Misunderstandings About Medicaid's Complex Laws Can Result in Tragic Consequences
This article was written by Timothy L. Takacs, Certified Elder Law Attorney.
The following is excerpted from the November 6, 13, and 20, 2000, issues of Elder Law FAX.
Myths about Medicaid law abound. Elder Law attorneys who practice in this field know most of them. Perhaps the most prevalent of such myths is the one about the Medicaid applicant’s home – that she will have to sell her home in order to qualify for Medicaid nursing home benefits. A variation on this one is that the applicant will have to give her house to the government or the nursing home.
Complex Gifting Rules
Some Medicaid myths relate to the program’s complex gifting rules. Medicaid is a means-tested program – or, as most lay people would put it, a welfare program – meaning that the Medicaid recipient can have only a minimum amount of assets in order to qualify. In most states, this means that the recipient can have a home, $2000 in cash or similar assets, miscellaneous personal property and a car of modest value, and very little else. So, most people understand that if they give away assets in order to qualify for Medicaid, they will be "penalized."
To some people, "penalized" means "punished," as in committing a crime and being fined or even going to jail. Medicaid caseworkers often reinforce this myth by warning applicants and their families not to give away assets because it’s "against the law."
It’s not against the law to transfer away property in order to qualify for Medicaid. (Long time readers of Elder Law FAX will remember that the "Granny’s Lawyer Goes to Jail" law, an offshoot of the "Granny Goes to Jail" law, was held unconstitutional by a federal court two years ago. See Elder Law FAX, April 20, 1998, http://www.tn-elderlaw.com/old/prior/980420.html. ) What is a crime is to give away assets, apply for Medicaid, and fail to disclose the transfers.
What does happen when a person gives away assets and applies for Medicaid is that Medicaid will impose a "period of ineligibility" as a result of the transfer. The general rule is that for every month of nursing home care the person gives away, she will be ineligible for Medicaid for one month.
What Medicaid defines as "a month of nursing home care" varies among the states. In Tennessee, one month of nursing home care is $2572. So, if Mom gives Daughter $25,720, Mom is ineligible for Medicaid for 10 months ($25,720 divided by $2572 = 10 months of nursing home care given away). The fact that the nursing home charges Mom $3600 a month is irrelevant, at least in Tennessee. She still is not eligible for Medicaid due to the gift until 10 months have gone by.
[Note: In October 2001, this figure was changed from $2572 to $3394.]
Another myth relates to Medicaid’s 36-month lookback rule. This rule says, in a nutshell, that any gifts made during the 36 months prior to the application for Medicaid are potentially disqualifying.
Of those who have heard anything at all about Medicaid and nursing homes, they have probably heard about this rule. Surprisingly, a few people – only a few, hopefully -- believe it means that if Mom gave away anything at all during the 36 months prior to applying for Medicaid, she has to wait out the full 36 months. Two years ago, Mom gave one of her sons $10,000 to buy a car. Those who believe the myth wait another year before applying for Medicaid.
Needless to say, interpreting the rule this way can result in devastating financial consequences for nursing home residents and their families.
Moreover, it can be unwise to rely on the advice of a Medicaid caseworker. For example, Robert Fleming, a Certified Elder Law Attorney in Tucson, reports on an Iowa case in which a caseworker’s misinterpretation of the 36-month rule cost a family almost three years of nursing home care. (See Elder Law Issues, July 10, 2000, http://www.elder-law.com/2000/Issue802.html.)
Speaking of $10,000 gifts, another myth is that a person can give away only $10,000 a year. This myth hangs on as persistently as a junkyard dog, and it is doubtful that it will ever really unleash its hold on the public mind, unlike, say, the myth that the home has to go to the nursing home. That myth seems to be slowly passing into history.
The $10,000 annual "limit" on gifts to one person is a rule of tax law and has no relation to Medicaid law. There is no legal limit on the amount of money a person can give away. A person can give away a million dollars if she wants. There may be tax and Medicaid consequences, but there is no law that limits how much money a person can give away.
Medicaid's "Serbonian Bog"
One court described the federal and state laws governing the Medicaid program as the regulatory equivalent of the "Serbonian bog," quoting John Milton's epic poem Paradise Lost. ("A gulf profound, as that Serbonian bog Betwixt Damiata and Mount Casius old, Where armies whole have been sunk.")
These laws have been characterized by other courts as "almost unintelligible to the uninitiated," as an "aggravated assault on the English language, resistant to attempts to understand it," and as "labyrinthinan."
Medicaid statutes, regulations and policy interpretations are some of the most challenging to understand in American jurisprudence. No wonder, so many myths abound about the program, such as:
- To be Medicaid eligible, you have to sell your house or give it to the government.
- It's against the law to give away your assets in order to qualify for Medicaid.
- You can't get Medicaid if you have given away assets within the last 36 months.
Within each of these myths is the ring of truth, perhaps accounting for how persistent they have remained in the public mind.
Gift of Funds in Joint Account
Joint accounts are the object of another myth about Medicaid law, and one that most Elder Law Attorneys who counsel in this area are familiar with. It goes something like this:
Mom has just entered the nursing home, and her children have consulted with an elder law attorney, who asks about Mom's "countable assets." These are the assets that Medicaid counts in determining her eligibility for Medicaid nursing home benefits. A person who has more than $2000 in countable assets, such as bank accounts, mutual funds, certificates of deposit, and the like, is not eligible for benefits.
