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Medicaid Planning to Maintain Exempt Assets

Presented to the State Bar of Texas

1994 Elder Law Institute, Dallas, Texas          © 1989-2016, Paul Premack

The Medicaid monetary limits discussed in this paper have changed. 
For current values,
click here

Ethical Implications: Whom do you represent?

  • Who Contacts You?

It is likely that the you will get your first call from the son or daughter of the elderly person. They will be inquiring -- ostensibly on their parent's behalf -- about the type of assets that can be protected if parent winds up in a nursing home.

Your position must be made clear early on. Typically, in the first interview with the "child," it will become clear that he/she is seeking information to report back to the parent. It is appropriate for you, at that time, to make it clear that there may be a conflict of interest between the child and parent.

The child, after all, may be seeking to unjustly enrich him/herself at the expense of the parent. If you are to represent the child, the parent must understand that you are not acting as the parent's counsel. If you are to represent the parent, the child must understand that you are not acting as the child's counsel.

  • Who pays you?

The Texas Disciplinary Rules of Professional Conduct require you to be concerned about who pays your fees. Rule 1.08(e) [1] states that a lawyer shall not accept compensation for representing a client from "one other than the client" unless the client consents, there is no interference with the lawyer's independence or with the client-lawyer relationship, and confidentiality is maintained.

Who do you represent? If the child is paying your fees, there is an appearance that the child is your client. You are probably best advised to be certain the parent pays your fees. If the parent lacks capacity to pay your fees, you have further issues to consider.

  • Capacity of the Elder

If the parent is in fine health, your ethical obligations may be clear cut: at the time you perceive a conflict, you can call in the parent and seek full disclosure.

If the parent's capacity is compromised, you have a harder row to hoe. Capacity, of course, is a legal issue. On the surface, until an individual has been declared incapacitated by a court of competent jurisdiction, the individual has full capacity. Below the surface, you will no doubt encounter various doctor's opinions and family opinions.

You must use your best legal and personal judgment. If you feel that, despite the lack of a formal determination of incapacity, the parent cannot understand your advice you should refrain from providing separate advice to the child.

  • Agency Arrangements

If the parent is either legally incapacitated, or is de facto incapacitated, you may be approached by a child (or other person) claiming to be an agent.

A detailed discussion of Agency Law is not appropriate here. Suffice it to say that Texas law relating to powers of attorney has changed greatly in the last 5 years. In 1989, the legislature passed the Durable Power of Attorney for Health Care Act [2] and placed medical agency on a separate footing from financial agency. In 1993, the legislature enacted the Texas Durable Power of Attorney Act [3], which codified many of the powers attorney have attempted to draft into their forms for years.

If an apparent agent approaches you with a Durable Power of Attorney, you must study it carefully. Is it dated prior to September 1, 1993 (the effective date of the new statute)? If so, was it recorded with the county clerk? Has it been revoked? Was it properly witnessed and notarized?

If the apparent agent gives you a post-September 1, 1993 document you have less to check into. There is no requirement that it be either witnessed or recorded. However, you will want to confirm that it conforms to the statute.

The Durable Power of Attorney Act does not contain a blanket grant of authority allowing gifts to be made on behalf of the principal. It allows (in section 492) the agent to "dispose" of real estate. Section 492 allows the agent to transfer any assets of the principal to a revocable trust created by the principal as settlor -- an act that will not shelter the assets.

The 1993 statute does specifically allow the agent to hire an attorney on behalf of the principal, and to pay fees to that attorney. Hence, ethical issues about whom you represent can be cleared up in the presence of such a durable power of attorney.

  • Conflicts with Other Family Members

The issue "whom do you represent" is never so important as when multiple adult children disagree on what is best for the parent. If you have created the appearance of "favoritism" -- one child received more assets than another -- then you'd better have strong records that 1) your client was the parent, 2) the parent had full capacity to determine a course of action, 3) the parent was not coerced by the "favored" child, and 4) the gift or gifts were proper.

Gifting by the elderly

  • Capacity Considerations

The same considerations about your client's capacity discussed above apply.

  • Gift Tax Considerations

Your client can gift up to $10,000 to any number of individuals in any single year without filing a gift tax return [4]. If married, the gift can be "split" so that a total of $20,000 is given to a single individual in a single year without owing tax. However, when splitting gifts a gift tax return is required (even if no tax is payable).

Gifts that exceed the annual exemption amount may be subject to gift tax. An individual's unified credit may be used to offset up to $675,000 of taxable gifts (or devises) for an individual donor -- $1,000,000 after January 1, 2002. To use the credit, a gift tax return must be filed for the year of the gift(s).

