PRE-NEED ASSET PLANNING
MEDICAID PLANNING FOR SINGLE VS. MARRIED APPLICANTS
Many of the Medicaid planning tools are common to married couples versus single persons. In fact, it would be foolish to not plan for the death of one spouse before the other needs assistance. People die and plans that do not take that into account are apt to cause problems if life does not go according to plan.
That being said, there are some things that couples can do, and probably need to do, that single persons cannot. For instance, a couple can hang on to a home longer than a single person, especially if the community spouse is able to live at home. If planning has not been accomplished before the need of one member of the couple to have benefit based care, the community spouse might get a child to move in and take care of him/her. If this lasts over a two year period of time the home can be transferred to that child and thereby protected from estate collection. It can also be maintained during the period of residency of the child should the community spouse need residential care of some sort.
Spouses have tools available that single persons do not. Many of these tools may assist with planning. They are also generally necessary to prevent the destitution of the community spouse.
Planning for a couple should involve both ensuring that the institutional spouse has all necessary and advisable care. It should also involve ensuring that the community spouse does not have to surrender too much of what the community spouse has by way of income and assets.
Income can be allocated to the community spouse if the institutional spouse is on Medicaid long term care. Income can be distributed by way of an income assignment through the caseworker. This is generally not as efficacious as might be thought as the guidelines by which caseworkers must abide do not synch well with reality. The 2014 standards for spousal impoverishment (yes, that is what they call it) can be found here: http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Eligibility/Downloads/Spousal-Impoverishment-2014.pdf
The 2014 Minimum Monthly Maintenance Needs Allowance is $1938.75. The Maximum is $2,931.00. To get beyond the minimum the expenses of the community spouse need to be higher – as allowed by the Medicaid program – than the minimum $1938.75. The housing cost allowance (known as Excess Shelter Amount) for 2014 is $581.63 per month. The Standard Utility Allowance in Tennessee has not been updated online since 2009. That year it was $314 per month.1 TennCare has taken the position that the numbers they have hidden somewhere in their internal releases are not subject to change in individual cases, no matter what the actual utility, housing, etc. costs might be. Counsel for the Division of Appeals and Hearings has informed me that TennCare is putting pressure on judges to conform to those numbers as well.
The one time standby of going to court with a spousal support case has been dealt a blow by the Tennessee Court of Appeals in McCollom v. McCollom:
“Thus, in order for Mrs. McCollom to obtain an increase in the MMMNA and a resulting increase in her CSRA, she is required to demonstrate “exceptional circumstances resulting in significant financial distress.” In its order, the trial court made the specific finding that there was no evidence of exceptional circumstances in this case.”
McCollom v. McCollom, M2011-00552-COA-R3CV, 2012 WL 1268296 (Tenn. Ct. App. Apr. 12, 2012).
Where the guidelines do allow for increasing the community spouse’s income allowance, that need can be met with the spend down device of purchasing a qualifying annuity with the institutional spouse’s assets.
Given that allocation of income is not likely to be a workable solution in many cases the planner’s goal is to work in two areas; decreasing costs and providing a non-disqualifying method of paying costs. Decreasing costs is, in many ways, more up to the client than the attorney. The attorney can, and should, advise about paying off credit cards, loans, and the like. The fewer the necessary payments, the less the need for additional income. Unfortunately, it is far too typical to have a couple who have run up credit cards in an attempt to keep up with spiraling health care costs.
Another way to plan for the income needs of the community spouse is to set up a special needs trust for a disabled community spouse. By the time an institutional spouse needs institutional care, the community spouse may well qualify as disabled. This is not, however, an especially safe bet for a plan, or a planner.
A better way, assuming time is on the planner’s side, is to establish an irrevocable trust, preferably more then five years before one of the couple needs Medicaid based assistance. The irrevocable trust should ensure that neither member of the couple is the trustee, or has any ability to demand payment. Additionally, it ought to be a spendthrift trust and provide an escape clause that allows the funding of a special needs trust if all else fails. My trusts provide for a change in rules by which they are governed in the event of a need for asset based funding instead of changing trust altogether.
