Strategies for Long-Term Care in California: Medi-Cal and Nursing Home Planning
This article provides general information only and should not be relied on as a legal opinion. Each situation is different and slight differences may have a large impact on the result.
Medi-Cal is a combined California and federal program. Among other things, it pays all or part of the cost of care at a skilled nursing facility. It does not cover the cost of in-home care or residential facilities that are not skilled nursing facilities. In other words, assisted-living retirement facilities, residential-care facilities or board-and-care facilities are not covered. Still, for families with a member in (or headed toward) a skilled nursing facility, Medi-Cal can be an immense help, especially since charges for a skilled nursing facility can exceed $60,000 a year.
To plan for Medi-Cal as a part of long-term-care strategy, a number of components must be managed in concert and with careful attention to timing. This article is divided into the following topics:
Medi-Cal planning can be very helpful, but sometimes it is preferable to use private money to pay for all or part of skilled nursing. This is particularly true when there are concerns about control of the assets or when the cost of strategies to minimize private payment is greater than the anticipated Medi-Cal payments. Medi-Cal will pay for only a shared room, not a private room–and not all skilled nursing facilities will accept Medi-Cal patients.
Medi-Cal does not cover assisted-living retirement facilities, residential care facilities, or board and care facilities. Thus planning should include use of private money and long-term care insurance if it is reasonably available. An additional consideration is that there is no guarantee that the Medi-Cal program will continue indefinitely in its current form.
BASIC ELIGIBILITY REQUIREMENTS
Assets limited to $2,000 for patient and $90,600 for spouse
Financial eligibility for Medi-Cal for skilled-nursing-facility payments is based on the "countable assets" of the ill individual if he/she is single. If ill person is married, then eligibility is based on the "countable assets" of the couple. A revocable or living trust provides no shield when it comes to counting assets. Single people are allowed countable assets up to only $2,000. With a married couple, the ill spouse is limited to $2,000 and the spouse is limited to a Community Spouse Resource Allowance of $90,660. (The amount of this allowance is adjusted each year for cost-of-living increases.) After the ill spouse qualifies for Medi-Cal, additions to the well spouse’s assets do not affect Medi-Cal payments. An example would be additions by inheritance or from interest or dividends. A frequent concern is that the Community Spouse Resource Allowance of $90,660 may not be enough to support the well spouse for the remainder of his/her life.
Assets over the limits must be spent on the skilled nursing facility
With some exceptions, Medi-Cal requires that amounts in excess of these default limits be spent on the skilled-nursing-facility fees. Medi-Cal requires this to continue until the remaining assets fall within these limits. At that point Medi-Cal generally assumes part of the cost of the skilled nursing facility.
Reducing countable assets
Medi-Cal planning involves reducing countable assets in one of three legally permissible ways. One way is to transfer assets in an exempt manner. A second way is to convert the assets so that they are not countable assets. The third way is to increase the asset limits to an amount greater than the Medi-Cal defaults. Generally, all of these must be done before the ill spouse applies for Medi-Cal.
Exceptions to transfer restrictions for other needs
Certain conditions or situations can provide an exception to the transfer restrictions. Included conditions are if an applicant is aged, blind or disabled, or in need of expensive surgery. (One example is surgery that is not fully covered by insurance where the patient does not need care by a skilled nursing facility.) If these situations/conditions are present, the applicant can simply transfer assets to become eligible for Medi-Cal without affecting eligibility. It is still important to plan the transfers carefully, though. If the transfers are not properly done, they may have a negative impact if that person later needs to apply for Medi-Cal for payment for a skilled nursing facility.
When a person can apply for Medi-Cal
An application for Medi-Cal may be submitted after the ill person has been admitted to a skilled nursing facility. The Medi-Cal payments can be retroactive for up to three months. It is also possible to apply for retroactive Medi-Cal payments for someone who has died.
Eligibility for Medi-Cal for persons who are not U.S. citizens
Qualified immigrants are eligible for Medi-Cal. Immigrants who are eligible include: lawful permanent residents, persons granted asylum, persons granted a withholding of deportation/removal, refugees, persons paroled into the U.S. for at least one year, Cuban/Haitian entrants, and certain battered immigrants (their parents and spouses). California also provides long-term nursing home care to immigrants regardless of their immigration status. The income or resources of an immigrant’s sponsor are not counted in determining eligibility. All the other rules are the same, including those regarding Medi-Cal attempts to recovery money after the ill person dies.
