MEDICAID TRANSFERS

 

 

 

 

 

 

 

 

 

 

H. Clyde Farrell

Attorney at Law

Certified Financial Planner

1411 West Avenue Suite 100

Austin, TX  78701

Telephone (512) 323-2977

Facsimile (512) 708-1977

E-Mail: cfarrell@texas.net

 

 

 

Previously Presented at:

2006 Advanced Elder Law Course

 

 

 

 

 

State Bar of Texas

MEDICAID TRANSFER RULES AND

MEDICARE PART D BENEFIT PLANS

November 15, 2006

Via Webcast

 


Nothing contained in this publication is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel.  This publication is  intended for educational and informational purposes only.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copyright 2006 by H. Clyde Farrell.  Parts of this work were previously published by the University of Texas School of Law; the American Bar Association; the State Bar of Texas; and Professional Education Systems, Inc., and Medical Education Services, both of Eau Claire, WI.


H. Clyde Farrell

Attorney at Law

1411 West Avenue Suite 100

Austin, Texas 78701

512/708-1977 (Fax) 512/323-2977 (Telephone)                  cfarrell@texas.net (Email)

 

BIOGRAPHICAL INFORMATION

EDUCATION

Certified as an Elder Law Attorney by the National Elder Law Foundation, 2000

Certified Financial Planner, College for Financial Planning, 1987

J.D. Degree,  The University of Texas School of Law, 1975

M.A. Degree (Political Science), The University of Wisconsin, 1971

B.A. Degree (Government), The University of Texas, 1970

 

PROFESSIONAL ACTIVITIES

Former Staff Attorney with Texas Rural Legal Aid in South Texas (1975-80)

Former Chief of Texas Attorney General’s Consumer Protection Division and Elder Law Section (1983-93)

Solo Practitioner in Austin, Texas (1993-present)

Founding Board Member and Past President, Texas Chapter, National Academy of Elder Law Attorneys

Past President, Family Eldercare, Inc. (Austin)

Advisory Council, Planned Living Assistance Network of Central Texas

Member of the Bars of United States Supreme Court, U.S. Court of Appeals for the Fifth Circuit, State Bar of Texas

Member of Texas Advocates for Nursing Home Residents, Family Eldercare, Inc., Gray Panthers, AARP, National Academy of Elder Law Attorneys, College of the State Bar of Texas

 

LAW-RELATED PUBLICATIONS, ACADEMIC APPOINTMENTS

AND HONORS

Author, Financing Long Term Care in Texas, 10th Ed. (2004)

Author, Public Benefits in Texas for Texans With Disabilities, 8th Ed. (2004)

Co-Author (with Joe C. Fiore), Texas Consumer Law (1993), 3rd Ed.

Author/Speaker, State Bar of Texas Elder Law & Disability Law Institutes (1996, 1997, 1998, 2000, 2002, 2003, 2004) and Advanced Estate Planning & Probate Course (1999, 2001); University of Texas School of Law Elder Law Courses (1997, 1999, 2000, 2001, 2003, 2004); South Texas College of Law Elder Law Courses (2002, 2003); American Bar Association Estate Planning Institute (1998); National Academy of Elder Law Attorneys Elder Law Programs (1996, 1997, 1998, 1999, 2000, 2003, 2004)

Editor, Elder Law Alert (newsletter of the Texas Chapter of the National Academy of Elder Law Attorneys), 1995 to present

Recipient of the "Texas Legend" Award by South Texas College of Law in 2003

Named a "Texas Super Lawyer" by Texas Monthly in 2003, 2004 and 2005


MEDICAID TRANSFERS

 

Table of Contents

I.       Medicaid TRANSFER ("GIFTING") RULES..................................... 1

A.       Nature and Purpose........................................................................................................... 1

B.       Rules for Calculating the Penalty Period...................................................... 1

1.       Calculation steps...................................................................................................................... 1

2.       Treatment of multiple transfers.............................................................................................. 2

C.       The "Lookback Period"................................................................................................... 3

D.       Medicaid Programs Subject to the Transfer Penalty............................. 3

E.       Disclaimers as Transfers............................................................................................. 4

F.       The "Return of Transferred Asset" Rule............................................................ 4

G.       What is "Compensation"?.............................................................................................. 6

H.       Certain Transfers Excepted From Penalty...................................................... 7

I.        Attempted "Criminalization" of Transfers..................................................... 8

J.       Legal Capacity Requirement for Gifting............................................................ 9

K.       Application Of The Transfer Penalty To Annuities.................................. 10

1.       Texas Annuity Rules--The "Five Criteria Test"................................................................ 10

2.       The New Federal Statute Pertaining to Annuities............................................................. 13

L.       Checklist of Risks of Gifting................................................................................... 15

II.      Medicaid transfer strategies................................................ 15

A.       The Fraudulent Transfer Act................................................................................... 15

B.       Strategies That Will Definitely Avoid Estate Recovery...................... 17

1.       Convey "Protected Resource Amount" to community spouse as separate property. 17

2.       Have a surviving spouse or a child who is under 21, blind or disabled........................ 18

3.       Transfer the residence to the client's child under age 21................................................. 19

4.       Transfer the residence to the client's child with blindness or disability........................ 19

5.       Transfer the residence to the client's qualified brother or sister..................................... 19

6.       Transfer the residence to the client's 2-year resident caregiver child............................ 19

7.       Transfer the residence to certain kinds of disability trusts............................................. 19

8.       Have an unmarried child in the residence at least a year before death.......................... 20

9.       Will residence to relatives who qualify for "undue hardship" exemption..................... 20

10.      Transfer any property and wait out the lookback period................................................. 21

C.       Strategies That May (Or May Not) Avoid Estate Recovery.................. 21

1.       Transfer the residence into a revocable trust.................................................................... 21

2.       Transfer the residence reserving a life estate.................................................................... 22

3.       Transfer the residence in a Lady Bird Deed....................................................................... 23

4.       Transfer the residence into a joint tenancy with right of survivorship......................... 24

5.       Purchase a life estate in a residence.................................................................................... 25

6.       Transfer property shortly before death.............................................................................. 26

D.       Non-Estate Recovery Strategies........................................................................... 26

1.       Wait Five Years After the Transfer to Apply.................................................................... 26

2.       Transfer All Immediately, Use the "Return of Transferred Asset" Rule....................... 27

3.       For Under-65 Clients: Transfer to an "Exception Trust".................................................. 27

4.       For 65 & Over Clients: Transfer to a Pooled Trust (With Penalty)................................. 27

5.       Make Other Transfers Exempt From the Transfer Penalty............................................... 28

III.         ETHICAL ISSUES IN MEDICAID practice................................. 28

A.       Identifying the Client..................................................................................................... 28

1.       Consider the options as to who is the client...................................................................... 28

2.       Make a decision and communicate it at the earliest possible time................................. 28

3.       Make required joint-representation disclosures................................................................ 28

4.       Do not represent both parties in litigation......................................................................... 29

B.       Avoiding Fraud.................................................................................................................... 29

1.       Do not assist a client in committing fraud.......................................................................... 29

2.       Do not assist a client in failing to disclose a material fact............................................... 29

C.       Diligent Representation.............................................................................................. 30

D.       Competent Representation........................................................................................ 31

E.       Client Capacity and Gifting....................................................................................... 31

IV.     APPENDICES............................................................................................. 32

Appendix 1: Deficit Reduction Act of 2005 (S. 1932).................................................... 32

Appendix 2: TEXAS RULES ON ANNUITIES................................................................................ 42

Appendix 3: “Spending Down” With a Focus on Quality of Life....................... 46

 

 


MEDICAID TRANSFERS

I.                   Medicaid TRANSFER ("GIFTING") RULES 

A.                 Nature and Purpose

 

If there were no restrictions on making gifts, many individuals would become eligible for Medicaid simply by giving their assets to family members.  Therefore, to protect the integrity of the program, the federal statute requires states to penalize transfers for less than fair market value. 

 

The basic rule (subject to exceptions discussed below) is that a person making a transfer for less than fair market value is ineligible for Medicaid for one day for every $117.08 gifted. The $117.08 amount represents HHS' estimate of the average private-pay cost of nursing home care in Texas. The HHSC rules are contained in the Medicaid Eligibility Handbook.[1]   The amount is different in every state and is changed from time to time with inflation.[2]

 

Practice Note: Whenever gifts exceeding $12,000 in value are made to any individual in a calendar year, a gift tax return should be filed.  However, this dollar amount has nothing to do with whether or not there is a Medicaid transfer penalty. Since there is now a $1 million lifetime exemption on taxable gifts, gift tax is a concern of few if any Medicaid applicants in Texas.

 

B.                 Rules for Calculating the Penalty Period

 

1.                  Calculation steps

 

In summary, here is how to calculate the penalty period in any transfer for less than fair market value:

 

  1. Determine whether an exception to the transfer penalty may apply. See page 7 below. For example, the transfer may have been to the client's child with a disability or entirely for purposes other than Medicaid eligibility (and you can prove it). If so, go no further.

 

  1. Determine whether or not the transfer was within the "lookback period" before filing or intended filing of a Medicaid application (discussed below at page 3). Generally, if the transfer was before February 8, 2006, the period is 36 months before application for transfers to individuals and 60 months before application for transfers to trusts; if on or after that date, the period is 60 months for all transfers. If the transfer was before the "lookback period," go no further. There is no transfer penalty, and the transfer need not be disclosed to Medicaid.

 

  1. Determine the "uncompensated amount" of the transfer. Begin with the amount of cash, or the fair market value of other assets transferred, then subtract any "compensation" received by the transferor (see page 6 below).

 

  1. Subtract any amount or value of the original transfer that has been returned by the transferee at any time since the transfer (see page 4 below)

 

  1. Determine number of days in the penalty period by dividing amount of uncompensated transfer by $117.08 and rounding down. (However, if the application was filed before September 1, 2005, the period is one month for every $2,908 transferred, after rounding down.)

 

  1. Determine the "start date" of the penalty period. If the transfer was before February 8, 2006, begin the count with the first day of the calendar month during which the transfer was made. If it was on or after that date, begin the count with the first day on which the transferor otherwise would have been eligible for Medicaid in a nursing home or in a Medicaid waiver program (CBA or CLASS).

 

  1. Add the number of days in the penalty period to the start date, to determine when it ends. Here is a high-tech (and very efficient) way of doing that:

 

·        Go to http://www.timeanddate.com/date/dateadd.html  and enter the start date.

·        Enter the number of days in the penalty period (calculated in Step 5 above).

·        Click "Calculate New Date." It tells you when the penalty period ends.

 

2.                  Treatment of multiple transfers

 

If there are multiple uncompensated transfers in which the penalty periods overlap, all such transfers during the lookback period are totaled, and the total value is divided by the average private pay cost (currently, $117.08 per day), to calculate the penalty period.[3]  This prevents application of the pre-OBRA 93 rule that allowed penalty periods of multiple transfers to run concurrently, thus allowing disposal of a much larger amount of property in a given time period. 

 

However, if the penalty periods of two transfers do not overlap, they are treated as separate transfers.[4]  This is designed to prevent clients from making a small transfer to "start the clock running," then making a larger  transfer later if Medicaid eligibility is needed, and including the entire period between the two transfers as a penalty period.

 

For applications filed before November 1, 2005, it was possible to make monthly transfers just under two times the private-pay rate (then, under 2 X $2,908 = $5,816).  This worked because there was no partial month penalty (you rounded down after dividing by $2,908, and as long as the penalty period was exactly one month, there were no “overlapping” penalty periods that would require aggregating the various transfers).  That no longer works, because the Texas Health & Human Services Commission passed a rule eliminating the requirement of rounding down, and the staff published a memo providing for partial-month ineligibility (one day for every $117.08 transferred).[5]

 

C.                 The "Lookback Period"

 

Only transfers within the "lookback period" are subject to penalty.  That period ends on the date a Medicaid application is filed (or, if later, date of entry into a nursing home or other medical institution) and begins--

     

      1. 60 months earlier, for transfers to most trusts before February 8, 2006 and for all transfers on or after that date.[6]

 

      2. 36 months earlier, for transfers to individuals before February 8, 2006.

 

Technique: Transfer an unlimited amount of property, then wait the applicable period from the date of the transfer before applying for Medicaid.  For transfers to one or more individuals, it is 60 months for transfers on or after February 8, 2006 or 36 months before that date. If the transfer is to an irrevocable trust whose corpus cannot be disbursed to or for the benefit of the client (i.e., whose corpus is not counted as a resource of the client), the waiting period has always been 60 months. 

 

Note that if an application is filed within the lookback period, the possible limitation on penalties offered by the limited lookback period is lost.  For example, if a client transfers $300,000 to an individual then applies for Medicaid 59 months later, the total penalty period will be $300,000 ¸ $117.08 X 30 =85.41 months.  Had the client waited only one more month, the transfer would have been outside the lookback period so would have been disregarded.  This is a trap for the unwary.

 

D.                Medicaid Programs Subject to the Transfer Penalty

 

      The following Texas programs are subject to the transfer penalty:

 

a.         Nursing Home Medicaid (SSI-Related MAO, Type Program 14)

b.         Community Based Alternatives Program (1915(c) Waiver Program)

c.         CLASS Program (also a 1915(c) Waiver Program)

d.         Home and Community-Based Services (HCS, involving mental retardation)

 

     


The following Texas programs are not subject to the transfer penalty:[7]

 

a.                   Family Care

b.                  Primary Home Care

c.                   Community Attendant Services

d.                  Qualified Medicaid Beneficiary Program (QMB) and Specified Low-Income Medicaid Beneficiary Program (SLMB)

 

Technique: If all the client needs is personal care at home, available through the Community Care programs listed above, gifting modest amounts of property may make sense.  There is no penalty period, and eligibility for Primary Home Care, Family Care, QMB or SLMB is immediate (assuming the income and other requirements of the program are met).  Remember, though, that if the client later needs more assistance at home through the Community Based Alternatives Program, or needs nursing home care, the transfer penalty will apply even though the purpose of the transfer was to gain eligibility for a program not subject to the penalty.

E.                 Disclaimers as Transfers

 

For purposes of federal gift tax and rights of creditors, property subject to a qualified disclaimer is treated as if it had never been owned by the disclaiming party.  However, the Medicaid rules treat such property as if it was received by the disclaimant and immediately transferred.[8]

 

Practice Note: Disclaimers often do not direct property to the desired recipients. For that reason, as well as their being treated as assignments under Medicaid law, they should almost always be avoided where Medicaid eligibility is a concern of the disclaimant.

F.                  The "Return of Transferred Asset" Rule

 

If a transferred asset is returned to the client, the transfer is nullified to the extent of the value returned.  If the asset is an excluded asset (such as a residence), the nullification is applied retroactively to the date of the transfer.  However, if it is a countable asset (such as a CD), it is treated under the transfer penalty rules as if the client owned it until the date it was returned.[9] "When only part of an asset or its equivalent value is returned, the penalty period can be reduced but not eliminated. For example, if only half the value of the asset is returned, the penalty period can be reduced by one-half."[10]

 

Technique: If a transfer within the lookback period precludes eligibility, consider returning only part of it. The client does not have to return the entire amount to erase the transfer penalty, because they have already “served” a portion of the “transfer penalty.”  For example, if the client gave away $80,000 before February 8, 2006 then needed nursing home Medicaid after 12 months, the transferee could keep the amount that would create a 12-month penalty, that is, they could keep

 

(365 X $117.08) = $42,734

 

They would have to return the rest, or $80,000 -  $42,734 = $37,266.  They could then apply one of the strategies such as buying exempt resources or gifting to their child with a disability, in order to spend down the $42,734.