Because of the risk that the five year mark will not reached it is advisable to suggest partnership program long term care insurance for those clients eligible for the insurance.
One reason for a trust is that the savings of couples are subject to division and spend down. When a spouse is in the institution where that spouse will need Medicaid, TennCare divides all of the countable resources of the couple into equal halves. The community spouse is allowed to keep a minimum of $23,448.00, up to a maximum of $117,240.00. Minimum here is a bit of a misnomer. If the couple does not have $23,448 between them no one steps in and gives them money. The community spouse just gets to keep all that they have. The institutional spouse is allowed to keep $2,000.00. Assets that are placed into a qualifying trust more than five years before need are not countable.
A single person does not necessarily need to worry about providing for an community spouse. Keep in mind though that older people do get married. Love and hope spring eternal in the human heart.
Planning for a single individual involves the usual trusts, savings, and long term care insurance tools. It also involves identifying persons who will provide care and decision making as required.2 A timely settled irrevocable trust works just as well for a single person as for a couple as long as there is someone trustworthy to be the trustee. In the case of a single person I recommend the use of a trust protector to receive private accountings on a regular basis. If the trust protector finds material irregularities in an accounting, or the accountings do not appear, the trust protector should have some powers to remove the trustee. It is just too tempting to do a little self help with trusts if there is no one looking over your shoulder.
For both single persons and couples having a good set of powers of attorney and helath care powers of attorney is not only important as regards finances and care decisions, they are important in terms of Medicaid planning. If the Settlor is not compos mentis enough to sign amendments to a trust, or other planning document an attorney in fact might be able to sign in the stead of their principal.
TRANSFERRING REAL PROPERTY WITHOUT JEOPARDIZING MEDICAID ELIGIBILITY
Prior Planning Prevents Poor Performance. My father assured me that was the motto of the Navy when he was an enlisted sailor.3 It should certainly be an elder law planners motto. Just as with establishing irrevocable trusts, transfers of property that occur more than five years before need for eligibility preserve Medicaid eligibility. This doesn’t always happen, so other methods become important.
If a child lives in the home for the two years immediately before institutionalization and helped keep the applicant off Medicaid a transfer does not create a penalty. The same applies to transfers to children under 21, spouses, disabled or blind children of any age, and siblings who have an equity interest in the home and have lived there at least one year before institutionalization. Note the difference with siblings and caretaker children. Caretaker children have to have provided the care immediately before institutionalization, whereas siblings just have to have lived in the house for a year at some time before institutionalization. It is also permissible to transfer the home in trust for the benefit of a child under 21, a disabled or blind child, or a spouse.
There are other ways to transfer a house that do not create a full penalty period. One way is to sell the house in exchange for a note. The note will have to meet certain criteria such as: actuarially sound (according to HCFA Transmittal 64, or as an appendix at the back of the TennCare Medicaid and TennCare Standard Policy Manual); require regular payments of equal amount; it cannot be deferred or forgiven at death, and; no balloon payments. The actuarially sound requirement may be hard to meet in the case of an older person.
Another method of transferring property would be to transfer property into a business venture that produces income. This method changes the property into property necessary for producing income and allows some room for maneuver in terms of preserving assets. Keep in mind though that only the first six thousand Dollars of equity in the property is an excludable asset. If the notion is to encumber the property there are limitations on notes as set forth above. Additionally, unless the land is already in a business like a farm, a transfer to a business may not pass the smell test.
The soon to be institutionalized individual may purchase a life estate in someone else’s home. To prevent this from being the substantial equivalent of a gift, the individual must live in the newly purchased life estate property for at least a year before institutionalization.
WHEN DOES THE HOME BECOME A COUNTABLE ASSET?
How is “Intent to Return Home” Interpreted?
In Tennessee the intent to return home is a mere fiction. It may not stay that way for long, but that is what it is now. The Rule states:
If absent from the home with intent to return, an individual may retain a homestead for an unlimited period of time.
