When both spouses of a married couple need nursing home care, the most immediate result is a catastrophic bill of $12,000.00 per month or more. Without the advice of an elder law attorney, the couple will continue to spend down assets until their assets reach just $4,000.00 in cash. Substantially better results can be achieved with some planning, but understanding how to proceed in these circumstances is a delicate matter. The rules are counterintuitive.

Michigan’s Program Eligibility Manual (which is used by the Department of Human Services to determine eligibility for Medicaid) does not have any clear policies on point to help families facing this situation. The rules allowing a healthy spouse to shelter assets above $2,000.00 do not apply because both spouses are in the nursing home. There is therefore no community spouse.

If any assets are transferred, it appears that the couple will face a shared penalty. What this means is that if the couple were to divest $63,260.00, they would both face a penalty of five months each ($63,260 / $6,326.00=ten months. But divide by two because of the shared penalty). The shared penalty rules are discussed at PEM 405, p11 and read as follows:

A client can be penalized if he or his spouse divests. The penalty is

imposed on whichever spouse is in a “Penalty Situation.” If both

spouses are in a penalty situation, the penalty period (or any remaining

part) must be divided between them.

Example: Mr. Brown is in LTC and under a divestment penalty for 1/1/

04 through 12/31/05. On 9/9/04, Mrs. Brown enters LTC and applies for

MA. She is eligible for MA starting in September. There are 16 months

of penalty left (9/04 – 12/05). Each spouse must serve 8 months. Mr.

Brown’s penalty is now 1/1/04 through 4/30/05. Mrs. Brown’s penalty is

9/1/04 through 4/30/05.

At the outset, I would mention that having the spouses share the penalty makes sense on an intuitive level. But we should expect a little more from the government. The actual rules controlling this situation are not what one would expect.

When two spouses are in the nursing home, it does not follow that gifts by one will result in penalties for both. This is because two spouses in a nursing home are treated as financially separate for purposes of Medicaid eligibility.

When determining financial eligibility for Medicaid, it is important to determine whose assets and income will be counted. There are different rules for making this determination depending on the type of Medicaid for which one is applying. For SSI-related MA, it is clear that the general rule is that an adult applicant forms a fiscal and asset group of one. Fiscal group rules are generally designed to impose financial responsibility among non-traditional living arrangements. But for L/H Patients, there is a clear exception “even if he lives with his spouse.” In other words, no rule to create financial responsibility between spouses will generally be imposed, even if they live together (which is the broadest net DHS casts for capturing assets). The rules prohibit expanding the fiscal group for SSI-related Medicaid where one person who generally lives in the same household is in long term care—and an intention to return to the household is specifically mentioned as not being an exception to this policy. Here is the relevant rule (PEM 211, p5):

SSI-Related Adult SSI-Related MA

An adult’s fiscal and asset groups are:

The adult for an L/H patient, a waiver patient (see PEM 106) and a

Freedom to Work customer even if he lives with his spouse.

Exception: When PEM 402 instructs you to determine a couple’s

countable assets for an “INITIAL ASSET ASSESSMENT” or “Initial

Eligibility,” the L/H or waiver patient and his community spouse are

considered an asset group.

In other words, when two spouses are in the nursing home, each long term care resident is a separate applicant for Medicaid. PEM 402 (the community spouse rules) are an exception to this rule. But where both spouses are in the nursing home, they are separate fiscal groups (of one).

On a practical level, this means that one spouse can qualify for Medicaid while the other spouse carries out asset protection planning. While asset protection planning for one in the nursing home generally means carefully managing a penalty period, it is nonetheless possible to protect a significant portion of a married couple’s estate from the enormous expense of two nursing home stays.

The Department of Human Services for the State of Michigan has announced new numbers for 2009. Every year the numbers concerning Medicaid eligibility for long-term care are adjusted to reflect increases in the cost of living.

The new community spouse resource allowance is a minimum of $21,912.00 and a maximum of $109,560.00. This number is important for married persons with a spouse in the nursing home. It determines how much in cash and otherwise non-exempt assets the spouse living in the community will have to spend down before qualifying for Medicaid.

The community spouse income allowance, which is the income that the community spouse can keep each month and not have to pay to the nursing home has been increased from a minimum of $1,750.00 to $2,739.00. The new utility allowance (which provides additional income protection for the community spouse above the minimum protected amount) is $550.00 per month. However, it is important to note that these numbers do not adjust until April of this year.

