Maryland Elder Law and Estate Attorney

It is not unusual for parents to lend money to their adult children in times of need. Often the funds are simply given to the younger family member with the understanding that the recipient will return the funds when his or her situation improves.

For seniors, lending money in this way could be a recipe for disaster. If a parent loans money to a child, or to any other person, without documenting such loan with a promissory note, such loan may foreclose the opportunity for such parent to obtain Medical Assistance if future nursing home care should be required.

Even if the loan is memorialized with a promissory note, Medicaid ineligibility still may arise. This is because the Medicaid rules impose strict requirements on the structure of a loan and on the form of a promissory note in order for the note holder to obtain Medical Assistance.

An example of how this might affect a married couple is instructive. Jenny, a single mother with two small children, suffered a reduction in hours at work and needed help with her house payment. Jenny’s parents, Bob and Mary, helped Jenny by loaning her $10,000 to tide things over until she could find another job. Two years later, while Jenny is now able to make her mortgage payments, she has not been able to save enough money to repay the loan.

Bob and Mary have fallen on lean times themselves. They own a house and $20,000 in the bank. Bob has a stroke and now must reside in a nursing home for the remainder of his life. Under the Medicaid rules, Bob and Mary can keep about $20,000. They also can make home improvements and can prepay their burial costs. If you count the loan to Jenny as one of their assets, Bob and Mary have $30,000 in assets, $10,000 of which they can use to improve their house or prepay their burials. Or Mary can use an annuity to save the entire amount. After making such payments, Bob would meet the financial eligibility requirements for Medicaid so that his nursing home costs could be paid by the state.

As long as the loan to Jenny is properly documented, Medicaid would be allowed. If it is not, however, then the $10,000 transferred to Jenny two years ago will be treated as a gift causing Bob to be ineligible to receive Medicaid benefits for one and a half months. The tragedy of the situation is that Bob and Mary will be required in that instance to spend about $12,000 of their saved funds to pay the nursing home for that one and a half month period thereby substantially depleting their meager savings.

The way to avoid such dire consequences is to structure the loan so that it complies with the Medicaid rules. Such loan must be “actuarially sound”. While that word as used in the Medicaid rules is somewhat nebulous, it presently is applied so as to require that the term of the loan must allow for full repayment within the life expectancy of the lender. Life expectancy is determined by using standardized life expectancy tables set forth in the Medicaid rules.

In addition, such loan must provide for equal, regular, periodic payments, and there must be no deferral of payments. Also, the promissory note must specifically state that the loan is not cancellable at death. Unfortunately, most promissory notes prepared by lawyers and most preprinted promissory note forms do not prohibit cancellation at death. Indeed, under general commercial law, a valid promissory note, even if it does not expressly prohibit cancellation at death, would nevertheless survive the death of the borrower. In other words, there would not be an automatic cancellation of the note. This legal principle, however, is not sufficient to salvage a promissory note in the eyes of the Medicaid rule makers who will look to see whether the promissory note specifically prohibits cancellation.

As is the case in many areas of life, when seniors enter into financial arrangements with family members or others, great care must be taken to ensure that such arrangements do not have unintended adverse consequences or prevent future eligibility for public benefit programs.

I received a nice letter from a client recently. It reads as follows:

Dear Mr. Gatesman,

You may recall that we met during the blizzard in February. My main question at that time was how to get my mother into a nursing home on Medicaid without losing her house.

During our meeting, you pointed out that my mother should be eligible for a Veteran’s Administration Aid & Attendance pension. The whole time I was completing the application and assembling all the supporting documents, I assumed that the application would be automatically denied and we would have to launch a lengthy appeals process.

You can imagine my shock when our application was accepted within about 3 weeks of receipt! It was received by the VA on May 21, and they sent my mother a notice dated June 17, that arrived on what would have been my parents 69th wedding anniversary, June 22.  The notice says she will receive $1056 per month as of June 1.

I did not know that this pension even existed before consulting you.

Thank you again!

Individuals who get Medicaid benefits to pay for nursing home care are allowed to keep their house as an exempt asset. However, the State is allowed to place a lien on the house to recover any Medicaid benefits paid on the individual’s behalf. Moreover, if there is no lien on the house, the State can make a claim in the individual’s probate estate after that person dies.

