1 IV. POSSIBLE MEDICAID PLANNING STRATEGIES A. ANNUITIES As discussed previously, an annuity that meets certain requirements under the DRA and Act 42 may qualify a person immediately for medical assistance benefits. There are still considerable questions, especially in Pennsylvania, concerning what are known as sole benefit of trusts or annuities established for the sole benefit of a community spouse or a child who is blind or permanently and totally disabled or a disabled person less than 65 years of age. In addition, the provision in Act 42 to the effect that all annuities are marketable and assignable, despite language in the annuity contract to the contrary, may be in violation of the DRA and, therefore, unenforceable. Since an annuity, if properly established, is not considered an available resource for medical assistance benefits, it may be advisable to transfer one half of the applicant s resources and purchase an immediate, actuarially sound annuity that meets the requirements of the DRA with the remaining resources. The applicant would then apply for medical assistance benefits and be rejected on account of the transfer penalty. The annuity must be structured such that the monthly payment received, together with the applicant s other income, would be sufficient to pay for the applicant s nursing home care for the duration of the penalty period. The applicant would then reapply for Medicaid when the penalty period has expired. It may be necessary to find a company that would issue an annuity payable over a short period of time. From a practical standpoint, it may be difficult to find a company that will issue an annuity providing payments for less than one or two years. If the market changes and short term annuities are available, this could be a viable planning technique especially for single elderly Medicaid applicants.
2 B. DIVORCE OR SUPPORT PROCEEDINGS There is nothing in Federal or State law that would prevent a community spouse from divorcing the institutionalized spouse or seeking an order of support from a court of competent jurisdiction. As a matter of fact, the law acknowledges that the CSRA and MMMNA may be increased through a valid court order [42 USCA 1396 r-5(d) (5) and 42 USCA 1396r-5(f)(3)]. If divorce or support proceedings are instituted, it is important that the institutionalized spouse be properly represented by legal counsel in order to avoid the appearance of collusion or unethical practices. C. HOME IMPROVEMENTS/PURCHASE OF EXEMPT RESOURCES The pre-dra strategy of filing a Resource Assessment form for a determination concerning the community spouse resource allowance (CSRA) and the assets necessary to be spent down on the care of the institutionalized spouse remains in effect. From the funds or assets allocated to the institutionalized spouse, various expenditures can be made, including, but not limited to, improvements to the family residence; purchase of a vehicle for the community spouse; purchase of furniture and household possessions; purchase of jewelry; purchase of irrevocable burial reserves for both spouses; and the purchase of other items that are exempt under State and Federal law. [42 U.S.C.A. Section 1396b and 55 Pa. Code through ]. As discussed earlier, however, those items that are exempt but which remain titled to the institutionalized individual are technically subject to estate recovery upon the individual s death if the items are still in existence at that time. If exempt assets are acquired for an institutionalized person, they should not remain titled to him, but either transferred to avoid estate recovery or titled as joint tenants with the right of survivorship to the institutionalized individual and another person or persons.
3 D. INCOME FIRST RULE The DRA requires income be assigned from the institutionalized spouse to the community spouse prior to the transfer of any additional resources to provide the community spouse with sufficient income, actual or imputed, equal to the applicable MMMNA. If, after such allocation, the community spouse s income is still below the applicable MMMNA, additional resources may be transferred to or on behalf of the community spouse to purchase an annuity that will generate sufficient income to satisfy the MMMNA. It has always been presumed in Pennsylvania that Social Security payments of the institutionalized spouse can be allocated or assigned to the community spouse. However, if less income is available to the community spouse from the institutionalized spouse, greater resources can be transferred to the community spouse to purchase an annuity. [62 P.S (c)]. In Robbins v. DeBuono, 218 F.3d 197 (2d Cir. 2000), it was held that Social Security payments are not assignable. It has also been held that prisoners Social Security benefits could not be attached by the State. [Bennett v. Arkansas, 485 U.S. 395]. In Crawford v. Gould, 56 F.3d 1162 (9 th Cir. 1995), it was held that California s practice of taking the patient s Social Security benefits, without consent, violated Section 407 of the Social Security Act. It therefore may be worthwhile to contest the mandatory assignability or allocation of the institutionalized spouse s Social Security income to the community spouse. In Pennsylvania the community spouse, if successful, will be required to purchase a commercial annuity in conformity with Act 42 with the additional resources. Note that Act 42 [62 P.S (b)] states that the institutionalized spouse may transfer income to the community spouse in an amount necessary to meet the MMMNA. The DRA, on the other hand, mandates the income first rule prior to allocating additional resources to the community spouse. [42 USCA 1396r-5(d)(6)]. This blatant conflict