Frequently, when advising clients regarding transfer of assets for Medicaid purposes, the client's estate is significantly below the $675,000 level. Those clients with estates above the $675,000 level typically have income that exceeds the minimum allowance, and cannot qualify for Medicaid regardless of asset transfers.

Valuation of assets is important. An attempt should be made to determine a defensible market value for any items being transferred.

Be sure to advise your clients that the gift recipient should not report the gift as income on his/her 1040 individual income tax return. Ordinarily, the transfer of assets will be both gift tax free (due to the annual exemption or the unified credit) and will be income tax free (because a gift received is not income).

  • Documentation

Whenever possible, the donor should personally sign all documents of transfer. If a bank deposit is being transferred to several children, the fund owner should sign the checks and should note in the "memo" field that the funds are intended as a gift.

Transfer of personal items can be documented with a signed and notarized statement from the donor. A "bill of sale" form can be used, so long as notations are made on it indicating that there is no consideration for the transfer and that it is a gift.

Medicaid: General Qualifying Standards

Medicaid's math changes every year. This paper has been updated to use the 2001 figures. As new figures are released they will be posted at this link.

  • There are several different ways to qualify for Medicaid benefits:

Any person who is qualified for Supplemental Security Income (SSI) automatically has Medicaid benefits.

Undocumented aliens who meet all criteria for SSI except citizenship may be entitled to Medicaid benefits for emergency medical care under "type program 30."

Individuals who do not otherwise qualify for Medicaid may be entitled to primary home care services under "type program 14." The goal is to avoid the greater expense of institutionalization by offering in-home services [5].

Home and community based services may be available to individuals who do otherwise qualify for Medicaid, even though they may not yet be in a nursing home [6].

The most common path to Medicaid for the elderly is the MAO (medical assistance only) program. Five conditions are imposed before an individual will qualify for Medicaid benefits under the MAO program.

  • Residence

The patient must be a Texas resident. He/she must have established a residence in Texas and must express an intent to remain in Texas [7].

The patient must also be a legal resident of the United States: a citizen, a permanent resident alien or a person permanently living in the U.S. "under color of law." [8]

The "color of law" exception is broad. If a person can prove that he/she has resided in the U.S. continually since January 1, 1972 then he/she is a resident under color of law. Further, any alien living in the U.S. indefinitely with the knowledge and permission of INS is a resident under color of law. Finally, any person who entered the U.S. before January 1, 1972 and who may be eligible for permanent residence at the discretion of the Attorney General is a resident under color of law.

  • Age, disability, blindness

The patient must be at least 65 years old, or blind or disabled [9] (as defined by the Social Security Act).

  • Medical status

Medicaid will not pay for custodial care. Hence, by default the patient must be classified at either the "intermediate" or "skilled" care level. The determination is made near the time of application for benefits on Form 3652-A by the Director of Nurses, an "assessor" who is a Nurse, and by a Physician. This hurdle is usually not difficult to overcome.

  • Income status

Texas is an "income cap" state. The income cap changes from time to time, but is set at $1,656 per month (2003). The income cap can be brutal: if a client has monthly income just a few dollars over the limit, Medicaid benefits will likely be denied even if he/she qualifies on all other counts.

The income cap is calculated by using three times the Federal Benefit Rate as determined by the Social Security Administration for SSI recipients.

For Medicaid purposes, "income" is given a sweepingly broad definition -- wider than the definition of income used in the Internal Revenue Code. Income is "any property or service a client can apply, either directly or by sale or conversion, to meet basic needs for food, clothing and shelter [10]." It includes gratuitous transfers made on a regular basis -- i.e., regular gift contributions made by family members to help support the elder. Fortunately, income can be changed with little impact: giving of gifts can be stopped, interest can be eliminated by moving resources.

Texas informally uses the "name on the check" rule to determine what income belongs to which spouse. If a dividend check arrives payable to husband, it is counted as husband's income only -- even though under community property rules he may only own half of the funds. Social Security retirement checks, pension checks and dividend checks are all treated in a like manner.

  • Asset status

For Medicaid, a person's assets are called "resources." Resources are divided into two categories: countable and non-countable (or exempt). Exempt resources are the primary topic being addressed here, and are discussed in greater detail as you read on.

Countable resources cannot exceed $2,000 for an individual or $3,000 for a married couple in a nursing home. If an individual's resources exceed the limit, Medicaid benefits will likely be denied even if he/she qualifies on all other counts.

  • Deeming of Resources

Assets belonging to only one spouse are deemed to belong to both spouses. Federal law here supersedes Texas community property law. Regardless of an asset's character as community property or separate property, all assets available to either spouse are lumped together for this test.