That does not mean that keeping the home without doing anything further is a good idea. There are issues like taxes, insurance, yard maintenance, house notes, and so on, that should be addressed. Insurance on a non occupied dwelling is both expensive and hard to get. Property taxes do not go away and must be paid to ensure the house is not sold at a tax sale. Even an unoccupied structure is going to have to have the lawn mowed and some basic yard maintenance done to avoid environmental court where such applies, or cranky neighbors just about anywhere a structure might be.
Letting a relative use the house can work out, and usually does not. Sooner or later someone is going to complain about the state of repairs, the free use of an asset, insurance getting behind, or some other issue. Once family members actually express irritation it may be hard to reach a compromise about what to do. Given that the only family members who might need a place to stay are the ones who have managed to not have a place to stay, you can see the potential for problems.
Leasing the house will convert it into some form of countable asset or another for VA purposes and Medicaid purposes. If it is rented out for Medicaid purposes at least the first $6,000.00 in equity will not be countable. If there is not much equity that may work. The amount of equity is unimportant for VA purposes and any rental converts the hose to a countable asset.
Selling the house obviously converts the (proceeds) into a countable asset. This regularly surprises families of people receiving VA benefits when they ger a letter from the VA explaining the recipient has not been eligible since (blank) date and they want their money back. The only time selling a house does not convert it into a countable asset in Medicaid is when the proceeds are used to purchase another house within three months. At least as of now, Medicaid/TennCare does not bother with the “return to the house” requirement to keep the replacement home non-countable.
Titling of the Home and Basic Homestead Issues in a Medicaid Planning Context
The home should generally be titled in the name of the residents. Titling the home in the name of trustees of a trust when there is sufficient planning to get past look back issues and the trust is a properly constructed trust. Unless things have changed at TennCare there are some attorneys who consider a home in a revocable living trust to be a countable asset and some who consider the home titled that way to be a passthrough and to have retained it’s exempt characteristics. So, if a home is part of a revocable living trust, do something about it unless you think your clients like denials and appeals. This is especially the case as you cannot count on getting any particular case worker anymore.
For those of you who are considering deeding out a percentage with survivorship, keep in mind that TennCare considers any such arrangement to be a life estate followed by a remainder interest and calculates transfer consequences accordingly. That is to say that a 10% survivorship interest may easily become a high percentage present value ownership interest for penalty purposes.
A life estate may seem like an attractive way to solve passing the house on down to the kids. In the case of Medicaid planning it has some, resolvable, problems. If the remainder interest is a gift and the transfer is made withing five years there will be a penalty period. Additionally, even though the life estate rule is about purchasing a life estate, it would be wise to check if there is a reasonable possibility that the grantor will be able to stay in the home for at least a year. This is a wise approach even though the Rule mentioned above does not quite directly address deeding out a remainder interest if there is fee simple ownership in the first place. TennCare counsel have treated deeding out a remainder interest while retaining a life estate to require a year of residency.
Along with that should be a calculation of the present interest value of the future estate for both the applicant grantor and the non applicant surviving interest. There may be some way to key the transfer to repayment of debts, or as a purchase with a self held complying note. When calculating present interest remember to use the Medicaid life tables as opposed to the IRS life tables. Medicaid life tables and IRS life tables do not coincide. There are a number of free online present value calculators. I recommend them over doing the math on paper unless you like doing those kinds of calculations.
In terms of planning, a life estate that does not incur the look back period avoids estate collection and probate at the same time. For life estate transfers that were made at fair market value, the same applies. For life estate transfers that were made within 60 months of application for benefits, there will be some sort of penalty period, but there will not, apparently, be an estate recovery issue:
“Tennessee recognizes the distinction between interests in real property that pass “by right of survivorship” and those that pass by “devise or descent.” Real property jointly owned by a decedent with others with a right of survivorship and real property owned by the entirety are not part of the probate estate administered by the decedent’s personal representative in the probate proceeding. 2 Pritchard 6th 630, at 142. On the other hand, interests in real property that pass by devise or descent can be reached by the decedent’s personal representative to pay the decedent’s or the estate’s debts if the decedent’s personal property is insufficient to pay these debts. Tenn.Code Ann. § 31–2–103; Tenn.Code Ann. 30–2–401 (2007); In re Estate of Vincent, 98 S.W.3d 146, 149 (Tenn.2003); 2 Pritchard 6th 801, at 405.