"SHARE OF COST" AND ADJUSTMENTS
Patient must pay part of skilled-nursing-facility costs
Medi-Cal does not usually pay the full cost of the skilled nursing facility. Normally the beneficiary is required to pay his/her share of the cost. The Share of Cost is gross income minus a $35 personal-needs allowance and the cost of any health-care insurance premiums. Gross income includes Social Security benefits, retirement plan benefits, pension payments, earned interest and other income.
Amount paid to skilled nursing facility may change if patient is married
If there is a spouse at home, the Share of Cost may be adjusted. Each year California publishes a Minimum Monthly Maintenance Needs Allowance. The allowance is $2,267 per month as of June 2003. (This allowance may be greater if there are minor ore dependent children, dependent parents or dependent siblings if they live with the well spouse.) If the at-home spouse’s income is less than the allowance, that spouse can request an allocation of income from the ill spouse’s monthly income to bring it up to the $2,267 allowance. This reduces the Share of Cost that the ill spouse must pay for the skilled nursing facility. (The well spouse may have any amount of income and the ill spouse still be eligible for Medi-Cal. But if the well spouse’s income exceeds $2,267/month then no income can be transferred from the ill spouse.)
Say the ill spouse has income of $1,602 per month and his/her monthly health insurance premium is $200 per month. In this case, the ill spouse’s Share of Cost would be $1,367. ($1,602 minus the $35 personal allowance minus the $200 health insurance premium = $1,367.)
If the at-home spouse has income of $1,000/month, then $1,267/month from the ill spouse’s income may be transferred to the at-home spouse. This would bring the at-home spouse up to the Minimum Monthly Maintenance Needs Allowance of $2,267.
This also lowers Share of Cost the ill spouse must pay to the skilled nursing facility by the amount being shifted to the at-home spouse ($1,267). In this example, the ill spouse’s Share of Cost is reduced to $100/month. ($1,367/month initial Share of Cost minus $1,267/month shifted to the at home spouse = $100/month.) Medi-Cal would then pay all but $100 a month of the cost of the skilled nursing facility.
If income is received via a check listing both spouses’ names, then one-half the income is attributed to each.
Exceptions to share of cost rules
The ill person is allowed to deduct from his/her income the monthly costs of necessary medical care that is not covered by Medi-Cal. This includes treatments and pharmaceuticals not covered by Medi-Cal. To qualify, such care and prescriptions must be part of the physician’s plan of care. The physician’s prescription or order must be in the medical records at the skilled nursing facility.
The ill person is also permitted to use his/her monthly income to pay for all his/her medical bills, even if they were incurred previously.
ASSETS EXEMPT FROM ELIGIBILITY CALCULATIONS
Assets that may be fully or partially exempt include the home, other real estate, household goods, personal effects, jewelry, cars, life insurance, burial assets, business real estate, work-related pensions, annuities, and certain government payments.
The home is a primary asset that is not counted toward the Medi-Cal limits on assets ($2,000 for the ill person and $90,660 for any spouse).
This includes not only houses but mobile homes, house boats, or an entire multi-unit dwelling as long as any portion serves as the principal residence of the person applying for Medi-Cal. The home may be either inside or outside of California.
To use this exemption, the applicant (or the person filing for the applicant) must state on the Medi-Cal application that the applicant intends to return home. This is based on a subjective intent to return home. There does not have to be a reasonable expectation that the applicant will actually return home. Since presumably virtually anyone in a skilled nursing facility would like to return home if able, the box indicating the applicant intends to return home should always be checked. If the box is not checked, and the applicant (or his/her representative) later makes a correction, the county must accept that correction.
While the home is exempt for eligibility purposes, the exemption does not protect against California taking the home after the ill person (and any spouse), has passed away.
If the ill person is single, generally he/she may not take deductions from his/her income to maintain the house. Renting the house to another party is often the only way for the ill person to deduct maintenance costs.
Other real estate
Other real estate is valued at the lesser of assessed or appraised value if it is located in California. (Property located outside California is valued by employing the assessment method used in that area.) If the real estate has been held for a significant length of time, the assessed value may be greatly lower than the appraisal value. The net value of the real estate for Medi-Cal purposes in that case is the assessed value minus any encumbrances on the property. If the net value of the property is $6,000 or less and the beneficiary receives yearly income of at least 6% of the net value, then the property is exempt from Medi-Cal calculations. (The $6,000 limit still applies if there is more than one parcel of other real estate; in other words, the total net value of all the parcels must be $6,000 or less.) Providing copies of rent checks that are made out to the applicant or his/her agent under a power of attorney may be necessary.