Protected Assets

  • Exemptions

Countable Allowance

After all exemptions are accounted for, the client is allowed $2,000 in countable resources. This can be cash or extra value attributed to items like a burial policy. If the client exceeds $2,000 in countable resources, he/she will be denied Medicaid benefits.

Spousal Impoverishment Provisions

The only surviving parts of the ill-fated Medicare Catastrophic Coverage Act [11] are the Spousal Impoverishment Provisions, now codified as part of the Social Security Act [12]. These provisions apply to any person who was placed into a nursing home after September 30, 1989 for a continuous period of at least 30 days.

The Spousal Impoverishment Provisions are poorly named; they should really be the "Prevention of Spousal Impoverishment" provisions.

Protection of Resources

The Spousal Impoverishment Provisions apply when one spouse is in a nursing home and one spouse lives at home. The at home spouse is given the label "community spouse" -- which has nothing to do with community property.

The community spouse is allowed to retain some assets, in contradiction of the deeming of resources rule. A maximum and minimum allowance are announced, and within that window the community spouse is may retain half of the couple's combined countable resources. The maximum is $90,660 and the minimum is $18,132. (2003)

The spousal allowance is in addition to the value of the home, car, burial fund and other exempt assets.

Example 1: Bob is living at home, Mary is in a nursing home. They have cash assets of $125,000, a home and a car. Mary is qualified for Medicaid in every other way. Application for Medicaid benefits is submitted, and Medicaid informs Bob that he may retain $62,500 as his spousal allowance. The balance of $62,500 is attributed to Mary, and since it exceeds the resource limit she is not qualified for Medicaid benefits. However, she can spend down her portion for medical care. When consumed, she will qualify for benefits. Bob still has his $62,500 even though Mary is now on Medicaid.

Example 2: The couple's assets total $275,000. When application for benefits is made, half of the assets exceeds the maximum allowable amount (i.e, $137,500 is more than $90,660). As such, Bob is allowed to retain $90,660 and Mary is charged with $184,340. She must spend down her part before she'll qualify for Medicaid.

(You won't be seeing many clients who present the fact pattern of Example 2.)

Example 3: The couple's assets total $27,000. Half of the assets is less than the minimum allowable amount (i.e., $13,500 is less than $18,132). As such, Bob is allowed to retain $18,132 and Mary is charged with $8,868. She must spend down her part before she'll qualify for Medicaid.

The maximum and minimum allowances change from year to year.

Protection of income

The community spouse is also granted an income allowance under the Spousal Impoverishment Provisions. Under year 2003 regulations, the community spouse may retain up to $2,266.50 of the couple's combined income per month to be used for the community spouse's living expenses.

The protection of income rule seems to violate the "name on the check" rule, but it doesn't. Before the couple reaches the point where this part of their income is diverted to the community spouse, the patient must still have income below $1,656 per month. The community spouse is allowed to keep the income allowance only if the patient first qualifies for Medicaid benefits.

Example 1: Bob is the community spouse. His monthly income is $1600. Mary is the patient. Her income is $850. She is qualified for Medicaid in every respect. Bob is allowed to keep $2,266.50 from their combined income. The balance, $183.50, must be paid to the nursing home for the care it is providing to Mary. Medicaid picks up the balance of the nursing home bill.

Example 2: Bob is the nursing home resident; he earns $1,700 per month. Since his income exceeds the $1,656 income cap, he does not qualify for Medicaid. We never reach the point were a division of income for the Spousal Allowance is made. A Miller Trust (Qualified Income Trust), which is beyond the scope of this article, can be used to defeat the monthly income limit.

"Unavailable" Assets

Your client may own an asset that has certain restrictions attached. If those restrictions make the asset inaccessible to the client, Medicaid may simply not consider the item to be a resource.

An asset is accessible if your client has the right, authority or power to liquidate the asset or his/her share of it. However, if court action would be necessary to dispose of or to access the item, it is not a resource for Medicaid purposes [13].

Assets that are jointly owned by the client and his/her spouse are always considered to be available, even if the other spouse has sole control of the assets and refuses to allow access [14]. However, assets that are jointly owned with an independent third party will be considered inaccessible (and therefore non-countable) if the co-owner's consent is withheld.

If your client's assets are managed by a Guardian, an Agent under power of attorney, or by a social security representative payee, they are considered to be available. If, however, a court denies the guardian or agent access to any item, that item is non-countable. The regulations do not permit a presumption that just because a client's assets are under guardianship they are not available. An explicit order from the court denying access is necessary; in the absence of such an order (even if there is no specific order authorizing the use of funds held in guardianship) the assets are countable.