In light of the broad and common understanding of the word “estate,” we have determined that “estate,” for the purpose of 42 U.S.C. 1396p and Tenn.Code Ann. § 71–5–116, includes not only the personal property owned by a TennCare recipient at the time of death, but also the recipient’s interests in real property that are properly subject to the payment of the deceased recipient’s debts should the recipient’s personal property be insufficient to pay these debts, including the debt to TennCare. Any real property that can be reached by the personal representative pursuant to Tenn.Code Ann. § 30–2–401 and 31–2–103 for the payment of the debts of an insolvent estate may be reached by the probate court for the purpose of reimbursing TennCare for the properly paid medical care provided to a deceased recipient in accordance with Tenn.Code Ann. 71–5–116.62
In re Estate of Trigg, 368 S.W.3d 483, 501-02 (Tenn. 2012)”
So, there are estate recovery prevention advantages to a transfer of a life estate. The key is to know what value has been transferred and to ensure proper measures have been taken to deal with potential penalty period issues.
Asset Valuation – Fair Market Value under DRA
There are two chief values to a typical house; the assessed value from the County Assessor’s Office and the market value as developed by an appraiser or a real estate agent. It is oftentimes the case that the assessed value is markedly lower than as appraiser’s calculation of value. This may, or may not, be a good thing. The maximum equity a home may have and not be counted is $543,000.00, with a maximum value not counting equity of $814,000.00. You may think this is a ludicrous amount. It is not when you start looking at family farms that have had commercial districts, or housing developments move closer and closer to the farm over time. A farm that is only good for raising cedar trees and cattle may be worth well over a million Dollars if it is close to existing services and developed roads.
If there is any doubt as to the value of the homestead it is wise to get a licensed appraiser to make an appraisal. This is not only for benefit planning purposes; it also serves well for tax planning purposes. Otherwise, this writer has never experienced an issue before TennCare using the assessed value of real property. A good place to conveniently find the assessed value of property is: http://www.assessment.state.tn.us/
Using Life Insurance to Spend Down
The initial problem with using life insurance as a spend down vehicle is insurability of the client. Insurability can be gotten around by purchasing a paid up policy, although there are still likely to be restrictions on the amount that can be collected until a time certain has passed. The problem with paid up life insurance as a spend down vehicle is that the cumulative cash value of life insurance policies held by the applicant or applicant couple over a total of $1,500.00 is countable. A $100,000.00 policy purchased with a one time premium of $100,000.00 will tend to have a higher cash value than $1,500.00.
This is not to say that life insurance policies are not a good idea, or a good idea for spend downs. There are life insurance policies that can be paid with a single premium which also have a partnership program long term care feature. Because of the single premium paid up front the underwriting is not as apt to prevent the purchase of the policy. The long term care feature can allow a spend down over time to delay the need for Medicaid. There are currently new policy models coming out on a fairly regular basis. It is worth investigating what is out there at the time of designing an emergency spend down, or a plan for disability.
There is nothing in the Tennessee Rule (1240-03-03-.03) that prevents trasferring property out of state. Neither does the TennCare Medicaid and TennCare Standard Manual mention any distinction about property in state vs. property out of state. This includes the section of the Manual that discusses unavailability of assets.
A transfer made deliberately out of state to achieve some sort of unavailability does not appear to be a particularly sound strategy.