 

Technique: If the transfer is on or after February 8, 2006, make sure enough is transferred to make the client eligible for Medicaid immediately but for the transfer penalty--that is, for an unmarried person, they have less than $2,000 in countable assets and are in a Medicaid-certified nursing home.[11] Advise the transferee to keep careful records of the amount returned to the client--for example, to pay the nursing home and other expenses not covered by the client's income. The transfer penalty period will then commence to run, plus the amounts spent for the client's benefit will reduce the penalty period one day for every $117.08 returned. The transferee will then be able to keep whatever is left after the transfer penalty period has run.

 

            Don't try to calculate this in your head or explain it in a simple sentence to the client. It can best be presented on a spreadsheet like the following:

 


MONTH BY MONTH PROJECTION OF SPEND-DOWN WITH RETURNED GIFTS

 

 

 

 

 

 

 

 

Assets Transferred

$50,000.00

 

 

 

 

Nursing home/mo.

$3,500.00

 

 

 

 

 

Other expenses/mo.

$300.00

 

 

 

 

 

Monthly Income

$1,800.00

 

 

 

 

 

 

 

 

 

 

 

 

Month

Nursing Home

Other

Income

Balance-

Returned

Months

 

Expense

Expenses

 

End of Month

Gifts

Left

 

 

 

 

 

 

 

1

$3,500.00

$300.00

$1,800.00

$48,000.00

$2,000.00

12.5

2

$3,500.00

$300.00

$1,800.00

$46,000.00

$4,000.00

11.0

3

$3,500.00

$300.00

$1,800.00

$44,000.00

$6,000.00

9.4

4

$3,500.00

$300.00

$1,800.00

$42,000.00

$8,000.00

7.8

5

$3,500.00

$300.00

$1,800.00

$40,000.00

$10,000.00

6.3

6

$3,500.00

$300.00

$1,800.00

$38,000.00

$12,000.00

4.7

7

$3,500.00

$300.00

$1,800.00

$36,000.00

$14,000.00

3.1

8

$3,500.00

$300.00

$1,800.00

$34,000.00

$16,000.00

1.6

9

$3,500.00

$300.00

$1,800.00

$32,000.00

$18,000.00

0.0


 

In summary, by documenting what is returned, the donee is able to qualify the client for Medicaid after 9 months instead of 14 months and is able to keep $32,000 instead of nothing.

G.                What is "Compensation"?

 

The following rules govern when a transfer penalty will be offset or eliminated by something the transferee does or provides for the transferor (the client) as "compensation":[12]

 

·        An agreement to provide something in the future to the client is not treated as any "compensation," until something of value is actually provided.

 

·        Compensation may be in the form of payment or assumption of a legal debt of the client.

 

·        If a client makes a payment to family members for services they provide (or agree to provide) that "would be normally provided by a family member," the payment is treated as a "transfer" without consideration. Examples of such services that are never "compensation" when rendered by family members are house painting or repairs, mowing lawns, grocery shopping, cleaning, laundry, preparing meals, and transportation to medical care.

 

·        Another exception is that the value of lost wages of a person who quits work to care for the client is "compensation" that can be repaid by the client without a transfer penalty.[13]

 

·        When expenses are incurred or services provided that can be treated as "compensation" under these rules, written receipts or statements are required.

 

·        Repayment by a client of out-of-pocket expenses paid by anyone (including a family member) will be treated as consideration for a transfer only if there was agreement before the expenses were paid that they would be repaid by the client. The agreement may either be written or it may be oral and informal.  However, if the expenses were paid without agreement for repayment, the repayment will be treated as a transfer without consideration.  Further, the agreement must have been established exclusively for purposes other than obtaining or retaining eligibility for Medicaid.

 

·        If payment of out-of-pocket expenses of the applicant is made after the applicant has made a transfer to the person paying the expenses, the repayment reduces the amount of "transfer" subject to a penalty, dollar for dollar, as of the date the out-of-pocket expenses are paid.   That is further explained in the discussion of the "Return of Transferred Asset" rule discussed above.

 

H.                Certain Transfers Excepted From Penalty  

 

The following transfers are not subject to transfer penalties:[14]

 

1. Transfers of a home to

 

a.   The client's spouse; or

 

b.   A child of the client who is (1) under age 21 or (2) blind or permanently disabled; or

                 

c.   A sibling of the client who has an equity interest in the home and who resided there for at least one year immediately before the date the client became institutionalized; or

 

d.   A son or daughter of the client who was residing in the client's home for at least two years immediately before the date the client became institutionalized and who provided care to the client which permitted the client to reside at home rather than in an institution or facility.

 

      2.   Any transfers to the client's spouse or to another for the sole benefit of the client's spouse (e.g. trusts and annuities)

 

3.   Any transfers from the client's spouse to another for the sole benefit of the client's spouse (again, trusts and annuities)

 

4.   Any transfers to a trust established solely for the benefit of the client's blind or disabled child (regardless of age of the "child"), or to such a child of the client directly.[15]

 

5.   Any transfers to a trust established solely for the benefit of an individual under 65 years of age who is disabled

 

6.   Any transfers of income to a Miller Trust ("Qualified Income Trust")

 

7.   Transfers in which the client intended to dispose of the property at fair market value (even if actual consideration turned out to be less)

 

8.   Transfers made exclusively for a purpose other than to qualify for Medicaid

 

Technique: If a transfer creating an unwanted penalty period has already been made, determine whether it was made exclusively for some purpose other than qualification for Medicaid.  If you can prove that at a fair hearing, the penalty period will be avoided.

 

9. Transfers of property that has since been returned to the client[16] See the discussion on page 4.

 

            10. Imposition of a penalty would cause "undue hardship."[17]

 

11. The client changes a joint bank account to establish separate accounts to reflect correct ownership of and access to funds (for example, if funds of client's child have been placed in an account with funds of the client, the child's funds can be transferred without a penalty to the client, if it can be shown they were in fact contributed by the child).[18] 

 

12. The client purchases an irrevocable funeral arrangement or assigns ownership of such an arrangement to a third party.[19]

 

I.                   Attempted "Criminalization" of Transfers

Effective January 1, 1997, it purportedly became a crime to knowingly and willfully dispose of assets in order for an individual to become eligible for Medicaid, if disposing of the assets results in the imposition of a period of ineligibility.[20]  This provision was amended, effective August 5, 1997, to purport to criminalize only counseling or assisting such conduct for a fee. 

 

However, enforcement of that law has been enjoined in New York State Bar Association v. Reno, 97-CV-1768-TJM-DRH, (S.D.N.Y.).  Before the injunction issued, the U. S. Attorney General announced that she would not defend the constitutionality of the law, because “the counseling prohibition in that provision is plainly unconstitutional under the First Amendment and because the assistance prohibition is not severable from the counseling prohibition.”  However, the Attorney General offered to assist Congress in drafting legislation that would address its concerns in a constitutional way.  See Appendix 6 for the full text of the law and of the Attorney General’s letter.  On September 14, 1998, the Court entered a permanent injunction.

 

Comment: The proponents of this law accomplished their purpose simply by having it on the books, creating fear and uncertainty regarding the Medicaid law.  To this day, some marketers of long-term care insurance falsely represent that Medicaid-motivate transfers are "criminal." [21]

 

At the same time, as argued elsewhere in this article, inducing and encouraging older and disabled persons to dispose of their assets to become eligible for Medicaid would in many circumstances be highly detrimental to their interests.  The ethical practice is in the middle ground of ensuring client capacity to make the decision (or existence of a power of attorney with appropriate gifting powers), providing accurate and objective information, and encouraging an informed decision that is truly the client’s.  See the discussion of ethical issues at page 31.

 

J.                  Legal Capacity Requirement for Gifting

 

·        Legal capacity required.  Like any other legal transaction, a gift is invalid if the donor did not understand the nature and purpose of the transaction at the time of the gift. The transaction may later be attacked by family members or others by civil suits or even in criminal proceedings. Other grounds, such as undue influence and unconscionability, may also be asserted.

 

·        Specific gifting powers required in durable power of attorney.  An agent under a general and durable power of attorney does not have power to make transfers for less than adequate consideration in Texas, unless the instrument makes a specific grant of such power.[22]  Even a guardian may not make a gift on behalf of a ward, except for certain court-approved tax-motivated and charitable transfers and, effective September 1, 1997, for education and maintenance of a ward’s spouse and other dependents.  The latter provision appears to allow transfers to the community spouse, if approved by the guardianship court.[23]

 

Practice Note: Donor capacity is a threshold issue whenever gifting is considered.  No capacity, no specific gifting power in a durable power of attorney (or revocable trust), no gift.  In the past this has been primarily an ethical concern for attorneys and, seemingly, nobody else; but Texas Medicaid officials have recently indicated an intent to treat property properly transferred (including that transferred for less than adequate consideration  under a power of attorney lacking gifting power) as being held in constructive trust for the transferor and therefore countable as a resource.

 

Technique: When drafting durable powers of attorney, particularly with older clients, discuss with the client the possible need for gifting powers.  Such needs may include continuation of family or charitable gifting, gifting for reduction of federal income and estate taxes, and lawful gifting for Medicaid purposes. Some points to consider:

 

      1.   The gifting clause should be tailored for the purposes intended, to avoid making it too broad or too narrow.

 

      2.   If gifting to the agent is desired, ordinarily avoid giving the agent the power to gift to himself or herself.  That would be a "general power of appointment" putting all the principal's property (or the maximum value of the possible gifts, if less) in the agent's gross estate for estate tax purposes--potentially disastrous if the agent dies before the principal with a taxable estate.  Instead, appoint a special agent to make gifts to the primary agent.

 

      3.   If gifting of particular real property is anticipated, include a description of the property.  Contrary to law and reason, some title companies still require it.

K.                Application Of The Transfer Penalty To Annuities

1.                  Texas Annuity Rules--The "Five Criteria Test"

 

In general, annuity payments are treated as “income,” without regard to how much is actually “return of principal."[24] 

 

However, the difficult and important rules have to do with whether or not the annuity contract is also treated as a “resource." Those rules (reproduced in Appendix 2) restrict the use of annuities by counting them as a resource unless they meet all the following requirements:[25]

 

1.      The annuity is "irrevocable." This is interpreted by the agency as requiring that the word "irrevocable" appear in the contract.

 

2.      Principal must be paid in equal monthly installments and interest paid either in equal monthly installments or in amounts that result in increases of the monthly installments at least annually.[26]

 

3.      It must be guaranteed to return within the payee's life expectancy at least the principal plus a reasonable amount of interest.[27] If it does not meet this requirement, then in addition to being treated as a resource, the annuity (to the extent of payments to come due after the client's life expectancy) is treated as a transfer of assets. To show that the amount of interest is reasonable, the client must document availability of at least two comparable annuities paying the same or less interest.

 

4.      Unless a community spouse is named as the annuitant, the State of Texas or HHSC must be named as the residual beneficiary of funds remaining in the annuity at the client's death, to the extent of Medicaid funds expended on the purchaser.[28]  And even if the community spouse is annuitant, the new federal statute discussed in the section next below requires that the Medicaid program be named as remainder beneficiary to receive any payments due after the death of the community spouse.

  1. The annuity must be issued by a licensed insurance company (which prevents use of private annuities and similar devices such as non-negotiable and self-canceling installment notes).[29] 

 

An important exception is that an "employment-related annuity" is not a countable resource. However, since the new federal statute discussed below does not include such an exception, there may be such annuities that must name the Medicaid program as beneficiary.

 

Unless it is subject to the federal annuity rules discussed below, an annuity meeting all five criteria is not counted as a resource, its payments are counted as unearned income, and there is no transfer penalty.

 

When an annuity does not meet  these criteria, unless one of the two exceptions applies, it has the following disadvantages:

 

  • It is counted as a resource and the countable value is presumed to be 80% of the remaining payout; provided, if it is non-negotiable (unassignable), the total remaining payout is a transfer of assets.

 

  • If it does not pay the principal plus a reasonable amount of interest within the annuitant's life expectancy, it is a transfer of assets. This can occur if (a) the guaranteed payment period extends beyond the life expectancy or (b) the amount of interest is not reasonable.

 

  • In either case, the amount transferred (to which the transfer penalty is applied, beginning on the date of purchase or annuitization) is the payout remaining after the life expectancy.

 

Practice Note: Many contracts for immediate-pay annuities do not expressly say they are irrevocable, probably because they are binding contracts and any possibility of revocation would make all the company’s actuarial calculations useless.  If the contract does not say it is irrevocable, ask the insurance agent for a statement to that effect and give it to HHSC, to avoid delay in processing the application.  Also be sure it does not have a provision saying it is assignable, which would give it a cash value.  Another problem with some annuities is that they are not irrevocable until the first check is cashed, or the expiration of a certain period of time, so HHSC counts the amount available by revocation as a resource until they are truly irrevocable.

 

The following addendum to the immediate annuity contract should solve all the foregoing problems: “Notwithstanding any contrary provision herein, this contract is immediately irrevocable and non-assignable from its inception.”  However, some insurance companies refuse to agree to this, for no apparent reason other than institutional rigidity.

 

The purchase of annuities to protect the community spouse is an important planning technique, not covered in this paper.

 

Comment: As a practical matter, the rule change effective September 1, 2004 had little effect on Medicaid planning strategies as far as annuities are concerned. It is still possible for a community spouse to purchase an annuity just like before, and there is still no incentive for a Medicaid applicant (married or unmarried) to purchase one. The new rule simply changes the theory on which the agency discourages purchase of an annuity by a Medicaid applicant, from imposing a transfer penalty if the Medicaid program is not a remainder beneficiary to counting the annuity as a resource. In addition, the administrative direction that the interest returned must be "comparable to at least two similar annuities" requires presenting proof of offer for sale of at least two annuities paying the same or less, with terms that are otherwise the same. Such documentation should be readily available from the insurance agent selling the annuity or at www.immediateannuities.com/?_o_annuity_calculator.

 

The new rule may, however, have the unfortunate result of disqualifying unmarried individuals who have purchased an immediate-pay annuity entirely for purposes other than Medicaid eligibility. Under the transfer rule, such persons have the opportunity to prove that Medicaid was no part of the motive for the purchase and thereby avoid imposition of a transfer penalty; but there is no such escape from treatment as a resource under the new rule. One agency official, however, has offered two helpful suggestions: (1) Since they do not plan to apply the new rule to persons eligible on the date of its adoption, it will not affect current beneficiaries; and (2) Persons affected in the future can still qualify for Medicaid by changing the remainder beneficiary to the Medicaid program. If the annuity is non-negotiable (which is probably intended to mean the same as non-assignable), and if there really is no market for it, making Medicaid the remainder beneficiary may be the only way out.

 

 It appears that annuities purchased before September 1, 2004 are subject to the new rule if the application occurs on or after that date. Presumably, there may also in some case be the option of actually selling the annuity and spending down or gifting the proceeds.

