y The Nursing Home

Survival Guide

How to Survive an Extended Nursing a Home Stay and Protect Your Assets

Prepared by:

Timothy P. McAloon, Esq.

Marshall, Crane & McAloon, P.C.

69 Winn Street

Burlington, MA 01803

(781) 270-0181

(617) 834-1276 Quincy

website:
The Nursing Home Survival Guide

How to Survive an Extended Nursing Home Stay and Protect Your Assets

Why Do You Need This Guide?

Studies show that three out of five people over the age of 65 will need some type of long-term care. Because people are living longer, many will spend time in a nursing home. The average nursing home cost in Massachusetts is about $140,000 per year. At these rates, it does not take long to seriously impact the life savings of most people.

The people who need long-term care planning the most are the middle class. The wealthy can afford to pay for their care or to purchase long-term care insurance to cover those costs. The poor will usually qualify for Medicaid (which covers nursing home costs) within a short period of time.

There are three primary means of paying for nursing home costs: (1) your own assets; (2) long-term care insurance; or (3) qualifying for Medicaid benefits. Medicare and private health insurance will only pay for nursing home costs for up to 100 days in limited circumstances. Because many people don’t have long-term care insurance and can’t afford to pay for nursing home care over an extended period, they eventually need to qualify for Medicaid to cover nursing home costs. Unlike Medicare, which you are entitled to receive when you attain age 65, Medicaid is a welfare program that you must qualify for based on need. Medicaid is a state program, entitled Mass Health, which receives reimbursement from the federal government for 50% of the cost.

Unfortunately, the Medicaid rules and regulations are very complicated and are not even fully understood by most attorneys. Thus, most attorneys are unable to properly advise their clients about the nuances of long-term care planning. Because the rules are so complicated, there is much confusion and misinformation about qualifying for Medicaid benefits. This Guide is designed to explain the basic eligibility rules and to show you how to use those rules to protect assets for the support of your spouse or for the benefit of other family members. Since the rules are hard to understand in the abstract, I will use examples based on a fictitious couple to illustrate how the rules work in practice.

There are those who feel that it is not proper to engage in long-term care planning to qualify for Medicaid and protect assets. I disagree. If an elderly person is diagnosed with cancer or some other illness that requires surgery, extended hospital stays and costly treatment, the government pays for most of the care costs through the Medicare program and private insurance typically covers the difference. If Medicare and private health insurance did not cover these costs it would financially ruin most people. If an elderly person is unfortunate enough to suffer from Alzheimer’s, dementia or other illness that requires them to be in a skilled nursing facility, why should they have to spend their life savings before getting help? Should a healthy spouse be forced to lose most of the life savings that a couple worked so hard to accumulate because his or her spouse is unfortunate enough to have a sickness that requires nursing home care? I think the answer is no. Just like with taxes and other laws, the government has enacted provisions that allow you to save money. But you have to be aware of these provisions and take action to obtain the benefits. The government does not automatically give you these benefits or necessarily make an effort to inform you about the benefits. But it certainly is not illegal or immoral to take advantage of these benefits if you are fortunate enough to obtain proper advice.

ELIGIBILIGIBILITY RULES

1. Asset Test. The "countable assets" of the person applying for Medicaid (hereinafter the applicant") cannot exceed $2,000.

2. Countable Assets. All assets of both the applicant and the applicant's spouse (hereinafter the "spouse") are counted except for certain "non-countable" assets.

3. Non-Countable Assets. The primary non-countable assets are:

  1. The applicant's residence and the furniture and furnishings which are essential to the needs of the household:
  • If the nursing home resident intends to return to it;
  • Certain relatives live in the home; or
  • At the time of admission to the nursing home the patient has a long-term health care policy that complies with certain DMA requirements.
  • An new exception to this rule is that if your residence has more than $802,000 of equity you will be disqualified from receiving Medicaid until the equity is reduced to $802,000 or less. You can borrow against the equity, including a reverse mortgage, to bring it below the threshold.

b.One car of any value used by the community spouse, or one car of any value if the applicant or family member can establish a need to own the vehicle. In any case, one car if its equity value does not exceed $4,500.

c.The applicant and the spouse may each set aside $1,500 in an account reserved for the payment of funeral and burial expenses.

d.More than $1,500 may be set aside for funeral and burial expenses if the money is placed in an irrevocable trust designated for the purpose of paying these expenses.

  1. The value of prepaid irrevocable burial contracts.
  2. A burial plot.
  3. Life insurance with a face value of $1,500 or less (if the face value exceeds $1,500, the cash value will be counted in determining Medicaid eligibility).
  4. Certain irrevocable annuity contracts.
  5. Income producing real estate; provided that the income produced by the property equals or exceeds the cost of operating the property.
  6. An annuity that is actuarially sound and meets other requirements imposed by the DMA.
  7. A promissory note held by you that is actuarially sound and meets other requirements imposed by the DMA.