Protecting Veterans Benefits
A current advantage of planners assisting clients with disability benefits in the Veterans Benefits area is that a client may give away all of their money and successfully apply for veterans benefits on the same day. That is about to radically change. A new set of Federal Regulations was proposed on January 23, 2015. The comment period is long over and we can expect that the regulations as proposed will be adopted sometime soon. Rumors are rife that January 1, 2017 will be the effective date of the new regulations and that some VA offices are even now using the new rules. It may well be the case that some offices would like to use the new rules although to do so would strain constitutionality to the breaking point.
The VA’s own summary of the major provisions of the proposed regulations follows:
Proposed § 3.274 would establish a clear net worth limit. VA does not currently have a bona fide net worth limit. The proposed net worth limit is the dollar amount of the maximum community spouse resource allowance established for Medicaid purposes at the time the final rule is published. This amount is currently $119,220, which would be indexed for inflation by adjusting it at the same time and by the same percentage as cost-of-living increases provided to Social Security beneficiaries. The amount of a claimant’s net worth would be determined by adding the claimant’s annual income to his or her assets. VA would calculate the amount of a claimant’s net worth when it receives an original or new pension claim; a request to establish a new dependent; or information that net worth has increased or decreased. Proposed § 3.274 would provide that a claimant’s net worth can decrease if the claimant’s annual income decreases or if the claimant spends down assets on basic necessities such as food, clothing, shelter, or health care. Proposed § 3.274 would include effective dates for benefit rate adjustments due to net worth.
Proposed § 3.275 would describe how VA calculates assets. It would provide that VA would not consider a claimant’s primary residence, including a residential lot area not to exceed 2 acres, as an asset. Proposed § 3.275 would also provide that if the residence is sold, proceeds from the sale are assets unless the proceeds are used to purchase another residence within the calendar year of the sale.
Proposed § 3.276 would provide new requirements pertaining to pre-application asset transfers and net worth evaluations to qualify for VA pension. The changes respond to recommendations that the Government Accountability Office (GAO) made in a May 2012 report, “Veterans Pension Benefits: Improvements Needed to Ensure Only Qualified Veterans and Survivors Receive Benefits.” Section 3.276 would establish a presumption, absent clear and convincing evidence showing otherwise, that asset transfers made during the look-back period were made to establish pension entitlement. The changes would establish a 36-month look-back period and establish a penalty period not to exceed 10 years for those who dispose of assets to qualify for pension. The penalty period would be calculated based on the total assets transferred during the look-back period to the extent they would have made net worth excessive. The penalty period would begin the first day of the month that follows the last asset transfer.
Proposed § 3.278 would define and clarify what VA considers to be a deductible medical expense for all of its needs-based benefits. The medical expense amendments will help to ensure that those who process VA needs-based claims process them fairly and consistently and that only needy claimants receive needs-based benefits. It would provide definitions for several terms, including activities of daily living (ADLs) and instrumental activities of daily living (IADLs), and provide that custodial care means regular assistance with two or more activities of ADLs or assistance because a person with a mental disorder is unsafe if left alone due to the mental disorder. It would provide that generally, payments to facilities such as independent living facilities are not medical expenses, nor are payments for assistance with IADLs. However, there would be exceptions for disabled individuals who require health care services or custodial care. The proposed rule would place a limit on the hourly payment rate that VA may deduct for in-home attendants.
Proposed § 3.279 would place in one central location all statutory exclusions from income and assets that apply to all VA needs-based benefits.
Proposed § 3.503 would incorporate in regulations statutory changes regarding Medicaid-covered nursing home care and applicability to surviving child beneficiaries.
One basic issue is that veterans and families have been taken in by self-styled VA benefits “experts” who are little other than life insurance agents wanting to sell high commission annuities in sheep’s clothing. Oh yes, and the VA experts generally refer customers to an attorney who will draft them a VA Trust and then as a gesture of good will make an application for VA benefits for “free.” The VA prevents attorneys from charging to help someone who might economically benefit from those VA benefits obtain or keep VA benefits. That rule does not prevent an attorney from charging for pre-application planning, or from drafting, VA Trust. And because the VA treats trusts that must distribute to the applicant as an available asset the VA trusts generally name anyone except the applicant and spouse as a beneficiary. It has been a situation that has invited abuse and, unsurprisingly, abuse has happened.
