Nursing Home / Medicaid Bootcamp

Posted on January 16, 2024

Originally published in October 2023

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Background

Basic Levels of Care

Independent Living – some facilities rent apartments or homes on their campus. This option is a private pay arrangement.
Assisted Living – some facilities offer services as needed to residence in addition to renting apartments. This option is a private pay arrangements and is sometimes covered by long term care insurance (depending on the policy).
Memory Unit – The evolution of a Memory Unit is the adaptation to needs of people suffering from cognitive issues. This level of care may be “Skilled Nursing Care” or assisted living depending on the care needed.
Skilled Nursing Care – skilled nursing care is a specific designation determined by a physician and is the only level of care the Medicaid pays for; and Medicaid is the only federal program that pays for skilled nursing care.

Medicaid – LTC

Medicaid is a federal program, administered by the states, through their County Assistance Offices.

Medicaid – Aging Waiver Program

Pennsylvania funds other programs under Medicaid. One significant program is the Aging Waiver Program. This program provides skilled nursing services in the applicant’s home; as well as some lower skilled level services.

Eligibility requirements are similar to Medicaid – LTC but the applicant must be at least 60 years old and their income cannot exceed $2742 per month.

The Medicaid Waiver option works best if the recipient does not need 24 hour care and the family can supplement with independent caregivers (and fill in when they don’t show up).

Medicaid as health insurance

A separate Medicaid program pays for doctors’ visits, hospital visits, and medications. Often someone on Medicaid – LTC is eligible for Medicaid for health care costs as a supplement to Medicare or their primary insurer.

Medicare

Medicare provides health insurance for eligible individuals (usually seniors). It does not cover skilled nursing costs. It does cover limited “skilled care” services. These services are room, board, and rehabilitation services at a skilled nursing facility PROVIDED, the individual:

Was admitted (not just observed) in a hospital for three days;
Was discharged to a skilled facility;
Needs services that a so complex that can safely or effectively be performed only by, or under the supervision of, professional or technical personnel.
The restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.

Patient has $0 copay for services received in the first 20 days and $200/day copay for services received days 21 – 100. The Medicare benefit period is 100 days.

Patient is eligible if they are:

65 years old;
Under 65 years old but has receive social security benefits for 24 months; or
Receive kidney dialysis and have sufficient number of Social Security quarters.
A person can also buy into Medicare if they are under 65 years old and US resident and citizen.

Medical Eligibility

Individual requires skilled nursing or skilled rehabilitation services, or both (i.e. requires the skills of technical or professional personnel such as registered nurses, licensed practical (vocational) nurses, physical therapists, occupational therapists, and speech pathologists or audiologists; and are furnished directly by, or under the supervision of, such personnel.
Ordered by a physician.

Financial Eligibility

Income

Includes earned and unearned income; must be below the cost of care (i.e. must have financial need).

Countable Resources

All assets the individual can convert to cash to pay for their care, except those that are expressly excluded or “unavailable”.
Assets and accounts that are owned joint with another person other than a spouse are presumed to be owned proportionately among the owners; and the applicant’s share is countable. Most counties however take the position that the entire asset or account is owned by the applicant and therefore entirely countable, thus requiring the applicant to overcome the presumption.
Trusts – All assets of a trust funded by an applicant or applicant’s spouse are countable resources if there are any circumstances in which payment could be made to the applicant (or applicant’s spouse) or for the applicant’s benefit.

Excluded Resources

Personal residence – If spouse, child under 21, or blind or disabled child continues to reside in the residence. Otherwise, $688,000 of equity excluded if the individual declares they intend to return to their home.
Community Spouse’s retirement accounts
Household goods and personal property
One motor vehicle
Burial spaces
Irrevocable burial reserves – Limited to 25% of the average cost of burial. This is determined by county.
Small Life insurance policies – The amount counted is the cash surrender value in excess of $1000 for policies with a death benefit in excess of $1500.
Property Essential to Self-support – This can be real or personal property. No definition of “essential for support”. Erie County has exempted rental property if the property provides a positive cash flow. Other examples of property essential to self-support are tools and equipment required for employment. Most counties exclude all personal property.
Other – uncommon assets such as retroactive payments under Supplemental Security Income or Social Security and disaster relief payments.

Unavailable Resources – generally excluded for six months

Non-resident real property with multiple owners – Unavailable for six months if the individual files a partition action
Nonresident real property - Unavailable for six months if the individual is actively trying to sell.
Other

Estate Recovery

Every state must have an estate recovery act. Pennsylvania’s requires that the probate estate of Medicaid – LTC recipient, must repay the Medicaid – LTC benefits received by the decedent after age 55. Thus, the Excluded Resources and Unavailable Resources may only be deferred resources.

Gift Penalty

Lookback Period – A window of time, the DHS looks back to see if the applicant or applicant’s spouse gave assets away. All gifts within the 5 years prior to applying for MA/LTC are presumed to have been made to become eligible for MA/LTC.