4 further bolsters the argument that Pennsylvania must either amend its law or at least submit an updated state plan to CMS for approval before this provision of the DRA may be fully implemented and enforced. E. INCREASE THE RESOURCES OF THE INSTITUTIONALIZED AND COMMUNITY SPOUSE If a husband and wife have resources, excluding their home and other exempt assets, of $100,000.00, one-half (1/2) or $50, would be the community spouse s CSRA and the remaining portion would have to be spent down on the institutionalized spouse s care. If prior to institutionalization and submission of the resource assessment, the couple incurs a loan for $100, and includes the proceeds of the loan on the resource assessment making the value of their total $200,000.00, the community spouse would be entitled to a CSRA of $100, and the remaining funds would be allocated to the institutionalized spouse. However, after the resource assessment is reviewed by the Department of Public Welfare and the Department concedes that the community spouse is entitled to a CSRA of $100,000.00, the $100, loan would then be repaid from the funds allocated to the institutionalized spouse. Therefore, instead of protecting only $50,000.00, the community spouse would be able to protect $100, and nothing would have to be spent on the institutionalized spouse s care. F. LONG-TERM CARE INSURANCE Another alternative would be for the elderly person, either directly or through his/her agent, to purchase a long-term care insurance policy that would provide benefits for the entire look back period if nursing home or a similar level of care becomes necessary. A long-term care insurance policy should not only provide for nursing home care, both skilled and custodial, but also for care at home and at an assisted living facility. The dollar amount, the duration of payments and length of coverage must be specified.
5 The long-term care insurance contract must also be scrutinized to determine the triggering events for payments. For example, some contracts require a lengthy waiting period, commonly referred to as the elimination period, or prior hospitalization for a certain period of time prior to commencing payments. Most specify the types and number of activities of daily living the insured must be unable to perform for payments to begin. Some contracts exempt from coverage or allow payments to be denied if a specified pre-existing condition is the cause of the insured s need for an otherwise acceptable level of care. Some contracts require that the services rendered to the insured must be provided by a licensed or certified professional and not a family member for payments to commence. Make sure the insurance company has a good rating, is financially sound and has a reputation of treating its policy holders fairly. The availability of long term care insurance is relatively new. A company with a good rating at the time of purchase may encounter financial difficulties as many of its insured individuals begin filing claims. Consequently, there is no guarantee that a company s good rating will continue indefinitely. Keep in mind that long-term care insurance policies are subject to group rate increases that are not based on the individual s advanced age or deteriorating physical/mental condition. Some policies include a provision that the rate will not increase for a specific period of time, such as ten years. Most include an inflation rider and a waiver of premium payments when benefits begin. It is also beneficial to obtain an indemnity policy rather than one that pays only if a person is actually incurring expenses for long-term care by a specific provider. A person may be entitled to long-term care insurance in group policies furnished through the federal government if they have a spouse, parent, step-parent, parent-in-law, child, including an adopted child or step-child, who is any of the following: (a) a federal employee;
6 (b) (c) on active duty or full-time National Guard duty for a period of more than 30 days; or a member of the Selected Reserve. [5 U.S.C.A. Section 9001, et seq.] The individual applying for a long-term care insurance policy through the Federal government, however, must still meet underwriting requirements that are similar to privately issued policies. However, the rates provided in contracts provided through the federal government may be more affordable. It is possible that Pennsylvania will eventually adopt a State plan amendment that provides for a qualified State long-term care insurance partnership in accordance with Section 6021 (a)(1)(a)(i) of the DRA. Under such a plan, the state would disregard any assets or resources in an amount equal to the insurance benefit payments available to the insured under a qualified long-term care policy. Federal law limits the annual amount of long term care insurance premiums that may be deducted for income tax purposes. In other words, only a portion, but not the entire premium, is deductible, and the amount is relatively modest. For tax year 2006, the deductions were as follows: a. Age 40 or under $280. b. Age 41 to 50 $530. c. Age 51 to 60 $1,060. d. Age 61 to 70 $2,830. e. Age 71 or over $3,530. In addition, qualified long-term care insurance contract must include certain provisions for the premiums to be deductible, as follows:
7 (1) it must be guaranteed renewable. (2) it must not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed; (3) it must provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits; (4) it generally must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses. [See IRS Publication 502, Medical and Dental Expenses, 2006 Returns and 26 USCA 7702B(b)(1)(A) through (F)]. G. NO MEDICAID INTENT As discussed earlier, there is no transfer penalty if the applicant for medical assistance benefits can prove through a satisfactory showing that the transfers were made for a purpose other than to qualify for Medicaid. [42 USCA 1396p(c)(2)(C)(ii)]. The applicant may have a history of gifting land, property or certain monetary amounts to various family members, providing contributions to charities or helping family members in need. Records should be maintained establishing these patterns. If a person has transferred funds to help a family member or other person who needs financial assistance to pay bills or medical expenses or who has asked for help in purchasing a home or starting a business, a letter or other type of documentation from the person requesting the gift is recommended in order to establish that the transfer was not made to qualify for Medicaid. In addition, the medical records of the person should be obtained to prove that the transferor was not suffering from a physical or mental condition that could have
