice President Dick Cheney casting the tie-breaking vote. The bill went back to the U.S. House of Representatives (for procedural reasons) and was thereafter passed by only four (4) votes. The DRA makes several major amendments to the federal law (42 U.S.C. Section 1396p) and, at the state level, to section 366 of the Social Services Law. On July 20, 2006, New York State issued the implementing regulations via the New York State Department of Health Administrative Directive Transmittal 06 OMM/ADM-5 (hereinafter cited as 06 ADM-5). In New York State, unless otherwise noted, the new laws are effective for all Medicaid applicants filed on or after Aug. 1, 2006.
There are four (4) major changes in New York State wrought by the DRA: 1) increased look-back period; 2) new commencement date for penalty periods; 3) changes to the homestead exemption; and 4) revised rules regarding treatment of annuities.
The Look-Back Period
The DRA increases the look-back period to five (5) years. DRA Section 6011(a); 42 U.S.C. 1396p (c)(1)(B)(i). Under the prior law, the look-back period was three (3) years for transfers to individuals and five (5) years for transfers to a trust.
The increased look-back period will be phased in over time in such a way that Feb. 8, 2006 will always be captured. As such, documentation requirements will remain at three (3) years until Feb. 8, 2009 (because Feb. 8, 2006 will still be "captured"). Thereafter, applicants will be required to produce three (3) years plus one month of financial documentation for each month post-Feb. 8, 2009 they are applying. 06 ADM-5 at 11. In other words, there will be a sliding and ascending scale as to the number of months and years for which financial documentation must be provided, culminating on Feb. 8, 2011 when the full five (5) year look-back will be reached. All Medicaid applications filed on or after February 8, 2011 will contain the full five (5) year review.
Consider the following example: Mr. Jones made a gift of $30,000 on March 8, 2006 to his granddaughter to help pay for her wedding. In June of 2009, Mr. Jones’ Parkinson’s worsens to the point that he can no longer live independently. Mr. Jones enters a nursing home and applies for Medicaid benefits in June of 2009. Mr. Jones will be required to submit three (3) years plus four (4) months of financial documentation (i.e., February 2006 through June 2009) and account for all asset transfers during these three (3) years and four (4) months. As June of 2009 is not five (5) years from Feb. 8, 2006, five years of documentation need not yet be provided.
The increased look-back period means that individuals and families must plan five (5) years before a health care crisis. Short of a crystal ball, no one knows when he or she may suffer a debilitating illness such that long-term care is needed. Early planning, while individuals are relatively young and healthy, is now even more of a mandate. The trick, of course, is balancing the desire to protect and preserve assets versus giving up control of those assets.
It’s also important to note that the new look-back period is the same whether assets are transferred into a trust or are transferred outright to family members. In the past, Elder Law practitioners steered clear of transferring assets into an irrevocable trust if the value of said assets would ultimately increase the penalty period from three (3) years to five (5) years because of the five (5) year look-back on trusts. Now, the look-back period is the same five (5) years across the board, thus making trusts far more attractive for asset protection and tax purposes with little or no downside.
The penalty periodThe DRA postpones the commencement date for a penalty period based on uncompensated asset transfers. DRA Section 6011(b); 42 U.S.C. 1396p(c)(1)(D). Under prior, the penalty period commenced on the first day of the month following the date of the asset transfer. As such, institutionalized Medicaid applicants transferred one-half of their assets to family members and maintained the other one-half to private pay for their nursing home care until the penalty period expired. With proper calculation, the individual’s funds would run out at the same time the Medicaid penalty period expired and eligibility would thereafter begin (colloquially known as the "rule of halves").
Now, the penalty period will not commence until the individual is "otherwise eligible" for Medicaid benefits but for the asset transfer. 06 ADM-5 at 15-16. This means that the applicant must be both residing in the nursing home (receiving care for which Medicaid coverage could be sought) and below the resource limit (currently $4,150 for 2006) before the penalty period clock will begin to run.
An example will help illustrate how the penalty period is calculated. Mrs. Smith has liquid assets totaling $160,000. (She does not own any real property.) Mrs. Smith’s children want to purchase a home and need help with the down payment. So Mrs. Smith gives $100,000 to her children on June 15, 2006 for the down payment. Mrs. Smith maintains the balance of $60,000 in her bank account. All is well until one year later, in June 2007, when Mrs. Smith suffers a stroke and goes into a nursing home. For purposes of our example, assume the "regional rate" (the average cost of nursing home care) is $10,000 per month.
Mrs. Smith spends down her remaining $60,000 on the costs of her care, which covers her for approximately six (6) months, that is from June 2007 through November 2007. As such, Mrs. Smith’s penalty period on the $100,000 gift made in June 2006 does not begin until Dec. 1, 2007 because that is when she is both under the resource limit and in the nursing home receiving care and services. Accordingly, the penalty period now runs from December 2007 through September 2008- 10 months based on the gift of $100,000 made in June 2006. The problem is, however, that Mrs. Smith does not have funds with which to private-pay during this 10-month period of time and she is not eligible for Medicaid benefits. She simply has no source of payment.