However, a lien may not be imposed if a spouse is living in the house, and estate recovery is allowed only after such spouse has died. For a single person in the nursing home, if the state has put a lien on the house, the law states that the “lien shall dissolve upon that individual’s discharge from the medical institution and return home.”

In some instances, family members choose to take a loved one home when that person has reached the end of life to be cared for by hospice providers in the home setting. In that instance, if a Medicaid lien was placed on the house, the law provides that such lien may not be enforced.

In light of such circumstance, a financially savvy family member who holds an appropriate power of attorney can take steps to protect the house from estate recovery by using a life estate deed.

Such planning would have the following result. First, the Medicaid lien will be ineffectual under the law. Second, the life estate deed will allow the property to pass to family members outside of probate. Property that passes outside of probate is not subject to estate recovery.

In this way, the state would be unable to obtain the house notwithstanding that it had placed a lien on the property.

Ensuring that the power of attorney has appropriate provisions to allow for this type of planning is one of the things this office does when working with a client.

Does your power of attorney fit the bill?

Do you have enough auto insurance coverage? Did you know that the minimum required amount of auto liability insurance in Maryland is woefully inadequate? Moreover, if you are in an accident caused by an uninsured or underinsured driver, you would look to your own insurer to make you whole for any losses you might suffer.

Such losses can be significant. For working age individuals, an automobile accident could result in you losing the ability to work. If that is the case, you will be dependent on an insurance recovery to provide you with the value of the wages you would lose by not being able to work and earn a living for the rest of your life.

Consequently, it is important that you review your automobile insurance bodily injury coverage. I generally recommend that working age people, and especially high earning workers, have at least $1,000,000 in coverage. And importantly, I advise that such high coverage limits apply for your uninsured motorists insurance. That way, if you are hit by an uninsured or underinsured driver, you could look to your own insurance company to make sure you are not impoverished if the accident results in an inability to work.

Also, if you are responsible for injury to a high earning individual and your insurance coverage is not sufficient to compensate that person for her lost wages, then your other assets may be at risk to pay for the injured party’s losses.

Often, one can obtain an increase in liability coverage with no premium increase if you also raise the deductible on your auto collision or comprehensive insurance coverage. Indeed, some advisers suggest that a higher deductible is desirable because, if you make a lot of small claims against your policy, the benefit of the claim will be minimal, but the resulting premium increase could be significant. With a higher deductible, $1,000 for example, you will assume the responsibility to pay for such loss, but you would get the benefit of reducing your premium. Such premium reduction may allow you to obtain higher liability coverage with no increase in overall premium.

Some insurers like GEICO advertise that they can save you money because they have less costly premiums than other insurers. However, GEICO generally will not write a policy with $1,000,000 liability coverage. Therefore, one must consider whether a cut-rate insurer is a good deal if it cannot provide you with the coverage you desire.

Also, while many people have umbrella insurance coverage, such coverage may not apply to uninsured motorist liability. If that is the case with your insurer, then you cannot rely on your umbrella insurance to cover a shortfall in liability coverage if you are hit and injured by an uninsured or underinsured driver.

It is prudent financial planning to review your automobile insurance policy to ensure that your coverage is adequate for your circumstances.

A lawyer I know is assisting a client seeking Medical Assistance to pay for his mother’s nursing home care. Mother has less than $2,500.

Prior to entering the nursing home, the client, as agent under mother’s power of attorney, assisted his mother by paying in-home care givers using mother’s funds. Such payments totaled $200,000 over a several year period. While doing so enabled mother to continue to reside at home giving her a better quality of life, at the insistence of the caregivers, such payments were made “under the table”. In other words, no employment taxes were paid for these care costs, and the payments were not reported to the IRS.

Client applied for Medicaid, which was denied because the caseworker improperly treated the $200,000 payments as gifts causing Medicaid ineligibility. In fact, such payments were payments for services. The client, on his mother’s behalf, contested the denial and the matter was set for a hearing before an administrative law judge.

Now the client is fearful that providing a sworn statement as to the reason for the payments will expose the client or his mother to potential civil or criminal liability relating to their failure to report the care giver payments to the IRS.