Initially the state of Michigan did not include a new divestment penalty divisor in the 2009 figures. After much prodding by the elder law bar, it has been announced that the new penalty divisor is $6,362.00. What that means is that for every $6,362.00 gifted by a nursing home patient within the look back period, the state will withhold nursing home care for 1 month. So if a senior has given away $63,620.00 during 2009 and needs nursing home care, the state will impose a penalty of 10 months.

For many seniors, these numbers may be discouraging: particularly those related to the community spouse. DHS will require an unadvised senior to spend down to ½ of the family’s total assets with a maximum of $109,560.00 before qualifying for Medicaid. Furthermore, the income allowance is very seldom any higher than $1,750.00 based on cost of living expenses alone. With effective advocacy, however, it is not uncommon for these figures to be increased by court order.

It is very common to hear annuities described as “Medicaid friendly.” Most people hearing the words “Medicaid friendly” would assume that assets placed in such an annuity will be protected from the cost of long term care and indeed, they may even be told so by an insurance professional or financial advisor. But under Michigan law, an annuity by itself does nothing to protect assets from the cost of long term care. In fact, without careful planning, simply investing in a Medicaid friendly annuity may result in the unnecessary loss of assets. Understanding why this is the case requires some understanding of estate planning, elder law, and annuities. But taking the time to understand these things can easily save tens if not hundreds of thousands of dollars. Moreover, understanding these points can help you to see why your estate plan must work in conjunction with your financial plans in order to receive the full benefit of an annuity.

Estate planning is traditionally thought of as the field of law concerning the distribution of assets at the time of one’s passing. Modern estate planning encompasses planning not only for distribution on death, but also planning for disability and asset protection. Planning for disability will greatly increase the likelihood of having something to pass on to heirs, while at the same time reducing stress and maximizing one’s own independence. But in order to effectively manage a one’s affairs through a period of disability, there must be a close relationship between the estate plan and the financial arrangement, including the types of investments used.

Annuities can have many different features. Sorting them all out would be beyond the scope of this brief article, but it is important to note that without effectively combining the estate plan and the annuity, you cannot achieve the maximum benefit of either one. To understand why this is so, a few common features of annuities are worth mentioning.

Annuities can be either assets or income streams. When initially purchased, most annuities are like certificates of deposit with a longer term and a greater penalty for early withdrawal. Such annuities are assets and are said to be “deferred.” Money can be taken out of the annuity at this stage, but like a certificate of deposit, there will be a penalty or surrender charge imposed if the withdrawal is taken too soon.

Annuities can be converted into guaranteed income streams. Once this is done, the annuity no longer has any cash value, but will instead pay out a fixed sum of money on a regular basis for a period of time. This process is often called “annuitizing” the annuity. Once annuitized, the funds placed in an annuity can no longer be accessed. What has really happened here is that an asset, the annuity or cash used to purchase the annuity, has been converted into an income stream. This is a permissible form of spending down for Medicaid eligibility provided that the requirements of Medicaid law (described below) are met. An annuity that will meet these requirements is fairly described as “Medicaid friendly.”

According the Program Eligibility Manual (Section 401, pp.4-5) for the state of Michigan, an annuity must have several different characteristics in order to avoid being considered a divestment for purposes of Medicaid qualification, including:

1. The annuity must be irrevocable and non-assignable;
2. The annuity must pay out on an actuarially sound basis;
3. The annuity must pay out in level installments;
4. The state must be named as a remainder beneficiary to the extent of Medicaid benefits received.

Any annuity that does not comply with these rules will be considered a divestment and subject to penalty. But any annuity that does comply with these rules will go to pay the cost of nursing home care in two ways. First, the regular income from the annuity will have to be paid to the nursing home on a monthly basis. Second, if the owner of the annuity should pass away before the annuity has paid out the entire balance, the remainder would go the state to the extent that any assistance had been provided. The owner of the annuity will have to pay the entire nursing home bill sooner or later. Medicaid friendly indeed!