If the ill person owns a house that he/she is renting out, the assessed value is $100,000 and there is a $95,000 deed of trust on the property, the net value for Medi-Cal purposes is $5,000. Assuming the ill person is receiving income in excess of $300/ year in rent (6% of $5,000), the property is exempt. (Deeds of trust are made according to the appraised value of the property. Get legal advice if you choose to create a deed of trust.)
Net income from rent is added to the ill person’s Share of Cost. On the other hand, taxes and assessments, insurance, interest payments (but not payments of principal), maintenance and utilities are deducted from the gross rental income to calculate net income. Upkeep and repairs are allowed at the greater of the actual amount or 15% of the gross monthly rental income plus $4.17/month. Different calculations are used for rentals of rooms, units in a multiple dwelling unit (for example an apartment or duplex), rentals providing room and board or board and care, and other dwellings on the property (such as a cottage in the back yard).
If the net market value exceeds $6,000, the first $6,000 of net value is exempt if the property generates annual income of 6% of the net value. The amount of the net value greater than $6,000 is countable.
One Medi-Cal planning strategy for real estate other than the home is to place sufficient liens against income-generating property so that the assessed value minus the liens leaves less than $6,000. Another strategy is to transfer the property to the spouse as separate property. This can be done if the ill person is married.
Unsecured debt (such as debt on an normal credit card) is not deducted from gross assets to determine eligibility, but secured debt is.
If a credit-card balance is paid with a loan that is secured by a brokerage account, the brokerage account is not counted to the extent of the amount owed.
Proceeds of real estate sales
Proceeds of real estate sales are exempt for six months if the holder intends to buy a residence. This is generally shown by providing a copy of a real-estate brokerage agreement.
Property used as a means of self support or as a business is exempt. Proof of a business is generally proved by providing a business tax return (IRS Schedule C or F). Rental property is not exempt unless it is clearly held as a business and not just as investment property. Business status must be demonstrated with tax returns.
Stocks and similar items are not exempt. What this means is that a corporation, limited liability company or limited partnership may have to be converted to a sole proprietorship to fall within the business-property exemption.
Property in the process of being sold
If the applicant implements and continues a bona fide effort in good faith to sell certain property, the property is exempt. With personal property, this bona fide effort is shown by placing advertisements in a local newspaper to sell the property. Real estate must be listed with a licensed real estate broker for its fair market value as set by a qualified real estate appraiser. The applicant must provide proof of good-faith efforts to sell the property every six months. With personal property this means there must be an advertisement placed in a local newspaper every six months.
The applicant must notify Medi-Cal of all offers and accept any bona fide offer, except that promissory notes secured by deeds of trust from the sale of property owned by the ill person need not be sold for at less than two-thirds (2/3) of their fair market value.
Once the property is sold or the applicant quits making a good-faith effort to sell the property, the property becomes available for Medi-Cal purposes.
Household goods and personal effects
Household goods (including TV’s, computers and VCR’s) and personal effects are completely exempt. Art work and collections (stamps, coins, etc.) fall in this category if kept for personal enjoyment rather than as an investment.
For a single person, wedding, engagement rings and heirloom jewelry are totally exempt, and other jewelry with a total net market value of $100 or less is exempt. When one spouse is in a skilled nursing facility, all jewelry owned by both spouses is exempt for determining the ill spouse’s eligibility.
One car is generally exempt if used at least in part for the benefit of the applicant (including visits to the ill person) or needed for medical reasons.
Term life insurance is completely excluded. Other life insurance is exempt if the face value (death benefits) of all policies combined is $1,500 or less. If the combined values of the policies exceeds this limit then the amount of the cash-surrender value of the policies that exceeds the limit is counted.
Tangible burial assets like caskets, plots, crypts, etc. are fully exempt. Up to $1,500 in designated burial funds (and interest on them) is exempt if held separate from all other accounts. Irrevocable burial trusts are fully exempt.
IRA, Keogh, 401k and other work-related pensions
Work-related retirement and pension funds held by an at-home spouse are fully exempt even if no distributions are being made. This includes IRA’s established for the well spouse using the ill spouse’s money. Ownership is determined by whose name appears in the account title.
Work-related retirement accounts held by the applicant are exempt if certain minimum withdrawals are met. For Roth IRA’s and for accounts held by those who are 70 ½ or older: if the IRS rules for required minimum distributions from those accounts are met, the Medi-Cal requirements are satisfied.
