Wright Abshire Attorneys

MEDICAID ESTATE RECOVERY

A. Estate Recovery Defined

'Estate recovery refers to an authority by which the state Medicaid agency seeks to recover from the estates of deceased Medicaid recipients the costs of certain LTC services paid by Medicaid after age 55. Estate recovery is mandated by The Omnibus Budget Reconciliation Act of 1993 ('OBRA 1993"). The law contains minimum requirements, but states are permitted to implement certain options that go beyond the minimum. Although estate recovery has been federally mandated since 1993, many states, including Texas, were slow to adopt it. The Texas Legislature passed an estate recovery enabling statute in 2003, but the program was not implemented until March 2005.

B. The Texas Estate Recovery Program

The following are characteristics of the Texas estate recovery program:

1. Persons subject to estate recovery are those who file an initial application for covered LTC services on or after March 1, 2005, and who are 55 years of age or older when such services are received.¹

2. Recovery claims are limited to the probate estate, as defined in §3(1), Texas Probate Code.² Texas does not currently recover from non-probate assets, such as joint tenancy with right of survivorship ('JTWROS') arrangements, life estates, living trusts, etc.

3. An estate recovery claim will not be filed if the decedent is survived by a spouse, child under age 21, a blind/disabled child, or an unmarried adult child who has lived continuously in the decedents home for at least one year prior to the decedents demise.³

4. Services covered by estate recovery include nursing home services, services in an intermediate care facility for the mentally retarded ('ICF-MR facility), home and community-based services, community attendant care services, and 'related hospital and prescription drug services paid by Medicaid after age 55.

5. An undue hardship exemption from estate recovery may apply if the property was operated as a family business, farm, or ranch for at least one year prior to the decedents demise and it produces at least 50 percent of the livelihood of the heirs/legatees, or if the heirs/legatees will be able to quit/avoid public assistance if estate recovery is waived, or if the decedent received Medicaid as the result of being a crime victim.⁴

There is an exemption from estate recovery, under undue hardship, on the first $100,000 of the tax value of the home. This exemption is available to the siblings and lineal descendants of the decedent. In order for this exemption to apply, 'family income must be below 300 percent of the federal poverty level ('FPL'). The term 'family for adult heirs and those who are legally emancipated is defined as the heir, the hero spouse, and the hero minor children/stepchildren. The term 'family for minor heirs is defined as the heir, the hero parent(s)/stepparent, and the hero minor siblings (including half-, step- and adopted siblings).⁵

Old Law - The look-back date is 36 months (or 60 months for certain transfers involving trusts) prior to the first month in which the individual is both in a nursing home and files a Medicaid application.⁶

2. DEFRA 2005 - For all transfers, the look-back date is 60 months prior to the first month in which the individual is both in a nursing home and files a Medicaid application .⁷

Previously, one could gift all assets in bulk and wait 36 months to apply for Medicaid. Now the waiting period is 60 months.

B. When the Transfer-of-Assets Penalty Begins

1. Old Law - In Texas, the penalty period began the first day of the calendar month in which the transfer occurred.⁸

Example: The individual transferred $10,000 in July 2005, and he entered a nursing home and applied for Medicaid in September 2005.

Analysis: The penalty period is calculated as follows: $10,000 ÷ $3,549 (monthly rate then used by Medicaid) = 2.81 months, which rounds down to a two- month penalty. This penalty period began on July 1, 2005, and it continued through August 31, 2005.

2. DEFRA 2005 - The penalty period begins the first day of the month during or after which the transfer occurred, or the date the individual would be eligible for Medicaid-funded LTC services but for the transfer, whichever is later.⁹

Example: The individual transferred $10,000 in February 2006 and entered a nursing home and applied for Medicaid in May 2006.

Analysis: Although the transfer occurred in February 2006, the 85-day penalty period ($10,000 ÷ $117.08 daily rate now used by Medicaid = 85 days) does not begin until May 1, 2006, and it continues through July 24, 2006 (85 days). The first full month in which Medicaid will pay for LTC services is August 2006.

Thus, the penalty period will not begin until the month in which the individual enters a nursing home and applies for Medicaid.