It is at this point that the need to consult with and elder law attorney regarding annuities becomes clear. Elder law is the practice of law related to serving the needs of senior citizens and their families. It often involves planning for health care costs and interactions with Medicaid and Veterans benefits. Medicaid law in Michigan and many other states has changed a great deal since the Deficit Reduction Act of 2005 was passed and this law has dramatically changed the meaning of “Medicaid friendly.” Great care must be taken under this new law to either avoid or carefully manage penalties for transferring assets and yet maximize the benefits available with annuities. Without proper planning, precisely because an annuity can be described as “Medicaid friendly” it would almost certainly have to be exposed to the cost of long term care. But a modern estate plan developed in consultation with an elder law attorney can avoid exposing funds placed in an annuity to the cost of long term care while still obtaining the other benefits of the annuity itself. Careful estate planning can render an annuity safe from spend down for Medicaid qualification and make it truly Medicaid friendly.

*Jerrold E. Bartholomew is a licensed attorney in the state of Michigan. He is not licensed for insurance products or securities.

The Michigan Department of Human Services has enacted several changes to the Medicaid eligibility rules recently that impact qualification for long-term care Medicaid.

Perhaps the most important change relates to divested assets (gifts) and the calculation of penalty periods. Generally speaking, the gifting of assets results in a period of ineligibility for Medicaid long-term care. Under previous policy, returning some of the gifted assets would result in a partial cancellation of the penalty period. For example, if a long-term care Medicaid applicant had given away $61,910.00, she would ineligible for Medicaid for 10 months ($61,910.00/$6,191.00=10 months). But if that same person returned $30,955.00 ($6,191.00 x 5), the penalty would be reduced to 5 months. This former policy was known as a “partial cure” of a penalty.

Under the new policy initiated on July 1, 2008, partial cures are no longer permitted. Instead, the penalty period will only be recalculated in those instances where all gifted assets are returned to the Medicaid applicant or full value is paid for the gifted assets.

This new policy is extremely harsh to Medicaid applicants who may have transferred assets, especially if it is impossible to return the entire amount given away because the money has been spent. These issues are extremely fact-sensitive, but a smooth transition to Medicaid assistance may still be possible. This is because some of the more sophisticated gifting techniques still remain viable under the new law.

Another consideration is whether Michigan has overstepped the boundaries of Federal law with this new rule.

The Federal law on point, namely 42 USC 1396p(c)(2)(C)(iii), reads as follows:

(c) Taking into account certain transfers of assets

(2) An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that—

(C) a satisfactory showing is made to the State (in accordance with regulations promulgated by the Secretary) that

(iii) all assets transferred for less than fair market value have been returned to the individual; or

I have clipped the appropriate sections above in order to make a complete sentence and placed the key phrases in bold. The question is whether “to the extent that” controls the phrase “all assets”. If so, the federal law requires states to allow partial cures of divestment penalties. On the other hand, if “all assets” is allowed to stand on its own, then the Michigan Department of Community Health has reasonably construed the federal statute. As a general rule of statutory construction, no interpretation that renders any phrase meaningless is a proper reading of a statute. Michigan’s interpretation of this rule that ignores the phrase “to the extent that” would generally be considered an improper reading of the law.

Michigan is in the minority of states to adopt the second, less favorable interpretation of this statute. Notes provided along with the amendment indicate that the policy change is in order to “bring the eligibility manual into compliance with the Federal regulations.” But as noted above, the federal statute on point is at least unclear and more reasonably read to require partial cures.

Medicaid applicants caught in the trap of having divested assets within the look back period that have now been spent or are otherwise unavailable will either have to find a way to cover the difference, seek a hardship waiver, which is extremely rare, or seek to challenge the state’s interpretation of the federal law. With regard to the first option, seeking a way to cover the difference, there are several planning opportunities that would, in a sense, stretch assets to cover the penalty period. But timely action and the proper timing of a Medicaid application would be necessary for these strategies to work.

For those now planning for their future needs, it is imperative to seek the advice of an elder law attorney well-versed in these issues.

Yours Truly scored a victory for community spouses of Pennsylvania nursing home patients on Tuesday, May 29, 2008. On that day the Pennsylvania Supreme Court sent the Department of Public Welfare packing. It denied DPW’s appeal from the decision of the Commonwealth Court that DPW could not refuse to grant Medicaid based on a proper, Medicaid-compliant, immediate annuity purchased by the community spouse.

To start at the beginning, on February 5, 2003, Pauline Ross entered a nursing home. On April 8,
2005, Pauline’s community spouse, Leonard Ross, transferred $418,026.66 in marital assets into a Fidelity & Guarantee “Medicaid Qualified, Single Premium,Immediate Annuity.” Under the annuity contract, F&G pays Leonard $10,211.83 per month from May 15, 2005, to September 15, 2008. Leonard established the F&G Annuity so that Pauline would be eligible for Medical Assistance-Nursing Home Care benefits and to pass the marital assets on to the next generation. Leonard is the owner and sole annuitant of the F&G Annuity, and Leonard’s three children are the beneficiaries if Leonard dies before September 15, 2008. Pauline had no monetary interest in the F&G Annuity, and, after Leonard transferred the marital assets into the F&G Annuity, Pauline had no assets with which to pay for her nursing home care.

