The Perils of Do it Yourself Medicaid Planning
Henry C. Weatherby, Esq., CLU, ChFC, CEBS
Weatherby & Associates, PC
An ElderCare Matters Partner
As we stress often to families in our practice, planning for and dealing with the significant challenges and difficulties of long-term care is a daunting process. The complexities of very complicated state and federal Medicaid laws and regulations present many pitfalls for those who try to engage in that process on their own without working with a competent elder law attorney. A recent Medicaid case from New Jersey is an example of a family that tried to go through the process on their own and are now dealing with some pretty nasty consequences. See C.W. v. New Jersey Division of Medical Assistance and Health Services, NO. A-02352-13T2 (NJ Sup. Ct. App. Aug. 31, 2015).
The facts are as follows: “C.W.” was a 90 year old New Jersey resident who moved into a skilled nursing facility in 2007. The following year, she transferred her home and $540,000 in assets to her children, which together were worth approximately $864,000. The following year C.W. applied for Medicaid benefits. Not surprisingly, the state Medicaid authorities imposed a penalty of 10 years and 4 months before they were willing to begin paying her nursing home costs. At that point, her children tried to fix the problem. They returned $235,000 to C.W. who in turn paid that amount to her nursing home. Then, her children returned the home to her, which was then sold. Oddly enough, the sale proceeds were then deposited into an account in the children’s names, not in C.W.’s name, with the children executing a written agreement to transfer the amount of C.W.’s care cost to her each month. C.W. then reapplied for Medicaid and was again denied as before.
Let’s consider each of the many mistakes made by C.W.’s family and also consider how the results would have been a little different if C.W. had lived in Connecticut. Under the Medicaid rules, when a Medicaid penalty period is assessed, it takes the form of a time period before which benefits will be paid. The simple mathematical formula takes the total gifted amount and divides it by the average monthly cost of private-paid skilled nursing home in that state. As of July 1, 2015 in Connecticut, that divisor amount is now $12,170. Dividing $864,000 by $12,170 would result in a penalty period of 71 months. Note: for C.W.’s actual case, New Jersey’s monthly divisor happens to be quite a bit lower than Connecticut’s and her application was submitted 7 years ago so costs have risen since that time. That is why her actual penalty period was considerably different than our hypothetical for a Connecticut 2015 Medicaid application.
What were some of C.W’s mistakes? The first mistake was in not understanding the rules of Medicaid’s 60 month look back period. When you apply for Medicaid, the administrative authorities are allowed to do a complete financial audit of the Medicaid applicant’s financial activities over the previous 60 months. Whatever was done earlier than 60 months before the application is never considered and has no effect whatsoever on Medicaid eligibility.
There are situations where someone is fairly healthy when they engage in asset protection planning but then suffers unanticipated health issues that force a move to a nursing home much sooner than they ever thought they might need it. That is clearly not the case for C.W. as she was already in a nursing home when she started gifting away her assets. In C.W.’s case, applying for Medicaid in 2008, she would have had no problems if she did the exact same gifting of assets in 2003 or earlier. Alternatively, the family could have considered delaying the Medicaid application for a few years and instead, privately paying the nursing home from the gifted funds until the 60 month look back period elapsed.
The second mistake was in transferring C.W.’s home out of her name. When a single individual applies for Medicaid, their home may be considered an exempt asset if they have a reasonable expectation of returning to the home within a relatively short period of time (at least initially, but the rule might require the home to be sold later on depending on circumstances). As soon as C.W. transferred the home, it ceased to be an exempt asset for purposes of her eligibility. Then, after her children conveyed the house back to her, it was sold. Once the equity in the home is converted to cash, it ceases to be exempt. At that point we might also question why the sales proceeds were put into the children’s’ bank account, rather than staying in C.W.’s account, because she therefore ultimately re-gifted that amount back to the kids.
Also, it is important to note that for income tax purposes, once C.W. transferred the house to her children, the opportunity to claim an exemption from capital gains tax on the sale of the home could have been lost. If the house had been sold by the children instead of being transferred back to C.W. first, and assuming that the house sold for $324,000, and further assuming for our purposes that C.W. had paid approximately $150,000 for the house, then capital gain of $174,000 would have to recognized by the children upon the sale of the home. At a probable 15% capital gains tax rate, there would be $26,100 in capital gains tax due to the IRS because of the sale. In Connecticut there would also be tax owed to the state of about 6% for another $10,440, for total tax costs of $36,540. Since C.W. sold the house herself, however, she could have qualified for the “primary residence” exemption for sale of the home, and paid no income tax. There was one thing that it appears C.W. and the children did right from an income tax standpoint, which was transferring the house back to C.W. before selling it.
Lastly, in Connecticut, C.W.’s children could have been held personally liable for C.W.’s nursing home costs under a relatively new statute which allows nursing homes to sue the recipients of gifts that cause a penalty period for Medicaid coverage. Under Connecticut General Statutes Section 17b-261q, if a person applying for Medicaid transferred assets within two years of the time that they apply for Medicaid, and they incur a penalty period due to that transfer, then the person who received the asset can be sued by the nursing home for nonpayment of their fees.
Clearly, good advice from a qualified elder law attorney could have made a big difference in the costs ultimately borne by C.W. and her family for her long-term care needs. Please call us if you have any questions about the issues presented above or if you care to discuss any other planning issues with us.