 


2.                  The New Federal Statute Pertaining to Annuities

 

The Debt Reduction Act of 2005 (enacted February 8, 2006) adds two more restrictions on "annuities":

 

·        Payback requirement for all "annuities" whenever purchased: Both initial applications for long-term care Medicaid and recertification applications (at annual review) must describe any interest of the individual or community spouse in an "annuity (or similar financial instrument, as may be specified by the Secretary), regardless of whether the annuity is revocable or is treated as an asset." The application or recertification form must contain a statement that "the State becomes a remainder beneficiary under such annuity or similar financial instrument by virtue of the provision of such medical assistance."[30]

 

  • Payback requirement for newly purchased "annuities":  The purchase of an annuity must be treated as a disposal of assets for less than fair market value unless the state is named as remainder beneficiary "in the first position" for at least the total of medical assistance paid on behalf of the annuitant, or the state is named as beneficiary in the second position after the community spouse or minor or disabled child, but if such spouse or child disposes of the remainder for less than market value, the state must be in the first position.[31]

 

Comment: In the author's view, there is less here than meets the eye. Despite the seemingly broad sweep of these inartfully drafted provisions, they  were probably intended only to curb the use of annuities to "turn resources into income" so as to qualify individuals for Medicaid. Here is why I think that:

 

  • Deferred annuities should not be affected. In common parlance, the term "annuity" includes deferred annuity contracts issued by insurance companies. However, in dictionary definitions, the defining feature of an annuity is simply payment in regular installments, which the industry refers to as "immediate annuities." I believe the latter meaning was intended here, because it is only immediate annuities that have ever been used to impede the impoverishment of Medicaid applicants. The Texas Medicaid program has rules pertaining to "annuities," and although the term is undefined, from the context it applies only to immediate annuities.[32] Deferred annuities are of no use in avoiding impoverishment, so there is no need for special rules restricting their use, because they are countable resources to the extent of their cash surrender value. Moreover, if they should be included in this definition, the interest of the Medicaid program could be easily avoided simply by surrendering the contract and reinvesting the proceeds in any investment that is not a deferred annuity.

 

  • The community spouse as annuitant will usually have priority over the Medicaid program. There is no requirement of changing the annuitant (who receives periodic payments during the term of the contract) but only of changing the beneficiary (who receives payments or a lump sum after the death of the annuitant or sometimes, the owner). Therefore, where husband and wife are both annuitants (which is often the case in insurance company contracts), the community spouse can receive payments as annuitant (not as beneficiary) after the death of the institutionalized spouse. The Medicaid program's interest will then come into play, if at all, only after the death of the community spouse--and then only if the contract provides for a period of guaranteed payments that have not been made yet. That will not be the case, for example, if the contract terminates at the death of the community spouse or if the community spouse outlives the guaranteed payment period.

 

  • Many beneficiary designations are irrevocable. The "annuities"  paid by Texas Employees Retirement System, Teacher Retirement System, U. S. Civil Services and many other employers require an irrevocable election as to whether to make the surviving spouse a beneficiary. Where that irrevocable election has been made (usually to name the spouse as remainder beneficiary), it would be futile for the Medicaid program to require an agreement by the employee to change the beneficiary, because such an agreement would be ineffective.

 

  • The provision affecting the transfer penalty shows Congressional intent was not to put the Medicaid claim ahead of the community spouse's interest. The provision applying to newly purchased annuities states quite clearly that the Medicaid program's interest is to be secondary to that of a community spouse or disabled child. Although the language requiring a beneficiary designation change at time of initial application or recertification does not say so expressly, it can easily be interpreted to protect the community spouse in her or his  position as "annuitant," as discussed above.

 

I conclude there is a good chance that except for some unusual contracts accidentally running afoul of these provisions, the primary effect in Texas will be to require that the Medicaid program be named remainder beneficiary (after the death of the community spouse) of annuities purchased for a community spouse to qualify the institutionalized spouse for Medicaid. Because the requirement applies to recertification applications, this will have to be done even in cases in which Medicaid eligibility has already been established, at the time of the next annual review--if the institutionalized spouse lives to the next annual review and the couple elects to continue Medicaid eligibility at that time.

 

Technique: This forced remainder interest discourages the purchase of annuities paying for the full life expectancy of the community spouse. Although shorter-term annuities will sometimes increase applied income, clients will have to weigh this against the risk that the community spouse might die before the end of the guarantee period; and in cases in which all institutionalized spouse income must be paid as applied income anyway, clients will want to buy the shortest annuity contracts possible.

L.                 Checklist of Risks of Gifting

 

Practice Note: Medicaid planning requests commonly come in the form of requests for advice on how to give away property so as to become eligible for Medicaid--and the person calling is usually a potential donee.  If the attorney represents the potential donor (which the author advocates doing, unless the donor already has qualified legal counsel), the attorney should present clearly and forcefully the potential costs and risks of gifting.  Here is my list, along with some techniques for reducing (but never eliminating) the risks:

 

      1.   The donees may squander the property (no matter how earnestly they plead they won't, nor how firmly the client believes they won't).  (Partial safeguard: put it in a joint account requiring more than one signature, thus increasing risk #2 below.)

 

      2.   The donees' creditors (present or future, known or unknown, in or out of bankruptcy) may seize it.  (Always ask about solvency and possible exposure of potential donees to creditors.)

 

      3.   The donees may refuse to return funds to the donor on request, in the donor's "best interests."  The donor must absolutely and finally part with legal control over the property.

      4.   A spouse of a donee may take it, either directly or through divorce proceedings as a result of intermingling with community funds.

 

      5.   A donee may die before the donor, leaving the property to an inappropriate person.  (This risk can be minimized by having the donee execute a will with a special needs trust funded by an amount equal to the value of the property transferred.)

 

      6.   If the transfer is of appreciated property (e.g., stocks or real estate), the donee takes the donor's basis, rather than taking a stepped-up basis at the donor's death.  Thus, the capital gains tax ultimately generated by the transaction may be quite substantial.

 

      7.   Family jealousy and conflict may result from the way the property is distributed and/or the way it is managed by the donees.  Complaints of undue influence and exploitation may be made against all involved in the transaction--including the attorney.

 

      8.   The law may change at any time, lengthening the lookback period or otherwise increasing the penalty, and it may be applied retroactively.

 

      9. Medicaid eligibility has certain inherent disadvantages in any case. 

 

II.                Medicaid transfer strategies

A.                 The Fraudulent Transfer Act

 

When the estate recovery  program was first required by Congress in 1993, there was speculation that it might lead to efforts by the states to characterize transfers permitted under the Medicaid laws (subject to various "transfer penalties" and exceptions thereto) as "fraudulent transfers."  However, a well-researched journal article demonstrated conclusively that any such state action was pre-empted by the comprehensive federal Medicaid regulatory scheme.[33]

 

Moreover, if the property being conveyed is exempt from execution under nonbankruptcy law--such as the exempt homestead of the debtor--it is by definition not an "asset" that can be "transferred" in fraud of creditors under the Uniform Fraudulent Transfer Act.[34] If a residence can be lawfully conveyed without consideration to avoid its being taken in probate by general creditors, no reason appears why it could not be conveyed to avoid seizure after death by the state as a creditor.

 

To the author's knowledge, since publication of the above-referenced article in 1994, no state has taken the position that a properly disclosed transfer for the purpose of Medicaid qualification was a fraudulent transfer, nor has any published article made that argument. However, the North Dakota Supreme Court recently held that a post-eligibility transfer for no purpose other than avoiding estate recovery, by an individual who herself never applied for Medicaid, was a fraudulent transfer.[35] In that case the transfer was by the surviving spouse of a Medicaid recipient. The funds in question had passed from the institutionalized spouse to the community spouse to qualify the former for Medicaid, a transfer that the Court expressly stated could not be considered a fraudulent transfer. However, after the death of the institutionalized spouse, the community spouse transferred the funds to her sons at a time when she had been diagnosed with a terminal illness and had been advised that if she owned the funds at the time of her death, the Medicaid program might recover them to reimburse expenses of her late husband. Both the trial court and the appellate court focused on the question of whether funds traceable from the community spouse to the institutionalized spouse were subject to estate recovery in the estate of the community spouse, even though they came from the institutionalized spouse by lifetime gift and were not in his estate. That is not an issue in Texas, which (like most states other than North Dakota) does not attempt to recover from the estate of a community spouse in any event. The community spouse was not receiving Medicaid herself and had no intention of applying for it, so the federal Medicaid transfer penalty rules were not involved. The issue of preemption was not discussed in the Supreme Court's opinion so apparently was not raised.

 

Comment: The preemption argument is strongest where the transfer is made in contemplation of qualifying for Medicaid so is subject to the comprehensive system of federal regulation of such transfers (that is, it potentially is subject to a transfer penalty). It is weakest in a case like the one just cited in North Dakota, in which the transferor is not on Medicaid and does not intend to apply for it. Where the transferor is on Medicaid and loses eligibility as a result of the transfer (pursuant to the comprehensive federal system), but the transfer was solely motivated by intent to avoid estate recovery (that is, the transferor has a terminal condition and the transfer occurs just before death), there may be some risk of a fraudulent transfer claim. However, even such a transfer may well be protected under the preemption doctrine.

B.                  Strategies That Will Definitely Avoid Estate Recovery

1.                  Convey "Protected Resource Amount" to community spouse as separate property

 

All nonexempt property must be titled in the name of the community spouse not later than the first annual review, which is supposed to be one year after the date of the notice certifying eligibility of the institutionalized spouse.[36]  There is no requirement that the property be conveyed to the community spouse as his or her separate property, which is necessary as a practical matter because in many cases, the institutionalized spouse has lost the capacity to make such a conveyance.  If the property consists of interests in joint accounts, the funds or other assets can simply be transferred from the joint accounts to one or more accounts titled only in the name of the community spouse.

 

However, if the institutionalized spouse has the capacity or has appointed an agent with authority to convey without consideration to the community spouse, they may elect to convert all the community property of the institutionalized spouse to separate property of the community spouse.  That was done even before the advent of estate recovery, primarily to allow the community spouse to direct all the property away from the institutionalized spouse--either to a testamentary Supplemental Needs Trust for the community spouse or to the children--to avoid disqualifying the institutionalized spouse for Medicaid in case she or he is the survivor. Now it is even more important, because community property retained by the institutionalized spouse will not only disqualify him or her after the death of the community spouse but will be subject to estate recovery if any is left after the death of the institutionalized spouse.

 

Some states seek to impose  a lien on property of the institutionalized spouse and/or to trace it into the estate of the surviving spouse.  Therefore, that strategy now has the additional advantage, even if the community spouse is the survivor, of emptying the estate of the institutionalized spouse so as to avoid the risk that Texas Medicaid may someday attempt to impose a lien on it and/or to trace it into the estate of the surviving spouse.  Although a lien cannot be imposed on the survivor's homestead without a constitutional amendment, the program could conceivably seek to impose a lien against and/or trace non-homestead property, such as the institutionalized spouse's community interest in financial accounts if they are merely retitled by the community spouse.

 

If the property involves low-basis assets, both spouses should be advised that making it separate property involves loss of the step-up in basis on the death of the first spouse to die.

 

An attorney in Harris County reports that that tax appraisal district recently treated a deed converting community property of a homestead into separate property of one spouse as destroying the school tax freeze on the property--even though both spouses were over the age of 65. When a correction deed was filed reserving a life estate, the district restored the freeze. However, Texas Tax Code §11.26(c) provides no support for the district's position, and the author has been unable to find such support in the Code.

 

Because the agency cannot constitutionally impose a lien on the community spouse's homestead, there is less need to convert it (as compared to non-homestead property) to separate property of the community spouse.  Moreover, there are considerations arguing for keeping it as community property. Here are some pro's and con's:

 

Pro's (for transferring the residence to the community spouse as separate property):

 

·        Avoids probate of the institutionalized spouse's estate.

 

·        Avoids estate recovery against the estate of the institutionalized spouse if he or she is the survivor (assuming the community spouse directs the property away from the institutionalized spouse if he or she is the survivor).

 

·        Facilitates sale of the residence if the institutionalized spouse is the survivor, living in a nursing home on Medicaid. (Otherwise, it could not be sold during his or her lifetime without interrupting Medicaid eligibility until the proceeds from his or her half interest are used up and/or gifted).

 

Cons (against transferring the residence to the community spouse as separate property):

 

·        If the community spouse owns the residence and it goes into a trust for the institutionalized spouse as survivor, he or she will probably not be able to claim the residence exemption from property tax, as the trust will own the residence. If he or she is in a nursing home, the exemption would otherwise be available; but as indicated above, the residence could not be sold without interrupting Medicaid. (Most people in this situation rent the residence to someone, usually a family member, for the cost of taxes, insurance and maintenance.) If the residence goes directly to the children, they may or may not be able to claim a residence property tax exemption, but it will not include the parent's school tax freeze nor (unless the "child" is age 65 or over) the age 65 residence exemption.

 

·        Keeping ownership may make the institutionalized spouse feel more secure.

 

2.                  Have a surviving spouse or a child who is under 21, blind or disabled

 

This is not really a strategy because clients are not likely to marry or have or adopt children to save the residence from estate recovery. The residence qualifies for exemption under §373.207(2) whenever the decedent is survived by a spouse, a child under age 21 or a child of any age with blindness or any disability meeting the Social Security Disability standard.

 

However, note that persons in these categories enjoy federal protection only to the extent the residence cannot be sold during their lifetimes.[37] By legislation, Texas could someday seek to trace the property and recover it from the estate of the surviving spouse or could adopt a lien statute precluding its sale by a surviving spouse or protected child. In addition, if the surviving spouse has an interest in the residence, the whole property is arguably exempt under the Texas Constitution from any lien for estate recovery purposes (in case Texas someday adopts lien recovery).[38] However, the program could conceivably try to trace the property into the estate of the child at his or her death.

 

Because of the risk of a lien or tracing at some time in the future, if the beneficiary has the capacity to execute a gift deed or has given an agent that authority, it may be preferable to transfer the property to the child as discussed below.

 

3.                  Transfer the residence to the client's child under age 21

4.                  Transfer the residence to the client's child with blindness or disability

5.                  Transfer the residence to the client's qualified brother or sister

6.                  Transfer the residence to the client's 2-year resident caregiver child

 

The four strategies above are grouped for discussion here because they all fall under the same federal statute.[39] That law and the state provisions based on it provide that certain transfers of the residence of a Medicaid beneficiary or applicant are protected, in the sense that they are not subject to the transfer penalty.[40] They include the following:

 

·        To the beneficiary's spouse.

 

·        To the beneficiary's child under age 21

 

·        To the beneficiary's child of any age who is blind or has a permanent and total disability (as defined by Social Security)

 

·        To the beneficiary's brother or sister who has an ownership interest in the residence and who was residing in the residence for at least a year before the beneficiary was admitted to a nursing home or other medical institution

 

·        To the beneficiary's child of any age who was residing in the residence for at least two years before the parent was admitted to a nursing home or other medical institution and who provided care that enabled the parent to reside at home rather than in a nursing home.