Mom has a $50,000 certificate of deposit, says Daughter, but "my name is on the CD too," she says. It's exempt, right? Isn't Mom eligible for Medicaid?
A similar argument was made in a recent Pennsylvania case, with predictable results, at least to most experienced elder law attorneys. On September 5, 1983, Dora Steinberg's husband died, and their jointly held assets became her property. On December 14, 1983, Dora opened a joint account at the bank with her son George and her daughter Marsha. Dora, Marsha, and George signed a joint account agreement with right of survivorship that allowed any of the three signers to the account to withdraw any and all funds from it. The account's opening balance was $120,000.
By December 1994, the account had grown to $240,000. In January 1995, George and Marsha withdrew $199,608 leaving a balance of approximately $41,513.
On July 10, 1995, Dora was admitted to the Saunders House Nursing Home. On January 9, 1997, Dora applied for Medicaid, but her application was denied on the basis that the $199,608 had been transferred from Dora's ownership without fair consideration.
George testified that at the time Dora opened the account and named her two children as joint owners, she made a gift of $40,000 to each of them.
The Commonwealth Court of Pennsylvania upheld the Medicaid hearing officer's finding that George's testimony lacked credibility, and that he and Marsha withdrew the money in order to qualify Dora for Medicaid.
Moreover, under Pennsylvania law, the ownership of a joint account is determined by the net contribution of each person listed on the account as owner. Because all the money in the account was contributed by Dora, all of the money withdrawn was hers too.
Steinberg v. Department of Public Welfare, September 12, 2000.
Medicaid and Married Couples
Many Medicaid myths pertain to Medicaid’s complex gifting rules. To summarize, transfers of assets in order to qualify for Medicaid subject the transferor to a period of ineligibility unless the transferor receives equivalent fair market value in return to the assets transferred.
For example, facing imminent nursing home placement, Mom makes a $20,000 gift to Daughter in order to qualify for Medicaid. Mom will be ineligible for Medicaid for a period of months equal to $20,000 divided by the average nursing home rate.
But if Mom transfers the money to Daughter to pay off a bona fide debt of $20,000, there is no period of ineligibility.
Occasionally, even a court will misunderstand or misapply the gifting rules and their relation to Medicaid’s other complex rules. Edward Dempsey discovered this to be the case when he applied for Medicaid benefits on behalf of his wife Eileen, who was afflicted with Alzheimer’s disease.
Eileen was admitted to a Pennsylvania nursing home in December 1996. At the time, the Dempseys countable assets—that is, assets regarded as available to pay for nursing home care—totaled $404,630. Under Medicaid's spousal impoverishment rules in 1996, Edward was allowed to keep $76,740 as his protected resource amount.
In January and March 1998, Edward purchased two annuities for $365,000, that would pay him a monthly income of $7030 for five years. The result of this purchase reduced the total amount of Eileen’s assets "at risk" to pay the nursing home below Pennsylvania’s $2400 threshold for institutionalized spouses. Edward therefore applied for Medicaid for Eileen.
The Pennsylvania Department of Public Welfare (DPW) contended that Edward had transferred the $365,000 in assets for less than fair market consideration and ruled that Eileen was not eligible for Medicaid until August 2004, when the ineligibility period expired.
Edward asserted that he had purchased the annuities as an investment and tax-saving strategy, which was recommended to him by a professional adviser as prudent for a person of his age (70).
Actuarially Sound Annuity
On appeal, the Pennsylvania Commonwealth Court upheld the DPW’s denial of benefits. Although the annuities were clearly "actuarially sound" under relevant federal guidelines given to the states by the Health Care Financing Administration, the Court said that the annuities purchase was a "gross violation" of the 1988 federal spousal impoverishment law that allocates countable assets and income for the benefit of non-institutionalized spouses like Edward.
Under that law, Edward would have been allowed a maximum allocation of income of approximately $2000 a month. The annuity payment alone put his income almost four times the statutory maximum, prompting the court’s characterization of the strategy as a "gross violation" of the law.
In effect, the Pennsylvania court will permit a DPW caseworker to make a subjective decision that a transfer of assets will be disqualifying, even though the transfer was made for equivalent market value. The federal guideline, said the court, is simply "to aid caseworkers in determining whether or not an annuity appears on its face to be a legitimate instrument as opposed to an abusive shelter for assets."
Persons engaging in Medicaid planning may reconsider trying such aggressive strategies, at least in Pennsylvania.
Dempsey v. Department of Public Welfare, July 18, 2000
Note: This document is meant not to give legal advice but only to answer certain frequently asked questions about how to protect assets from being wiped out to pay for nursing home costs. You are not to rely on the limited information given here. Medicaid is a highly complex area of the law; it varies from state to state and even within a particular state. Unfortunate and costly mistakes can be made if you do not know what you are doing. Before taking any steps to protect assets, you are strongly urged to consult with an attorney who is competent in this area of the law so that you will understand all of the ramifications of your actions, including but not limited to estate, gift and income tax; financial and estate planning considerations, and even criminal sanctions.