Ineligibility Period – the period of time the applicant is not eligible for MA/LTC due to gifts made within the Lookback Period. Calculated by dividing the aggregate value of all gifts made within the Lookback Period divided by the average cost of skilled nursing care in Pennsylvania ($423.11/day – 2023).

Example: Assume total gifts of $130,000 during the Lookback Period. Ineligibility Period = $130,000/$423.11 = 307.25 days (approximately 10 months and a week).

Patient Pay Portion – A resident’s copayment for skilled nursing care. Generally, this is their income less $45.

Net Cost of Ineligibility - For planning purposes, the Net Cost of Ineligibility is the amount of assets, not the Patient Pay Portion, the resident must spend on their care. Thus, if a nursing home costs $13,000/month and the resident’s social security is $2000, their Net Monthly Cost of Ineligibility is $11,000/month.

Exempt Transfers:

To the applicant’s spouse
Gifts to non-spouse, IF total of all gifts in a month is $500 or less
Other than to receive MA/LTC benefits
To a minor or disabled child
Undue hardship: Extremely difficult to receive. Must prove that ineligibility would be an undue hardship to the applicant. Most common in situations where the applicant is unable to get the asset back, has no other medical options, and has no family that would be subject to liability under the filial support law.
Personal residence exempt transfer (i) to a minor child or disabled or blind child; (ii) to a caregiver child [if for two years prior to the applicant entering a skilled nursing facility, the child provided care to the applicant and but for the care provided, the applicant would have needed to enter a skilled nursing facility. This is often supported by a physician’s affidavit or medical records]; (iii) to a sibling with equity – if the sibling lived in the home of one year immediately preceding the applicant entering a skilled nursing facility.

Countable Resource Conversions

Buy a car
Improve or repair personal residence
Purchase pre-need burial arrangements
Purchase entire or part interest in a personal residence
Purchase a Medicaid Compliant Annuity – this converts resources (countable and excluded) to income rather than to Excluded Resources. An annuity is a Medicaid Compliant Annuity if it: (i) Is irrevocable and non-assignable; (ii) Is actuarially sound; (iii) Has equal monthly payments (no balloon or deferred payments); and (ix) Names DHS as primary beneficiary for the total amount of Medicaid paid on behalf of the applicant.

ADVANCE PLANNING

Advance Planning is done when an individual wants to start the Lookback Period on certain assets, so that after five years, the transferred assets are neither countable resources, nor resources subject to recovery by the Department of Human Services.

Transfer Assets

The transfer of assets is what “protects” them from the costs of skilled nursing care, simply because the individual cannot convert them to cash to pay for their care. Therefore, “putting your house in your child’s name” works to protect the house from having to be sold to repay Medicaid.

However, such planning often creates more problems than it solves.

The child may not give the assets back if asked either because they can’t or they won’t.
Child dies, divorces, or is sued and now the house is owned by someone else.
The child does not get the capital gain exclusion for the sale of a primary residence.
Low basis assets don’t receive an adjusted income tax basis.
Parent may change their estate plan objectives and not want a child to receive assets outright or at all.

Trusts

Income Only Trust
Asset Protection Trust
Medicaid Trust
Grantor Trust
Intentionally Defective Income Only Trust (IDIOT)

Remember the only requirement is that the trust prohibit payment of principal to or for the benefit of the Settlor and settlor’s spouse.

The Settlor can retain:

Rights to income. Income is defined as “trust income” and includes interests, dividends, rent, a portion of timber proceeds, or a portion of OGM royalties. Principal includes the asset or asset value transferred to the trust and capital gains from the sale of an asset.
Rights to use assets (e.g. live in the home).
Right to distribute principal to others during life or upon death (limited power of appointment).
Right to buy and sell and invest assets.

Taxation

Typically tax neutral, but depends on the terms of the trust.

The Settlor is taxable on federal ordinary income, if the Settlor retains the right to income or use the asset(s). Other trust provisions can cause the Settlor to be taxable on ordinary income, but these provisions are typically added only to achieve this tax result.
The Settlor is taxable on federal capital gains if the Settlor retains the right to determine principal distributions during life or at death.
The Settlor is entitled to Section 121 capital gain exclusion on the sale of a personal residence by the trustee; provided the settlor lived in the home two of the five years preceding the sale. The Settlor is entitled to a pro rata exclusion if the Settlor lived in the house less than two years during the preceding five years.
The assets of the trust are subject to Pennsylvania inheritance tax, if the Settlor retains the right to income or the right to use asset(s).
The above are the primary provisions included in trusts of these types. Other provisions may affect the taxation of the trusts income and assets.

Why a Trust?

It’s the transfer of the asset out of the Settlor’s name that provides the protection, not the trust. However, the Settlor may not be done using the assets or income and, if circumstances change, may need some of the assets back. The trust is the Settlor’s “perfect child”. It can’t get divorced, sued, or die, and will listen to whatever the Settlor says. A trust gives the Settlor substantial control and use of the assets without having to ask kids for assets back if needed.

