Elder Law FAX -- November 28, 2005

House and Senate Pass Two Different Budget Bills that Affect Medicaid Asset Transfer Rules (Part 2)
This month the U. S. Senate and the House of Representatives enacted two different budget bills that include significant changes to current laws that affect how people transfer assets in order to qualify for Medicaid.

On November 3, the Senate approved the Deficit Reduction Omnibus Reconciliation Act of 2005, S. 1932, which includes section 6011 titled "Reform of Medicaid Asset Transfer Rules." By contrast, on November 18, the House approved the Deficit Reduction Act of 2005, H. R. 4241, which includes a Chapter 2 titled "Reform of Asset Transfer Rules."

Last week's issue of Elder Law FAX reviewed the history of the Medicaid budget reconciliation process. This week's issue looks at how the Senate and House bills differ.

The Senate Bill
The Senate's bill targets several Medicaid asset transfer strategies, either eliminating their usefulness entirely or making them less attractive in "Medicaid planning."

The Senate bill allows states to end the practice of "aggressive gifting": in this strategy, the individual gives away the equivalent of 1.99 months' of the cost of nursing home care every month. Each monthly gift results in a one-month period of ineligibility, rather than 1.99 months. Under the Senate bill, States may treat the monthly gifts as one transfer.

Similarly, States are prohibited from rounding down the penalty period; thus, if assets equivalent to 1.5 months of nursing home care are given away, the transferor would be disqualified for 1.5 months, not one month.

Furthermore, a potential Medicaid applicant who has "lent" money to others using a promissory note that is not actuarially sound and is canceled (that is, forgiven) on the death of the Medicaid applicant would be regarded as having given money away, and therefore subject to a transfer penalty.

This provision is intended to curtail the "self-canceling installment note" technique, whereby large amounts of assets are "lent" to family members with little or no repayment intended.

The Senate bill also addresses the use of annuities in Medicaid planning. (See Elder Law FAX, May 14 and 21, 2001; at http://www.tn-elderlaw.com/prior/010514.html and http://www.tn-elderlaw.com/prior/010521.html.) Annuities in which payments are deferred (sometimes for several years) or that contain large balloon payments would be outlawed; moreover, to prevent the annuity purchase from being regarded as a disqualifying transfer, the State must be named as the remainder beneficiary of the annuity.

Also, the Senate bill would discourage "private annuities" -- the practice of buying an annuity from a family member -- by making the amount in such an annuity subject to a Medicaid estate recovery claim.

The House Bill
The House of Representatives took a broader approach to curtailing some Medicaid planning practices, including three provisions that would make significant changes to existing law.

First, the Medicaid lookback period is increased from three years to five years. That is, when an application for Medicaid benefits is filed, the State would look back five years for any disqualifying transfers.

Second, the House bill would begin the period of Medicaid ineligibility as a result of a transfer of assets on the date the individual would otherwise be eligible for Medicaid but for the transfer. That is, if the Medicaid applicant gave away, for example, $50,000 two years ago, entered a nursing home and now has less than $2000, the penalty period would begin to run on the $50,000 transfer not in the month of the transfer, but in the month the individual entered the nursing home and had less than $2000.

As a practical matter, this provision would end the practice of "half-a-loaf" gifting, which allows an individual to retain her assets until she needs nursing home care and only then give away half of her assets, using the other half to pay for her nursing home care until the penalty period resulting from the gift elapses.

Third, the House bill would count the individual's equity in her home above $750,000 as available assets. There are exceptions for spouses, among others, to this provision, but the idea is to require individuals to use home equity to pay for her nursing home care.

These changes to the lookback period and when the penalty period begins are not included in the Senate bill and have drawn strong opposition from several quarters, including AARP, the seniors' organization.

Both Medicaid bills now go to a conference committee, consisting of members of the House and Senate, for compromise, to be worked out, if possible, just before Congress recesses for Christmas next month.

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