Medicaid is the federal program administered through each state to assist persons with low income and minimal assets. Medicaid provides payment for long term care for individuals in nursing homes and for specific types of care for individuals who reside in the community.
In addition to the medical care requirements, an individual must meet financial requirements in order to qualify for Medicaid. The financial requirements restrict a single person to $2,000 in assets plus qualifying exempt assets. Exempt assets include in most cases the homestead, one vehicle, household furniture, a small life insurance policy, and prepaid funeral and burial arrangements. A married couple, with one spouse in the nursing home, may also retain an additional amount of assets for the community spouse up to $99,540 in value.
Because the financial requirements for qualification are strict, individuals often reduce their countable assets by giving away or divesting assets to children or other family members. The gifts typically are made over a period of months or years to take advantage of the Medicaid rules for transferring assets. Any penalty period resulting from the divestment often expires by the time the individual actually needs nursing home care.
The Medicaid rules governing gifts and divestments changed significantly under the Deficit Reduction Act (DRA) signed into law on February 8, 2006. Those changes have virtually eliminated the use of some planning techniques and have shifted the focus to other available planning options. Several of the changes are described in this article.
Lookback Period Increase. The lookback period for all gifts was increased from three years to five years. This means at the time an individual applies for Medicaid the individual must report all gifts made within the prior five years - no matter how insignificant the gift or the purpose of the gift. This reporting serves as the basis of determining any period of ineligibility for receiving Medicaid benefits.
Start Date of Period of Ineligibility. A divestment often results in a period of ineligibility during which the Medicaid applicant is disqualified from receiving Medicaid. Under prior law, the period of ineligibility began on the date of the gift. That start date was often long before the applicant resided in the nursing home. It was the general expectation that the period of ineligibility would expire before the applicant actually moved to the nursing home. Under the DRA, however, the period of ineligibility does not start until the applicant is actually residing in the nursing home and has reached an asset level which would qualify for Medicaid except for the fact the applicant made the prior gifts. That means an individual may end up without funds to pay the nursing home, and yet not qualify for Medicaid to pay the nursing home for several months.
Period of Ineligibility Includes Partial Months. The period of ineligibility caused by a divestment now includes partial months. Under the prior law partial months were disregarded so that monthly gifts in amounts up to the average monthly nursing home cost could be made without penalty. Under the DRA, all gifts, no matter how small, will be counted in determining the period of ineligibility.
Limit on Value of Exempt Homestead. One of the assets exempt from being counted for Medicaid qualification is the homestead. The homestead exemption includes the residence and residential lot as well as all outbuildings and contiguous acreage. Prior to the DRA, there was no limit on the value of the homestead. However, the DRA has now capped the equity value of a homestead for exemption purposes at $500,000. Each state is allowed to increase that value up to $750,000. It is unknown whether Wisconsin will adopt a higher value. This limit will have particular effect on farms and higher valued residences.
Annuities. Under the DRA, an annuity purchased by an applicant for Medicaid will be considered a divestment unless the State is named as either the primary beneficiary or as a secondary beneficiary after the spouse or minor or disabled child. This change affects the use of annuities as a means of sheltering assets and passing them to family members at the death of the nursing home individual.
Conclusion. The changes regarding Medicaid qualification eliminate some former planning techniques but also create new opportunities for planning. Those include the use of larger one-time gifts, developing mechanisms for family members to hold the gifts, and using family care contracts as a means of providing for family members.