 

·        To certain kinds of trusts for the benefit of persons under age 65 who have a permanent and total disability (as defined by Social Security)

 

The beneficiary should be advised that unless a life estate or other interest is reserved, resulting in inclusion in the beneficiary's gross estate, the child will receive the beneficiary's basis in the property.  That will not matter if the property qualifies for exemption of tax on capital gains on sale of a residence; but under current law, if the child should move away for as long as three years then sell the property, the parent's basis would apply and the child would be taxed on all gains above that basis.[41]

 

7.                  Transfer the residence to certain kinds of disability trusts

 

There is an exemption from the transfer penalty for transfers to two types of trusts for the “sole benefit” of a any person with a disability, regardless of age of the transferor, and regardless of relation of the beneficiary to the transferor.  One type is the “under-65 special needs trust” discussed above.  The other is a trust that is “actuarially sound based on the life expectancy of the individual involved.”[42]

 

Based the State Medicaid Manual of the Centers for Medicare & Medicaid Services, the “actuarially sound” in this context means the same as in the annuity context.[43] That is, distributions must be made over a period not longer than the actuarial life expectancy of the beneficiary, as determined from the Social Security table now used in lieu of Medicaid Eligibility Handbook Appendix IX.[44] For example, the table says a female age 40 has a life expectancy of 40.97 years.  It should therefore be sufficient to require that 1/40 of the initial contribution be distributed in the first year of the trust’s operation. In the second year, 1/39th of the amount in the trust at the end of the first year must be distributed, etc.  Presumably, the trust could restrict distributions so as to protect Medicaid and other benefits of the beneficiary, in addition to allowing the settlor to qualify.

 

8.                  Have an unmarried child in the residence at least a year before death[45]

 

9.                  Will residence to relatives who qualify for "undue hardship" exemption

 

One provision for waiver of estate recovery for "undue hardship" applies only to siblings and descendants of the decedent living in families with income below three times the federal poverty level.[46]  If there are one or more distributees of interests in the residence who do not qualify, the exemption will be limited to a share of the residence value equal to the share of those who do qualify. Therefore, as long as at least one distributee qualifies, it apparently is possible to ensure the exempt share will be 100% of  the maximum exemption (limited, perhaps, to $100,000 total exemption) by providing in the will or trust that if this problem arises, only those eligible for this benefit will receive interests in the residence.

 

At this writing, since it appears that residences in revocable trusts are both exempt for eligibility purposes and pass outside estate recovery, the instrument of choice is likely to be a revocable trust and not a will. Unless the law is changed, the trust alone will protect the residence. However, the law could very well change or be reinterpreted, putting the residence again at risk. Here is a possible formula clause for maximizing use of the exemption:

 

It is my understanding that at this time, the Medicaid law allows for exemption from Medicaid estate recovery of an interest in a residence that passes to specified family members who have incomes below certain levels.  In the event that such a provision exists in the Medicaid law at the time of my death, establishing a means test of any kind or otherwise giving an advantage to any beneficiaries in this regard, and that but for it, [this trust][my estate] owns a residence that would otherwise be subject to Medicaid estate recovery, the following shall apply notwithstanding any other provisions herein: If but for this paragraph the residence would otherwise pass to more than one person, one or more of whom do not qualify for exemption of part or all of their share from the Medicaid estate recovery program, the gifts to any who do not qualify shall not go to them but instead shall be distributed in equal parts to those beneficiaries who do qualify for that more favorable treatment. For example, if three persons would otherwise receive equal shares of the residence, but Medicaid estate recovery applies and only two of them qualify for special treatment under it, the one who does not qualify shall receive no part of the residence and those who do qualify shall receive all.

10.              Transfer any property and wait out the lookback period

Of course, the client can avoid estate recovery against any property by lifetime transfers that create a penalty period. 

 

Comment: This is likely to be the "strategy" clients think of first. It is our job to help find other options, including in many cases the avoidance of Medicaid eligibility altogether. Perhaps the feature of estate recovery that makes it most harmful to the interests of older Americans is that many feel they must part with the last remnant  of their life's work and savings before getting help--if by bad luck they are stricken with a condition requiring long-term care not reimbursed by Medicare.

 

C.                 Strategies That May (Or May Not) Avoid Estate Recovery

1.                  Transfer the residence into a revocable trust

 

Convey the residence and any other exempt property into a revocable trust with a provision that the remainder after the lifetime of the settlor will be distributed directly to remainder beneficiaries, leaving nothing to pass through the probate estate and therefore nothing subject to estate recovery.  Be sure to reserve an interest sufficient to qualify the residence for all property tax exemptions, with a provision such as the following:

 

Settlor shall have the right to use and occupy as his or her principal residence the following residential property so long as it is owned by the trust, rent free and without charge, for life: [residence description]

 

If the client is not presently on Medicaid nor planning to apply soon, and they do not have nor desire a revocable trust for other reasons, it may be sufficient to provide in a power of attorney for the agent's authority to convey the residence to such a trust.  Such authority is probably not provided in the Texas statutory durable power of attorney form, which allows transfers by an agent to the trustee of a revocable trust only if the trust was "created by the principal as settlor."[47] This probably means the trust must have been created personally by the settlor, not by an agent. Here is a form that can be used to create this power as well as to use trusts for other purposes:

 

My agent may convey any and all assets of my estate into such trust or trusts as my agent shall deem proper, irrespective of whether said trust is now in existence or hereafter established.  Specifically and without limitation, my agent shall be empowered to create, and transfer assets to, a revocable management trust for my benefit from which, after my lifetime, the assets shall revert to my estate or shall pass in the same manner I shall have designated in a will or otherwise. This paragraph shall not be construed to limit any powers that my agent would otherwise have.

 

Comment: Texas Medicaid has long had a policy of treating a residence in a revocable trust as exempt. However, officials have noted correctly that this treatment is not federally required.[48] It therefore appears likely that at some point they will begin treating a residence in a revocable trust as a countable resource, with the result that to qualify for Medicaid in the first place, the original owner will have to convey the residence back to himself or herself individually.

 

2.                  Transfer the residence reserving a life estate

 

Convey the residence to one or more persons, reserving a life estate. Unless an exemption from the transfer penalty applies, this will create a period of ineligibility, with the amount of the uncompensated transfer equal to a fraction of the fair market value of the fee simple title, as set out in Medicaid Eligibility Handbook Appendix X.  For example, the value of the remainder interest transferred by an 80-year-old is 0.56341 of fair market value, which is presumptively the market value determined by the property tax appraisal.  Therefore, if the appraisal district determines the value is $100,000, conveyance reserving a life estate will be treated as a gift of a remainder interest with a value of $56,341.  If the daily cost of nursing home care as determined by the Medicaid agency is $117.08 at the time of application (as it is at this writing), the grantor will be ineligible for Medicaid for $56,341 ¸ $117.08 = 481.22 (rounded down to 481) days (about 16 months).

 

For example, the following reservation can be included in the deed to the remainder beneficiary:

 

Grantor reserves for Grantor and Grantor’s assigns, a legal life estate in the property for Grantor’s life, without liability for waste.  Upon the death of Grantor, full record title shall vest in Grantee. 

 

This has the following benefits:

 

  • Unlike an absolute conveyance, it allows the grantor to retain the right to the over-65 property tax breaks (exemption and school tax freeze).

 

  • Likewise, the grantee receives a stepped-up basis for capital gains tax purposes at the death of the grantor.

 

  • It is not clear that the Medicaid estate recovery program could reach a vested remainder even if the state statute were amended to recover against non-probate assets. In the case discussed below holding the remainder interest of a Lady Bird deed recoverable under California's expanded estate recovery rule, the Court distinguished a "vested" remainder from one subject to revocation.[49] This is logical, as a creditor could not reach a remainder interest purchased in good faith for value. Unless a fraudulent transfer can be shown, then, the owner of a vested remainder after a life estate may be insulated from estate recovery even if it was conveyed as a gift.

 

A disadvantage of this strategy is that creditors of the grantees may be able to obtain a partition order and thereby force sale of the residence.

 

3.                  Transfer the residence in a Lady Bird Deed

 

This type of deed adds to the reservation of a life estate, the reservation of the power to take away from the remainder owner(s) the rights given them in the deed and give those rights to someone else. It has the following benefits in addition to the benefits of reserving a life estate:

 

  • If a remainder owner displeases the grantor, his or her interest can be taken away.

 

  • If creditors of a remainder owner threaten action affecting the property, the grantor can protect his or her interests by appointing the remainder to someone else. This would not be a fraudulent transfer if the life tenants are not "debtors" as to the creditors.[50]

 

  • According to CMS, the conveyance creates no transfer penalty.[51]

 

 For example, the following deed reservation could create this interest:

 

Grantor reserves for Grantor and Grantor’s assigns, a legal life estate in the property for Grantor’s life, without liability for waste. Grantor further reserves the full power and authority, without the joinder of any other person, to sell, convey, mortgage, lease and otherwise dispose of the property in fee simple with or without consideration and without joinder by Grantee, to any person or persons whatsoever, and to keep absolutely any and all proceeds derived therefrom. Further, Grantor reserves the right to appoint different or additional remainder owners (Grantees), at any time and from time to time without consent of Grantee.  Upon the death of Grantor, subject to any interests that may be created by Grantor under the powers reserved herein, full record title shall vest in Grantee.

 

In the author's opinion, at the death of the grantor, title would pass under such a deed outside the grantor's probate estate and would therefore not be subject to Texas estate recovery under the current state law. However, the following could interfere with the "ideal" operation of this strategy:

 

  • Any rule change to deny exemption to a residence in a revocable trust could be made applicable to property held under such a deed. Therefore, a residence so conveyed would be countable property of the grantor, who in most situations could not qualify for Medicaid until the conveyance was reversed.

 

  • The Medicaid program could seek to impose a transfer penalty, disregarding what is essentially a right of revocation, as has reportedly been done in Pennsylvania.

 

  • The Texas Legislature could adopt "expanded estate recovery," thus possibly bringing property so held within the scope of estate recovery, as has happened in many states.[52]

 

Comment: Because there is no clear and settled impediment to its working at the present time, this is a strategy to consider. The most immediate concern is that a transfer penalty could be imposed, the risk of which can be reduced (but not avoided) by testimony of an expert in real estate valuation to the effect that the grantee's interest has no market value. Clients should also be warned of the other potential problems discussed above.

 

4.                  Transfer the residence into a joint tenancy with right of survivorship

 

Because property in a joint tenancy with right of survivorship passes outside the probate estate of an owner at death, it is apparently beyond the scope of Texas estate recovery.  Therefore, transferring a residence into such ownership would presumably avoid estate recovery, while still allowing the owner's interest to have exempt status as far as Medicaid eligibility is concerned.

 

Conveying a 50% interest with such an agreement would result in a Medicaid transfer penalty based on 50% of the fair market value of fee simple ownership (unless you can establish with evidence that it is less). It would also result in loss of half of the over-65 residence exemption from property tax. However, those disadvantages can be largely avoided by limiting the fractional interest of the grantee. For example, Mom as grantor could convey a 1.0% interest to Son as grantee, with the following agreement at the end of the deed:[53]

 

SURVIVORSHIP AGREEMENT

(Pursuant to §46(a), Texas Probate Code)

 

Date:               The                   day of                                      , 20      .

 

Owners:          Grantor(s) and Grantee(s)

 

Property (including any improvements):

 

«Property Description»

 

Owners own the property jointly and agree with each other as follows:

 

1.         If no severance occurs before the death of any Owner, then on the death of either Owner, the interest of the joint Owner who dies shall survive to the surviving joint Owner.

2.         Owners will after this date own the property in the same manner as joint tenants with right of survivorship.

3.         This agreement is binding on Owners and Owners' respective heirs and personal representatives.

4.         In the event that Grantor desires to sell, exchange, convey, mortgage, encumber, partition, subdivide, apply for zoning, rezoning or platting, grant options, lease or sublet or otherwise dispose of an estate or interest in the property or a right incident to the property, Grantee shall join Grantor in such transfer of interest in the property so that the grantee of such transfer of interest shall receive the 100% of the interest transferred, to the same extent Grantor could have transferred the interest but for this deed, without reservation.

 

(signature lines and acknowledgments of Grantor and Grantee(s))

 

Comment: As compared to reserving a life estate, this has the advantage of creating a much shorter period of ineligibility (transfer penalty) if only a small fractional interest is conveyed.

 

The Medicaid program may argue that the value transferred should be measured by the reduction in market value of what the seller owns and that the reduction is virtually the entire value of the property. That was the argument it made at one time to blunt the effect of transferring fractional interests in real estate under the "monthly gifting" strategy. CMS apparently rejected that argument, and the recent change in the gifting rules followed (making monthly gifting ineffective by striking the rule that fractional months are rounded down). Moreover, numbered paragraph 4. of the Survivorship Agreement above is intended to reserve to the grantor the full right of sale so that no transfer penalty is incurred, under the same CMS-approved theory that supports the Lady Bird Deed discussed above.

 

5.                  Purchase a life estate in a residence

 

If the client does not own an interest in a residence, they may decide to purchase only a life estate in a residence. Under the rules in the Medicaid Eligibility Handbook, this should be treated as a transfer for full consideration as long as the client pays no more than the fair market value of the life estate as determined from Medicaid Eligibility Handbook Appendix X. 

 

The Deficit Reduction Act of 2005 specifically addressed this strategy to provide that funds used to purchase a life interest in the home of another individual will be regarded as assets transferred unless the purchaser resides in the home at least one year after the date of purchase.[54]

 

 Moreover, the author has been told that HHSC officials have in at least one case disregarded Appendix X and contended that a life estate has little or no fair market value, so a transfer penalty should be imposed on such a purchase.  Such a policy by a Medicaid agency was approved recently by an Arkansas state court.[55] Therefore, anyone considering such a strategy should first obtain an opinion from a qualified real estate appraiser as to the fair market value of the life estate and advise the client that the unpenalized transfer may be limited to that amount and that any additional amount paid for the residence may be subjected to a transfer penalty.

 

6.                  Transfer property shortly before death

 

Estate recovery will apply only to property owned at death. Therefore, the client presumably may convey a residence or any other property at any time before death, for the purpose of avoiding estate recovery.  Such a transfer would have to be reported to the Medicaid program, and unless an exception to the transfer rules applies, it would result in termination of Medicaid eligibility. However, if life expectancy is short, paying privately may be a small price for the transferee to pay for avoiding estate recovery.

 

Comment: As discussed beginning  at page 15 above, this is more likely to draw a "fraudulent transfer" claim than a transfer with purposes other than avoiding Medicaid estate recovery. However, in the author's opinion, it is at worst an unresolved issue, and therefore assisting a client to make such a transfer would not be unethical.

 

If this strategy is contemplated, the client should be advised of the need to execute a power of attorney authorizing gifts to the intended donee(s) and specifically describing any real property to be conveyed.  If the primary agent is an intended donee, a special agent should be appointed for making gifts to the primary agent, to avoid possible title problems.  Such a power of attorney allows the agent to make the conveyance even after the principal has lost capacity.

D.                Non-Estate Recovery Strategies

1.                  Wait Five Years After the Transfer to Apply

The rules behind this strategyare discussed above at page 3 above. It comes in two versions:

(a) Transfer essentially all countable resources and wait five years to apply. If the transferee then provides more than half the transferor's "support," this has the advantage, sometimes, of allowing the transferee to claim the transferor as a dependent and to deduct the transferor's medical expenses (including long-term care expenses). If the transferee's income is low enough, it may enable qualification for Medicaid home care programs without a transfer penalty, subsidized Medicare Part D, drug company low-income programs, QMB or SLMB, subsidized housing, VA pension or widow's death benefits, etc. It also ensures that there will be no funds left to spend down at the end of five years. It has the disadvantage (a big one) of leaving the transferor entirely dependent on the transferee, subject to the risks of transferee death, financial distress, bankruptcy, ethical distress, etc.

