Wright Abshire Attorneys

Medicaid Planning after DEFRA 2005

By: O.S. Bucky Olive

The Deficit Reduction Act of 2005 ("DEFRA 2005"), as approved by Congress on February 1, 2006, makes it more difficult for many seniors to qualify for Medicaid-funded long-term care ("LTC") services. Yet provisions of this new law do provide some additional planning opportunities, making it all the more important for seniors to seek the services of an elder law attorney. The law is quite controversial, as evidenced by the narrow margins by which it passed in both chambers of Congress. Indeed, the tally was so close in the Senate that Vice-President Dick Cheney cast the tie-breaking vote. The changes promulgated in this law are effective for actions taken on or after the enactment date of the law.

The DEFRA 2005 changes and their impact are outlined below:

LOOK-BACK PERIOD FOR TRANSFERS (i.e., GIFTS)
New Law - Extends the look-back period to five (5) years for all transfers.
Old Law - The look-back period was 36 months for most transfers.
Impact - This eliminates bulk transfers in most situations.

WHEN THE TRANSFER PENALTY BEGINS
New Law - The penalty begins the date the applicant would be eligible for Medicaid-funded LTC services but for the transfer.
Old Law - The penalty began the month in which the transfer occurred.
Impact - Even if the transfer occurred prior to nursing home entry, the penalty begins after nursing home entry.

PARTIAL-MONTH TRANSFER PENALTIES
New Law - Transfers totaling less than the nursing home private rate for one month incur a partial-month penalty.
Old Law - States had the option of imposing no penalty in such situations.
Impact - Texas already uses partial-month penalties for applications filed after October 1, 2005.

MULTIPLE TRANSFERS
New Law - Multiple transfers occurring in more than one month are lumped together and treated as a single transfer.
Old Law - Such transfers were treated as separate events, provided the amount of each monthly transfer did not exceed the nursing home private rate for one month.
Impact - This eliminates "aggressive monthly gifting" and may extend penalty periods.

NOTES, LOANS, & MORTGAGES
New Law - These arrangements are considered to be disqualifying transfers, unless:

The payment schedule is actuarially sound
Payments are made in equal monthly installments over the term of the loan; and
The balance of the loan is not cancelled upon the lender's death

Impact - Possible planning opportunities for investing in promissory notes rather than in annuities.

PURCHASE OF LIFE ESTATES
New Law - Purchase of a life estate in another person=s home is considered a disqualifying transfer, unless the purchaser lives in the home for at least one year after purchase.
Impact - This may still present a planning opportunity for persons not considering immediate nursing home entry.

LIMITS ON HOME EQUITY
New Law - An individual is ineligible for Medicaid if his/her home equity is more than $500,000, or at state option $750,000. These limits will be indexed for inflation. There is an exception if the home is occupied by a spouse or a minor/disabled child.
Old Law - No limit on home equity.
Impact - Possible planning opportunities, since the law encourages reverse mortgages as a means of reducing home equity.

MANDATES "INCOME FIRST"
New Law - The couple's combined income is considered in determining whether and to what extent the protected resource amount ("PRA") for the community spouse may be expanded (the "income-first" method).
Old Law - In determining whether and to what extent the PRA for the community spouse may be expanded, states had the option of considering only the community spouse's income (plus at least a $1.00 diversion from the institutionalized spouse), called the "resources-first" method, or using the couple's combined income (the "income-first" method). Impact - Mandating "income first" will require couples to exhaust assets before the institutionalized spouse can qualify for Medicaid. Under "resources first," generally all of the couple's assets could be protected for the community spouse.
Note: Texas already follows the "income- first" methodology in cases where one spouse is institutionalized on or after September 1, 2004, and the community spouse remains at home.

ANNUITIES
New Law - Purchasing an annuity is a disqualifying transfer of assets, unless:

1. The annuity is owned by (or purchased with the proceeds of) an individual retirement account ("IRA"); or

2. The annuity is:

irrevocable
Non-assignable
Actuarially Sound
Pays in equal monthly installments over its' term (no balloon payments)

3. Also, the annuity must name the state as the remainder beneficiary

In the first position, for the total amount of medical assistance provided; or
In the second position after a community spouse or minor/disabled child, but is named in the first position if the spouse or minor/disabled child disposes of the remainder for less than fair market value.

Impact - This is not new to Texas; except for minor variations, Texas has for some time required all of the above.

Conclusion
DEFRA 2005 by no means eliminates Medicaid planning, and indeed it presents some new planning opportunities. Now, more than ever, it is critical for seniors contemplating LTC (and their families) to seek the services of an experienced elder law attorney.

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