Law Offices of Maria V. Primushko

A Nursing Home’s Take on the Need for Medicaid Planning

Compliments of Our Law Firm,

Written By: The American Academy of Estate Planning Attorneys

There has long been a misconception that nursing homes and Medicaid planning are on opposing sides of the proverbial fence. That misconception is starting to change as many nursing homes begin to realize that Medicaid planning actually helps ensure that patients qualify for Medicaid. In turn this ensures that the patient’s financial obligation to the nursing home is covered. Without Medicaid planning, a nursing home can find itself stuck with an exorbitant bill that the patient cannot pay and that non-spouse family members are not obligated to pay. All too often that leaves the nursing home with an uncollectable bill, which is why many nursing homes are reconsidering their support for the concept of Medicaid planning. In order to better understand how nursing homes perceive Medicaid planning, consider a couple of common real-life scenarios:

Scenario One: A nursing home admits a patient who has applied for Medicaid. The nursing home is under the belief that the resident has spent down all of her assets to under the $2,000 limit in the state of residence, making the resident appear to be eligible for Medicaid benefits. Unbeknownst to the nursing home, the resident still owns a piece of property in another state that she has had listed for sale for over a year. The resident has listed the property as “best offer,” clearly indicating her willingness to accept any offer made on the land. Unfortunately, there have been no takers. In practical terms, the property is worthless if no one is willing to pay anything for it; however, because the property appraised for $10,000, Medicaid considers it a “countable resource.” Consequently, the resident’s application for Medicaid benefits was denied and the nursing home was stuck with the bill.

Had the resident consulted with a Medicaid planning attorney ahead of time, a number of Medicaid planning strategies might have been utilized that would have resulted in a better outcome for both the resident and the nursing home. Even transferring the property to the nursing home when she entered the home might have produced a better result because she would have then been approved for benefits right away.

Scenario Two: A woman enters a nursing home and immediately applies for Medicaid based on the fact that she believes she has reduced her “countable resources” to under the program limit of $2000 in her state of residence. Knowing this, the nursing home accepts her under the assumption that her application for Medicaid will be approved and the bill she is incurring will be covered. Both the patient and the nursing home are shocked when her application for benefits is denied. The cause of the denial was apparently a life insurance policy with a face value of just $3000 and a cash value of $2,500. Everyone involved believed the life insurance policy would be considered an exempt asset. However, in her state, if a life insurance policy has a face value that exceeds $1,500 then the entire cash value of the policy becomes a countable resource. Therefore, she would not qualify for Medicaid until the cash value of the policy was “spent down.” In the interim, the resident has incurred a hefty bill for her stay at the nursing home. To make matters worse, the nursing home was informed that even if she spent down the value of the policy tomorrow and re-applied, Medicaid would not cover the bill the applicant had accrued to date, leaving the nursing home with no way to collect on the bill.

This scenario highlights the need to consult with a Medicaid planning attorney before applying for benefits. Had the applicant done that she likely would have been advised to cash out the policy prior to applying and apply the funds to her nursing home bill. Had she done that, she would have been eligible for Medicaid right away and her entire nursing home bill would have been paid. Instead, the nursing home wound up stuck with a bill for several months of care that it will likely never collect.

As the cost of long-term care continues to climb and the number of older Americans continues to increase, it becomes more and more important for nursing homes and patients to work together to ensure that the cost of a patient’s care is covered. One way to do that is to work closely with a Medicaid planning attorney as early in the process as possible. Doing so will ensure that the facility providing care is paid, allowing everyone to focus more on the quality of care instead of the cost of care.

Medicaid Gifts to Children

Compliments of Our Law Firm,

Written By: The American Academy of Estate Planning Attorneys

At some point during your retirement years there is a very good chance you (and/or your spouse) will need long-term care. There is also a good chance that you will need to qualify for Medicaid benefits in order to cover the high cost of that care. Qualifying for Medicaid can be a complicated process given the complex eligibility guidelines. The asset transfer rules, in particular, are a source of much confusion for applicants. While it is always best to consult with an experienced Medicaid planning attorney if you foresee the need to qualify for Medicaid, you may also benefit from knowing the answers to some basic questions regarding Medicaid eligibility, asset transfers, and gifting while participating in the Medicaid program.

Can an applicant transfer assets to an adult child in anticipation of the need to qualify for Medicaid?

No, not without incurring a penalty. Medicaid uses a five-year “look-back” period when determining an applicant’s eligibility. The “look-back” provision allows Medicaid to review an applicant’s finances for the five-year period prior to applying for benefits. Asset transfers made during that time period for less than fair market value will be flagged and the value of the asset effectively imputed back into the applicant’s estate. This, in turn, will cause the applicant to incur a penalty period before being eligible for benefits.