For other work-related retirement accounts, the California Department of Health Services requires that one of two conditions be met. One is that the financial broker or fund manager for each account must verify in writing that the distributions from that account meet the requirements for early distribution based on IRS life-expectancy tables. The other is that periodic payments must be made and that those payments include both interest and principal.
A letter to the pension fund requesting that these payments be made is considered sufficient evidence that the required payments will be made (assuming they are not already being made).
Only the minimum distributions should be taken out. The retirement account should be preserved as much as possible, since it is exempt. Be aware that financial institutions often suggest a figure higher than the minimum.
Annuities not related to work
Non-work-related annuities purchased prior to August 11, 1993, are considered unavailable if the applicant is receiving periodic payments of interest and principal.
Non-work-related annuities purchased between August 11, 1993, and March 1, 1996, that cannot be modified to meet the current requirements are considered unavailable. The agent or company who sold or issued the annuity must provide written verification that the annuity cannot be modified for this strategy to be successful.
For annuities purchased after March 1, 1996, the applicant or spouse must receive periodic payments of principal and interest such that the annuity is exhausted by the end of the annuity-holder’s life expectancy. In some cases the annuity payments must be level or increase by no more than 5% a year. If the guaranteed period exceeds life expectancy, the excess is a countable transfer.
Special government payments
Certain special government payments are exempt, regardless of whether they are held by the ill person or spouse. These include crime-victim payments, Nazi war-victim payments, and Japanese internment camp payments. These amounts do not have to be held separately, but can be part of a mixed account or asset.
PROPERTY TRANSFERS AND INELIGIBILITY PERIODS
Property gifts and some property sales can cause penalties
Transfers of property that are made as a gift or with inadequate compensation (less than fair market value) are subject to penalty.
The penalty is a period during which the ill person is not eligible for Medi-Cal. The period of ineligibility is determined by dividing the amount of the uncompensated part of the transfer by the Average Private Pay Rate, which is currently $4,415. The period of ineligibility is rounded down to the nearest whole month.
A gift of non-exempt property worth $7,500 would result in ineligibility for one month, while a gift of property worth less than $4,415 would not cause any ineligibility at all.
The period of ineligibility begins on the first day of the month in which the transfer takes place. This means that if the transfer occurs enough months prior to the application for Medi-Cal, there is no period of ineligibility.
For example, a gift of $11,000 would result in ineligibility for two months ($11,000 divided by $4,415 is 2.49, which is rounded down to 2). If the transfer is made at least two months prior to the application for Medi-Cal, there is no period of ineligibility.
The maximum period of ineligibility under the current regulations is 30 months. (This is in the process of being changed to 36 months for transfers made prior to the application and to an unlimited time for post-application transfers.) So for the moment, gifts in excess of $132,450 (30 x $4,415) still only create a period of ineligibility of 30 months, even if the gift is as large as $1,000,000 (for example) as long as the transfer is made prior to the application for Medi-Cal.
There is a tough 60-month look-back period for certain transfers from trusts. Still, this rule is relatively easy to avoid by either dissolving the trust or removing the asset from the trust before it is transferred. In that case, the 30-month (soon to be 36-month) look-back period still applies.
MEDI-CAL RECOUPMENT OF PAYMENTS AFTER BENEFICIARY’ DEATH
California Department of Health can attempt to obtain reimbursement after the beneficiary dies
The California Department of Health Services has the right to recoup Medi-Cal money spent on skilled nursing facilities. It can make a claim against the estate of a person who received benefits (before death) for living in a skilled nursing facility unless there is a surviving spouse or a minor, blind, or disabled child . The estate includes assets conveyed through joint tenancy, tenancy in common, living trust, will, community property, etc. As a result, many families wish to find legitimate ways to move property, such as the principal residence, out of the name of the beneficiary.
Claim limited to estate or benefits received, whichever is lower
The Department of Health can only claim the lesser of the beneficiary’s estate or the amount of benefits received. If property is in joint tenancy, recovery is limited to the amount of the beneficiary’s interest (rather than the entire value of the property). If there is a deed of trust on the property, the amount of that debt is subtracted first.
Property and payments exempt from claims
The Department of Health cannot recover payments made prior to October 1, 1993, or from property held in living trusts, joint tenancies, or community property where the other party died prior to October 1, 1993.
Revocable versus irrevocable life estates
The current policy of the Department of Health is to recover from revocable life estates, but not from irrevocable life estates. Both are created by deeds involving real estate.
The Department of Health is trying to expedite regulations to recover any survivor’s interest in a deceased beneficiary’s annuity. Still, as of April 2003 no regulations have been adopted. Once such regulations are adopted, annuities will have little benefit for Medi-Cal planning.