So, instead of running that risk, the client will withdraw his challenge to the denial of Medicaid benefits. That is unfortunate because the payments to the care givers clearly were not gifts.

This cautionary tale is but one example of the complex matters frequently addressed by elder law attorneys as they seek to guide their clients through the maze of public benefits law.

Last month, in the Article entitled Letting the Fox Guard the Henhouse, I suggested that a married couple could use an annuity to enable the spouse at home to retain more assets than otherwise would be available to her.

Annuity Replaces Lost Income
Enabling the spouse to keep more assets is particularly important when one considers the Medicaid rule that requires that most of the income earned by the spouse in the nursing home must be paid to the nursing home as a contribution to the cost of care. Hence, whatever additional assets the couple can retain by using an annuity will serve to offset the lost income, income the couple most likely depended on to maintain the day-to-day household expenses.

Specialized Annuity
The strategy discussed in last month’s article involves the use of a specialized annuity. I have addressed the characteristics of such annuity in my article discussing the 2006 Medicaid rule changes. You can read that article by clicking -HERE-.

These Articles are Not Legal Advice
As with any article on this website, you should not consider the ideas presented here as constituting legal advice to you in particular, or advice that addresses your particular situation. For more information, click the Is This Legal Advice? tab at the top of this page.

I recently met with a woman whose husband requires nursing home care. The couple owns a house and has $200,000 in the bank. Upon learning that the woman had come to see me, the nursing home representative offered to help her apply for Medicaid and filed a Medicaid application on her behalf.

Why Did the Nursing Home File a Medicaid Application?
I found it odd that the nursing home would file a Medicaid application when it knew full well that Medicaid would not be granted unless something was done with the cash in the bank. Then it dawned on me: is it possible the nursing home filed such application to further its own interests?

The Medicaid Application Will Be Denied.
In this case, the Medicaid rules allow the couple to keep only $100,000 in the bank. Because they had $200,000, Medicaid would not begin to pay for husband’s nursing home care until the couple had spent the other $100,000, and the Medicaid application filed by the nursing home would be denied because the couple has too much money. With such denial would come a notice stating that the couple had to spend $100,000 and then reapply for Medicaid before the State could begin to pay for the nursing home costs.

Was the Nursing Home Pursuing It’s Own Interests?
I wondered, after hearing that the nursing home filed the Medicaid application, if the nursing home’s purpose was to get such a Medicaid denial notice in order to show such notice to the wife and tell her she needed to continue paying the nursing home until she spent $100,000 on nursing home costs.

A More Beneficial Alternative.
The other alternative that I had discussed with the wife was that she could use that excess $100,000 to purchase an annuity to provide her with additional income, thereby allowing her husband to qualify for Medicaid immediately.

Two Possible Courses of Action.
In other words, there are two courses of action available to the couple. One alternative is to pay to the nursing home $100,000 of the $200,000 in the bank and then apply for Medicaid. At that point, there is only $100,000 to cover the retirement needs of the wife living at home (husband’s needs will be covered because Medicaid will pay the nursing home costs.)

The other alternative is for the wife to use $100,000 to purchase an annuity that will return the full amount to her over a three to five year period. Those funds, together with the $100,000 remaining in the bank accounts, $200,000 in total, would be available to cover the retirement needs of the wife living at home. As in the first alternative, husband’s needs will be covered because Medicaid will pay the nursing home costs.

Which Would You Prefer?
Most people would prefer to keep $200,000 for their retirement years as opposed to keeping only $100,000. Because the Medicaid rules allow one to do so, why wouldn’t the nursing home, which offered to “help” the couple get Medicaid benefits, assist the wife to keep the full amount? Unfortunately, because Medicaid reimburses nursing homes at a slightly lower rate than a private pay resident, nursing homes prefer to have families pay privately for as long as possible and not take advantage of cost saving strategies like the one discussed above in which the wife got to keep $200,000 instead of $100,000.

However, it is a lot easier to live comfortably in retirement when you have $200,000 in savings than when you have only $100,000.

So, whenever a nursing home suggests that it will assist in applying for Medicaid benefits, one has to wonder: is this a case of the fox guarding the hen house?