What is Medicaid

• The federal Medicaid laws were amended, in 1993 to materially change the eligibility rules in order to close many of the "loop holes" people used to fall under the eligibility rules. Eligibility for Medicaid benefits is established by meeting a series of eligibility tests. Failure to meet any one of the eligibility tests results in denial of Medicaid benefits. The tests are:

• (1) Has the applicant deliberately disposed of assets for the purpose of making himself or herself "needy"? See the disqualifying transfer test, below.

• (2) If there have been no disqualifying transfers, does the applicant have assets that could be liquidated to pay for his or her own care? See the available assets test, below.

• (3) In Texas, they impose yet a third test: Does the applicant have so much income that our state won't consider him or her as "needy'' regardless of how many or how few assets the applicant may have? See income cap test, below.

The Disqualifying Transfer Test

• Clients who are considering gifts to children or others, in order to make themselves eligible under the resource requirement discussed below must consider certain "traps'' that now exist under the new laws. Merely transferring title to an asset into someone else's name, while retaining all benefits from the asset such as its use or its income, probably will not be sufficient to take the asset out of its "available'' status. Any transfer of a person's assets without receiving fair consideration in exchange for those assets will subject the transferor to a period of temporary ineligibility for Medicaid benefits. Transfers without fair consideration include outright gifts as well as transfers to irrevocable trusts. Assets transferred to a revocable trust are considered as still being owned by the transferor.

• The period of ineligibility under both the old and new laws is determined by a formula which calculates how long the transferor could have paid for his or her nursing home care with the transferred assets, if they had not been transferred. For example, if one transfers $20,000 in assets without fair consideration, and the average cost of nursing home care where the transferor resides is $2,000 per month, the period of ineligibility would be 10 months because he or she could have paid for 10 months of nursing home care with the $200,000 if it hadn't been transferred. (The divestment factor for 2005 is $2,908.00)

• There is a "look-back" period to see if such transfers have been made. The look-back period is 3 years in the case of outright gifts. Assets transferred by a Medicaid applicant's spouse within the look-back period result in a disqualification period for the applicant the same as assets transferred by the applicant himself or herself. Also, if a person makes a disqualifying transfer while the disqualification period for some other transfer is still running, the new disqualification period doesn't start until the previous one ends.

The Available Assets Test

• If a person is not disqualified for benefits because of asset transfers during the look-back period, the next eligibility test that must be met is whether he or she has "available'' assets exceeding the state limitation. Each state imposes a limit on the maximum amount of countable assets a person can have while receiving Medicaid benefits. For married couples, this eligibility test was drastically changed by the 1993 laws, because since then all assets of the spouse of the applicant for Medicaid benefits are considered as being available to the applicant, as well as the applicant's own assets.

• Certain items do not count as resources, such as:

  a. The entire value of an individual's principal residence and the land pertaining to it;

  b. The current wholesale market value of an automobile up to $4,500 (the total value of a car is excluded if it is needed for employment or medical treatment, or if it is specially modified for use of a handicapped person);

  c. If the total face value of all life insurance policies does not exceed $1,500, then no part of the cash surrender value is counted (but if the total face value exceeds $1,500, then the entire cash surrender value counts);

  d. The entire value of burial spaces for an individual and immediate family, a prepaid irrevocable burial contract regardless of the value, and up to $1,500 ($3,000 for an eligible couple) of a burial expense fund.

Medicaid Strategies

• There are, however, a few long term care planning opportunities that are still available to get the person qualified for resources:

• (1) Special Needs Trusts: If a disabled person has assets of his or her own that such person is mentally or physically able to manage, a trust can be established to manage the disabled person's assets. The corpus of such a trust is exempted from the regular "available assets" rules as long as the Trustee is directed to reimburse the state, at the beneficiary's death, for governmental medical benefits received during the beneficiary's lifetime (to the extent the trust is able to do so). Funds for "special needs" not covered by Medicaid can be paid out of the trust.

• (2) Certain annuities: Nonexempt resources could be used to purchase an annuity in the name of the community spouse. Before Medicaid application is made, the community spouse would irrevocably elect an annuity (periodic income) payout and no cash value lump sum would be available as a resource. Any annuity income payable in the name of the Medicaid applicant could raise his or her income above the permitted level. Such annuity arrangements are closely examined by the Department of Human Resources to determine if the annuity purchase was in reality an attempt to transfer resources

• In addition, the institutionalized spouse is permitted to establish a minimum resource allowance that allows him or her to transfer assets to the spouse living at home (to the extent his or her resources are less) in an amount generally equal to the lesser of (i) one-half of all joint resources or (ii) $95,100.00 (for 2005). Example: If total nonexempt assets is $100,000, the maximum resource allowance is ½ of total (subject to a maximum of $95,100) = $50,000. Plus the spouse keeps all protected assets and the $2,000 the other spouse may have.

• There is also a monthly maintenance allowance that can be awarded the non-institutionalized spouse of an institutionalized Medicaid recipient. In Texas, the year 2005 protected income award is $2,377.50 per month. This allowance protects some of the institutionalized spouse's income from having to be used to pay for his or her institutional care.

Income Requirement

• Texas is an "income cap" state. A person in Texas cannot qualify for Medicaid nursing home coverage if his income exceeds $1,737 per month (for 2005). This is based not on community property rules but rather whose name appears on the check.

• For those who otherwise qualify, one method for reducing income to the institutionalized person is for him or her to transfer, when possible, that income stream to another person. Obviously, social security and retirement income can not be thus transferred. Another method to transfer excess income is by placing it into a Qualified Income Trust, sometimes called a Miller Trust. We can usually draft these to qualify people in time for the next calendar month's counting period.

• Example: Assume for this example that Client's mother resides in nursing home, she receives $2,000 per month ($700 social security and $1,300 pension retirement fund), she has monthly expenses for the nursing home, $2,300, for medical insurance premiums, $240 and the Client is contributing $570 toward mother's care each month because Medicaid coverage not available since mother's income exceeds income cap.

• Solution: Have payors of income pay directly to our carefully drafted qualified income trust for mother's benefit. Mother will then qualify for Medicaid nursing home coverage, saving client $570 per month. Trust funds are "swept out" each month in the following manner:

  Receipts $2,000

  Disbursements:

  Mother's monthly allowance ($60)

  Medical insurance premiums ($240)

  Balance to nursing home ($1,700)

  Medicaid pays the remaining $600 per month to the nursing home; client does not have to contribute toward mother's nursing home care at all!

Conclusion and Planning Opportunities

• In seeking payment of nursing care by Medicaid, the state of Texas has set two basic requirements, the resource requirement and the income requirement. If done correctly, many people who otherwise wouldn't qualify can do so by careful estate planning. If done incorrectly, the institutionalized person may have their period of disqualification extended. Once eligibility is determined, special allowances allow transfers and payments to the non-institutionalized spouse.

• Yes, this is quite a bit of information, but only scratches the surface of a very complex area of the law. Also please keep in mind that this is an area than can change! DHS should be your next stop to get it "from the horses mouth" so to speak, and then, when appropriate, have us draft up certain legal documents such as the Qualified Income Trusts, as well as assist you with living trusts, powers of attorney, guardianships and probate maters as they arise.