Homestead

Your client's homestead is an exempt asset (i.e., it is non-countable). Hence, the fact that the client owns a home will not interfere with Medicaid qualifying.

Extent of Protection

The "homestead" for Medicaid purposes might be broader than it is for many other purposes. There is no distinction here between a rural and urban homestead. Instead, the home and all adjacent land are considered part of the homestead. No regard is given to the value, so it can be $10,000 or $250,000 and still be exempt.

Adjacent land includes all parcels, whether they were purchased at the same time or at various times, so long as it is not separated by property owned by another person. The fact that a road or river may bisect the land does not impact its status as adjacent to the home [15].

Title to the homestead can be held in joint tenancy, in life estate or some other interest.

The client can only claim one homestead. All other real property is a countable resource. A client is not allowed to exclude a homestead in another state -- if he/she considers that out-of-state home to be his/her residence, then he/she is not a Texas resident and will not qualify for benefits here.

If the client is a Texas resident, but his/her spouse resides in another state, the home in the other state is non-countable [16]. However, at the first annual review by Medicaid, if the client still has title to that out of state home it will then be counted as a resource.

Intent to Return

A prerequisite to the homestead being made non-countable is the client's declaration of intent to return home. At the time of Medicaid application, and from time to time thereafter, the patient will be asked to declare his/her intent to return home if possible. The answer to this question should always be "YES."

Even if it is clear that the patient cannot in fact return home because of an existing medical condition, the mere "intent" to return is necessary to shelter the homestead. As such, the question and answer often takes on an illusory quality.

Intent to return to the homestead may not be necessary if the community spouse or a dependent is residing in the home [17].

Asset Recovery Liens

The Omnibus Budget Reconciliation Act of 1993 [18] imposed a new, sweeping mandate on all 50 states: implement an active program of asset recovery liens against otherwise exempt Medicaid assets. Until this mandate, such liens were optional and Texas never used them.

Now, section 1396p(b) requires that the State seek adjustment or recovery of any medical assistance correctly paid on behalf of an individual for anyone who: 1) is an inpatient in a medical facility and was required to spend almost all of his/her own income for the costs of medical care, or 2) who was 55 or older when he/she received the medical care. Recovery can be sought from the individual or by foreclosure on the asset recovery lien.

Recovery against the estate or foreclosure on the lien can only be made after the death of the patient's community spouse. Further, it is only allowed when there are no dependent children under age 21 or who are blind or permanently or totally disabled [19].

If recovery is to be made against the patient's home, the government must also wait until no siblings (who resided in that home for at least one year prior to the patient's admission to the nursing facility) and no children (who resided in that home for at least two years prior to the patient's admission to the nursing facility, provided care to the patient, and has continued to reside in the home during the patient's stay in the nursing facility) remain as residents in that home.

The asset recovery lien statute took effect October 1, 1993. The 2003 Legislature acted to authorize an asset recovery program. TEXAS HAS NOT YET ADOPTED REGULATIONS THAT ENACT THE MEDICAID ASSET RECOVERY LIEN MANDATE, but is working on them -- expect regs to be issued in early 2004.

Rental Occupancy

Your client is in the nursing home. She was a widow, and her kids all live elsewhere. She has expressed her intention to return home if possible. He house is an exempt asset and the children's last hope of an inheritance.

The oldest son phones you: "Someone broke the front window on mom's house last night. We talked and decided to rent it to mom's cousin Clyde." Do you give the go-ahead, or tell them to throw on the brakes?

The Medicaid regulations provide minimal and sometimes contradictory guidance here. You are probably safe to advise your client that a short term rental agreement is acceptable; something in the range of three to six months. Remember, your client must express an intent to return home. If the client (or her agent) places a long term lease on the house, it seems clear that she cannot return home.

On the other hand, the client is allowed to exclude from countable resources any item essential to self support [20]. If you can establish that the rental is a business operation, then the value of the item is excluded from countable resources regardless of its value. The catch is the income cap. It would be delightful to advise your client that all fifteen of her rental houses are exempt assets; but by the time you've counted up the rental income she will be disqualified from Medicaid benefits for being over the $1,656 income cap.

On the other hand, the regulations specifically state that land and houses are countable resources [21]. Are we stretching the "self support" exemption too far in light of the clear casting of houses as resources? Sorry, there is no reliable answer.

Transfer to spouse or child (blind or disabled)

Generally, transferring title to an exempt resource like the home incurs a transfer penalty. However, a transfer between spouses does not trigger the penalty. Likewise, a transfer of the home to a child who is either blind or disabled [22] does not trigger the penalty.