 

(b) Keep enough to meet all the client's expected needs during the five-year wait. During the five-year period, this minimizes the transfer risks just discussed. However, it has no potential income tax benefits for the transferee, nor will it improve the transferor's ability to qualify for non-Medicaid benefits.

 

2.                  Transfer All Immediately, Use the "Return of Transferred Asset" Rule

This rule is discussed at page 4 above. Notice that it works best if the client is already in a nursing home, because only then can the client meet the new "start date" requirement of  being eligible for Medicaid but for the transfer. Another requirement is that the amount transferred be low enough, and amounts to be returned high enough, that eligibility will be achieved in less than five years.

A variation on this is, when the client is not already in a nursing home, is to make the transfer hoping the client will not need nursing home care for five years. If the client has the option of spending down quickly on exempt property (e.g., a large home mortgage and a home that falls within one of the estate recovery exemptions) or of making an exempt transfer (e.g., to a child with a disability), in the event they need nursing home care, the property can be returned and the quick spend-down accomplished.

Comment: A theme is emerging. The DRA 2005 changes strongly encourage making large transfers immediately, thus completely impoverishing the client and leaving him or her subject to the many risks we always try to minimize. Likewise, the means-testing of Medicare benefits (virtually free medications under Part D for those with low assets and income) makes it harder to argue that clients should maintain control of their savings.

3.                  For Under-65 Clients: Transfer to an "Exception Trust"

If the client is under age 65, he or she can qualify immediately for Medicaid (and SSI if income is low enough) by transferring assets to a trust established by the client's parent or grandparent, by a court or by a guardian.[56] If the requirements are met, the assets of the trust are not counted as resources, and the transfer is not subject to penalty. To qualify, the trust must provide for "payback" to the Medicaid program of all benefits provided to the client, but only to the extent trust assets remain at the client's death.

Likewise, the same individuals have the option of transferring assets to a pooled trust with a payback provision.[57]

4.                  For 65 & Over Clients: Transfer to a Pooled Trust (With Penalty)

Although transfers to a pooled trust by persons age 65 or older are subject to a transfer penalty, the assets are not counted as resources by Medicaid or SSI. Therefore, even a person age 65 or over can qualify for long-term care Medicaid (in 5 years) or SSI and associated Medicaid (in 3 years) by transferring assets into The Arc of Texas Master Pooled Trust. In the meantime, if their income is low enough and they meet the other requirements, they may be able to qualify for means-tested programs without a transfer penalty such as subsidized Medicare Part D, QMB or SLMB, Primary Home care, drug-company programs, subsidized housing and VA pensions or widows' death benefits.

5.                  Make Other Transfers Exempt From the Transfer Penalty

The list of exempt transfers starts on page 7. The most common opportunities in this area are transfers to the client's child (of any age) with a disability or blindness or to a "sole benefit trust" for such a child; or to a "sole benefit trust" for any person under age 65 with a disability; or to the client's spouse (which doesn't help establish eligibility but may be essential for post-eligibility planning.

 

III.             ETHICAL ISSUES IN MEDICAID practice

A.                 Identifying the Client

1.                  Consider the options as to who is the client. 

 

The options are, ordinarily, the following:

 

   An unmarried elder/disabled person

   A married couple, with one or both needing long term care

   Children or other family members

   Joint representation of the elder/disabled person and family members

 

Practice Note: It is the author’s practice and recommendation that unless the elder/disabled person is already represented by an attorney, the attorney’s representation should be exclusively of that person.  Whether the spouse may or should be represented jointly will depend on the nature and extent of the conflicts of interest involved.  For example, if one spouse expresses an interest in considering divorce (other than a mistaken belief that there is no other planning alternative), that will preclude joint representation.  Also to be considered are potential conflicts with and among other family members such as stepchildren and estranged children.

 

2.                  Make a decision and communicate it at the earliest possible time

 

In any case, include the identification of the client(s) in a written attorney-client agreement. The following situations, for example, cannot be ethically managed until you have done this:

 

    A child wants to tell you a "secret" about their parent, the veracity of which is critical to the parent's decision

    The younger generation argues strongly for Medicaid qualification, while the older person or persons have reservations.

    The disabled spouse expresses reservations about transferring title to all their countable property to the other spouse (which is required for continuing eligibility under the spousal impoverishment provisions, as discussed below).

    One spouse discloses to you "in private" that he or she is considering filing for divorce, for non-Medicaid reasons.

 

3.                  Make required joint-representation disclosures 

 

See Disciplinary Rule 1.06 for the elements of a disclosure of conflicts of interest that must be made if joint representation is undertaken.

 

4.                  Do not represent both parties in litigation. 

 

Note that litigation is an exception to the rule that joint representation is permissible, with adequate disclosure.  Therefore, you cannot represent both spouses in a petition for a Qualified Domestic Relations Order (discussed below), even though both spouses are clearly in agreement that it is needed.

 

Practice Note: When joint representation of spouses is undertaken, the attorney-client agreement is a good place for the disclosure regarding joint representation.  It should also be in any marital property agreement in which joint representation is undertaken.

 

B.                 Avoiding Fraud

1.                  Do not assist a client in committing fraud.[58]

 

This sounds obvious, but it can be difficult in application where the fraud is as to the client's intent.  For example, an uncompensated transfer is not penalized if it is "exclusively for some purpose other than to qualify for Medicaid"[59] services.  This is a tougher standard to meet than the intent requirements in the federal tax laws, which ordinarily do not penalize a transaction merely because tax avoidance was one motive for it.

2.                  Do not assist a client in failing to disclose a material fact.[60] 

 

The fact that a transfer was in cash or consisted of tangible, untitled property and cannot be traced does not mean it does not have to be disclosed.  The same applies to property owned by the client that cannot be traced in any legal records.  Contrary to some clients' beliefs and values, these disclosures are required in the Medicaid application and in the oral interview after it is filed.

 


C.                 Diligent Representation

 

It is the client's philosophy regarding public benefits, not the attorney's, that should govern.   “There is no question that the use of ... Medicaid planning by competent persons is permissible and that proper planning benefits their estates.”[61] Tax lawyers do not exhort their clients to decline tax benefits they (the lawyers) do not think are in the public interest.  Public benefits lawyers cannot behave differently.  To do so, or to advise incorrectly that planning would not be effective, would be inconsistent with the disciplinary rules and invite litigation for negligence or breach of fiduciary duty.[62] A Maine attorney received a six-month suspension of his license for, among other omissions, failing to include a Supplemental Needs Trust in a client's will that would have avoided disqualifying the beneficiary for Medicaid.[63]

 

At the same time, as argued above, it is not appropriate for an attorney to insist that a client apply for a benefit he or she does not want for strictly philosophical reasons, after full disclosure by the attorney of the client's rights.

 

In general, the attorney should bring to the client’s attention the full range of relevant considerations.  Fordham University’s 1993 Conference on Ethical Issues in Representing Older Clients resulted in the following recommendation for practice guidelines regarding “divestment of assets” of a client for the purpose of achieving Medicaid eligibility:

 

1.   In representing clients where divestment of assets is or may be considered, the attorney should:

 

a.   Counsel clients about the full range of long-term care issues, options, consequences, and costs relevant to the client’s circumstances;

b.   Endeavor to preserve and promote dignity, self determination, and quality of life of the elderly client in the face of competing interests and difficult alternatives; and

c.   Strive to ascertain the client’s fundamental values in order to be responsive to the goals and objectives of the client.[64]

 

This is consistent with Rule 2.1 of the Model Rules of Professional Conduct:

 

Lawyer as Advisor: In representing a client, a lawyer shall exercise independent judgment and render candid advice.   In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.

 

Likewise, the Ethical Considerations speak to the breadth of advice required and permitted:

 

Ethical Consideration 7-8: A lawyer should exert his best efforts to insure that decisions of his client are made only after the client has been informed of relevant considerations.  A lawyer ought to initiate this decision-making process if the client does not do so.   Advice of the lawyer to his client need not be confined to purely legal considerations...in assisting his client to reach a proper decision, it is often desirable for a lawyer to point out those factors which may lead to a decision that is morally just as well as legally permissible...In the final analysis, however,...the decision whether to forego legally available objectives or methods because of non-legal factors is ultimately for the client and not for himself.  (emphasis added)

D.                Competent Representation

Medicaid law has been accurately characterized as "an aggravated assault on the English language." In the author's opinion, competent practice in this area requires, at a minimum, the following:

 

1.   Access to and general familiarity with all sources of law; and

 

2.   Familiarity with all current planning techniques; and

 

3.      Keeping up to date on changes in all the sources of law and currently practiced techniques.

 

Practice Note: The most efficient way of keeping up to date on Medicaid and other Elder Law topics is through membership in the National Academy of Elder Law Attorneys (NAELA), which sends members its newsletter and journal and announcements of national educational conferences held twice per year.  The Texas Chapter of NAELA also provides a newsletter and one or two statewide conferences  per year.   For more information, visit the web page at www.naela.org or, call NAELA at 520/881-4005.

E.                 Client Capacity and Gifting

A client who lacks legal capacity cannot make a gift.  It would be unethical for an attorney to assist in such a transaction.

 

Under Texas law, an agent under a durable power of attorney generally cannot make gifts of the principal's assets without specific gifting powers.[65] Even if HHSC did not question such a gift, it would leave the agent--and the attorney--wide open to charges of exploitation by family members or other observers.

 

To assess capacity, use a standardized form.  A form provides a disciplined way of recording observations.  If the transaction is later challenged, you will have a written record of the basis for your judgment.[66]


IV.              APPENDICES

 

Appendix 1: Deficit Reduction Act of 2005 (S. 1932)

 

Note: At the time this appendix is being written, S. 1932 has passed both houses of Congress has just been signed by the President at a press conference on February 8, 2006. Because the date of "enactment" is its effective date for most purposes, and date of enactment is generally defined as the date a bill is signed by the President or otherwise becomes law, this paper gives the date February 8, 2006 as its effective date.

 

The text below is an excerpt of sections of greatest interest to Elder Law attorneys. The full text is at http://thomas.loc.gov/cgi-bin/query/z?c109:S.1932.EAS  .

S.1932

Deficit Reduction Act of 2005 (Engrossed Amendment as Agreed to by Senate)

 

CHAPTER 2--LONG-TERM CARE UNDER MEDICAID
Subchapter A--Reform of Asset Transfer Rules

SEC. 6011. LENGTHENING LOOK-BACK PERIOD; CHANGE IN BEGINNING DATE FOR PERIOD OF INELIGIBILITY. 

SEC. 6012. DISCLOSURE AND TREATMENT OF ANNUITIES.

SEC. 6014. DISQUALIFICATION FOR LONG-TERM CARE ASSISTANCE FOR INDIVIDUALS WITH SUBSTANTIAL HOME EQUITY.

SEC. 6015. ENFORCEABILITY OF CONTINUING CARE RETIREMENT COMMUNITIES (CCRC) AND LIFE CARE COMMUNITY ADMISSION CONTRACTS.

SEC. 6016. ADDITIONAL REFORMS OF MEDICAID ASSET TRANSFER RULES.

 

 


SEC. 6011. LENGTHENING LOOK-BACK PERIOD; CHANGE IN BEGINNING DATE FOR PERIOD OF INELIGIBILITY.

(a) Lengthening Look-Back Period for All Disposals to 5 Years- Section 1917(c)(1)(B)(i) of the Social Security Act (42 U.S.C. 1396p(c)(1)(B)(i)) is amended by inserting `or in the case of any other disposal of assets made on or after the date of the enactment of the Deficit Reduction Act of 2005' before `, 60 months'.

(b) Change in Beginning Date for Period of Ineligibility- Section 1917(c)(1)(D) of such Act (42 U.S.C. 1396p(c)(1)(D)) is amended--

(1) by striking `(D) The date' and inserting `(D)(i) In the case of a transfer of asset made before the date of the enactment of the Deficit Reduction Act of 2005, the date'; and

(2) by adding at the end the following new clause:

`(ii) In the case of a transfer of asset made on or after the date of the enactment of the Deficit Reduction Act of 2005, the date specified in this subparagraph is the first day of a month during or after which assets have been transferred for less than fair market value, or the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional level care described in subparagraph (C) based on an approved application for such care but for the application of the penalty period, whichever is later, and which does not occur during any other period of ineligibility under this subsection.'.

(c) Effective Date- The amendments made by this section shall apply to transfers made on or after the date of the enactment of this Act.

(d) Availability of Hardship Waivers- Each State shall provide for a hardship waiver process in accordance with section 1917(c)(2)(D) of the Social Security Act (42 U.S.C. 1396p(c)(2)(D))--

(1) under which an undue hardship exists when application of the transfer of assets provision would deprive the individual--

(A) of medical care such that the individual's health or life would be endangered; or

(B) of food, clothing, shelter, or other necessities of life; and

(2) which provides for--

(A) notice to recipients that an undue hardship exception exists;

(B) a timely process for determining whether an undue hardship waiver will be granted; and

(C) a process under which an adverse determination can be appealed.

(e) Additional Provisions on Hardship Waivers-

(1) APPLICATION BY FACILITY- Section 1917(c)(2) of the Social Security Act (42 U.S.C. 1396p(c)(2)) is amended--

(A) by striking the semicolon at the end of subparagraph (D) and inserting a period; and

(B) by adding after and below such subparagraph the following:

`The procedures established under subparagraph (D) shall permit the facility in which the institutionalized individual is residing to file an undue hardship waiver application on behalf of the individual with the consent of the individual or the personal representative of the individual.'.

(2) Authority to make bed hold payments for hardship applicants- Such section is further amended by adding at the end the following: `While an application for an undue hardship waiver is pending under subparagraph (D) in the case of an individual who is a resident of a nursing facility, if the application meets such criteria as the Secretary specifies, the State may provide for payments for nursing facility services in order to hold the bed for the individual at the facility, but not in excess of payments for 30 days.'.

SEC. 6012. DISCLOSURE AND TREATMENT OF ANNUITIES.

(a) In General- Section 1917 of the Social Security Act (42 U.S.C. 1396p) is amended by re-designating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection:

`(e)(1) In order to meet the requirements of this section for purposes of section 1902(a)(18), a State shall require, as a condition for the provision of medical assistance for services described in subsection (c)(1)(C)(i) (relating to long-term care services) for an individual, the application of the individual for such assistance (including any recertification of eligibility for such assistance) shall disclose a description of any interest the individual or community spouse has in an annuity (or similar financial instrument, as may be specified by the Secretary), regardless of whether the annuity is irrevocable or is treated as an asset. Such application or recertification form shall include a statement that under paragraph (2) the State becomes a remainder beneficiary under such an annuity or similar financial instrument by virtue of the provision of such medical assistance.

`(2)(A) In the case of disclosure concerning an annuity under subsection (c)(1)(F), the State shall notify the issuer of the annuity of the right of the State under such subsection as a preferred remainder beneficiary in the annuity for medical assistance furnished to the individual. Nothing in this paragraph shall be construed as preventing such an issuer from notifying persons with any other remainder interest of the State's remainder interest under such subsection.

`(B) In the case of such an issuer receiving notice under subparagraph (A), the State may require the issuer to notify the State when there is a change in the amount of income or principal being withdrawn from the amount that was being withdrawn at the time of the most recent disclosure described in paragraph (1). A State shall take such information into account in determining the amount of the State's obligations for medical assistance or in the individual's eligibility for such assistance.