Children of deceased living in family home
While there is no official exemption for children of the deceased Medi-Cal beneficiary where those children lived continuously in the beneficiary’s home for at least two years and provided care that delayed the beneficiary’s entry into a skilled nursing facility, the Department of Health will in fact consider this factor.
Recoupment claim cannot be filed before the surviving spouse dies
The Department of Health cannot recover while the spouse of a deceased Medi-Cal beneficiary is alive. But once the surviving spouse dies, the Department may recover any property left to the surviving spouse by will or community property from the original Medi-Cal beneficiary.
Transferring the property before death can help
On the other hand, if the property is transferred out of the Medi-Cal beneficiary’s name while he/she is alive (via power of attorney, court order, or deed where the beneficiary has capacity), there is no recovery.
It is also possible to file a hardship waiver within 60 days of the notice of the recovery claim, if the claim would cause substantiated hardships to the dependents or heirs of the Medi-Cal beneficiary. If the waiver is denied, the applicant may request an administrative law hearing within 60 days of the denial. That hearing can be appealed if needed to the appropriate court.
STRATEGIES FOR ELIGIBILITY
Caution regarding making changes too soon
Although Medi-Cal planning can be very useful, often it is disadvantageous to engage in too many asset transfers before the ill person has entered a skilled nursing facility. The reason is that many skilled nursing facilities will admit a patient only if he/she has what the institution considers to be a reasonable amount of assets.
Pay Down Debt First
Payment of debts does not constitute a transfer that results in a period of ineligibility, so one of the first planning measures is to pay down debt. The exception is medical expenses, since generally the applicant’s ongoing income can be used to pay those – thereby lowering the share of cost that the applicant must pay.
Spending money on exempt property
Another Medi-Cal planning approach is to use money that would otherwise be countable for Medi-Cal purposes by purchasing or "improving" property that is exempt.
For example, since the principal residence is exempt in calculating Medi-Cal eligibility, money can be used to pay down loans secured by the principal residence. (With a married couple, usually only money in excess of the $90,660 Community Spouse Resource Allowance is used for this purpose.) Amounts in excess of the allowance can also be used for repairs, improvements, and outstanding maintenance on the principal residence, along with home furnishings. These amounts can be used to pay bills or prepay health insurance premiums as well.
Because one vehicle is exempt, existing cars can be sold and excess funds used to buy a new, perhaps more-expensive, vehicle, ideally as the separate property of the well spouse. The car does not have to be used for transportation, but the ill person’s name must be on the title. (Vehicles used in a business may fall within the exemption for property used in a trade or business.) Additional vehicles are valued by multiplying the DMV license fee by 50, then subtracting any money owed on the vehicle.
Money in excess of the allowance may also be spent on burial assets, including up to $1,500 in designated burial funds, caskets, plots, crypts and burial trusts that are irrevocable.
Real estate transfers to children
Even though gift transfers to children of real estate (other than the principal residence) may result in periods of ineligibility, they may not be as painful as originally anticipated. If the real estate has a high fair-market value but low assessed value, the penalty is calculated only on the assessed value. In addition, any liens against the real estate are subtracted before the calculation is made. In some situations the liens against the property may exceed the assessed value.
A promissory note generally can be valued three ways: face value, appraised value, or market value. Since promissory notes generally sell at a significant discount, a note may be worth much less than its face value indicates. If the promissory note is unsecured and is from a family member with few assets, it may have no market value. Some counties will deem a promissory note "unavailable" if the person who owes the money makes a sworn statement that he/she is unable to pay.
Special rules apply to promissory notes that are secured by deeds of trust and that arose from a sale of the applicant’s real estate. These promissory notes are treated as "other real property". They are exempt from Medi-Cal calculations only if the net value of the note is less than $6,000 and the beneficiary receives yearly income of at least 6% of the net value.
Creation of businesses
In some cases the Department of Health Services has accepted a business created with the assets of the ill person, so long as a business tax return (IRS Schedule C or F) is filed regarding the business.
Transferring joint property to another
When there is cash in a joint account, all of that cash is counted for purposes of determining the ill person’s eligibility.
Non-cash joint accounts (and property held as community property) are counted as the ill person owning one-half. In other words, the value of one-half of that property is counted as part of the ill person’s assets for determining eligibility for Medi-Cal. As a result, it is often useful to transfer ownership to another person as separate property. Generally this requires that the property be exempt or that the transfer itself be exempt, as transfers to spouses are.
