NAELA Symposium Sessions Provide Insight on the DRA

By Harry S. Margolis

The National Academy of Elder Law Attorneys Symposium in Washington, D.C., held from April 20th through 23rd, featured a plenary session in which six leading elder law practitioners analyzed various features of the Deficit Reduction Act of 2005 (DRA). Following are some notes from that presentation as well as from a subsequent break-out session on planning options under the DRA.

The Penalty Period Start Date

New York elder law attorney Bernard Krooks reviewed the elements necessary to start a transfer penalty period under the DRA. The transfer start date requires two elements:

  1. The individual must spend down to the state’s resource limit; and
  2. “[W]ould otherwise be receiving an institutional level of care . . . based on an approved application for such care but for the application of the penalty period.” 42 U.S.C. § 1396p(c)(1)(D)(ii).

Krooks pointed out that the House bill talked about “receiving services” and the law says “otherwise receiving institutional level care.” So is there any significance to this change in language? Possibly. An argument may be made that the penalty start date should occur when the individual needs an institutional level of care rather than when she actually enters a nursing home. Establishing that date may be difficult, or it may be as simple as getting a letter from the client’s physician.

The next question, Krooks said, is whether an application is necessary to begin the penalty period. He outlined three possible scenarios:

  1. Two applications in all cases, one to start the penalty period and another when it expires.
  2. One application to start the penalty period, supplemented when the spend-down is complete to show the spend-down.
  3. One application when the penalty period expires that provides information establishing the beginning of the penalty period.

Krooks and the others on the panel expressed their hope that the Centers for Medicare and Medicaid Services (CMS) will choose the third option, but they counseled attendees not to rely on this hope until the rules are established in their states. Where a penalty period must be started as part of a plan, the only safe course is to apply for Medicaid immediately.

Life Estate Purchases

In closing one potential loophole, Congress created a game plan for a new planning technique. At 42 U.S.C. §1396p(c)(1)(J), the DRA provides as follows:

For purposes of this paragraph with respect to a transfer of assets, the term ‘assets’ includes the purchase of a life estate interest in another individual’s home unless the purchaser resides in the home for a period of at least 1 year after the date of the purchase.

As panelist and New York practitioner Vincent Russo pointed out, while this requires a year’s residency, which may not have been necessary in all states before, it clearly approves a parent moving into a child’s home and purchasing a life estate interest if the parent lives there for at least a year. In fact, there’s nothing to prevent a parent from moving from one child’s house to another’s and repeating this strategy.

Russo raised the question of what will be deemed an acceptable valuation of the life interest so that its purchase will not be considered a transfer despite meeting the guidelines in the statute. Depending on the tables used, a life interest can vary significantly. Russo also raised the question of whether the year of residency must be consecutive. What if the parent winters in Florida, but summers with a child up north? These questions will have to be clarified by CMS or as the law is implemented state-by-state.

Notes and Loans

As with the DRA’s provision on life estate purchases, its rules on promissory notes codified at 42 U.S.C. §1396p(c)(1)(I), while barring “abuses” such as SCINs and balloon notes, provide safe harbor rules that offer guidelines for permissible notes. As explained by panelist Susan Levin, a Massachusetts elder law attorney, such notes must (a) have repayment terms that are “actuarially sound” according to publications of the Office of the Chief Actuary of the Social Security Administration, (b) provide for payments that are in equal amounts during the term of the loan, and (c) prohibit cancellation of the balance at death.

These rules are designed to make sure that money is lent to family members without expectation of repayment. If the loan does not meet these requirements, the balance owed will be treated as a disqualifying transfer.

Levin raised the question of what happens if the loan agreement meets these tests, but the payments aren’t actually being made. She suggested that there would be no disqualifying transfer, but the balance of the loan payments due may be considered a countable asset.

She also pointed out that unlike most of the DRA changes, this new rule applies to notes and loans made before the date of enactment.

Effective Date

Connecticut practitioner Whitney Lewendon discussed the various effective dates of the DRA. The measure applies only to transfers and annuities effected or purchased on or after the date of enactment. However, if the Secretary of Health and Human Services determines that a state law change is necessary to implement the new rules, he may grant an extension to the first day of the first calendar quarter beginning after the end of the state’s next legislative session. While this is the Secretary’s choice, it’s likely that he will defer to each state’s interpretation of its own law. This may provide room for state-by-state advocacy on this issue.

