The Medicaid maze

The oft-amended rules for the state and federal program that subsidizes nursing home care for the poor create financial and emotional dilemmas for people who exceed the qualification limits.

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times, published August 6, 2000

Granny and her lawyer no longer have to fear going to jail for doing it, but moving around money to qualify for Medicaid is no simple feat.

"It's such an illogical system," said Clearwater lawyer Charles Robinson, who specializes in elder law. Part of his practice requires interpreting the 5-inch-thick rule book for Medicaid, a state and federal program that subsidizes nursing home care for the poor.

In the Tampa Bay area, nursing home patients face bills of $3,500 to $4,500 a month. But if they want the government to help pay, they are expected to spend down their assets to $86,120 for married couples with one spouse at home or $2,000 for a single person in a nursing home.

The Medicaid rules create financial and emotional dilemmas for people who are over the limits. Those who are healthy enough can buy long-term care insurance. Those who are wealthy enough can pay the bills out of pocket and still have something left for their families.

For those in between, there is "Medicaid planning," the controversial practice of reshuffling assets to qualify for government benefits.

Some people consider it cheating, and Congress made it illegal under a 1996 federal law that became known as the "Granny Goes to Jail Act." The law was quickly amended so that Granny no longer risked going to jail but her advisers could be hauled off for helping her. In 1998, even that restriction fell when a federal judge ruled the law unconstitutional and Attorney General Janet Reno said it would not be enforced.

Medicaid planning may no longer be illegal, but it remains so difficult and confusing that most people do not even attempt it.

"My husband and I are both 79 and it's scary," South Pasadena retiree Helen Connelly said. "We're sorry we didn't do anything earlier. You're ready to talk about everything except the important things."

Part of the problem is that there are no simple solutions, and many of the more effective techniques require years of planning.

"You're punished for being successful," St. Petersburg financial planner Lana Wagner said. "They have closed a lot of the loopholes so some of the trusts and things you could do in the past are no longer available. But the biggest problem we've seen is that people are in denial. They will do absolutely nothing until they're down making out the application for Medicaid or they're already in a nursing home."

When state social workers determine Medicaid eligibility, they consider a couple's assets without regard to which spouse's name is on the deed or title. Prenuptial agreements are ignored. The addition of a child's name to an account does not shelter anything if the parent still has access to the money.

The obvious solution -- giving everything to the children -- fails unless it is done well in advance, and even then it has serious drawbacks.

Medicaid's "look back" rules, part of a 1993 federal law, penalize most transfers for less than market value that are made in the three years before the Medicaid application is filed. The "look back" extends to five years for transfers into or out of a trust.

Give money away during that period and you may be denied benefits for a short time or many months, even years, depending on the amount transferred. The rules gradually have gotten tougher to discourage transfers, leaving many people unaware of how they work.

"People are still living with the old rules in their heads, thinking, "I can give this money to my family and they'll be able to help me with it and the state will pay,' " said Ethel Sharp, executive director of Aging Matters Inc., a non-profit network for caregivers. "But if they do that, the state will not pay."

Giving money to the children years before you might need a nursing home creates problems of its own. Money held in the accounts of an adult child may be at risk if the child ends up in a nasty divorce or gets sued. It may disqualify the adult child's children from receiving college financial aid. It may even get spent.

"There are a lot of problem children that if you give them control of any assets, the money will be gone," financial planner Wagner said.

In addition, there are tax complications if an asset you give a child was acquired for less than it is worth today. The child who sells such an appreciated asset received as a gift will owe capital gains tax. If that same asset is inherited, the tax basis is "stepped up" to its value at the donor's death, wiping out the tax liability. That makes inheritance preferable, as long as there is something left to be inherited after the nursing home bills are paid.

But even if nursing home care is less than three years away, some asset transfers are possible:

In most cases, assets worth less than $3,300 can be transferred each month without affecting eligibility. That allows the gradual transfer of up to $39,600 in a year as long as the money is moved one month at a time.

A home can be transferred to an adult child who lived there and helped care for the patient for at least two years immediately preceding the move to the nursing home.

An adult child can be paid in advance to provide care. A lump sum can be transferred through a personal services contract signed before care is given. To qualify, the contract has to be drawn up properly and the amount being paid has to be reasonable based on the person's life expectancy and wages for caregivers. It can even be for care to be provided while the person is in the nursing home, such as guardianship and case management services.

Another strategy is to move money out of assets that count and into those that do not while retaining ownership. Medicaid rules ignore the value of certain assets in determining eligibility, sometimes with odd results. Robinson, the Clearwater lawyer, offers this example of two couples, each with a net worth of $200,000:

"The first couple has a $50,000 house, an $80,000 IRA and another $70,000 in bank accounts, CDs and securities. That couple qualifies." That's because their bank accounts, CDs and securities count against the $86,120 per couple limit, but their house and IRA do not.

"The second couple sold their house up North and decided to rent down here," Robinson continued. "They have $200,000 invested in securities and bank accounts. They're almost $120,000 over what they can have." All their assets count against the limit.

Similarly, the rules make it smart to take money out of a bank account (countable against the asset limit) to pay off a mortgage, install a new roof or make other repairs to a home (not countable). Buying a new car or paying off a car loan also works because the rules ignore the value of one car of any age and of additional vehicles at least 7 years old.

Other assets that go uncounted include property used in a trade or business, property rented or listed for sale at fair market value, prepaid burial contracts and some life insurance.