Automobile

One automobile is an exempt resource. If the car is for convenience only, it is exempt up to $4,500 in value. Above that value, it counts as a resource.

If that automobile must be used for "necessary transportation [23]" then its entire value is non-countable. The regulations do not define "necessary transportation," but I would argue that any need for medical transport or for food (grocery shopping) is "necessary." As such, the standard is very low and most automobiles can be exempted if they are used for anything other than pure leisure.

Can additional automobiles be used as an asset shelter? The regulations state that other automobiles in which the patient has an interest are non-countable IF 1) the spouse or another member of the household needs it to drive to work or in his/her trade or business, 2) it is used by a handicapped person and is specially equipped for handicap use, or 3) it is used by the client or his/her spouse or a member of the household to be transported for medical care.

Life Insurance.

Life insurance is exempt without further inquiry if the face value is $1,500 or less [24]. If the face value exceeds $1,500 then the cash value must be determined. The cash value counts as a resource, and is only exempt up to $1,500.

Burial provisions

The value of a burial plot, casket, vault and opening and closing the grave for a Medicaid recipient are non-countable assets. This is true even if the value is several thousand dollars.

In addition to the above "merchandise" type burial items, an individual is allowed up to $1,500 for other burial expenses. The amount will not disqualify him/her from receiving Medicaid benefits. Any interest earned on this fund does not count as income, and the fund continues to be totally exempt even if it grows beyond $1,500 [25]. This fund can be expressed in one of three ways (but never exceeding $1,500 in value):

Prepaid burial contract.

A prepaid burial agreement is exempt up to $1,500. Remember, the value of the grave plot and casket are separate. Typically, funeral directors are aware of this limitation and sensitively counsel family members on the proper way to structure a burial contract.

Cash

The burial fund can be held as a bank deposit. It must be in a segregated fund that is separately identifiable. The bank should be instructed to earmark the signature card as "burial fund."

Life insurance

A client's life insurance can be earmarked as a burial fund. The regulations do not make it clear whether an individual can have $1,500 life insurance generally and $1,500 life insurance as a burial fund. Common practice among Medicaid screeners is to allow one or the other, but not both.

Personal Items

Personal items and household effects (furniture) are non-countable up to a value of $2,000 [26]. The value must be reported on the Medicaid application.

In practice, household goods and personal effects are usually ignored for Medicaid purposes. The value of these items is often difficult to determine, and is typically set below the $2,000 limit. A person's clothing and furnishings are, after all, used goods. When your client is of modest means, it is defensible to place a low value on personal items.

When your client is of medium means, however, there may be real value to personal assets. Jewelry, for instance, can quickly move the value of personal items above the exempt amount.

Informally, Medicaid usually ignores the value of a wedding ring no matter how expensive. A New York family tried to take advantage of this by purchasing a new, very expensive diamond wedding ring for mother, who was about to go into a nursing home. They hoped the funds invested in the ring would be sheltered. New York ruled that they had gone too far, stating that the value of a ring must be "reasonable" to be sheltered.

Livestock

The value of any livestock either used in a trade or business, or used purely for home consumption, is not counted [27].

This is an opportunity for a ranch family: the ranch house and all attached land are exempt as homestead. Extra cash can be sheltered by purchasing livestock for the ongoing business operation of the ranch. Since the livestock do not produce income unless sold (and sale can probably be deferred until the nursing home resident has died) there is no violation of the income cap.

  • Transfer of Assets

Your client is the owner of certain assets. He/she has the legal right to sell, gift, convey or otherwise dispose of his/her assets without interference or restriction.

Medicaid does not forbid or interfere with the transfer of any assets. They do, however,react after the fact to any transfer for less than fair market value (i.e., they react when gifts are given).

Any transfer for adequate value will not cause a Medicaid disqualification. If your client owns a piece of land worth $10,000 the land value is too high to qualify for benefits in the first place. If he/she sells the land at market value, he/she has cash of $10,000. This is still too much to qualify for Medicaid.

If your client gives away the land, however, he/she is not receiving any consideration in return. The land value is removed from his/her asset base, and any application for Medicaid would indicate the asset level had been reduced. This seems at first glance to be the ideal way to qualify for Medicaid benefits: give everything away!

Federal statute put an end to penalty-free gifts in short order [28].

Look-back Period

Gifts that are made prior to the look back period are exempt. Prior to October 1, 1993 the look back period was 30 months. Since then it has been expanded to 36 months [29]. A crystal ball is helpful when attempting to plan gifts that will utilize this exemption.