8 reasonably been expected to result in the person seeking nursing, home health or a similar level of care at the time the gift was made. H. PERSONAL CARE OR LIFETIME CARE AGREEMENTS The parent may enter into a written contract with a child or other person to provide long term personal care, usually at the residence of the child, for the parent s life or a fixed term. There is a presumption that services provided to a parent by a child or other relative are gratuitous and that no payment is expected. [Sections and A of HCFA Transmittal No. 64, the State Medicaid Manuel]. It is therefore important to draft a contract specifying the services which the caregiver child will provide and the period through which the services will be rendered. It is important that the caregiver be identified in the agreement as an independent contractor and that appropriate language be included consistent with the definition of independent contractor as recognized by the applicable workers compensation statutes, regulations and case law. It may be difficult and contrary to Pennsylvania law to designate a person as an independent contractor especially if this individual is not engaged in the business of providing care giver services to others as a business operation. In the alternative, the caregiver would be an employee of the elderly individual thus necessitating the purchase of workers compensation insurance. Under Pennsylvania law, the term "employee" is declared to be synonymous with servant, and includes-- All natural persons who perform services for another for a valuable consideration, exclusive of persons whose employment is casual in character and not in the regular course of the business of the employer, and exclusive of persons to whom articles or materials are given out to be made up, cleaned, washed, altered, ornamented, finished or repaired, or adapted for sale in the worker's own home, or on other premises, not under the control or management of the employer [77 P.S. 22]
9 The caregiver should also consult with an accountant in order to establish procedures wherein various taxes, including FICA, will be paid in order to assure that the caregiver will be covered for Social Security Disability purposes if he or she becomes injured. It may also be advisable to seek the advice and obtain a written opinion from a geriatric care specialist in order to establish the value of the services to be rendered. I. PURCHASE OF A NON-NEGOTIABLE PROMISSORY NOTE, LOAN OR MORTGAGE Pursuant to the DRA, a transfer of funds to purchase a promissory note that meets certain specifications is not considered a transfer for less than fair consideration and, therefore, does not invoke a penalty period. There is nothing contained in the DRA that would prevent the note from being non-assignable to preclude an argument there is a secondary market for the purchase of the note. The note should also prohibit prepayment to avoid the argument that the entire proceeds may be immediately available. It should also bear a reasonable rate of interest [perhaps based on the applicable federal rate (AFR)], and be payable in equal monthly installments. However, as discussed previously, there is a question as to whether the note itself is an available resource despite the forgoing. The DRA is unclear in this regard, but the CMS Enclosure attempts to offer guidance as set forth in Article III and which concludes as follows: If the above criteria are not met, the purchase of the promissory note, loan or mortgage must be treated as a transfer of assets. In determining the amount of the asset transfer, the value of the note, loan or mortgage is the outstanding balance due as of the date of the individual's application for Medicaid coverage of services listed in section 1917(c)(1)(C) of the Act. J. PURCHASE OF A LIFE ESTATE IN ANOTHER S HOME The DRA permits the purchase of a life estate, under certain conditions, in
10 the home of another person. As stated previously, the DRA is vague as to how the value of the life estate will be calculated. It is also vague whether the individual purchasing the life estate would be required to reside in the home for a continuous period of one (1) year or if the condition is satisfied if the person resides in the home for a cumulative total of one (1) year. For example, after the purchase of the life interest, the person may be required to undergo a lengthy hospital stay; may decide to visit another child for an extended period; or simply elect to travel. If the person has resided elsewhere for a period of time after the life estate interest was purchased, is the one year requirement nevertheless met despite the gaps in the calculation? Must the person begin a new one year period of continuous occupancy every time the previous periods are interrupted for whatever reason? The DRA is unclear. However, the Article IV of CMS Enclosure attempts to offer some guidance, as follows: States should note that the new rules pertaining to purchase of life estates add a criterion for evaluating whether a transfer of assets has occurred, but do not replace existing provisions of title XIX. Thus, States should still apply Medicaid resource eligibility and transfer of assets rules, even in cases where individuals purchasing life estates in the home of another individual do live there for at least one year. In determining the value of life estates, States should continue to follow Centers for Medicare & Medicaid Services (CMS) instructions at Section of the State Medicaid Manual. These instructions permit use of the life estate tables published by