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The New Medicaid Laws |
Pension and Retirement Memo |
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On February 8, 2006, President Bush signed the Deficit Reduction Act of 2005. The new law stands on its head what we used to call "estate planning," "retirement planning," or "Medicaid planning." It is a whole new ballgame, with new rules, and new players, many of whom don't yet know they are in the game. Those new players are you and me. Better pay attention. There will be new winners and losers in the new game, and success will depend upon long range planning. The winners will be those who plan, get comprehensive professional advice, and then take that advice. The losers will be the uninformed, the misinformed, and the arrogant --- those who think they can do this without help. Background Medicaid is the federal law that provides health care for the poor. Well, that's how it started when President Lyndon B. Johnson signed the first Medicaid law on July 30, 1965. From that day until the signing of the new law, a mere 14,803 days, Medicaid evolved from a modest effort to provide basic medical care for the very neediest, to the insatiable cash-hungry monster that could bankrupt state and local governments. Congress passed the new law to try to stop the cash hemorrhage. The new law makes every one of us a player in the Medicaid planning game. Grab a bat. Welcome to the game. The Old Rules Under the old rules, if nursing home care was on the horizon for a client, we would recommend transferring substantial assets to his or her family members. Here's how it worked. The two key concepts are (i) the “look-back” period and (ii) the “penalty period,” which is also called the “ineligibility period.” To qualify for Medicaid, the applicant's assets must be under a few thousand dollars. What assets count? Those things owned by the applicant at the time of the application and those that had been gifted in the preceding "look-back" period. The look-back period is the length of time the government can "look back" in the past to find gifts and treat them as an available asset. If gifts made by the applicant are caught in the look-back period, the "penalty period" (or “ineligibility period”) is applied. The “penalty period” is the number of months during which Medicaid will not be paid. The penalty period is calculated by dividing the (i) amount of the gift by (ii) the monthly cost of nursing home care in the applicable county. However, the penalty period could not exceed 36 months for outright gifts, or 60 months if the gifts were in trust. For example, if the gift caught in the look back period was $50,000 and nursing home costs were $8,000 per month, the penalty period was $50,000 divided by $8,000, or 6.25 months. Under those old rules, the penalty period started the month following the date of the gift and was capped at 36 months. Even if the applicant made a gift of $1 million, the penalty period would be limited to 36 months and it would start the month after the gift was made. Generally speaking, after three years all gifts were safely beyond the reach of the Medicaid “look back” period. If trusts were used as the gifting vehicle, the "look-back" period was five years. Those days are over. The New Rules Here are few key points about the new law. · The look-back period is now five (5) years, not three, even when a trust is not used. · Most importantly, the trigger date for calculating the penalty period has completely changed. The penalty period no longer starts the month after the gift is made. Under the new law, the penalty period is suspended and does not begin to run until the applicant is in a nursing home and has spent down assets to the Medicaid threshold.. · Annuities purchased within the five year look back period must now name the State as the beneficiary in order for the owner to qualify for Medicaid. · Home equity greater than $500,000 is no longer an exempt asset for Medicaid purposes. Owners are now required to spend down the excess in order to qualify for Medicaid. (New York has opted to increase that to $750,000.) · If one spouse is on Medicaid and the other is not (the "well-spouse"), under the old rules the well-spouse could protect a larger share of the couple's combined assets if the couple had income below certain levels. The new law imposes an "income-first" rule that forces the well-spouse to take a greater portion of that combined income, thereby reducing the assets that are protected for the well-spouse. The bombshell in the new law, of course, is the postponement of the five year penalty period for gifts until the client is otherwise eligible for Medicaid (i.e., broke). For example, on June 15, 2007 grandmother makes a $35,000 gift to her grandson to pay college tuition. The grandmother enters a nursing home on a private pay basis in 2009, but runs out of money at the end of 2011. She is otherwise eligible and applies for Medicaid on January 1, 2012. Assume nursing home costs are $7,000 per month. Result Under the Old Rules The gift would have been safe. The seven month penalty period ($35,000 divided by $7,000) would have begun on July 1, 2007 (the month after the date of the gift) and would have ended February 1, 2008. Furthermore, the three look-back period would have ended on July 1, 2010, so a gift of any amount would have been safe. Result Under the New Rules The five year look-back period runs from January 1, 2007 to December 31, 2011. It catches the 2007 gift. The penalty period begins on January 1, 2012, the date of the Medicaid application. If the nursing home costs have risen to $10,000 per month, she will be ineligible for Medicaid during a 3.5 month penalty period beginning on January 1, 2012. Our grandmother cannot pay for her nursing home care and Medicaid will not start for 3.5 months. What happens now? Will she be discharged from the nursing home for non-payment? Will the nursing home detect a new illness, send her to a hospital and "park" here there? The Planning Problems Family financial planning --- whether you call it "estate planning," "retirement planning," or "Medicaid planning" --- is a whole new ballgame. Here are the basic rules. · Planning and record keeping is now critical. A Medicaid applicant must provide five years of monthly statements for each assets. · Crisis planning for Medicaid is now almost impossible. The planning must start at least five years before entry into a nursing home. · Saving at least half of a married couple's assets may not be possible in all circumstances. · Everyone other than the very wealthy should consider long term care insurance. · Those with existing long-term care policies should review them. For example, those who own the NYS Partnership Long Term Care Insurance are still at risk and must protect their income stream once they convert to Medicaid coverage. · Any gifts, even small gifts, must be planned in light of Medicaid consequences. All gifts can be caught in look-back period, not only those made for Medicaid planning. The purpose of the gift is irrelevant. · Medicaid is a joint federal and state program. State residency is now a more critical factor for two reasons. First, Medicaid eligibility, benefits, and amounts of assets that can be protected vary from state to state. Second, the costs of nursing home care can vary by several thousands of dollars per month from state to state. There is now a greater incentive to move from a high cost state to a low cost state. The Planning Risks The new law makes it more difficult to preserve family wealth. The complexity of the new law, and the amounts now at risk, are so great that it is virtually impossible to plan for Medicaid and wealth preservation without professional help. Simple mistakes can produce disasters. Nonetheless, mistakes will be widespread because, as in the past, many will not get help. Many baby boomer retirees will believe that they know as much about Medicaid as anybody, but they do not know that the rules of the game have changed. Eugene Parrs |
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© 2008 Eugene Parrs |
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