As is clear, many individuals entering nursing homes will have neither private pay funds nor eligibility for Medicaid benefits. A senior who has transferred assets to children, made charitable gifts, etc. may not have access to those previously gifted funds and will be ineligible for Medicaid benefits for a period of months or years (depending on the value of the assets transferred) beginning sometime on or after the date of admission to the facility. A health care facility is not likely to admit such a resident and hospitals will have tremendous difficulty discharging such patients. What may result is stratification of "good" nursing homes that will have no choice but to bear the risk of admitting residents who have no source of payment just to fill their beds.
The Valuable House Rule
The DRA provides that if a person has equity in a home exceeding $500,000, they will be automatically ineligible for Medicaid benefits. DRA Section 6014. Individual states were granted the ability to raise the threshold limit to $750,000 and New York State did just that. 06 ADM-5 at 24. This provision in the DRA is effective as of Jan. 1, 2006 and applies to all Medicaid applications filed on or after that date.
Under prior law, the homestead was an exempt asset and Medicaid benefits could be secured regardless of the value of a home in the community (based on an "intent to return home"). The DRA did leave in tact, fortunately, the same categories of persons to whom the house could be transferred without penalty or who, if living in the house, could make the real property an exempt asset- that is, a spouse, a minor child, or a blind or disabled child.
This provision of the DRA seeks to force seniors and the disabled to either sell their homes or tap into the equity in their homes to pay for the cost of their care. The DRA specifically notes that seniors may take home equity lines of credit or take out reverse mortgages to reduce their equity. DRA Section 6014(3). However, neither scenario is likely to actually work. First, if a nursing home resident takes out a home equity loan, they will need to make monthly payments to the bank on that loan but will, at the same time, be responsible for turning over all of their income to the nursing facility as their NAMI (Net Available Monthly Income) budget. There will be no funds from which to pay back the home equity loan. Second, a reverse mortgage, although specifically singled out in the DRA, is not actually available to nursing home residents. Once a homeowner is out of residence from their home for a period of time fixed by the reverse mortgage company (anywhere from 60 days to one year, generally), the homeowner is no longer eligible to obtain (or continue to maintain) a reverse mortgage. The home must be the primary residence and if the applicant now resides in a nursing facility, he or she will not qualify for a reverse mortgage (or if they have taken a reverse mortgage already, it will be due and payable in full). The DRA completely disregards this contradiction.
Treatment of annuitiesThe DRA changed the rules regarding the treatment of annuities such that the purchase of an annuity after Feb. 8, 2006 will be treated as an uncompensated transfer of assets subject to a penalty period unless the state is named the remainder beneficiary of the annuity. DRA Section 6012; 42 U.S.C. 1396p(e)(1). The state is to be named in the first position for at least the total amount of medical assistance paid on behalf of the annuitant. If the annuitant has a spouse, minor or disabled child, the state may be named the beneficiary in the second position. If the Medicaid applicant or the applicant’s spouse fails or refuses to name the State as the remainder beneficiary, the purchase of the annuity will be considered a transfer of assets for less than fair market value. 06 ADM-5 at 22. Further, as was the case with annuities under the prior law, the annuity must be irrevocable and non-assignable, actuarially sound, provide for payments in equal amounts during the term of the annuity and not contain any deferral of payments or balloon payments. 06 ADM-5 at 23.
The annuity rules apply to all transactions after Feb. 8, 2006, including not just the purchase of an annuity but also any actions that change the course of payment or change the treatment of income and principal post Feb. 8, 2006, including elective withdrawals, additions to principal, requests to change the distribution or to annuitize the contract. 06 ADM-5 at 23. Exceptions apply for certain annuities under Internal Revenue Code Section 408, including simplified employee pension plans, annuities purchased with proceeds from an individual retirement account and Roth IRAs.
The DRA and the related New York State Administrative Directive (06 ADM-5) severely restrict asset protection planning opportunities and create a very difficult environment in which to counsel clients. Elder Law attorneys have to be more creative then ever in devising plans and strategies to protect assets, such as caregiver contracts and personal care services agreements, heretofore seldom employed. However, many issues will need to be litigated by fair hearing and Article 78 proceeding, such as transfers back or payment of parent expenses in lieu of transfer back, use of loans, notes and private annuities to reduce penalty periods, etc. Elder Law attorneys will need to find clients willing to be the "test" case on these issues. Only until then will attorneys have a semblance of definitiveness and guidance when counseling clients. In the meantime, the minefield for attorneys created by these uncharted waters is paramount.
Jennifer B. Cona is an elder law and estate planning attorney at Cona Elder Law, LLP, Melville, Long Island.