Example: Bob and Carol have $200,000 cash but they would otherwise qualify for Medicaid. They still both live at home. They come to you because Bob has been diagnosed with Parkinson's disease and they anticipate that he may need a nursing home in a few years.

You can recommend that they give away their $200,000 cash asset. If they do so, and Bob remains in the community (or as a private pay patient) for the next 36 months, the entire transfer is penalty free.

When they apply for Medicaid for Bob, they will be asked if any gifts have been given within the last 36 months. Since they deferred the application until the 37th month after the gift, they can respond "no" to the query. They have sheltered the entire $200,000 fund.

Clearly there are drawbacks to this approach. What if Bob decays faster than anticipated? If he goes into the nursing home only 6 months after the transfer, he is left without funds and without Medicaid eligibility.

The recipient of a gift (typically the children) cannot be placed under any legal obligation to use the funds for the benefit of the donors. If an obligation exists between the donor and recipient, it is not a complete gift. As such, it will continue to count as a resource of the "donor." Often the family will come to an "understanding" that the funds are to be segregated as the child's asset. The child feels a moral obligation to care for the parent, and may contribute to the parent's care out of the goodness of his/her heart.

The child's goodwill is not, however, a guarantee of safety for the parent. If the assets are indeed part of the child's estate, they are liable for the child's debts and torts. If the child dies, they will pass to some heir who may not feel the same moral obligation to care for the parent.

One method that can bypass the control questions is to gift the cash to an irrevocable trust for the child's benefit. (More discussion of trusts follows below.) However, since October 1993 the look back period for any transfer to trust is 60 months [30] (instead of 36 months).

Calculating a disqualification

The states are allowed to determine the average cost of nursing home care in various regions of the state. TDHS has set the cost at $2,908 per month (effective in 2001, 2002, and up until September 1, 2003). After September 1, 2003 the figure is reduced to $2,858.

This "average cost" is then used to determine a period of disqualification when a gift is made during the look back period [31]. Thus, a reduction in this figure has a negative impact when transfers are made prior to applying for Medicaid. For example, a $8,700 transfer under the old penalty resulted in a 2 month disqualification. Under the new lower figure, a $8,700 transfer results in a 3 month disqualification.

Prior to October 1, 1993 the disqualification period had to be capped at 30 months. That is, no matter what the actual calculation yielded, no disqualification from benefits could last longer than 30 months. This rule was a boon to wealthy clients who could transfer large resources to family members, keeping just enough to cover 30 months of care. The 30 month cap was lifted by OBRA '93.

Today, a disqualification period is figured as follows: take the amount of the gift, divide by the average cost of nursing care in your area. Round the result down to the nearest integer. That is how many months the client will be disqualified from Medicaid benefits.

Example: Bob has $200,000, but is otherwise fully qualified for Medicaid. He gifts the funds to his daughter on August 1, and applies for Medicaid on August 10. Since the gift occurred within 36 months of the application date, he must report it to Medicaid.

Medicaid disqualifies Bob from receiving benefits for 68 months (that is: $200,000/2858=69). Before October 1993 the 69 month period would have been cut back to 30 months. Now, it stays 69 months. Doesn't the cost of providing care for Bob during that 69 months make it impractical to even make the gift in the first place? Yes, and that's what Medicaid hopes people will conclude. (But see the "rule of halves" below.)

Usable transfer methods

Rule of Halves

In the last example, Bob is disqualified for 69 months if he gives away his $200,000. During that 69 months, he'll need to pay for his care out-of-pocket -- an expense that will consume the $200,000 anyway.

The rule of halves tells us to transfer only half of the money. If Bob gifts $100,000 and keeps $100,000 he may preserve some of the funds. The disqualification period for a gift of $100,000 is 34 months. The portion that Bob retained should be about enough to pay for that 34 months. Hence, at the same time that his disqualification period is ending he is running out of money. Medicaid will kick in after 34 months if Bob has run out of funds.

The rule of halves is actually much more complex than it appears. In real life, there are several unpredictable variables that you must content with. The client's actual monthly income, any costs incurred by the community spouse, and extra medical costs during the disqualification period all contribute to the final figures.

See Appendix A for an example based on the following facts. Husband needs medical care. His income is $985/month. Wife lives at home and has income of $445/month. All assets are non-countable except $200,000 cash in the bank. The best prediction is that husband can live at home for 12 more months, then will need to be moved to the nursing home. The nursing home costs $2,300 per month. Wife needs an additional $750 per month to survive at home (minimum).