Traditional planning was to transfer assets to kids with the understanding that the children would give the asset back when asked. A trust does not solve allow the parent to get the asset back unilaterally, but it does give them the ability to only distribute to the child if, and when, they would ask for it back. Thus, if the settlor can pick which descendant to distribute an asset to if it is necessary for the settlors to get assets back.

CRISIS PLANNING

Crisis Planning is when someone is determined to need skilled nursing care and is therefore medically eligible for Medicaid – LTC. What can be done at this time depends on whether the person is married or single. In each case, a Medicaid Compliant Annuity will likely be used to protect assets. A Medicaid Compliant Annuity is not considered a resource nor is it an uncompensated transfer of assets.

Married Individual (Spousal Annuity)

Determine value of all resources – This is critical. Any overlooked asset could void the planning or delay benefits. Individuals often overlook old life insurance policies and stock of demutualized insurance companies. Also, children often don’t have a full understanding of their parent’s finances. The DHS verifies assets and income with the Department of Labor, the Internal Revenue Service, the Department of Revenue and the Social Security Administration.

Determine Spousal Shares – each spouse is allocated one-half of the total Countable Resources effective as of the day the applicant was determined medically eligible.

Determine Resource Limits for each spouse – the applicant spouse’s Resource Limit is either $2400 (if their income is in excess of 300% of the federal poverty rate; $2742) or $8000 (if their income is less than $2742). The Community Spouse’s Resource Limit is the lesser of spousal share and the maximum published amount (2023 - $148,620).

Determine Excess Resources – the amount each spouse’s spousal share exceeds their respective Resource Limit.

Transfer Assets to Community Spouse – transfers to spouses do not create a penalty.

Purchase Medicaid Annuity – The Community Spouse purchases a MCA in the amount of the Excess Resources. The Annuity is payable to the Community Spouse in equal monthly installments over a term as short as possible. The shorter the term, the less risk that the Community Spouse dies during the annuity term, causing the annuity to pay the DHS the Medicaid liability incurred. The DHS has accepted monthly payments as high as $50,000 per month.

Apply for Medicaid.

Complications – the full benefits of planning could be reduced by taxes or delayed eligibility.

Retirement assets – Can’t transfer these accounts. They must be liquidated then transferred. This triggers taxable income.
Illiquid assets – real property and non-marketable securities.
Failure to report all assets could keep the Countable Resources above the Resources Limits and delay financial eligible.

Revise Community Spouse’s estate plan.

Disinherit or create trust for Institutionalized Spouse
Spousal Election – because the Institutionalized Spouse has the right to receive one-third of their spouse’s estate, the Community Spouse should consider making irrevocable transfers to a Medicaid Trust. The Community Spouse should consider factors such as each spouse’s life expectancy and whether the Community Spouse may need skilled care within five years.

Unmarried Individual (Gift Annuity)

In this case, we are going to protect assets by transferring some of the applicants resources (consistent with their estate plan) and use the remaining assets to pay for the Ineligibility Period created by the gift.

Determine value of all assets.

Determine Resource Limit. Either $2400 or $8000 (see above).

Determine monthly income.

Determine monthly skilled facility cost.

Calculate Net Cost of Ineligibility – cost of skilled nursing facility less the applicant’s monthly income.

Calculate gift, Ineligibility Period, and Medicaid Compliant Annuity – this is a circular equation because the greater the gift, the longer the Ineligibility Period, the larger the MCA needed to cover the Cost of the Ineligibility Period. That said, the amount of the MCA and gift can easily be determined because it is the same ratio as the ratio of the monthly annuity payment and the Penalty Divisor.

Advance Plan to Crisis Plan

Sometimes a person will need skilled care within five years of creating and Advance Plan. Then we need to determine whether it makes sense to privately pay for the remaining days of the Lookback Period or adjust the plan

EXAMPLE 1:

Husband and wife transferred their personal residence and other “non-consumable” assets to an IDIOT. 56 months later husband needs skilled care. They could return all of the assets to husband and wife by distributing the assets to a child who in turn transfers them to her parents. This eliminates the gift and the Ineligibility Period. Then, transfer all of the assets to wife and buy a Medicaid Annuity, making husband eligible for Medicaid immediately.

If however, wife may need skilled care soon, they could privately pay for husband’s care until the initial transfers fall outside the Lookback Period.

EXAMPLE 2:

Single individual transferred personal residence and other non-consumable” assets to an IDIOT. 12 months later he needs skilled nursing care. He can distribute enough cash to a child who in turn transfers the assets back to him so that the reduced Ineligibility Period can be paid by the returned cash. The Applicant then purchase a Medicaid Annuity to reduce his assets below his Resource Limit and pay for his care for the reduced Ineligibility Period.

Author: Jerome C. Wegley

Originally published in October 2023