SSA for the Supplemental Security Income (SSI) program, which may be found in the Program Operations Manual System (POMS) at Section SI If payment for a life estate exceeds the fair market value of the life estate as calculated in accordance with the POMS table, the difference between the amount paid and the fair market value should be treated as an asset transfer. In addition, if an individual makes a gift or transfer of a life estate interest, the value of the life estate, as calculated under the POMS life estate and remainder interest table, should be treated as a transfer of assets. Finally, unless a State has a provision for excluding the value of life estates in its approved State Medicaid plan, or the property in which the individual has purchased the life estate qualifies as the individual's exempt home, the value of the life estate should be counted as a resource in determining Medicaid eligibility. If a life interest is purchased in another s home, it is important to
11 determine whether there is any mortgage encumbering the premises, and if so, whether the applicable documents contain a due on transfer or transfer of beneficial interest clause. If such a clause is present, written permission from the lender may be necessary in order to allow an individual to purchase a life estate interest in the home and avoid acceleration of the debt. K. PURCHASE OF MORE EXPENSIVE HOME If there is an institutionalized and community spouse, a more expensive home can be purchased by the community spouse and titled in his or her name alone. Since the home is an exempt resource, there will be no l penalty period imposed if the home is titled to the community spouse. In addition, the home will not be subject to estate recovery upon the death of the community spouse unless the community spouse was receiving medical assistance benefits at the time of his or her death. The purchase of a more expensive home may be justified for several reasons. For example, the community spouse may want a ranch rather than a two story home; may prefer a home that is closer to the children; may want a home that is closer to shopping, church and other community related activities; or may prefer a home in a different neighborhood for personal reasons. L. SPOUSAL REFUSAL There is statutory authority, [42 USCA 1396r-5(c)(3)(A)(B)], as well as a second circuit court case providing that an institutionalized spouse cannot be rejected for Medical Assistance benefits if he or she has made an assignment of his/her support rights to the State and the community spouse has refused to voluntarily provide support for the institutionalized spouse and to otherwise cooperate in the application process. [Morenz v. Wilson-Coker, Docket No , C.V., August Term, 2004, United States Court of Appeals for the Second Circuit, decided July 14, 2005].
12 Although the state may pursue a civil action against the community spouse for the support of the institutionalized spouse, this strategy may, nevertheless, be recommended because the institutionalized spouse would become immediately eligible for Medicaid. Most importantly, he would be charged by the nursing home at the Medicaid and not the private pay rate. Therefore, even if the state is successful in pursuing its claim for support against the community spouse, the amount payable would be lower than if the community spouse had cooperated and been charged the private pay rate by the nursing home. M. THE HOME As discussed earlier, the transfer of one s principal residence or home is not subject to the traditional look back periods and does not create a transfer penalty if made to any of the following: (i) the spouse of such individual; (ii) a child of such individual who (I) is under age 21, or (II) is blind or permanently and totally disabled; (iii) a sibling of such individual who has an equity interest in the home and who was residing in the home for a period of at least one (1) year immediately prior to the date the individual becomes institutionalized; or (iv) a son or daughter of such individual who was residing in the home for a period of at least two (2) years immediately before the date the individual becomes institutionalized, and who has provided care to such an extent that permitted the parent to reside at home rather than in a long-term care institution or facility. [42 U.S.C.A. Section 1396p(c)(2)(A)]
13 N. SOLE BENEFIT TRUST FOR A DISABLED PERSON The DRA does not change the statutory provisions regarding the following: (a) the transfer of assets to or from an individual s spouse for the sole benefit of the individual s spouse; (b) the transfer of assets to, or to a trust including a subsection (d)(4) trust, established solely for the benefit of an individual s child who is blind or permanently and totally disabled; or (c) The transfer of assets to a trust, including a subsection (d)(4) trust, establish solely for the benefit of an individual under 65 years of age who is disabled as defined under Federal law. [42 USCA 1396p(c)(2)(B)(i) through (iv) 42 U.S.C.A. 1382b(c)(C)(ii)(III)]. A special needs trust written pursuant to these statutory provisions which is for the sole benefit [See 3257 B.6 of the State Medicaid Manual] of a disabled person, not necessarily a child of the Settlor, qualifies as a transfer that will not be penalized under the DRA to qualify a person for Medicaid benefits. In addition, the trust does not have to include a pay-back provision pursuant to 42 USCA 1396p(d)(4)(A) since the funds establishing the trust are not those of the disabled beneficiary, but rather a third party. Nor would the trust have to comply with the requirements of 62 P.S. 1414, including the reasonable relationship language, since it is a third party, common law trust. O. MISCELLANEOUS SRATEGIES (1) Filing a Resource Assessment form to maximize the spend down for the community spouse on exempt purchases and expenditures as discussed more fully in the materials; (2) Maintain gifting at $ per month or less in conformity with 62 P.S (a);