Maryland has issued new regulations making significant changes to Medicaid law. These changes affect many individuals who have done Medicaid planning in the past. This article will discuss the changes and show how they might affect you. Because these new rules drastically alter the assumptions that underlay all previously considered plans, prudence suggests that all existing asset preservation plans be reconsidered. These new regulations deal with Federal rule changes and many of the points discussed below will apply in D.C. and other States as well. This office has been working to develop strategies to address these new rules.
High Home Prices Affect Medicaid Eligibility. Many homeowners in the Washington area have seen the value of their homes rise astronomically in the past few years and Federal and State lawmakers have decided to disallow Medicaid coverage for individuals who have home equity over $500,000. Now that so many houses sell for more than that amount, those seniors who have paid off their mortgages may find themselves unable to get Medical Assistance for nursing home care until they sell their homes. Before this change in the law, every person had a right to keep the house and still get Medicaid benefits.
The Rules Concerning Gift Giving Have Changed. Many readers will recall that giving assets away will cause Medicaid ineligibility for a period of time. In Maryland, the penalty is one month of Medicaid ineligibility for every $4,300 given away. Under the old rules, that penalty started when the gift was made, so for example, one who gave $43,000 to her children could not get Medicaid for 10 months following the gift. Now for gifts made after February 7, 2006, Medicaid ineligibility will not begin until the gift giver runs out of money, resides in a nursing home and applies for Medicaid.
Future Medicaid Ineligibility. Let us revisit the example above. If one gives $43,000 to her children, then it doesn’t matter if she waits ten months, one year, or even four and a half years before she needs nursing home care. Now, as a consequence of such gift, the moment the individual enters the nursing home with no money left to her name, she will learn that she cannot get Medical Assistance to pay for her care for ten months after entering the nursing home. While there are ways to address this problem, it is clear that the playing field has changed and the tried-and-true asset preservation strategies of past years will no longer suffice to protect your financial interests.
Estate Planning Pitfalls. For years many accountants and estate planners have been advising that annual exclusion gifts are simple and effective estate planning tools. Many of you are familiar with the concept of giving gifts of $10,000 per year to your loved ones. (The law now allows annual exclusion gifts to be greater than $10,000 depending on the year the gift is made.) Many more are in the habit of giving children and grandchildren cash or securities as holiday gifts or to celebrate such rites of passage as graduating from high school or college. Some may even contribute to college savings plans for younger family members. Will the new Medicaid regulations penalize such generosity? And what about the more common gifts of small amounts of cash to grandchildren on birthdays and holidays – do you risk losing nursing home coverage if you continue to make such gifts?
Estate Planners Cannot Ignore the Medicaid Rules. Maryland does not care about the reason one makes a gift to one’s grandchild. For gifts made after February 7, 2006, the rules will treat all gifts, including annual exclusion gifts, the same, although there are special rules for gifts made to disabled individuals. Before the rules were changed, the ineligibility period that arose from a single $10,000 gift expired less than two and a half months after the gift was made. Now, however, all gifts made in the five years preceding a Medicaid application will be added up and the resulting period of Medicaid ineligibility will not begin until the individual is in a nursing home and out of money (although this rule is being phased in and some people still may use a three year lookback period). No longer can the estate planner look solely at the gift and estate tax consequences when making estate planning recommendations. Advising seniors to make regular annual exclusion gifts without considering the effect on future medical needs would be short-sighted.
What About The Checks to My Grandchildren on Their Birthdays? This question was raised with the rule makers in Maryland but they have declined to give us guidance on the point. For now, our clients continue to make such gifts, but one must stay closely attuned to the rapidly changing legal environment and be prepared to adjust one’s behavior if we learn that such actions would result in Medicaid ineligibility at some future time.
Using Annuities is Now More Complex. Annuities are a useful asset preservation tool for married couples should one of the partners require long term care in a nursing home. For example, if the law allows the spouse who is not in the nursing home to keep only $95,000, but the couple has $195,000, rather than spend $100,000 on the nursing home before Medicaid will pay, the spouse who is not in the nursing home could purchase an annuity for $100,000 instead. Then Medicaid will pay for the nursing home care the following month, and the couple can retain all $195,000, although it must be titled in the other spouse’s name.