Are gifts of up to $14,000 per year excluded from the Medicaid transfer rules?

No. This is a common source of confusion. The $14,000 per year figure refers to the I.R.S. annual exclusion rule that allows a taxpayer to make gifts valued at up to $14,000 per year to an unlimited number of beneficiaries without incurring gift taxes. The Medicaid asset transfer rules are completely unrelated.

How are asset transfer penalties calculated?

As a Medicaid applicant or recipient, the figure you need to be concerned with is the “penalty divisor” for your state. The penalty divisor is the average cost of a month of nursing home care in the state and is used when calculating your penalty period if your assets exceed the program limit. Penalties are calculated by dividing the value of the amount transferred by the penalty divisor. For example, if you gifted your vacation house valued at $100,000 to your daughter you would incur a penalty of about 20 months if the divisor were $5,000 ($100,000/$5,000). Keep in mind that the penalty divisor is subject to change as the cost of nursing home care changes.

Can my mother just give me all of her assets to hold and tell Medicaid she has no assets?

Absolutely not. Whether your mother calls it a “gift” or not, Medicaid will consider it an asset transfer and failure to report asset transfers constitutes Medicaid fraud. Moreover, the gift would incur a penalty period during which your mother would not be entitled to benefits. If she accepted benefits anyway during that time period she could be required to repay them. The bottom line is that there is no easy way around the Medicaid asset transfer rules nor the five-year “look-back” period.

Since my mother’s house is considered an exempt asset by Medicaid, can she give me the house without incurring a penalty?

Maybe. The fact that the asset is an exempt asset for Medicaid eligibility purposes is not sufficient to avoid a penalty. In most states, all asset transfers while receiving Medicaid are potentially subject to a penalty. There are, however, certain transfers that may not incur the penalty. Your mother may be able to transfer her house, without incurring a penalty, to the following people:

• Her spouse
• Her child who is blind or permanently disabled
• A trust for the sole benefit of anyone under age 65 and permanently disabled
• Her child who is under age 21
• Her child who has lived in her home for at least two years prior to your mother moving to a nursing home and who provided your mother with care that allowed her to stay at home during that time.
• A sibling who already has an equity interest in the house and who lived there for at least a year before your mother moved to a nursing home.

The best way to avoid penalties is to include Medicaid planning in your estate plan well before you enter the five-year “look-back” period. Since that is not always possible, the next best thing is to make sure you consult an experienced Medicaid planning attorney before you apply for Medicaid and certainly before you make any asset transfers. Your attorney can help you develop a gifting strategy that will minimize any potential penalties you might incur.

Loaning Family Money – What You Need To Know
Written By: The American Academy of Estate Planning Attorneys

People lend money to family members for a variety of reasons. For example, lending your son money to buy his first home, or lending your daughter money to start a new business. At some point, you may find yourself in a similar situation. Therefore, it is important to know how this will impact you from a tax standpoint.

Are you charging the borrower interest on the loan? If so, you must pay income tax on the interest you collect.

If you lend money, despite the fact that a family member is the recipient, the IRS expects you will charge interest, just the same as a bank would. With this in mind, the IRS has set the “Applicable Federal Rate” (or “AFR”), which varies based on the month of the loan as well as the term. A list of Applicable Federal Rates, by the month, can be found by visiting the IRS website.

In the event that you do not charge interest, it is considered a “gift loan” by the IRS, meaning that special rules apply.

Any loan between individuals less than $10,000 is disregarded. If you charge interest less than the Applicable Federal Rate for a loan between $10,000 and $100,000, the difference is considered a gift for which you may have to pay a gift tax if your total gift tax for the year exceeds 14,000.

What if the loan is in excess of $100,000? Not only is the forgone interest considered a gift, but the IRS automatically assumes that the forgone interest was paid to you as interest, meaning that you have to pay income tax on the money.

Say for instance you lend your daughter $200,000 in a five-year interest-free loan with an Applicable Federal Rate of 2.85 percent, the IRS will assume that you received interest of $5,700 each year. Subsequently, you must pay income tax on that amount each year. For someone with a combined 40 percent federal and state income tax rate, the end result would be $2,280 in additional tax each year.

There are ways around this, such as an Irrevocable Trust. You could set up the Trust so the transactions between you and your Trust are not considered income. For this reason, if you lent $200,000 to the Trust, the IRS would ignore the forgone interest when calculating your tax liability. The forgone interest may still be considered a gift, but the Trust can be designed so that the gift to the Trust will be considered a gift to your family member. The annual gift tax exclusion for 2014 is set at $14,000.

Thinking of loaning someone money? Be sure to consult with a qualified estate planning attorney to ensure that your loans are structured in a manner that will not generate additional income taxation.