Individual retirement accounts and annuities may be counted as income rather than assets if you are taking sufficient withdrawals. But not just any annuity will work. It must be irrevocable, non-assignable and paying out income for the life of the insured person or for a period of years not longer than the person's life expectancy.

The most common use for an annuity in Medicaid planning is to provide more income for the spouse remaining at home, the "community spouse" in Medicaid lingo.

But there are drawbacks to this approach. For starters, the extra income from the annuity may offset money that otherwise could have been paid to the spouse from the nursing home patient's income.

If a community spouse's monthly income is less than $1,407 (up to $2,103 in some cases), it can be supplemented from the nursing home spouse's income. If the community spouse is not eligible for the supplement, all the nursing home patient's income will go to the nursing home, less a $35 monthly allowance.

The annuity income also can be a problem if the community spouse ends up in a nursing home. A higher income reduces the Medicaid benefits that person otherwise would be eligible to receive.

But annuities are being used to shelter assets, sometimes by people who could well afford to pay for nursing home care.

"We've got a man in Clearwater receiving $14,000 a month in income from annuities, and Medicaid has been paying his wife's nursing home bill since Day 1," said Linda Coleman, an adult payments specialist with the Department of Children and Families.

She says such large asset transfers to preserve an inheritance bother her, but "as long as it's legal, that's the way it is. Once we approve the case and they're within the asset limits, we never go back and look at the community spouse's assets again."

Sometimes a transfer is not necessary. By appealing the initial denial of eligibility, a community spouse sometimes is allowed to keep more than $84,120 in assets. A key consideration is whether the assets are generating income that brings the community spouse up to minimum levels.

Financial advisers say the income of the nursing home spouse also should be taken into account before making decisions to transfer assets.

"We look at at how close the income comes to paying the nursing home bill," Robinson said. "Some people are so close that they're better off just to pay it," rather than shifting assets to get Medicaid approval.

That's because assets are not the only measure of whether a nursing home patient qualifies for Medicaid. There also is a limit on the patient's income; in Florida, it's no more than $1,536 a month. (There is no limit on the income of the spouse remaining at home.) People who have incomes higher than that but less than the cost of care may qualify for Medicaid by setting up a "qualified income trust" to receive all their income above the limit. The nursing home gets payments from the trust, and any money remaining when the insured person dies is used to reimburse the state.

The state also seeks reimbursement after death through liens filed against the estates of nursing home patients. The Agency for Health Care Administration recovered $10.2-million last fiscal year on 3,009 claims involving Medicaid expenditures of $114.4-million, spokeswoman Connie Ruggles said.

Typically the patient's home is the estate's only significant asset, which makes recovery difficult. The Florida Constitution protects a house from creditors if it legally is declared homestead property and is being left to a relative who qualifies as an "heir at law," a category that includes spouses, children, grandchildren, nieces and nephews.

Some financial advisers say those who can afford it would be better off buying long-term care insurance or paying for their own care rather than trying to qualify for Medicaid.

"Do anything but rely on Medicaid," Dunnellon lawyer Kellean Kai Truesdell said. "I advise clients, "If you have a good relationship with your kids, ask them if they'll pay for your insurance premium.' The middle-class retiree oftentimes has children who can well afford it."

She said the Medicaid application process is so stressful that many people equate it to an IRS audit.

"It's a very traumatic, awful experience when a spouse or parent has to go to an alternate living facility anyway," she said. "When you're encumbered by health conditions yourself, it's a nightmare. I wouldn't go on Medicaid if I had a choice."

Sharp from the caregivers' group said many people fail to consider that it is more difficult to qualify medically for nursing home care if the state is footing the bill.

"But as long as you have the cash to be able to pay your own way, they want your business," she said.

People who want advice on Medicaid planning can get it from financial planners and lawyers who specialize in elder law. Payments specialist Coleman said state workers also will answer factual questions about eligibility issues without giving advice. (For the telephone number of the nearest office, check government listings for the Florida Department of Children and Families, Economic Self-Sufficiency program.)

"There's nothing wrong with spending your money on your care, but you need to make that decision from a position of knowledge as opposed to blithely doing that out of ignorance," said Largo lawyer Sean Scott, who has made Medicaid planning his specialty. "Every case is different."

St. Petersburg lawyer William Keene said people should look at Medicaid planning as part of the estate-planning process. But he said he has found the topic a tough sell.

"We tried to offer seminars on "putting your house in order' free for seniors, but the resistance was unbelievable," he said.

"You're dealing with emotional and psychological factors. It's so definite and so depressing."

Measuring up

Want Medicaid to help pay your nursing home bills? Here's what it takes to qualify financially:

Asset limits:

Nursing home patient: $2,000

($5,000 if monthly income below $647)

Spouse at home: $84,120

Assets not counted:

Homestead property

Property used in a business

Property rented or listed for sale

One car of any age or value Other vehicles at least 7 years old (not antiques)

Retirement accounts making distributions *

Irrevocable, unassignable annuities making distributions *

Term life insurance of any amount

Cash value life insurance with face value less than $2,500

Designated burial funds up to $2,500

Prepaid irrevocable burial contract of any amount

Income limits:

Nursing home patient: $1,536 a month **

Spouse at home: No limit

* Restrictions apply. If met, these are considered income sources rather than assets.

** Patients with higher incomes may become eligible by creating a qualified income trust to hold excess income, all of which goes to the nursing home or the state.

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