Selling an asset held in joint tenancy (or community property) results in each of the two owners receiving one-half the net proceeds. This can disqualify the ill spouse for Medi-Cal, at least for a substantial period of time. It is often better to transfer full ownership in the property to another party first (first); then that party (which may be the well spouse) can sell the property.
Another possible planning strategy is to establish one or more annuities, although this approach has some disadvantages. Annuities not related to work that are purchased after March 1, 1996, are exempt if the holder (whether the ill person or the spouse) receives level periodic payments of principal and interest that exhaust the annuity by the end of the holder’s life expectancy as established by the Health Care Financing Administration. That income will generally be counted in calculating the ill person’s Share of Cost and any spouse’s Minimum Monthly Maintenance Needs Allowance.
Another problem is that annuities frequently provide a much lower rate of return than other comparable investments.
A major problem with annuities with an ill single person is the income that they generate. One solution to this is for him/her to purchase an "immediate annuity" (one with periodic payments that is irrevocable) that makes small payments at first and a balloon payment at the end. The Department of Health Services counts as available the "cash surrender value" of annuities that have payments that increase by more than 5% a year, the cash surrender value of an immediate annuity (versus the more common "deferred" annuity, which is more like a certificate of deposit) is almost always zero.
If a well spouse’s income is below the minimum monthly maintenance needs allowance, income shifting (from the ill spouse) or enlargement of the community spouse resource allowance for assets is usually better, since an annuity will raise the well spouse’s income. On the other hand, where the well spouse’s income already exceeds the minimum monthly maintenance needs allowance, an annuity may be more attractive.
For a well spouse a short-term annuity is generally best, since it will return control of the money to the well spouse sooner.
California has stated that it is preparing regulations that would allow recovery of annuities. The risk of recovery is relatively low where assets are used to purchase an annuity as separate property of the well spouse. With a single individual, the risk of recovery is great.
Transfers to a well spouse
Transfers between spouses are generally exempt under the Medi-Cal rules (with the exception of certain transfers of their principal residence). The transfers may be used to raise the well spouse’s separate property up to the $90,660 Community Spouse Resource Allowance, to purchase an annuity for the well spouse, etc. In certain circumstances, the well spouse can also transfer assets to other family members. As a result, transfers from the ill spouse to the well spouse are often a key part of Medi-Cal planning.
Property held in joint tenancy or as community property must be transferred to the well spouse as separate property before being sold. Otherwise some of the proceeds will be attributed to the ill spouse. This property may include stock, promissory notes, life insurance, rental property, a second home etc. Simply changing the name on the property to that of the well spouse alone is likely to be ineffective, since under California law property that is held in the name of one spouse can still be community property. Instead the ill spouse (or his/her agent, if there is a proper power of attorney) should waive, release and/or quitclaim any interest in the property in writing.
Expanding the Community Spouse Resource Allowance
If the well spouse’s income is less than the Minimum Monthly Maintenance Needs Allowance, the well spouse may obtain an order increasing the Community Spouse Resource Allowance (CSRA) (currently $90,600), allowing him/her to keep additional assets sufficient to produce the minimum amount of income. This must be authorized by a court order or at a hearing before an administration law judge. The court or administrative law judge must order enlargement of the CSRA if the additional assets are needed for the minimum amount of income. On the other hand, procedures to obtain an expanded CSRA are time-consuming, cumbersome and frequently frustrating. As a result, the approach is usually most effective when the well spouse has little or no separate income.
Non-income producing assets for a well spouse
If there is a well spouse who does not need additional income, often that spouse will want to convert his/her assets into investments that do not produce income but instead appreciate in value, such as zero-coupon bonds. This can maximize the amount of income that the ill spouse can transfer to the well spouse (so that the well spouse reaches the monthly minimum maintenance needs allowance) and the ill spouse’s share of cost of the skilled nursing facility payments are minimized. The income is taxable but (because it is considered unavailable) it is not countable as income for Share of Costs purposes, even when the bond matures, assuming the money is again invested in zero-coupon Treasure bonds.
Assuming it is best to pursue an expanded CSRA, six-month Certificates of Deposit are particularly attractive right now, given that they carry only about a 2% rate of return.
The allowance is currently $2,267 per month, so if the well spouse had $1,000 of income from other sources, with a six-month Certificate of Deposit earning 2% annual interest, the well spouse could keep $760,200 in that CD ($760,200 x 2% divided by 12 months = $1,267).