The new rules, however, impose strict requirements for any annuity purchases or changes to existing annuities after February 8, 2006. Any annuity owned by either spouse must be reported on the initial Medicaid application, and any change to an existing annuity must be reported within 10 days of the change. For all new annuities, the State must be named as a beneficiary to pay back any Medicaid benefits should the annuitant die before the annuity pays out in full.
If the State is not named as the beneficiary, then the purchase of the annuity, or the conversion of an existing annuity into an income stream, will cause Medicaid ineligibility for the spouse in the nursing home. Because the conversion of an annuity into an income stream generally can not be changed back, this consequence of Medicaid ineligibility could be a severe financial setback for the family. Even where the State is named as a beneficiary, the annuity must be structured such that it will pay out the entire purchase price to the community spouse during the community spouse’s life expectancy.
Sixty Month Look Back Period. Many people interested in Medicaid law have become familiar with the “36 month lookback period”, that is, the three year period preceding the filing of a Medicaid application for which the applicant must submit copies of all bank and investment account statements. Any gift transfers during the look back period are taken into account to determine the Medicaid ineligibility period. Under the new rules, the look back period has been extended to five years. A skilled asset preservation planner can show you how to use the lookback period to shelter a large gift of assets thereby preserving your family’s wealth to be passed on to future generations. While the opportunities are more limited with the longer look back period, individuals with foresight may still use the look back period to their advantage.
The State Will Closely Scrutinize Family Business Transactions. A senior family member who loans money to another will suffer a period of Medicaid ineligibility if the loan is not commercially sound. While it always is prudent to consider the borrower’s wherewithal to repay any loan, some grandparents, for example, may be prone to take a greater risk in loaning money to a grandchild to purchase her first home even if her credit is marginal. If the loan is not repaid, however, the lender could find himself unable to get Medicaid benefits for a period of time should he require nursing home care within a few years of making the loan. Similarly, if a senior family member purchases a life estate in her child’s home as a way of
preserving assets by passing liquid wealth to her heirs, she would be ineligible for Medicaid as a result of such transfer if she fails to reside in the home for 12 months before entering a nursing home. Otherwise, such a purchase would effectively shelter the entire amount paid to the children to purchase the life estate, and the State would have no claim on the house after the senior family member dies.
Dealing With Severe Financial Setback. The overall landscape of these new rules is like a minefield. What should one do if she purchased a life estate in her daughter’s home intending to live out the rest of her life with her child and grandchildren, but suffers a sudden health crisis and requires nursing home care within 12 months of the purchase? Such situation would be especially complicated if the homeowner used the funds to build an in-law apartment in the home and no longer has access to liquid cash. Similarly, what if one converts an annuity into an income stream but failed to fulfil all of the new annuity requirements, only some of which are discussed above?
The new Medicaid law provides for a hardship exception to allow the relief of not imposing a period of Medicaid ineligibility for people who find themselves in such straits. It remains to be seen whether the State will be more generous in its implementation of this new “Undue Hardship Waiver” as it is called, than it was with the hardship waiver available under the old law. Elder law practitioners considered the previous hardship waiver provisions to be, for the most part, generally unavailable, although this office has been successful in obtaining a hardship waiver for a client under the prior law.
Free Transaction Review. As this article shows, the landscape has changed and asset preservation planning in anticipation of future nursing home care has become much more complicated and treacherous. William M. Gatesman is a leader in devising new strategies to enable individuals and families to preserve wealth, and he continues to work on solutions to the problems presented by these new rules. For individuals residing in, or those who have family members residing in, Maryland or the District of Columbia, the Gatesman Law Office is pleased to offer a free one-time review and analysis of your overall financial situation or a particular transaction you may be contemplating so you may learn how these new rules may effect you. To inquire about this offer or to get more information about our services, please send us email at contact@williamgatesman.com.