The statute does allow the penalty period to be waived in cases of undue hardship. Undue hardship means that the individual would be deprived of essential medical care, 'food, clothing, shelter, or other necessities of lido were the penalty to be imposed.¹⁰

C. Partial-Month Transfer Penalties

1. Old Law - The length of the penalty period was determined by dividing the value of all assets transferred by the average monthly nursing home private rate.¹¹ Partial-month penalty periods were allowed but not mandated.

Under the old law, an individual could gift slightly less than twice the average monthly nursing home private rate ($2,908 x 2 = $5,816) each calendar month for many months and be Medicaid-eligible at the end of the gifting period. Because of 'rounding down,' the penalty periods for these transfers did not overlap and were thus treated as separate transfers. This is illustrated in the following example.

Example: The individual gifted $5,800 each calendar month from January 2005 through September 2005.

Analysis: $5,800 ÷ $2,908 = 1.99, which rounds down to one month. Although the total amount gifted during this period was $52,200 ($5,800 x 9 months), the individual is only ineligible on a monthly basis from January 2005 through September 2005. The individual is potentially eligible for Medicaid-funded nursing home services effective October 1, 2005. This strategy, which was often used as a means of spending down assets quickly, was referred to as 'aggressive monthly gifting.'

2. DEFRA 2005 - States are no longer permitted to disregard partial-month penalty periods.¹²

Texas switched to partial-month transfer penalties for Medicaid applications filed on or after November 1, 2005. In calculating partial-month penalties, Texas divides the value of assets transferred by an average nursing home private daily rate (currently $117.08). The quotient is rounded down to the lower day.

Example: The individual transfers $8,500 in February 2006 and applies for Medicaid on April 1, 2006.

Analysis: $8,500 ÷ $117.08 (daily rate) = 72.6, which rounds down to 72 days. This penalty period begins on April 1, 2006, and it continues through June 11, 2006 (72 days).

D. Treatment of Multiple Transfers

The term 'multiple transferor refers to sequential transfers that occur over a number of months.

1. Old Law - Multiple transfers for which the penalty periods did not overlap were treated as separate events.¹³

2. DEFRA 2005 - States are authorized to treat the total cumulative value of all assets transferred in different months as a single event.¹⁴ This new treatment of multiple transfers lengthens penalty periods in many cases. Moreover, the combined effect of partial-month transfer penalties, coupled with treating multiple transfers as a single event is to eliminate aggressive monthly gifting as a Medicaid planning strategy.

III. LIMITS ON HOME EQUITY

Home equity refers to the market value of the home less the amount that is owed. For example, if the market value of the home is $100,000, but $50,000 is still owed, the equity value is $50,000.

Old Law - There was no limit on home equity for purposes of eligibility requirements.

DEFRA 2005 - The individual is ineligible for Medicaid if the home equity exceeds $500,000, or at state option $750,000. These limits are indexed for inflation. The limits do not apply if the home is occupied by a spouse, child under age 21, or blind/disabled child. The statute does not discourage the use of reverse mortgages as a means of reducing home equity, which may present an estate planning opportunity.¹⁵

IV. PURCHASE OF LIFE ESTATE

A 'life testator is a degree of ownership interest in real property, the duration of which is for the life of the person holding that interest (the 'life tenant). The remaining interest, logically enough, is called the 'remainder interest .” In theory, both interests are separately marketable. The life tenant has the right to occupy the premises and to enjoy all revenues from the property and is responsible for taxes and maintenance. When the life tenant dies, the remainder interest blossoms into fee simple ownership of the property. Historically, some individuals have spent down assets in order to become Medicaid-eligible by purchasing a life estate in a relatives house and then claiming the life estate as their exempt homestead.

1. Old Law - An individual who had excess liquid assets but no home could spend down those assets by purchasing a life estate in a relatives home. The individual could then claim the homestead exemption for the life estate interest and qualify for Medicaid.

2. DEFRA 2005 - Purchasing a life estate in another persons home is considered to be a disqualifying transfer of assets, unless the purchaser lives in that home for at least one year after the life estate interest is purchased.¹⁶

This change eliminates the strategy of purchasing a life estate in a relatives home and immediately qualifying for Medicaid. However, it may still be used effectively if the individual is not considering immediate nursing home entry.

SPOUSAL IMPOVERISHMENT

The provisions of 42 U.S.C. §1396r-5 are designed to prevent the impoverishment of the spouse who remains at home (the community spouse or 'CS') when the other spouse (the institutionalized spouse or 'IS') enters a nursing home. The law protects a portion of the couples combined assets for the CS. The amount protected is called the protected resource amount ('PRA').