The "rule of halves" will not even apply for this example be cause a gift of 1/2 the assets triggers a disqualification period that is longer than 36 months. It is therefore appropriate to keep enough assets to meet expenses during the 36 months and to transfer the remainder.

But using that approach may conflict with using the Spousal Impoverishment Provisions. Timing is the crucial factor. To maximize the spousal allowance, you want the estate to be as large as possible when Medicaid application is made, hence application is usually made as soon as possible. But if that is done, Medicaid must also be informed of the existence of the gift, and may impose a disqualification longer than the 36 month look back period. A comparison must be made: do we save more for the family using the Spousal Allowance, or do we save more making a transfer and waiting 36 months?

If the total starting assets of the couple are smaller than the example in Appendix A, then it may be appropriate to reverse the process. First they will make application for Medicaid, solely for the purpose of requesting an assessment to apply the Spousal Impoverishment Provisions. After they know how much is sheltered as a spousal allowance, they must deal with the excess.

The rule of halves can be applied to the excess. Part is retained to cover expenses, and part is transferred to family members. The transfer, of course, causes a disqualification from benefits for some period of time -- but the money retained should be enough to cover the expenses. They end up saving both the spousal allowance and around 1/2 of the excess.

Pay off Mortgage

As discussed earlier in the section on Asset Recovery Liens, a possible shelter lies in paying off the outstanding balance on a homestead mortgage.

The opportunity is risky because the home may, in the future, be subject to an asset recovery lien. If so, all of the equity may be lost. But if the family feels the timing is appropriate, moving cash (a countable resource) into home equity (a non-countable resource) is a shelter.

Repair of Homestead

Repair of the homestead is another possible asset shelter. It is subject to the same objection as paying off the mortgage: home equity may be grabbed via an asset recovery lien. If the family feels the risk is acceptable, then it may be time to fix the leaky roof and to rewire the old homestead. Any funds spent are removed from the "countable" column and are placed into the "non-countable" column.

Irrevocable Trust

An asset can be sheltered by transfer to an irrevocable trust, but the transfer is subject to all of the penalty rules discussed above. The only advantage of transferring assets to an irrevocable trust (as opposed to an outright gift to an individual) is control over heirship issues. If the individual beneficiary dies, the trust can determine to whom the assets pass.

Transfer to an irrevocable trust must be reported to Medicaid if made any time within the 60 months before application. Transfer to an individual, on the other hand, is only reportable if made within the 36 months before application.

The client cannot act as Trustee of the trust, and should not be entitled to any part of the principal. The client can be an income beneficiary, so long as it is mandatory that the income distribution be small enough to stay below the income cap.

There was some question whether the October 1993 OBRA amendments caused any trust, even one in which the grantor only retained an income benefit, to count as a resource. The statute recited: "if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual (grantor), the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of corpus or income -- (i) to or for the benefit of the individual shall be considered income of the individual, and (ii) for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c); (iii) any portion of the trust from which, or any income on the corpus from which no payment could be under any circumstances be made to the individual shall be considered....to be assets disposed by the individual for purposes of subsection (c)... [32]"

HCFA (the Health Care Financing Administration) has confirmed, in a private letter to the Alzheimer's Disease and Related Disorders Association, Inc. on December 23, 1993, that the mere fact that income is distributable to the grantor does not render the entire corpus of the trust a countable resource [33].

The HCFA letter makes some other valuable points: 1) if any corpus of the trust can be paid over to the Grantor, even if it is not actually paid, it is considered to be a countable resource; and 2) if any corpus that can be paid to the Grantor is instead paid to a third party, the transfer of assets rules apply and a disqualification penalty will be imposed.

1396p Trusts

OBRA '93 virtually destroyed trusts as reliable asset shelters. But it did contain some exceptions:

-- A trust established for an individual under age 65 [34] who is disabled (as defined by social security) that is established by a parent, grandparent, guardian or court and that pays all remaining corpus to the State upon the death of the individual. This type of trust can be managed by a nonprofit organization for the individual.

-- A trust that contains only pension benefits, social security funds and other personal income [35] that pays all remaining corpus to the State upon the death of the individual up to the amount that Medicaid has paid for that person's medical care

A Less Reliable Method:

Automotive purchase & gift

Transfer of an exempt asset should not cause a disqualification from benefits. If ownership of the asset did not cause disqualification, how could eliminating that ownership cause a disqualification?

It has been suggested that since an automobile can be a non-countable asset, the client should be advised to buy a new automobile and then give it away. The purchase converts a countable resource (cash) into a non-countable resource (a car). Disposing of the car does not alter the client's stance vis-à-vis qualifying.