4. Community Spouse Allowance. All the countable assets of the applicant and the spouse are totaled, regardless of how the assets are owned. The community spouse is allowed to keep all of the countable assets up to a maximum of $119,220. The balance of the assets, if any, are attributable to the applicant. The applicant's share of the countable assets must be spent down to $2,000 before the applicant will qualify for Medicaid. The above computation is done at the time the institutionalized spouse applies for Medicaid benefits.

TRANSFER OF ASSETS - EFFECT ON ELIGIBILITY

If an applicant transfers assets to an "ineligible person" for less than fair market value prior to applying for Medicaid or being institutionalized, whichever occurs later, the applicant will be ineligible for Medicaid assistance for a number of days equal to the value of the assets transferred divided by $310 (the current average daily nursing home rate in Massachusetts as determined by DMA; this rate will be adjusted each year) or the number of months of ineligibility can be calculated by dividing the value of the assets transferred by approximately $9,300. The "value" of each asset is the equity value at the time of transfer, less the amount of any compensation received by the applicant. Many people confuse this disqualification period with the “look back period”. For transfers occurring prior to February 8, 2006, you are required to disclose transfers to individuals that took place within three years (five years for transfers to most types of trusts) of the date you submit the MassHealth application. For transfers occurring on or after February 8, 2006 you are required to disclose transfers within five years of the application date, regardless of whether the transfer is made to an individual or a trust. This is called the look back period. If a transfer falls within the applicable look back period it must be reported; if it falls outside of the look back period it does not have to be disclosed. If a transfer has to be reported, the disqualification period is always calculated based on the amount transferred divided by the average daily nursing home rate. This disqualification period may be shorter than or longer than the look back period. When this disqualification period begins depends on when the transfer was made. If it was made prior to February 8, 2006 the period will begin on the date the transfer was made. If the transfer is made on February 8, 2006 or later, the period of disqualification does not start until the applicant has entered a nursing home and is otherwise eligible to receive Medicaid benefits, but for the disqualification period.

Generally, this transfer rule does not apply to the following transfers:

(a)Transfers for fair market value, or to satisfy a legally enforceable debt;

(b)Transfers of up to $1,500 to a qualified burial account, or more to an irrevocable funeral and burial trust;

(c)Transfers to the spouse;

(d)Transfers to the applicant's blind or permanently and totally disabled child;

(e)Transfers exclusively for a purpose other than to qualify for Medicaid.

Although the applicant's residence is normally a non-countable asset for determining Medicaid eligibility, the DMA may ultimately obtain a lien on the residence. Consequently, many people seek to transfer the residence out of the applicant's name to avoid this potential lien by the Commonwealth. If the residence is transferred to an "ineligible person" prior to applying for Medicaid benefits, it is subject to the transfer rule outlined above and will delay the applicant's eligibility for Medicaid. However, the transfer rule does not apply to a transfer of the applicant's residence to any one of the following individuals:

(a)the spouse;

(b)A child of the applicant under 21, or a child who is blind or permanently and totally disabled;

(c)A sister or brother of the applicant who has an equity interest in the home and resided in the home for at least one year prior to the applicant's admission to an institution; and

(d)A child of the applicant (other than a child described above) who resided in the applicant's home for a period of at least two years before the applicant's admission to an institution, and who the Department of Welfare determines provided care to the applicant which permitted the applicant to reside at home rather than in an institution.

INCOME PROVISIONS

Generally, an applicant must apply all of his or her income to the care costs, except for a nominal personal needs allowance and any amount that a spouse may be entitled to as explained in this section. The community spouse is allowed to keep all of his or her separate income. In addition, the community spouse may be allowed to keep some of the applicant’s income if the spouse's income does not exceed a minimum allowance. The spouse's "minimum monthly maintenance needs allowance" (hereinafter "spouse's allowance") is calculated as the sum of the following:

(a)122 percent of the federal poverty level for two (now $1,966.25);

(b)An excess shelter allowance to the extent mortgage or rent plus utility costs exceed $547; and,

(c)An allowance for certain dependents that reside with the spouse.

In any event, the spouse's allowance may not exceed $2,980.50(without filing an appeal to request a greater allowance).

THE BROWNE FAMILY

Now that we have reviewed the basic Medicaid eligibility rules, we are ready to apply these rules to our fictitious family. Steve and Janet Browne are 80 and 78 years old and have two children, Kyle and Emily. Steve and Janet are retired and have the following assets:

House$350,000 ($25,000 mortgage)

Investments$300,000

Life insurance$ 25,000 (no cash value)

Car$ 25,000

Steve and Janet also have the following income:

Steve’s Social Security$1,000 per month

Janet’s Social Security$ 750 per month

Steve’s Pension Income$ 600 per month

We will use these assets and income to apply the rules. But remember, the same concepts will apply to you whether your assets and income are greater or less than the Brownes.

