Can I Protect My Life’s Savings from Nursing Home Expenses?

Yes, there are three ways to protect your assets from nursing home expenses:

• Long term care policy
• Private pay
• Medicaid

Assuming you do not have a long term care policy and are concerned about spending all the assets you’ve spent a lifetime accumulating, the information listed below is meant to inform you on how the Medicaid process works, as well as educate you about the Deficit Reduction Act (DRA).

Understanding Medicaid

What are the basic Medicaid eligibility requirements?

• Minimum age of 65 or disabled.
• Resident of the state in which you are qualifying.
• Must be a medical necessity.
• Admission into a certified care facility with a minimum stay of 30 days.
• Your monthly income should be no greater than your state dictates. (The limit for Texas in 2008 is $1911 per month.)
• Total countable assets (see “Asset Test”) for applicant must not exceed $2000.

Each state has an income and an asset guideline for qualifications. Check with your state’s Medicaid office for current eligibility requirements.

When attempting to qualify for Medicaid, there are two specific areas to consider: income and assets.

A. Income Qualifications
Sources such as Social Security, earned income (if the at-home spouse still works), passive income from investments, IRA distributions and reverse mortgage payments are all examples of what is determined as income by Medicaid. Each state has its own income limit to qualify for Medicaid. So what should you do if your income exceeds the Medicaid limits for qualification?

1. Dispose of Excess Income - Social Security and pensions cannot be transferred to the at-home spouse. However, you can dispose of certain excess income which could cause you to exceed the threshold for qualification. These other incomes include, but are not limited to, producing mineral rights, rent payments, and reverse mortgage payments which can be transferred to the at-home spouse.

2. Purchase a Qualified Income Trust (QIT) - If an applicant’s income is still over the allowable amount, you must purchase a Qualified Income Trust (QIT), formerly known as a Miller Trust. This trust allows individuals whose income exceeds the Medicaid limits to still qualify. This is accomplished by placing all income above the qualifying income limit each month into the QIT. You can establish this account at your local bank. The Medicaid division of Health and Human Services is the beneficiary of this account upon the applicant’s death. The attorney who drafts your QIT should work closely with the Medicaid case worker assigned to you.

B. Asset Options:
Exempt assets (those that are protected) include your homestead with equity up to $500,000 (some states up to $750,000), household and personal goods, and one automobile of any value, an irrevocable Funeral Services Contract, and life insurance cash values under $1500. The remaining assets can be handled in the following manner:

1. The at-home spouse may have to liquidate the applicant’s qualified monies, such as 401(k)s, 403(b)s, IRAs and Self Employed Pension Plans depending on the total account values.

2. If you are an at-home spouse, you have a Protected Resource Allowance (PRA). This amount is 50% of your combined countable assets, with a $104,400 limit. These countable assets include bank accounts, CD’s, money markets, mutual funds, stocks, bonds, deferred annuities, life insurance cash value over $1500, real estate other than homestead and safety deposit box collectables.

What can you do as an at-home spouse whose accounts exceed the Protected Resource Amount (PRA) limit?

1. Spend down the assets until your spouse qualifies.

2. Pay off the house with the excess amount.

3. Do repairs and necessary upgrades to the house.

OR

4. The PRA can potentially be expanded beyond the normal PRA if the joint income is less than the Medicaid threshold.

5. Purchase a Qualified Pension Annuity. This will convert the asset (which needs to be spent-down) to an income for you. The contract must be set up as an irrevocable, unassignable, immediate income annuity. In most states this allows you to convert the asset to a qualified income, which protects the spouse from spending down the asset.

Warning:
Once qualified for Medicaid there are events which could potentially disqualify you. For example, the Medicaid recipient must be removed as beneficiary from all legal documents. Ask siblings or anyone else who would name you as their beneficiary to remove your name and place the next person in line for that asset. If they don’t do this, it could potentially endanger your status, and change you to private pay.

Can Medicaid take my home, upon my death, if they’ve covered my nursing home expenses? Is there anything I can do to protect my home?

Medicaid Estate Recovery Program (MERP)
In March of 2005, the Department of Aging and Disability Services (DADS) implemented the Medicaid Estate Recovery Program (MERP).This act enables Medicaid to seek recovery of expenses from a Medicaid recipient’s homestead upon their death. The question that has become paramount for many is Medicaid’s ability to file a Class 7 claim to recover expenses in probate court upon the sale of the homestead. MERP only recovers estate property that is subject to and is probated in court.

Exemptions- If a surviving spouse or a single adult child has been living in the home for at least 12 months prior to the recipient’s death, then the state does not seek recovery. Typically, no action is taken if recovery is not cost effective.

What if my house is in a Revocable Trust?
If you are applying for Medicaid for your spouse or parent you must remove the home from a Revocable Trust. You will then place the homestead back into the at-home spouse’s name only. If there is no at-home spouse, the house still must be removed from the Trust so that the state can potentially recover their expenses by filing a probate claim on the property at your death.

How to Avoid Medicaid Estate Recovery on Your Homestead
You can potentially convey real estate through an Enhanced Estate Deed, sometimes known as a Lady Bird deed. This deed creates the ability to bypass probate and creditors, which allows you to pass the homestead to your heirs.

Key Changes in the 2006 Medicaid Law
Converting accountable or eligible assets to exempt assets (those you get to keep) is not as easy as it used to be because of the Deficit Reduction Act (DRA). Let’s review a few of these updated rules:

1. Planned monthly gifts are now prohibited as a way to “spend down” assets.

2. The penalty period now begins when one applies for Medicaid, rather than when the last asset transfer took place.

3. The “look-back” period to keep track of asset transfers has been extended for families from three to five years. This means that major gifts or other asset transfers bar Medicaid eligibility for five years.

4. Any balance from an annuity a healthy spouse has initiated must go to the state to pay Medicaid costs for the ill spouse when the well spouse dies (not to the children).

5. When an individual or surviving spouse enters a nursing home, the excess of home equity over a cap of $500,000 or (at a state’s option) $750,000 must be tapped through a Reverse Mortgage or other means to pay nursing-home costs before Medicaid will assume payments.<

6. The new home-equity cap rule does not apply if a well spouse remains in the home, regardless of its value, but would apply if the well spouse died.

7. Under the “income first” initiative, when setting the well spouse’s allowed income, states must consider all income available to the sick spouse, which in practice may reduce the amount permitted for the healthy spouse.

8. The Long-Term Care Partnership program allows all states (not just the original four, California, Connecticut, Indiana, and New York) to relax asset limits in Medicaid eligibility cases when individuals have taken out long-term care insurance policies that conform to the standards of the National Association of Insurance Commissioners (NAIC).

Source: The Deficit Reduction Act of 2005 (signed by the President February 8, 2006) as summarized in eldercareanswers.com and the Kaiser Family Foundation’s website, www.kff.com

Every state has a Medicaid program that is funded with state and federal money. There are federal guidelines, as well as individual state requirements for qualification.

The Federal Government enacted the Deficit Reduction Act in 2005. In February of 2006 most states changed the “look back” period regarding money moved out of the name of the Medicaid applicant to a non-spouse from three years to five years. Each state has a penalty period regarding the transfer of assets from your personal estate to another individual. Those assets that moved out of your estate prior to February 8, 2006 are subject to pre-DRA rules and those after February 8, 2006 will be subject to post-DRA rules.

Next - Should I Spend Money on Long Term Care Insurance that I May Never Use?

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