Report From One Break-Out Session

In the afternoon, attendees broke into smaller groups to discuss how they would adjust their practices in light of the DRA. Following are notes from one of the sessions:

One participant suggested that since any long-term care planning now will be based on our best guesses of how and when the DRA will be implemented, any plan should include a letter to the clients explaining the uncertainties and that the proposed plan may not work. The client should be asked to sign off on the plan showing her understanding that there is no guarantee the plan will work but that it is the best course of action available under the circumstances.

The group discussed doing a new version of half-a-loaf planning by transferring assets and spending down the balance through a private annuity or an actuarially sound promissory note. The monthly payments under either the annuity or note plus the client’s other income should be less than the cost of care. In Maryland, the plan must include a private annuity rather than a promissory note because its Medicaid agency counts the balance due on promissory notes as a countable asset.

One participant suggested that clients should place all of their countable assets in an irrevocable income-only trust containing a spray provision permitting a distribution of principal to the children. In his state, the clients can even be the trustees of the trust. In other states, it would be necessary for the clients to give up control by naming others as trustees.

There was discussion of whether the transfer hardship waiver is illusory. It has been suggested that no one will qualify because there will never be real hardship on the nursing home resident since facilities cannot evict non-paying residents unless they find a suitable place for them to move. One practitioner proposed that this eviction protection is more procedural than substantive and may not protect residents from eviction. While it may make them eligible for the hardship waiver, it could also create significantly more stress for the residents and their families.

Must the nursing home resident remain eligible for Medicaid throughout the penalty period? The weight of opinion is that the initial eligibility determination that begins the penalty period is a snapshot and that the resident can exceed the resource limit after the determination is made that he is eligible for Medicaid coverage but for the transfer.

If that interpretation proves correct, then the client may not have to maintain the need for institutional care, either. In that case, there may be a planning opportunity for seniors who receive temporary skilled nursing facility care due to a broken hip or other medical treatment. They could transfer at that time to begin the penalty period, even though they would then return home.

And, if the snapshot interpretation is correct, rather than using a private annuity or a promissory note, a nursing home resident could make two separate gifts to children, and have one cured by its return after the penalty start date has been established. Of course, the process of establishing the penalty start date could take several months.

What do you do as the attorney if the child fails to return the transferred funds under any of these strategies – private annuity, actuarially-sound promissory note, or partial cure? Does that become a fraudulent transfer subjecting the attorney to potential liability?

One solution would be to pursue a hardship waiver in the event a wayward child undermines the original plan. But who is going to pay the attorney’s fees to pursue such an appeal?

While the hardship waiver may become a large part of the elder law practice on behalf of clients who run into trouble due to bad luck or poor planning, the question was raised as to whether any elder law attorneys would recommend making transfers based on the availability of the hardship waiver. Given the uncertainty of success and the potentially long process of a fair hearing and possible court appeal, no one suggested using the hardship waiver affirmatively.

Some states permit transfers to (d)(4)(C) trusts by individuals over age 65 without a transfer penalty. This is likely to become a much more appealing planning option under the DRA.

For healthy clients, one practitioner suggested transferring the house to children or into trust. After five years, some of the clients’ savings could be protected without extending the penalty period by purchasing back a life estate in the property.

The one-year life estate safe harbor described above can also be useful for a married couple that does not own a home. The community spouse could move in with a child, purchasing a life estate and spend down by paying privately for the ill spouse’s care for one year.

Another practitioner suggested that whenever a parent moves in with children, they should enter into a care agreement requiring either a lump sum or periodic payments to the child. If the parent does live with the child for more than a year, then she can purchase a life estate interest.

There was some dispute about whether an actuarially sound annuity purchased by a community spouse must name the state as a remainderman to the extent of the nursing home spouse’s medical expenses. The DRA is not consistent on this point. In its transfer provisions at 42 U.S.C. § 1396p(c)(1)(F) and (G), there is no such requirement. However, in the disclosure rules at 42 U.S.C. § 1396p(e), the DRA does appear to require that all annuities, whenever purchased and whether owned by the nursing home resident or by the community spouse, name the state as the primary beneficiary. Perhaps CMS will clarify this inconsistency.

In short, a lot of very astute elder law practitioners had a lot of very good planning ideas. There will be considerable trial and error over the next few years to determine what works in what states. We’ll keep you posted.

A recording of the plenary session on the DRA is available in a variety of formats from ADC Services, 69013 River Bend Drive, Covington, LA 70433; Ask for recording 3ab.