THE IMPOVERISHED SPOUSE AND THE ANNUITY

Mr. Browne suffers a stroke and has significant deficits that require skilled 24-hour care that Mrs. Browne is unable to provide at home. Janet locates a suitable nursing home with the help of her children. The nursing home costs $130,000 per year. The Brownes have no long-term care insurance and Janet is fearful that the cost of the nursing home will wipe her out financially if her husband has to stay there for an extended period.

The problem is that Steve does not qualify for Medicaid because their assets exceed the allowable amount. Their countable assets amount to $300,000 (investments). The home, car and life insurance are not counted in determining Steve’s eligibility. Under the community spouse allowance rules, Janet would be allowed to keep $119,220 and they would have to spend down $180,780 before Steve would qualify for Medicaid. Under the income rules, we will assume that Janet is allowed to keep $2,200 of income. Thus, she could keep her income of $750 and most of Steve’s income.

One planning option is to transfer approximately $180,000 to Janet’s name (which is not a disqualifying transfer) and have her purchase an immediate annuity with a payment period that does not exceed her life expectancy under tables used by the Commonwealth. Now the $180,000 is no longer an asset and has been converted to an income stream payable to Janet. Since Janet is not required to contribute any of her income to Steve’s care costs, this allows her to retain full use of their investment assets for her support. It will substantially increase her income to about $2,800 per month, compared with the approximately $2,200 that she would otherwise be allowed to keep, and Steve will qualify for Medicaid immediately and his nursing home costs will be covered. While Steve is in the nursing home, all of his income will have to be applied to his care costs. Also, if Janet has to go into a nursing home in the future, all of her income will have to be applied to her care costs. Under current Massachusetts policy, Janet’s children can be named as the beneficiaries of any annuity payments due after her death. Consequently, this annuity approach is a very useful method of protecting Janet by preserving the countable investment assets for her benefit and increasing her income, while at the same time preserving assets for children if she should die during the term of the annuity.

Even though the house is not a countable asset, the Brownes decide to transfer the house to Janet’s name alone to avoid any potential lien against the house for Medicaid benefits paid to Steve. This is not a disqualifying transfer because transfers are allowed to a spouse.

THE HOUSE TRANSFER

Steve qualifies for Medicaid. Janet now owns the house in her individual name. She is concerned that if she has to enter a nursing home in the future the Commonwealth will obtain a lien against the house. She would like to transfer the house to her children, but she is concerned about losing control of the house and possible tax consequences.

We inform her that if she transfers the house outright to the children, it creates a number of issues. First, she loses control of the house and the children could potentially sell it against her wishes. Second, the house would then become subject to the potential claims of creditors of the children. In addition, if either of the children became divorced or died a whole new set of issues arise. Third, there would be some negative tax consequences. If the house were sold during Janet’s life, it would not qualify for the $500,000/$250,000 exclusion of gain on the sale of a principal residence because Janet is not the owner. The children would obtain a basis equal to Janet’s basis in the house and would most likely owe a significant capital gain on the eventual sale of the house.

We encourage Janet to transfer the house to a trust for the benefit of her children. This type of transfer would provide the following benefits:

  • The Trust will provide that Janet can live in the house for as long as she chooses and it cannot be sold without her consent. In addition, if she wants to sell the house the trust can sell it and invest in another residence.
  • If a knowledable attorney prepares the trust, it can be structured so that Janet is deemed to be the owner of the house for income tax purposes, but not for Medicaid purposes. Thus, if Janet sells the house while she is living in it, it would qualify for the $500,000/250,000 exclusion of gain for income tax purposes.
  • The trust can also be structured so that the value of the house will be included in Janet’s taxable estate for estate tax purposes. This will not result in any estate tax (due to the size of the estate) but will give the children a “stepped-up” basis in the house for income tax purposes equal to the value on the date of death. Thus, the children would be able to sell the house and pay little or no capital gain on the sale.
  • The trust can be drafted so that the house would not be subject to the potential claims of creditors of the children and would not be affected by the divorce or death of a child.

The transfer to the trust will be a disqualifying transfer. The Commonwealth currently uses the assessed value of the house for property tax purposes as the value for determining the disqualification period. Assuming the house is assessed at $300,000, the disqualification period would be a little less than three years. This disqualification period would not start to run until Janet went into a nursing home. Note, however, that if Janet waits at least five years from the date of transfer to apply for Medicaid, the transfer would fall outside of the five-year look back period and she would not have to disclose the transfer on the Medicaid application and no penalty period would apply. If Janet had to go into a nursing home within the five year period, the children could consider transferring the house back to Janet to cure the disqualifying transfer and qualify her for Medicaid sooner.