`(3) The Secretary may provide guidance to States on categories of transactions that may be treated as a transfer of asset for less than fair market value.

`(4) Nothing in this subsection shall be construed as preventing a State from denying eligibility for medical assistance for an individual based on the income or resources derived from an annuity described in paragraph (1).'.

(b) REQUIREMENT FOR STATE TO BE NAMED AS A REMAINDER BENEFICIARY- Section 1917(c)(1) of such Act (42 U.S.C. 1396p(c)(1)), is amended by adding at the end the following:

`(F) For purposes of this paragraph, the purchase of an annuity shall be treated as the disposal of an asset for less than fair market value unless--

`(i) the State is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the annuitant under this title; or

`(ii) the State is named as such a beneficiary in the second position after the community spouse or minor or disabled child and is named in the first position if such spouse or a representative of such child disposes of any such remainder for less than fair market value.'.

(c) INCLUSION OF TRANSFERS TO PURCHASE BALLOON ANNUITIES- Section 1917(c)(1) of such Act (42 U.S.C. 1396p(c)(1)), as amended by subsection (b), is amended by adding at the end the following:

`(G) For purposes of this paragraph with respect to a transfer of assets, the term `assets' includes an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services under this title unless--

`(i) the annuity is--

`(I) an annuity described in subsection (b) or (q) of section 408 of the Internal Revenue Code of 1986; or

`(II) purchased with proceeds from--

`(aa) an account or trust described in subsection (a), (c), or (p) of section 408 of such Code;

`(bb) a simplified employee pension (within the meaning of section 408(k) of such Code); or

`(cc) a Roth IRA described in section 408A of such Code; or

`(ii) the annuity--

`(I) is irrevocable and nonassignable;

`(II) is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and

`(III) provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.'.

(d) Effective Date- The amendments made by this section shall apply to transactions (including the purchase of an annuity) occurring on or after the date of the enactment of this Act.

 

SEC. 6013. APPLICATION OF `INCOME-FIRST' RULE IN APPLYING COMMUNITY SPOUSE'S INCOME BEFORE ASSETS IN PROVIDING SUPPORT OF COMMUNITY SPOUSE.

(a) In General- Section 1924(d) of the Social Security Act (42 U.S.C. 1396r-5(d)) is amended by adding at the end the following new subparagraph:

`(6) APPLICATION OF `INCOME FIRST' RULE TO REVISION OF COMMUNITY SPOUSE RESOURCE ALLOWANCE- For purposes of this subsection and subsections (c) and (e), a State must consider that all income of the institutionalized spouse that could be made available to a community spouse, in accordance with the calculation of the community spouse monthly income allowance under this subsection, has been made available before the State allocates to the community spouse an amount of resources adequate to provide the difference between the minimum monthly maintenance needs allowance and all income available to the community spouse.'.

(b) Effective Date- The amendment made by subsection (a) shall apply to transfers and allocations made on or after the date of the enactment of this Act by individuals who become institutionalized spouses on or after such date.

 

SEC. 6014. DISQUALIFICATION FOR LONG-TERM CARE ASSISTANCE FOR INDIVIDUALS WITH SUBSTANTIAL HOME EQUITY.

(a) In General- Section 1917 of the Social Security Act, as amended by section 6012(a), is further amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

`(f)(1)(A) Notwithstanding any other provision of this title, subject to subparagraphs (B) and (C) of this paragraph and paragraph (2), in determining eligibility of an individual for medical assistance with respect to nursing facility services or other long-term care services, the individual shall not be eligible for such assistance if the individual's equity interest in the individual's home exceeds $500,000.

`(B) A State may elect, without regard to the requirements of section 1902(a)(1) (relating to statewideness) and section 1902(a)(10)(B) (relating to comparability), to apply subparagraph (A) by substituting for `$500,000', an amount that exceeds such amount, but does not exceed $750,000.

`(C) The dollar amounts specified in this paragraph shall be increased, beginning with 2011, from year to year based on the percentage increase in the consumer price index for all urban consumers (all items; United States city average), rounded to the nearest $1,000.

`(2) Paragraph (1) shall not apply with respect to an individual if--

`(A) the spouse of such individual, or

`(B) such individual's child who is under age 21, or (with respect to States eligible to participate in the State program established under title XVI) is blind or permanently and totally disabled, or (with respect to States which are not eligible to participate in such program) is blind or disabled as defined in section 1614,

is lawfully residing in the individual's home.

`(3) Nothing in this subsection shall be construed as preventing an individual from using a reverse mortgage or home equity loan to reduce the individual's total equity interest in the home.

`(4) The Secretary shall establish a process whereby paragraph (1) is waived in the case of a demonstrated hardship.'.

(b) Effective Date- The amendment made by subsection (a) shall apply to individuals who are determined eligible for medical assistance with respect to nursing facility services or other long-term care services based on an application filed on or after January 1, 2006.

 

SEC. 6015. ENFORCEABILITY OF CONTINUING CARE RETIREMENT COMMUNITIES (CCRC) AND LIFE CARE COMMUNITY ADMISSION CONTRACTS.

(a) Admission Policies of Nursing Facilities- Section 1919(c)(5) of the Social Security Act (42 U.S.C. 1396r(c)(5)) is amended--

(1) in subparagraph (A)(i)(II), by inserting `subject to clause (v),' after `(II)'; and

(2) by adding at the end of subparagraph (B) the following new clause:

`(v) TREATMENT OF CONTINUING CARE RETIREMENT COMMUNITIES ADMISSION CONTRACTS- Notwithstanding subclause (II) of subparagraph (A)(i), subject to subsections (c) and (d) of section 1924, contracts for admission to a State licensed, registered, certified, or equivalent continuing care retirement community or life care community, including services in a nursing facility that is part of such community, may require residents to spend on their care resources declared for the purposes of admission before applying for medical assistance.'.

(b) Treatment of Entrance Fees- Section 1917 of such Act (42 U.S.C. 1396p), as amended by sections 6012(a) and 6014(a), is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

`(g) Treatment of Entrance Fees of Individuals Residing in Continuing Care Retirement Communities-

`(1) IN GENERAL- For purposes of determining an individual's eligibility for, or amount of, benefits under a State plan under this title, the rules specified in paragraph (2) shall apply to individuals residing in continuing care retirement communities or life care communities that collect an entrance fee on admission from such individuals.

`(2) TREATMENT OF ENTRANCE FEE- For purposes of this subsection, an individual's entrance fee in a continuing care retirement community or life care community shall be considered a resource available to the individual to the extent that--

`(A) the individual has the ability to use the entrance fee, or the contract provides that the entrance fee may be used, to pay for care should other resources or income of the individual be insufficient to pay for such care;

`(B) the individual is eligible for a refund of any remaining entrance fee when the individual dies or terminates the continuing care retirement community or life care community contract and leaves the community; and

`(C) the entrance fee does not confer an ownership interest in the continuing care retirement community or life care community.'.

 

SEC. 6016. ADDITIONAL REFORMS OF MEDICAID ASSET TRANSFER RULES.

(a) REQUIREMENT TO IMPOSE PARTIAL MONTHS OF INELIGIBILITY- Section 1917(c)(1)(E) of the Social Security Act (42 U.S.C. 1396p(c)(1)(E)) is amended by adding at the end the following:

`(iv) A State shall not round down, or otherwise disregard any fractional period of ineligibility determined under clause (i) or (ii) with respect to the disposal of assets.'.

(b) Authority for States To Accumulate Multiple Transfers Into One Penalty Period- Section 1917(c)(1) of such Act (42 U.S.C. 1396p(c)(1)), as amended by subsections (b) and (c) of section 6012, is amended by adding at the end the following:

`(H) Notwithstanding the preceding provisions of this paragraph, in the case of an individual (or individual's spouse) who makes multiple fractional transfers of assets in more than 1 month for less than fair market value on or after the applicable look-back date specified in subparagraph (B), a State may determine the period of ineligibility applicable to such individual under this paragraph by--

`(i) treating the total, cumulative uncompensated value of all assets transferred by the individual (or individual's spouse) during all months on or after the look-back date specified in subparagraph (B) as 1 transfer for purposes of clause (i) or (ii) (as the case may be) of subparagraph (E); and

`(ii) beginning such period on the earliest date which would apply under subparagraph (D) to any of such transfers.'.

(c) INCLUSION OF TRANSFER OF CERTAIN NOTES AND LOANS ASSETS- Section 1917(c)(1) of such Act (42 U.S.C. 1396p(c)(1)), as amended by subsection (b), is amended by adding at the end the following:

`(I) For purposes of this paragraph with respect to a transfer of assets, the term `assets' includes funds used to purchase a promissory note, loan, or mortgage unless such note, loan, or mortgage--

`(i) has a repayment term that is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration);

`(ii) provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and

`(iii) prohibits the cancellation of the balance upon the death of the lender.

In the case of a promissory note, loan, or mortgage that does not satisfy the requirements of clauses (i) through (iii), the value of such note, loan, or mortgage shall be the outstanding balance due as of the date of the individual's application for medical assistance for services described in subparagraph (C).'.

(d) INCLUSION OF TRANSFERS TO PURCHASE LIFE ESTATES- Section 1917(c)(1) of such Act (42 U.S.C. 1396p(c)(1)), as amended by subsection (c), is amended by adding at the end the following:

`(J) For purposes of this paragraph with respect to a transfer of assets, the term `assets' includes the purchase of a life estate interest in another individual's home unless the purchaser resides in the home for a period of at least 1 year after the date of the purchase.'.

(e) EFFECTIVE DATES-

(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to payments under title XIX of the Social Security Act (42 U.S.C. 1396 et seq.) for calendar quarters beginning on or after the date of enactment of this Act, without regard to whether or not final regulations to carry out such amendments have been promulgated by such date.

(2) EXCEPTIONS- The amendments made by this section shall not apply--

(A) to medical assistance provided for services furnished before the date of enactment;

(B) with respect to assets disposed of on or before the date of enactment of this Act; or

(C) with respect to trusts established on or before the date of enactment of this Act.

(3) EXTENSION OF EFFECTIVE DATE FOR STATE LAW AMENDMENT- In the case of a State plan under title XIX of the Social Security Act (42 U.S.C. 1396 et seq.) which the Secretary of Health and Human Services determines requires State legislation in order for the plan to meet the additional requirements imposed by the amendments made by a provision of this section, the State plan shall not be regarded as failing to comply with the requirements of such title solely on the basis of its failure to meet these additional requirements before the first day of the first calendar quarter beginning after the close of the first regular session of the State legislature that begins after the date of the enactment of this Act. For purposes of the previous sentence, in the case of a State that has a 2-year legislative session, each year of the session is considered to be a separate regular session of the State legislature.

 

 

SEC. 6062. OPPORTUNITY FOR FAMILIES OF DISABLED CHILDREN TO PURCHASE MEDICAID COVERAGE FOR SUCH CHILDREN.

(a) STATE OPTION TO ALLOW FAMILIES OF DISABLED CHILDREN TO PURCHASE MEDICAID COVERAGE FOR SUCH CHILDREN-

(1) IN GENERAL- Section 1902 of the Social Security Act (42 U.S.C. 1396a) is amended--

(A) in subsection (a)(10)(A)(ii)--

(i) by striking `or' at the end of subclause (XVII);

(ii) by adding `or' at the end of subclause (XVIII); and

(iii) by adding at the end the following new subclause:

`(XIX) who are disabled children described in subsection (cc)(1);'; and

(B) by adding at the end the following new subsection:

`(cc)(1) Individuals described in this paragraph are individuals--

`(A) who are children who have not attained 19 years of age and are born--

`(i) on or after January 1, 2001 (or, at the option of a State, on or after an earlier date), in the case of the second, third, and fourth quarters of fiscal year 2007;

`(ii) on or after October 1, 1995 (or, at the option of a State, on or after an earlier date), in the case of each quarter of fiscal year 2008; and

`(iii) after October 1, 1989, in the case of each quarter of fiscal year 2009 and each quarter of any fiscal year thereafter;

`(B) who would be considered disabled under section 1614(a)(3)(C) (as determined under title XVI for children but without regard to any income or asset eligibility requirements that apply under such title with respect to children); and

`(C) whose family income does not exceed such income level as the State establishes and does not exceed--

`(i) 300 percent of the poverty line (as defined in section 2110(c)(5)) applicable to a family of the size involved; or

`(ii) such higher percent of such poverty line as a State may establish, except that--

`(I) any medical assistance provided to an individual whose family income exceeds 300 percent of such poverty line may only be provided with State funds; and

`(II) no Federal financial participation shall be provided under section 1903(a) for any medical assistance provided to such an individual.'.

(2) INTERACTION WITH EMPLOYER-SPONSORED FAMILY COVERAGE- Section 1902(cc) of such Act (42 U.S.C. 1396a(cc)), as added by paragraph (1)(B), is amended by adding at the end the following new paragraph:

`(2)(A) If an employer of a parent of an individual described in paragraph (1) offers family coverage under a group health plan (as defined in section 2791(a) of the Public Health Service Act), the State shall--

`(i) notwithstanding section 1906, require such parent to apply for, enroll in, and pay premiums for such coverage as a condition of such parent's child being or remaining eligible for medical assistance under subsection (a)(10)(A)(ii)(XIX) if the parent is determined eligible for such coverage and the employer contributes at least 50 percent of the total cost of annual premiums for such coverage; and

`(ii) if such coverage is obtained--

`(I) subject to paragraph (2) of section 1916(h), reduce the premium imposed by the State under that section in an amount that reasonably reflects the premium contribution made by the parent for private coverage on behalf of a child with a disability; and

`(II) treat such coverage as a third party liability under subsection (a)(25).

`(B) In the case of a parent to which subparagraph (A) applies, a State, notwithstanding section 1906 but subject to paragraph (1)(C)(ii), may provide for payment of any portion of the annual premium for such family coverage that the parent is required to pay. Any payments made by the State under this subparagraph shall be considered, for purposes of section 1903(a), to be payments for medical assistance.'.

(b) STATE OPTION TO IMPOSE INCOME-RELATED PREMIUMS- Section 1916 of such Act (42 U.S.C. 1396o) is amended--

(1) in subsection (a), by striking `subsection (g)' and inserting `subsections (g) and (i)'; and

(2) by adding at the end, as amended by section 6041(b)(2), the following new subsection:

`(i)(1) With respect to disabled children provided medical assistance under section 1902(a)(10)(A)(ii)(XIX), subject to paragraph (2), a State may (in a uniform manner for such children) require the families of such children to pay monthly premiums set on a sliding scale based on family income.

`(2) A premium requirement imposed under paragraph (1) may only apply to the extent that--

`(A) in the case of a disabled child described in that paragraph whose family income--

`(i) does not exceed 200 percent of the poverty line, the aggregate amount of such premium and any premium that the parent is required to pay for family coverage under section 1902(cc)(2)(A)(i) and other cost-sharing charges do not exceed 5 percent of the family's income; and

`(ii) exceeds 200, but does not exceed 300, percent of the poverty line, the aggregate amount of such premium and any premium that the parent is required to pay for family coverage under section 1902(cc)(2)(A)(i) and other cost-sharing charges do not exceed 7.5 percent of the family's income; and

`(B) the requirement is imposed consistent with section 1902(cc)(2)(A)(ii)(I).