The PRA is the greater of:

One-half of the couples assets as of the date of institutionalization, but not more than the maximum of $99,540 (in 2006); or

The minimum amount of $19,908 (in 2006).¹⁷

If potential income from assets comprising the PRA is inadequate to raise the Coos income to a minimum monthly maintenance needs allowance ('MMMNA' or $2,488.50 in 2006), then the PRA may be expanded.¹⁸

1. Old Law - In expanding the PRA, states were free to use either a 'resources-first methodology or an 'income-first methodology.

a. 'Resources Firestone - Only the Coos income (plus $1.00 of the Sols income) is measured against the MMMNA. The result is that all of the couples assets can generally be protected for the CS. No spend down is required for the IS to be Medicaid-eligible.

b. 'Income Firestone - The couplescombined income (less certain allowable deductions for the IS) is measured against the MMMNA. The result is that the PRA can rarely be expanded. The spouses must spend down their assets in order for the IS to qualify for Medicaid. Clearly, 'income firestone disadvantages many couples.

2. DEFRA 2005 - The 'income-first methodology is mandated for asset allocations to the CS occurring February 8, 2006, or later.¹⁹

NOTE: Texas has been following the 'income-first methodology for continuous periods of institutionalization beginning September 1, 2004 or later.

VI. PURCHASE OF ANNUITIES

In this context, the term 'annuity refers to a contract for periodic payments made in exchange for an amount of principal invested. Some individuals purchase an annuity as a means of spending down assets in order to qualify for Medicaid. However, this is often not the best means of spending down assets, and there are only certain situations where the purchase of an annuity might be indicated.

1. Old Law - The only federal requirement was that the annuity be actuarially sound.²⁰ This means simply that the guaranteed pay-out term of the annuity could not exceed the life expectancy of the annuitant.

2. DEFRA 2005 - The state must be the remainder beneficiary of the annuity:

a. 'In the first position for at least the total amount of medical assistance paid on behalf of the annuitant;'

b. 'In the second position after the community spouse or minor/disabled child and is named in the first position if such spouse or representative of the child disposes of such remainder for less than FMV.'²¹

Moreover, the purchase of an annuity is treated as a transfer of assets, unless:

c. The annuity is owned by (or purchased with the proceeds of) an individual retirement account ('IRA'), Simplified Employee Pension ('SEP') IRA, or Roth IRA; or

d. It is irrevocable and non-assignable; and

e. It is actuarially sound; and

It provides for payments in equal installments during the term of the annuity (i.e., balloon annuities are not allowed).²²

NOTE: Most of the above requirements for annuities are not new to Texas. However, Texas had not required that the state be the remainder beneficiary of an annuity for the community spouse.

VII. CONSTITUTIONAL CHALLENGE

There has been a constitutional challenge to DEFRA 2005 as the result of a clerical error difference between the House and Senate versions. An attorney has filed suit in the U.S. District Court in Mobile, Alabama, contending that the statute violates the 'bicameral clause of the U.S. Constitution, which requires that both chambers of Congress pass identical versions of a bill before it goes to the President to sign. Some constitutional scholars believe that the statute may be struck down.

VIII. CONCLUSION

This past year has seen formidable changes in Medicaid funding of LTC. Texans must now be concerned about the state claiming their property after death, if they require Medicaid-funded nursing home care. DEFRA 2005 tightens up the Medicaid requirements by mandating more restrictive gifting provisions, limiting home equity, mandating 'income firestone in expanding the PRA, and requiring that annuities meet stringent guidelines. The overall effect has been to make the Medicaid program even more complex, making it more critical than ever that families looking toward LTC consult an elder law attorney.

About the Authors:

Wesley E. Wright and Molly Dear Abshire are partners in the law firm of Wright Abshire, Attorneys, in Bellaire, Texas. Both are Certified as Elder Law Attorneys by the National Elder Law Foundation. Mr. Wright is Board Certified by the Texas Board of Legal Specialization in Estate Planning and Probate Law. Bucky Olive is a Public Benefits Analyst for Wright Abshire. They are frequent authors and lecturers on elder law and estate planning. Bucky Olive also works for the firm as a public benefits analyst.

Nothing contained in this publication should be considered as the rendering of legal advice to any persons specific case, but should be considered general information.