SPECIFIC STRATEGIES FOR TRANSFERS OF ASSETS
Transfers of exempt assets
The transfer rules generally cover only assets that are not exempt. If an asset is exempt, it usually can be transferred. One major exception to this approach is the principal residence, since by special statute the transfer rules apply to the home. On the other hand, an exempt automobile, for example, may be given to another person without incurring a transfer penalty.
Current and upcoming regulations
California has been using regulations based on revisions to the Medical Catastrophic Coverage Act ("Catastrophic Act") rather than the Omnibus Budget Reconciliation Act ("Omnibus Act"). California is in the process of adopting regulations that conform with the Omnibus Act, but currently the more generous Catastrophic Act regulations are still in effect. When the Department of Health adopts regulations based on the Omnibus Act, they probably will apply only to transfers that occur after the date the new regulations are issued.
Breaking gifts into smaller pieces
Under the Catastrophic Act rules, each gift or transfer for less than fair market value creates its own separate period of ineligibility. Separate periods can run concurrently. Medi-Cal ineligibility can be minimized by breaking gifts into smaller pieces. Various planning strategies involve concurrent disqualification periods.
The Omnibus Act rules will end the simultaneous running of disqualification periods and make the disqualification periods run one after the other. This will invalidate some of the planning techniques discussed here. In addition, some of the Catastrophic Act techniques require substantial periods of time, and the Omnibus Act rules may be in effect before an application is made.
Issues with transfers to third parties
If assets transferred to third parties are used for the ill person’s or a well spouse’s benefit, Medi-Cal may find that a trust has been created, subjecting the assets to the 60-month look-back period that applies to trust assets. On the other hand, there may be immense bad feelings in the family if the transferred assets are not used for the spouses’ support.
Transfers to Disabled and Minor Children
Both the Catastrophic Act and Omnibus Act rules provide an exemption for transfers to the Medi-Cal applicant’s minor or disabled children, as well as to trusts for disabled children.
Gift tax returns
If the value of a gift exceeds the recipient’s annual exclusion amount ($11,000 in 2003), the recipient is required to file a gift tax return. There is generally no tax to pay unless the donor’s unified credit amount is exhausted.
Change of title
The Department of Health Services requires that the ill spouse’s name be removed from transferred assets within 90 days after the determination that the ill spouse is eligible for Medi-Cal.
Transfers to spouses and then to others
Transfers from the ill spouse to the well spouse are generally exempt (with the exception of certain transfers of their principal residence). The question is what transfers the well spouse may make of the property without causing Medi-Cal ineligibility.
The well spouse can freely transfer any or all of his/her separate property assets (assuming they were not received from the ill spouse) without any effect on the ill spouse’s eligibility.
Under the Catastrophe Act there is no problem with eligibility if the well spouse receives assets from the ill spouse at any time but waits until the ill spouse has entered a skilled nursing facility before transferring them to a third party.
This will change under the proposed regulations based on the Omnibus Act. Assets will still be able to be transferred from the ill spouse to the well spouse without penalty. What will be new is that the well spouse will not be able to transfer the assets to others without creating a period of ineligibility for the ill spouse.
TRANSFERS OF THE PRINCIPAL RESIDENCE
As long as a Medi-Cal applicant states that he/she intends to return home (whether that is realistic or not), the principal residence is exempt. Still, Medi-Cal will attempt to recover the house once both spouses have passed on.
Transfer of principal residence to spouse
Transfer of the principal residence to the well spouse can avoid Medi-Cal’s recovery of the home so long as the spouse is willing to lose the stepped-up tax basis that would otherwise occur on the ill spouse’s death. Once the home is transferred to the well spouse, he/she can rent it out, sell it and borrow against it. (It is often important to transfer the home while the ill spouse still has the mental capacity to sign documents.)
Timing of home transfer to spouse
The well spouse usually must not sell or borrow on the principal residence before the institutionalized spouse is eligible for Medi-Cal. If this is done, the cash raised will be considered as part of the well spouse’s countable assets. The well spouse needs to wait until the ill spouse is receiving Medi-Cal before selling or borrowing against the home. In addition, if the well spouse plans to sell the house, there are capital gains taxes issues that should be considered in advance.
Transfer of principal residence to others
Because the principal residence has exempt status, it can also be transferred without Medi-Cal penalties to children or third parties. In any case, the donor must intend to return home for the home to be exempt. Stating this intent can be accomplished through a variety of methods, including an affidavit, declaration, or agreement of right to return to live at home signed by the recipient. Frequently this agreement is also used to state which party will receive any rents from the property, since otherwise it may be unclear.