`(3) A State shall not require prepayment of a premium imposed pursuant to paragraph (1) and shall not terminate eligibility of a child under section 1902(a)(10)(A)(ii)(XIX) for medical assistance under this title on the basis of failure to pay any such premium until such failure continues for a period of at least 60 days from the date on which the premium became past due. The State may waive payment of any such premium in any case where the State determines that requiring such payment would create an undue hardship.'.

(c) CONFORMING AMENDMENTS- (1) Section 1903(f)(4) of such Act (42 U.S.C. 1396b(f)(4)) is amended in the matter preceding subparagraph (A), by inserting `1902(a)(10)(A)(ii)(XIX),' after `1902(a)(10)(A)(ii)(XVIII),'.

(2) Section 1905(u)(2)(B) of such Act (42 U.S.C. 1396d(u)(2)(B)) is amended by adding at the end the following sentence: `Such term excludes any child eligible for medical assistance only by reason of section 1902(a)(10)(A)(ii)(XIX).'.

(d) Effective Date- The amendments made by this section shall apply to medical assistance for items and services furnished on or after January 1, 2007.

 

SEC. 6065. RESTORATION OF MEDICAID ELIGIBILITY FOR CERTAIN SSI BENEFICIARIES.

(a) In General- Section 1902(a)(10)(A)(i)(II) of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(i)(II)) is amended--

(1) by inserting `(aa)' after `(II)';

(2) by striking `) and' and inserting `and';

(3) by striking `section or who are' and inserting `section), (bb) who are'; and

(4) by inserting before the comma at the end the following: `, or (cc) who are under 21 years of age and with respect to whom supplemental security income benefits would be paid under title XVI if subparagraphs (A) and (B) of section 1611(c)(7) were applied without regard to the phrase `the first day of the month following'.

(b) Effective Date- The amendments made by subsection (a) shall apply to medical assistance for items and services furnished on or after the date that is 1 year after the date of enactment of this Act.


Appendix 2: TEXAS RULES ON ANNUITIES

 

1 T.A.C. §358.442(g) (effective September 1, 2004):

 

(g) Annuities. A person may purchase a revocable or irrevocable annuity to provide income (a nonemployment-related annuity), or may receive the benefits of an employment-related annuity that provides a return on prior services, as part of or in similar manner to a pension or retirement plan. This subsection applies to a person who applies for Medicaid on or after September 1, 2004.

  (1) An employment-related annuity is not a countable resource. A nonemployment-related annuity is a countable resource unless the annuity:

    (A) is irrevocable;

    (B) pays out principal in equal monthly installments and pays out interest in either equal monthly installments or in amounts that result in increases of the monthly installments at least annually;

    (C) is guaranteed to return within the person's life expectancy at least the person's principal investment plus a reasonable amount of interest (based on prevailing market interest rates at the time of the annuity purchase, as determined by DHS);

    (D) names the state of Texas, DHS, or DHS's successor agency as the residual beneficiary of amounts payable under the annuity contract, not to exceed any Medicaid funds expended on the person during his lifetime; and

    (E) is issued by an insurance company licensed and approved to do business in the state of Texas.

  (2) Income from an annuity that is not a countable resource under paragraph (1) of this subsection is treated in accordance with §15.455(d) of this chapter (relating to Unearned Income). An annuity that is a countable resource under paragraph (1) of this subsection and that does not meet the criterion described in paragraph (1)(C) of this subsection is also a transfer of assets. The date of the transfer of assets is the date of the annuity purchase or, if applicable, the date that the annuity contract was last amended in exchange for consideration. DHS determines the penalty period based on the amount payable under the annuity contract during that portion of the guarantee period of the annuity that is after the date the person is reasonably expected to die.

  (3) A revocable annuity that is a countable resource under paragraph (1) of this subsection is valued according to the amount refundable upon revocation. A transfer of assets occurs if a person sells a revocable annuity for less than this amount. An irrevocable annuity that is a countable resource under paragraph (1) of this subsection is valued according to its fair market value. DHS presumes that the fair market value of such an annuity is 80% of its total remaining payout. A person may overcome this presumption by providing credible evidence to the contrary. If, however, the annuity contract by its terms is non-negotiable, the total remaining payout is a transfer of assets, as provided by §15.435(g)(3) of this chapter (relating to Liquid Resources). A transfer of assets also occurs if a person sells an irrevocable annuity for less than the purchase price (that is, the total principal invested) minus the amount of principal that has already been paid.

  (4) The requirement in paragraph (1)(D) of this subsection does not apply to an annuity purchased by or for a person who is a "community spouse," as described in §15.503 of this chapter (relating to Protection of Spousal Income and Resources). As provided by §15.430(d)(2)(A) of this chapter (relating to Transfer of Assets), the purchase of an annuity by the institutional spouse is not a transfer of assets on the basis that the community spouse is the annuitant.

Medicaid Eligibility Handbook §2342.8 (administrative instructions after the rule quoted above):

 

General Treatment of Annuities and the Five Criteria Test

When an annuity meets the above five criteria (§358.442(g)(1)(A)-(E)):

  • it is not counted as a resource; and
  • payments are counted as unearned income.

When an annuity does not meet the above five criteria:

  • It is counted as a resource and the countable value is presumed to be 80% of the remaining payout.
  • It is a transfer of assets only when it does not pay out the principal, plus a reasonable amount of interest within the annuitant's life expectancy.
  • The date of the transfer is the date of the annuity purchase or, if applicable, the date that the annuity contract was last amended in exchange for consideration. If the annuity contract has been amended, refer to agency legal counsel to determine if amendment has affected the date of the transfer.

Use the life expectancy table to determine the amount payable during the client's life expectancy. The remaining payout is the amount of the transfer. Example: If the life expectancy is six years and the payout is eight years, the amount payable the last two years is the amount of the transfer.

To determine life expectancy, use the available online actuarial publication from the SSA Online Statistical Tables.

Determining a Reasonable Amount of Interest

Treatment of Annuities that Return the Principal within the Life Expectancy but Pay No Interest

If the annuity in question is guaranteed to pay out only the principal investment within the annuitant's life expectancy, then it does not meet the requirement to return a reasonable amount of interest. If this is the case, then the annuity is a countable resource.

HHSC presumes that the fair market value of such an annuity is 80% of its total remaining payout. This presumption may be overcome only if the client provides credible evidence to the contrary. This may be done only by providing a written appraisal of the annuity's value obtained from at least two reputable companies that are in the business of purchasing annuities.

If the countable value of the annuity does not render the client resource ineligible, determine whether there is any penalty resulting from a transfer of assets. Transfer of asset policy applies because, by purchasing an annuity that pays out no interest, the purchaser does not receive fair market value on the principal investment. To determine the amount of the transfer, first determine the interest percentage that a one-year CD in the local marketplace was paying at the time of the annuity purchase. Obtain this information from a local bank or financial institution. After obtaining this information, use the following formula:

-

-

Purchase Price

x

-

One-Year CD Interest Rate

-

-

Uncompensated Transfer

Example: If the purchase price of the annuity in question is $10,000 and the one-year CD rate is 3%, the amount of the uncompensated transfer is $300 ($10,000 x .03 = $300). The date of the transfer is the date of the annuity purchase. Follow current policy to determine if the uncompensated transfer results in any penalty.

Treatment of Annuities that Return the Principal within the Life Expectancy and Pay Interest

If the annuity in question is guaranteed to pay out the principal investment, plus at least some interest within the annuitant's life expectancy, the following standard applies for determining whether the interest is reasonable: whether the interest returned is comparable to at least two similar annuities.

The client must furnish these comparisons, which the client may obtain from the individual who sold the client the annuity or from any other reputable source. Each market comparison provided must be a similar product from a company licensed to sell annuities in Texas. For example, if the annuity in question is a single premium annuity, with a five-year payout, the comparisons provided must be for a single premium annuity with a five-year payout based on the same principal investment as the annuity in question. Copies of the market comparisons must be filed in the case record. The annuity being reviewed must pay out interest in an amount at least equal to or greater than the furnished comparisons.

If the client does not provide comparisons or the comparisons do not meet the standard above, the annuity in question does not return a reasonable amount of interest, so it is a countable resource.

HHSC presumes that the fair market value of such an annuity is 80% of its total remaining payout. This presumption may be overcome only if the client provides credible evidence to the contrary. This may done only by providing a written appraisal of the annuity's value obtained from at least two reputable companies that are in the business of purchasing annuities.

If the countable value of the annuity does not render the client resource ineligible, determine whether there is any penalty resulting from a transfer of assets. To determine the amount of the transfer, first determine the interest percentage that a one-year CD in the local marketplace was paying at the time of the annuity purchase. Obtain this information from a local bank or financial institution. After obtaining this information, use the following formula:

-

-

Purchase Price

x

-

One-Year CD Interest Rate

=

-

Amount Transferred

-

-

Actual Guaranteed Interest Payout

=

-

Uncompensated Transfer


Example: If the purchase price of the annuity in question is $10,000 and the one-year CD rate is 3%, the amount transferred is $300 ($10,000 x .03 = $300). If the actual guaranteed interest payout of the annuity in question is $200, the uncompensated transfer is $100 ($300 - $200 = $100). The date of the transfer is the date of the annuity purchase. Follow current policy to determine if the uncompensated transfer results in any penalty.

Note: All annuity documents must be referred to agency legal counsel. Legal counsel will provide a written opinion on terms and conditions that impact eligibility.

Use Form H1210, Subrogation, to report to the Provider Claims area any potential paybacks to the state as the residuary beneficiary of irrevocable annuities.


Appendix 3: “Spending Down” With a Focus on Quality of Life

 

[Your Letterhead]

 

"The government is forcing my loved one into poverty before they can get any help. How can I help them 'spend down' to qualify for Medicaid?"

 

Qualifying for Medicaid is not an end in itself. If it is a good idea (and sometimes it isn't), that is only because you can't pay for your own medical expenses and need help. We advocate, then, that this natural question be considered in light of another question--"How can I help my loved one use their savings to make their quality of life as good as possible for the time that remains?"

 

Start with  your loved one's senses and feelings.

 

The government places no limit on what can be spent for services for the benefit of the Medicaid applicant (and his or her spouse if any).  Let's begin there, with a focus on your loved one's senses and feelings.

 

  • Touch usually remains forever.

 

Ø      This can include anything from a massage by a licensed massage therapist to a simple caress from a family member.  The important thing is to touch gently & look for a reaction.  It’s easy to hurt someone who is frail or in pain, so go easy at first.  Don’t be shy about asking for response (listen and watch carefully for anything – like a sound, a movement, or a blink).  And if you do get a response, let the person know by squeezing their hand or by responding and encouraging them.   Don’t be afraid of their responses.  Even a person’s tears can be something to celebrate because it means that something still touches them.  Let the person know that it is okay to cry by holding them or their hands.

 

Ø      Massages should be non-invasive, and physical therapy should be geared toward maintaining muscle tone.

 

Ø      Lotion can be applied to the hands and feet.  Or consider gentle brushing of the person’s hair or soft stroking of the person’s head.

 

Ø      One can’t overestimate the importance of just holding hands while talking or sitting with someone.

 

Ø      Consider bringing a small pet (like a kitten or a puppy or small dog) to the nursing home to let the person stroke the animal, and feel its fur and purring.

 


  • Smell often evokes the fondest of memories.

 

Ø      Bring things, like freshly cut flowers, that are fragrant. 

 

Ø      Consider bringing an amaryllis, which they can watch as it grows (most bloom from a stump within 30-60 days and are sometimes sold by Alzheimers’ groups or MS societies).

 

  • Sound affects people very differently. Find out if the patient is partially or completely deaf or unusually sensitive to sounds.  Don’t assume all elderly or disabled people need to have a raised voice to hear. 

 

Ø      Speak at a level that is right for the individual.

 

Ø      Bring a boombox and recordings of old familiar tunes to play or sing along with. 

 

Ø      Bring books to read to the person or books on tape, and talk about the story with them.  Just the sound of your voice as you read a poem may have a rhythmic and soothing sound to the person.

 

Ø      Consider using a cell phone, especially one with free minutes, to call family members and old friends, and letting the person either talk or just listen to their voices.  Family members might know the phone numbers of other family members, but the person’s address book may be a good place for a caregiver to start looking if he/she has access to it.  Be sure to let the person hear and participate in the call.   If anyone asks if there is anything they can do, perhaps suggest that a short letter or card would probably be welcomed.

 

  • Sight affects more than just vision. To many people in need of care, their eyes are their most important means of communication.

 

Ø      Bring things to look at.  Big picture books, photos,  home movies or videos.  Consider buying a T.V. or DVD player (or a combination system) for the person as part of their spend-down (but be sure to take it after each visit so it’s not stolen or get something to lock it to the bedside).

 

Ø      Take the person out if at all possible.  The nursing home staff can put the patient in and out of the car.  A car trip to see the sights can be one of the biggest treats in the world.  It’s like a pass out of jail for some who believe the inside of a nursing home is the last thing they’ll ever see. 

 

Ø      If a car trip is not feasible, the nursing home may be able to help in putting the person into a wheelchair so that they can be taken at least for a stroll in a courtyard or for a longer distance. 

 

Ø      Make sure the person is comfortable and suitably covered for the time of year.  The feel of a gentle breeze can be either pleasant or chilling.

 

  • Taste is one of the most pleasant of senses.

 

Ø      Find out about any dietary restrictions. 

 

Ø      Bring in treats to enjoy together. Leaving things at the bedside doesn’t usually work. 

 

"Sniff out" what your loved one most needs.

 

Ø      Ask nursing home or home care aides what the patient needs . . . clothing items, personal items, etc. Buy supplies of what they enjoy while funds last, then make them available over time.

 

Ø       Ask the patient what she or he needs.

 

Ø      Make sure the person has access to his/her glasses, teeth, or hearing aids, and that if they are using a hearing aid that it has the right kind of battery and isn’t whistling.

 

Consider this checklist of personal items

 

Ø      Small stuffed animals, special pillows, blankets, soft sweaters.  If they are soft and belong solely to the individual, they can become an item of comfort.  Be sure any special items provided are labeled. 

Ø      Items that play music by flipping a switch, opening a box, etc.

Ø      A comfortable chair, rocking chair, recliner, or self lifting recliner. 

Ø      High density floor light that can be moved next to the bed or chair to enhance the ability to see.

Ø      Good TV set with remote and VCR or DVD for old movies.  If hearing is poor, headphones may be recommended.

Ø      Radio, DVD player with their favorite type of music.

Ø      Hearing aides.

Ø      Dentures.

Ø      Glasses.  Magnifiers.

Ø      Massage therapy visits.

Ø      A great walker and walker bag or basket.

Ø      Slippers, robe.

Ø      Good rubber sole, lace up or Velcro shoes.

Ø      Plenty of good socks, underwear, undershirts (for men & women).

Ø      Bed linens.

Ø      Food – as long as it is medically permitted (people often get tired of nursing home food, and non-institutional food may stir their appetite).

 


Consider hiring a caregiver to provide the things you'd like to give.

 

Ø      Often, the greatest gift of all is human contact.  With busy lives and loved ones at a distance, it makes sense to hire a caregiver to come as often as affordable. 