Pennsylvania refused to approve Medicaid for Pauline, claiming that the annuity could be sold to J.G. Wentworth at a 40% discount, an immediate payment of $250,000. Pauline, according to the Commonwealth, had that much in available assets.

There were several problems with DPW’s case. First of all this would be a loan, not a sale, and loan proceeds are not considered an asset under Medicaid law. Secondly, there was solid testimony proving that F & G would not permit J.G. Wentworth to purchase the annuity. Finally, federal Medicaid law clearly permits exactly this sort of transaction. Pennsylvania and only four other states try to deny Medicaid in such cases.

An administrative law judge–a DPW employee, of course–ruled against Ms. Ross. She said Mr. Ross would have to dump the annuity on J.G. Wentworth and lost 40% of his investment. On appeal, the Pennsylvania Commonwealth Court pummeled the Department. It ruled that Mr. Ross was within his rights to invest in an annuity and his wife is entitled to Medicaid. Tuesday’s ruling by the supreme court was the final smackdown. Pennsylvania’s highest state court told DPW it could not deny Medicaid based on a properly amortized Medicaid-friendly annuity purchased by the community spouse.

Tuesday’s ruling also completed the tri-fecta. Two federal district courts had already told DPW it was acting illegally. Those cases were Mertz, ex rel. Mertz v. Houstoun, 155 F. Supp. 2d 415 (E.D. Pa., 2001), and James ex rel. James v. Richman, 465 F. Supp. 2d 395 (M.D. Pa., 2006). DPW appealed the James ruling to the federal court of appeals, but has little chance of winning.

This decision means that if your spouse is in a nursing home, you can preserve a substantial amount of money through an annuity, in addition to the 50% or $104,400 the DPW says you can keep. This annuity purchase is done after your spouse is in a nursing home. If an annuity sales person tells you to put your money into an annuity now, in case you or your spouse needs to go into a nursing home, run–do not walk–away. However, if your spouse is in a nursing home in Pennsylvania and your assets, apart from your house and one care, are higher than $25,000, we can help you save the excess. Call us for a consultation.

John B. Payne, Attorney

Dearborn, Michigan & Pittsburgh, Pennsylvania

(800) 220 7200

FAX (313) 562 3340

©2008 John B. Payne, Attorney

www.law-business.com

An astounding thing happened during the fall of 2007. Michigan changed its Medicaid policy with respect to annuities and implemented those changes with retroactive effect.

The new policy requires annuities to have several features in order to avoid being considered a divestment. Among the requirements is a rule that the state of Michigan must be named a remainder beneficiary to the extent of Medicaid benefits received. This law applies to all annuities purchased or altered after February 8th, 2006, the day President Bush signed the Deficit Reduction Act into law.

This policy change is troubling is several respects. First, it certainly defeats a common sense understanding of justice and fair play to change the rules retroactively, particularly where the financial consequences can be so significant. The law changed in October of 2007, but it applies to all annuities purchased or changed more than a year and half before the new policy was announced. Annuities not in compliance with the new policy can be considered a divestment–just as though the money used to purchase the annuity had been given away. So, for example, a $60,000.00 annuity could result in more than 10 months of ineligibility for Medicaid and under the new law, this penalty time would not begin to run until the purchaser was otherwise out of money and in the nursing home.

Second, this policy change–with all of its harsh consequences–is not necessarily understood by those selling and recommending annuities. Even today, annuities are still being sold with the idea that they will help one to qualify for nursing home care. But for many annuities, just the opposite is true. How many annuities are likely to be sold with Michigan as a remainder beneficiary? Would you invest your money that way? Many annuities will actually prevent qualification and it may be extremely difficult or impossible to undo the transaction. With nursing home costs averaging $6,500.00 per month or more, the problem is widespread and troubling.

The lesson here is that Medicaid policy is potentially an issue for almost everyone at or approaching retirement age. It is important to consult with an elder law attorney before making any long term decisions on annuities or other financial products. The impact on Medicaid qualification may surprise you.