The biggest flaw in this untested approach is the regulation regarding transfer "resources." Although the client's homestead is non-countable, there are specific regulations that say transfer of the home will trigger a disqualification [36] under certain conditions. Likewise, an automobile is considered a "resource" even though it may not be countable. But transfer of a resource, even if non-countable at the time, may still trigger a disqualification.

Outdated methods

Staggered Gifts

Prior to OBRA '93, the transfer of assets rules allowed penalty periods to be overlapped. After OBRA '93, penalty periods that grow from multiple gifts must be laid end-to-end.

Under current rules, overlapping penalty periods for staggered gifts is cumulated.

The work-around is to be sure your penalty periods do not overlap. Thus, a gift of $5,600 will cause a 1 month penalty. Another $5,600 the next month will cause a 1 month penalty. The periods do not overlap, so the $11,200 transfer caused a 2 month penalty. If $11,200 had simply been given away in one lump sum, it would have caused a 3 month disqualification.

Revocable Trusts

A living trust (revocable grantor trust) does not act as a Medicaid shelter in any way [38]. The assets are considered to be part of the grantor's estate, and remain countable resources despite being placed into trust. Any income earned by the trust counts against the Medicaid income cap.

Medicaid Qualifying Trusts

Before 1985, attempts were made to shelter assets in trusts that provided discretion to the Trustee on whether to pay benefits to the grantor. Utilizing their spendthrift provisions, they hoped that such a trust would act as a shelter. It worked sometimes and failed sometimes.

In 1985 Federal law was changed to specifically outlaw discretionary trusts [39], and labeled them "Medicaid qualifying trusts" because their goal was to qualify the grantor for Medicaid. Hence, since 1985 the term "Medicaid qualifying trust" has meant "a trust that does not qualify the grantor for Medicaid."

1.1.1.1.          Footnotes

[1]State Bar Rules (Texas Disciplinary Rules of Professional Conduct) Rule 1.08.

[2]V.T.C.A., Civil Practice & Remedies Code, §135.001 et.seq. See also Premack, Durable Power of Attorney for Health Care -- Texas' New Legislation, 53 Texas Bar Journal 860-863 (Sept. 1990).

[3]V.A.T.S., Probate Code, §481 et.seq.

[4]Internal Revenue Code of 1986, §2503

[5]42 U.S.C. §1929b

[6]42 U.S.C. §1915(c)

[7]40 T.A.C. §15.301

[8]40 T.A.C. §15.300

[9]40 T.A.C. §15.305

[10]40 T.A.C. §15.100

[11]Pub. L. No. 100-360

[12]42 U.S.C. §1396r

[13]40 T.A.C. §15.415(b)

[14]40 T.A.C. §15.415(c)(2)

[15]40 T.A.C. §15.441(a)(1)

[16]40 T.A.C. §15.441(a)(9)

[17]40 T.A.C. §15.441(a)(4)

[18]Pub. L. No. 109-239, Codified as 42 U.S.C. §1396p

[19]42 U.S.C. §1396p(b)(2)

[20]40 T.A.C. §15.443

[21]40 T.A.C. §15.440(a)(1)

[22]40 T.A.C. §15.432(b)(1)

[23]40 T.A.C. §15.442(a)

[24]40 T.A.C. §15.442(c) and Long Term Care Medicaid Eligibility in Texas, an in-house paper of drafted by the Texas Department of Human Services.

[25]40 T.A.C. §15.442(f)

[26]40 T.A.C. §15.442(b)

[27]40 T.A.C. §15.442(h)

[28]42 U.S.C. §1396p

[29]Texas regulations have not yet been amended to reflect the increase to 36 months, nor have many of the preprinted Medicaid applications. Your clients might be led to believe that the old 30 month rule still holds, but it does not.

[30]42 U.S.C. §1396p(c)(1)(B)

[31]42 U.S.C. §1396p(c)(1)(E)

[32]42 U.S.C. §1396p(d)(3)(b)

[33]Letter from Sally K. Richardson, Director, Medicaid Bureau, Department of Health and Human Services, Health Care Financing Administration to Alzheimer's Disease and Related Disorders Association, Inc. dated December 23, 1993 as reproduced in Volume 6, Number 1, NAELA News, February 1994 (National Academy of Elder Law Attorneys).

[34]42 U.S.C. §1396p(d)(4)(A)

[35]42 U.S.C. §1396p(d)(4)(B)

[36]40 T.A.C. §15.432(b)

[37]See, for example, 18 TR 26 (4/2/93) through 18 TR 53 (7/9/93).

[38]42 U.S.C. §(d)(3)(A)

[39]42 U.S.C. §1396a(k), which was amended again by OBRA '93.