 

Ø      If the services of a caregiver seem too expensive, consider asking the nursing home if there are other families who might also want to hire a caregiver, and pool your resources together to hire a single caregiver.  It may be more worth a caregiver’s time to come to one facility to visit 2-3 patients at a time than to come all the way out just to visit one person. 

 

Ø      Consider looking for volunteers through a church, sorority, or other organization that may provide these services on a regular and responsible basis. 

 

Ø      Ask the caregiver to use the last 10 minutes of each session to write down in a notebook any responses he/she noticed and the activities that were provided.   This may then be used to justify what you are spending to the Medicaid program, to a court or to family members.  It may also help family members who can't be there to know that all the patient's needs are being met.

 

Buying services for your loved one is a great way to "spend down" for Medicaid. Also, she or he may want to make gifts as allowed by the Medicaid rules, and the best reason for accepting such gifts is to set aside funds that can be used later for services. You can put the money in an account in your name, then without legal obligation, your loved one later when they are on Medicaid.

 

Pay off debts.

 

A Medicaid applicant can pay any debts you may owe, to reduce the amount of your “resources.”  For example, you can pay on your home mortgage, credit cards, or legal debts to family members, if you have such debts.

 

Buy "exempt resources."

 

This is the list you usually see when "spending down" is discussed. We're putting it last, because we advocate spending first on the patient's needs before considering whether they may need to buy a car, home improvements, etc. that someone else will use. However, it is important to keep in mind the government's approved "shopping list":

 

Ø      One automobile used for transportation, regardless of value

 

Ø      Life insurance with a death benefit and cash value of not more than $1,500

 

Ø      Term life insurance and burial insurance with unlimited death benefit

 

Ø      Burial spaces of unlimited value, both for you and for your immediate family (including your children of any age, stepchildren, adopted children, brothers, sisters, parents, adopted parents, and spouses of those individuals)

 

Ø      The entire cost of any nonrefundable funeral contract without limit as to the cost.  In addition to your own funeral, you can likewise purchase nonrefundable funeral contracts for your brothers, sisters, children, step children and adopted children and their spouses.

 

Ø      Burial funds (for example, designated bank accounts) with a maximum value of $1,500 (but any amount paid on a funeral contract counts against this).

 

Ø      A home to which you intend to return (including the cost of repairs and improvements on your home).  However, consider whether the Medicaid estate recovery program may force sale of the home later.

 

Ø      Household goods that are found in or near the home and used on a regular basis, or needed for maintenance, use and occupancy of the home. 

 

Ø      Personal effects that are "ordinarily worn or carried by the individual" or "articles otherwise having an intimate relation to the individual."

 

Ø      A wedding ring and an engagement ring, regardless of value.

 

Ø      Household goods and personal effects such as prosthetic devices, dialysis machines, hospital beds, wheel chairs and similar equipment required because of a person's physical condition, regardless of value.

 

Ø      Certain trade or business property and other property essential to self-support (not including liquid resources, except cash used in a trade or business)

 

This guide combines tips from Elder Law attorneys Patricia M. Tobin (of Mill Valley, California) and H. Clyde Farrell (of Austin, Texas) and from Geriatric Care Manager Debbie Pearson, RN (of Austin, Texas).  They give their permission to reproduce it with attribution.

 



[1]Medicaid Eligibility Handbook §§2320-2329 (especially §2324), based on 1 T.A.C. §358.430. Also see an important memo explaining how to apply the $117.08 per day rule: LTC ME Bulletin No. 06-01 at http://www.dads.state.tx.us/handbooks/meh/policy/09-29-05.pdf .

[2] For applications filed before November 1, 2005, the applicable rule is one month of ineligibility for every $2,908 transferred. LTC ME Bulletin No. 06-01, supra. NAELA members can look up these amounts for each state in the "Medicaid Desk References at www.naela.com/private/Medicaid.htm .

[3] 42 U.S.C.A. §1396p(c)(1)(E); 1 T.A.C. §358.430(f), Medicaid Eligibility Handbook §2324.

[4] State Medicaid Manual §3258.5G-I; 1 T.A.C. §358.430(f)(5), Medicaid Eligibility Handbook §2324.

[5] 1 T.A.C. §358.430(f)(2), which was amended by striking the sentence, "Fractional remainders are rounded down." 30 Texas Register No. 24 (June 17, 2005); and see LTC ME Bulletin No. 06-01, supra.

[6] 42 U.S.C.A. §1396p(c)(1)(B); 1 T.A.C. §358.430(e), Medicaid Eligibility Handbook §2323. The federal statutory language refers only to transfers from a trust, but CMS interprets this to include also transfers to a trust, if the trust is such that the corpus is not treated as a resource of the individual.  State Medicaid Manual §3258.4E.  The purpose of this appears to be to discourage establishment of irrevocable trusts that are not treated as resources of the grantor.

[7] Medicaid Eligibility Handbook §2320; 1 T.A.C. §358.430(a)(4). Family Care and Primary Home Care do not have transfer penalties because they are not "waiver" programs.

[8] 42 U.S.C.A. §1396p(e)(1); 1 T.A.C. §358.455(e)(5)(D(iii)(II); Medicaid Eligibility Handbook §2353.52.

[9] 1 T.A.C. §358.430(h)(1), Medicaid Eligibility Handbook §2324.4. If the transfer reduced the countable resources below $2,000, the return of the asset or part of its value does not affect the "start date" under DRA 2005. The returned asset rule is one of the rules involved in applying the penalty period, but for which the client would have qualified immediately after the transfer. If in the absence of a transfer penalty period the transfer would have rendered the client immediately eligible for Medicaid in a nursing home, then the start date is the first day of the month after the transfer--regardless of how much or little may later be returned.

[10] 1 T.A.C. §358.430(h)(2), Medicaid Eligibility Handbook §2324.4.

[11] It is uncertain at this writing whether the Texas Health & Human Services Commission will require that the nursing home be Medicaid-certified. Likewise, the agency could conceivably require that the client be in a Medicaid bed to start the transfer penalty running--though that would create an administrative burden and a burden on unpaid nursing homes the agency seems unlikely to bear.

[12] Except as otherwise indicated, these rules are from 1 T.A.C. §358.430(j), Medicaid Eligibility Handbook §2326.

[13] Medicaid Eligibility Handbook §2326, first example. In the past, an exception was made where a family member provided "professional" services--for example, a daughter who is a nurse being paid by her parent for nursing services. That is a logical extension of the qualification "normally provided by a family member," but it does not appear in the Medicaid Eligibility Handbook as of this writing.

[14] 42 U.S.C.A. §1396p(c)(2); 1 T.A.C. §358.430(d); Medicaid Eligibility Handbook §2322.

[15] Medicaid Eligibility Handbook §2322.1; State Medicaid Manual §3258.10B. The term "solely for the benefit" contains a trap for the unwary.  It is interpreted by CMS to mean the trust instrument or other document must provide for the spending of the funds on the beneficiary during the beneficiary's actuarial life expectancy.  State Medicaid Manual §3257B.6.  Presumably, HHSC would use the life expectancy table that it uses in evaluating annuities.

[16]1 T.A.C. §358.430(h), Medicaid Eligibility Handbook §2324.4.

[17] 1 T.A.C. §358.430(d)(2), Medicaid Eligibility Handbook §2322; 1 T.A.C. §358.430(m), Medicaid Eligibility Handbook §2329. In addition to the standards at §2329, an informal requirement of the Commission is that some effort must be made to have the asset transferred back, unless such effort would put the client in danger of harm.

[18] 1 T.A.C. §358.430(d)(2), Medicaid Eligibility Handbook §2322.

[19] 1 T.A.C. §358.430(d)(2), Medicaid Eligibility Handbook §2322.

[20] The original provision is in the “Kennedy Kassebaum” Act, Senate Bill 1028 (Health Insurance Reform Act) §217, to be codified at 42 U.S.C.A. §1320a-7b(a).  The amendment is §4734 of H. R. 2015 (Balanced Budget Act of 1997).

[21] The judgment by its terms applies only to members of the State Bar of New York.  However, in the author’s judgment, the risk that a future Attorney General would prosecute an attorney under a law subject to a permanent injunction by a federal court, that a previous A.G. refused to defend, seems minimal.  The requirement of diligent and exclusive representation of our clients would seem to demand that if we choose to practice in this area, we accept whatever small risk may remain and do our jobs for our clients.

                [22] See page 30.

[23] Texas Probate Code § 865, 866; and §776A, eff. September 1, 1997.

[24] 1 T.A.C. §358.455(d)(5)(A), Medicaid Eligibility Handbook §2452.4

[25] Medicaid Eligibility Handbook §2342.8, 1 T.A.C. §358.442(g). Note that some important materials that are not contained in the rule were added to the Handbook in July 2005. Their apparent source is a memorandum from Jennifer Mathys dated June 1, 2005.

[26] This reference to equal payments of principal and interest presumably refers to the constant ratio of return on investment that is used for income tax reporting of fixed annuity income.  If "interest" were really being paid (as on a note), the declining balance of principal would necessarily require a declining amount of interest in each successive payment. This is also suggested by the consistent use of the term "interest" throughout the rule, indicating that the drafter uses that term as synonymous with "return" or "buildup" in an annuity.

[27] In the past the life expectancy table has been at Medicaid Eligibility Handbook Appendix IX. However, at this writing, Appendix IX is not available in the online version of the Handbook, and the recently revised Handbook §2342.8 provides, "To determine life expectancy, use the available online actuarial publication from the SSA Online Statistical Tables." It is my understanding that this refers currently to the Social Security Period Life Table updated October 4, 2005, which is at http://www.ssa.gov/OACT/STATS/table4c6.html.

[28] The exception for an annuity bought by or for a community spouse is at 1 T.A.C. §358.442(g)(4), Medicaid Eligibility Handbook §2342.8.

[29] The HHSC theory appears to be that non-negotiable notes have no market value, so the purchase of one is a transfer of the purchase price that is subject to a transfer penalty.

[30] S. 1932 §6012(a), amending 42 U.S.C. §1396p(e).

[31] S. 1932 §6012(b), amending 42 U.S.C. §1396p(c)(1)(F).

[32] 1 T.A.C. §358.442(g).

[33]Pantaleo & Freedman, In Defense of Medicaid Planning: Federal Law Prohibits States from Applying Debtor-Creditor Laws to Asset Transfers, Naela Quarterly p. 15 (Fall 1994).

[34] Tex. Bus. & Comm. C. §24.002(2)(B), (12)

[35] Estate of Lucille E. Bergman v. North Dakota Commission of Human Services, 688 N.W.2d 187 (N.D. Sup. Ct. 2004).

[36] 40 T.A.C. §15.503(b), Medicaid Eligibility Handbook §4133.3.

[37] 42 U.S.C. §1396p9b)(2).

[38] Texas Constitution §50.

[39] 42 U.S.C.A. §1396p(c)(2); 40 T.A.C. §15.430(d); Medicaid Eligibility Handbook §2322.

[40] 42 U.S.C.A. §1396p(c)(2); 40 T.A.C. §15.430(d); Medicaid Eligibility Handbook §2322.

[41] Internal Revenue Code §121.

[42] 1 T.A.C. §358.430(d)(2), Medicaid Eligibility Handbook §2322.

[43] State Medicaid Manual §3258.10B, referencing the definition in the annuity section, §3257.

[44] At this writing, the October 4, 2005 table at www.ssa.gov/OACT/STATS/table4c6.html .

[45] 1 T.A.C. §373.205(A)(4).

[46] 1 T.A.C. §373.209(d).

[47] Texas Probate Code §499(6).

[48] State Medicaid Manual §3259F.

[49] Bonta v. Burke, 98 Cal.App.4th788, 120 Cal.Rptr.2d 72 (2002).

[50] Tex. Bus. & Comm. C. §24.005.

[51] State Medicaid Manual §3258.9A: "Some States allow life estates with powers, wherein the owner of the property creates a life estate for himself or herself, retaining the power to sell the property, with a remainder interest to someone else, e.g., a child. Since the life estate holder retains the power to sell the property, its value as a resource is its full equity value. In this situation, the individual has not transferred anything of value, because he or she can terminate the life estate at any time and restore full ownership to himself or herself. Instead, the full value of the asset in question is treated as a countable resource to the individual (assuming, of course, that it is not an otherwise excluded resource)."

[52] Bonta v. Burke, 98 Cal.App.4th788, 120 Cal.Rptr.2d 72 (2002) held that property conveyed by this type of deed is subject to estate recovery in California, which has an expanded definition of estate recovery (including nonprobate assets).

[53] Survivorship Agreement adapted from State Bar of Texas, Texas Real Estate Forms Manual Form 9-18 (2005). Paragraph 4. is a simplified form of a provision drafted by Patricia F. Sitchler of San Antonio, in a deed conveying a 1% interest and creating a joint tenancy with right of survivorship that the Medicaid program has acknowledged did not create a transfer penalty.

[54] S. 1932 §5016(D), amending 42 U.S.C. §1396(c )(1).

[55] Groce v. Director, Arkansas Commission of Human Services (Ark. Ct. App. No. CA02-1274, June 11, 2003), at http://courts.state.ar.us/opinions/2003a/20030611/ca021274.html. At the national level, Vincent Russo, a former president of  the National Academy of Elder Law Attorneys, has suggested to Congress that "loopholes" including purchase of a life estate be closed instead of more punitive changes to the transfer rules. U. S. Senate Special Committee on Aging (20 Jul 2005) http://aging.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&Hear .

[56] 42 U.S.C. §1396p(d)(4)(a) (long-term care Medicaid), 42 U.S.C. §1382b(e)(5) (SSI).

[57] 42 U.S.C. §1396p(d)(4)(c) (long-term care Medicaid), 42 U.S.C. §1382b(e)(5) (SSI).

[58] Disciplinary Rules 3.04, 3.10, 4.01.

[59] 1 T.A.C. § 358.430(d)(2)(E); Medicaid Eligibility Handbook §2322.6.

[60] Disciplinary Rules 3.04(a), 3.10, 4.01(b).

[61] Matter of Klapper, NYLJ , Aug. 9, 1994, p. 26, col. 1, Sup. Ct., Kings Co.

[62] In In re Guardianship of Connor, 525 N.E. 2d 214 (Ill. App. 1988), a guardian was held liable for damages for selling the ward’s home and spending the proceeds on nursing home care, when the home was an exempt resource under Medicaid law.  See also Disciplinary Rule 1.01.

[63] Board of Overseers of the Bar v. Ralph W. Brown, Esq, Docket No. Bar-01-6 (Maine, October 25, 2002), full text at www.courts.state.me.us/opinions/documents/Bar-01-6%20Brown.htm  

[64] Proceedings of the Conference on Ethical Issues in Representing Older Clients, 62 Fordham L. Rev. 1063 (1994).

[65] Gouldy v. Metcalf, 12 S.W. 830 (Tex. 1889); but see Hanna v. Ladewig, 11 S.W. 133 (Tex. 1889) and other cases cited in a note arguing that this is not always the case, at 33 Real Estate, Probate & Trust Law Reporter  42 (October 1994).

[66] A form for assessing capacity is included as an appendix to an excellent article on this subject in the materials for the 1992 Symposium of the National Academy of Elder Law Attorneys. A more comprehensive form, together with extensive legal and medical discussion, is contained in Walsh, et al., Mental Capacity, 2nd ed. (Shepard’s/McGraw-Hill Tax and Estate Planning Series 1994, looseleaf).