Another basic issue is that converting assets is generally a practical response to the fact that VA Aid and Attendance benefits are generally not high enough to fully fill in the gap between retirement income for a couple and the cost of living in an assisted living center for a couple.
The proposed regulations may do something to help with the above enumerated issues. The proposed regulations may also exacerbate some of the issues.
Careful attorneys will urge clients to plan well ahead of actual need for VA benefits, just as attorneys urge clients to plan well ahead for TennCare/Medicaid benefits.
Careful attorneys will also want to give consideration to how they go about assisting clients with VA benefits applications. The forms the VA uses for benefits (including the electronic forms for one line applications) are filled with pitfalls for the unwary. There is also the sometimes considerable process of gathering the documentation necessary for a complete application. Add to that the waiting period between the time of application and when the VA acts upon applications and the fact that people in assisted living have a lot of time on their hand with which to ask the attorney what is happening with their benefits and attorneys who take on applications for which they cannot be paid learn to regret helping with VA benefits. My solution is to retain a third party who is adept at VA benefits applications (or train that person) and pay them to help the family make the application themselves. That way if the family wants information they can be put on hold by the VA all by themselves.
The Gifting Powers in Powers of Attorney
Gifting powers are allowed in Tennessee. The statute itself is worth reading:
(a) If any power of attorney or other writing:
(1) Authorizes an attorney-in-fact or other agent to do, execute or perform any act that the principal might or could do; or
(2) Evidences the principal’s intent to give the attorney-in-fact or agent full power to handle the principal’s affairs or to deal with the principal’s property; then the attorney-in-fact or agent shall have the power and authority to make gifts, in any amount, of any of the principal’s property, to any individuals, or to organizations described in §§ 170(c) and 2522(a) of the Internal Revenue Code or corresponding future provisions of the federal tax law, or both, in accordance with the principal’s personal history of making or joining in the making of lifetime gifts. This section shall not in any way limit the right or power of any principal, by express words in the power of attorney or other writing, to authorize, or limit the authority of, any attorney-in-fact or other agent to make gifts of the principal’s property.
(b) If subsection (a) does not apply, an attorney-in-fact or other agent acting under a durable general power of attorney or other writing may petition a court of the principal’s domicile for authority to make gifts of the principal’s property to the extent not inconsistent with the express terms of the power of attorney or other writing. The court shall determine the amounts, recipients and proportions of any gifts of the principal’s property after considering all relevant factors including, without limitation:
(1) The value and nature of the assets of the principal’s estate;
(2) The principal’s foreseeable obligations and maintenance needs;
(3) The principal’s existing estate plan; and
(4) The gift and estate tax effects of the gifts.
Tenn. Code Ann. § 34-6-110
This statute does not negate case law on undue influence or on breach of fiduciary duty in the event of self dealing that is not specifically authorized by the power of attorney instrument itself.
Given that gifting can cause any number of problems in terms of look back period and penalty period, it might seem odd to include a gifting piece in a discussion of pre need planning. In fact, such gifting powers can be invaluable as a planning tool. Such powers could allow: gifting of the home to a child who took care of the parent for a two year period immediately before admission to long term care; gifting of the home to a minor child or a child who is blind or disabled, and; gifting of assets to a special needs trust or a pooled special needs trust among other things. Like a disclaimer is a useful tool in post mortem estate planning, a gifting power is a useful tool in post incapacity planning for incapacity.
1The fact that numbers necessary to assist persons in planning for Medicaid are not open to the public is both execrable and a violation of due process.
2Married couples need this as well, but typically at least have each other as a first recourse.
3This is simply not true. According to a friend of mine who is an Annapolis graduate with the submarine service the motto of the Navy is “I could tell you that, but then I’d have to kill you.” Not as inspiring as the preparation motto.