If a transfer to others is going to be made, it is often best to pay down the loans on the house and make any needed repairs before making the transfer. Doing so maximizes the value of the transfer and increases the basis of the property.
Gifts of real property also raise tax issues. Unless the house has a high tax basis, the transfer can ultimately imposes substantial income taxes. If the recipient receives the property upon the donor’s death, the recipient’s tax basis in the property is the date-of-death value. If the recipient receives the property before the donor passes on, the recipient receives the donor’s basis (usually the amount the donor paid for the house, plus any the cost of any improvements). If the property has substantially appreciated in value, that means the recipient will eventually face taxes on that appreciation.
While there are many ways to force a new tax basis, the most common is for the donor to transfer the property but retain for his/her life the right to possess, use, or obtain income from the property. This approach will work until new federal tax basis rules go into effect in 2010. While having the donor retain a life estate has been put to similar use in the past, the Department of Health Services has said that it intends to issue new regulations that will allow it to recover against life estates.
In addition to income-tax issues, the real estate may be reassessed and the property taxes may increase unless the transfer is made to a child or children.
Timing the sale of the house
If selling the house after it is transferred from the ill person is needed or useful, an irrevocable grantor trust may be the best option. The trust gives the donor only a right of occupancy, but allows the trustee to sell the property. Because this is a grantor trust, the sale proceeds fall within the donor’s residential exemption. Because the trust is irrevocable and provides only for a right of occupancy, the sale proceeds do not count against Medi-Cal eligibility. The trust may escape Medi-Cal estate recovery claims, although this is not definite.
Title problems due to lack of capacity
A title problem can arise from transfer of the home when the ill person lacks the legal capacity to make the transfer himself/herself. Usually standard powers of attorney do not solve this problem. One reason is that powers of attorney do not always include the power to make gifts. By statute, gifts of real estate are not allowed by power of attorney unless the power of attorney expressly authorizes the making of gifts.
Even if the power of attorney authorizes gifts, the person holding the power of attorney frequently is going to receive title to the house. This makes the gift of the house a "self-dealing" gift. Authorizing power to "self-deal" presents the danger that the power may be abused. In addition, clauses that allow self-dealing make the assets taxable in the estate of the person holding the power of attorney – even though that person does not own them – if he/she dies before the owner.
If the ill person still has capacity, it may be possible to create power of attorney provisions that avoid this problem. If not, a petition may need to be made to the court in order to obtain the power to transfer real estate.
POWERS OF ATTORNEY
Trusts often state that only the trustor can exercise power over the trust assets. If the donor becomes incapacitated, it can be extremely difficult to transfer trust assets, since a power of attorney only covers assets outside of the trust unless the trust says otherwise. In addition, most standard powers of attorney do not include the power for the agent to make gifts. If they do, they do not permit the agent to make gifts to himself/herself. This is an issue because often the agent is a family member and Medi-Cal planning frequently calls for transfers to family members.
Trusts need a special gift provision
For Medi-Cal planning purposes, trusts need a special provision. This should state that the powers to amend or revoke the trust or make gifts of the trust property, including to the attorney in fact, may be exercised by the attorney in fact or a conservator acting according to the doctrine of substituted judgment.
Preventing abuse of gift provisions
To thwart the possibility of this provision being abused, a list of individuals who may receive gifts may be specified. Often a provision is added stating that no amendments to the trust or gifts of trust property may be made that affect the ultimate disposition of trust assets. In other words, gifts may only be given to the trust’s beneficiaries.
Power of attorney should include changes to trust
The power of attorney should state that it includes the power to create, modify, or revoke a trust on behalf of the principal and to make or revoke gifts of the principal’s real estate (and other property) in trust or otherwise, including to the agent. Often a provision is added stating that the agent may only make gifts to those persons who are the principal’s heirs or beneficiaries.
Taxes on the gifted assets
One problem with these gift clauses is that they can make the estate of the agent liable for the taxes on the assets if the agent dies before the ill person. This can be solved by making sure that the agent is not also a potential beneficiary. For example, a friend of the family could be named the agent. Another solution is to have the power of attorney name a special agent with the power to make gifts to the general agent. If neither of these is practicable, it may be sufficient to state that the power of attorney may be exercised only if the trustor is incapacitated or no longer competent.
Revocable or "living" trusts do not prevent the assets from being counted for Medi-Cal purposes unless the assets they contain are all exempt in and of themselves. When planning for Medi-Cal eligibility, often one of the first acts is to revoke any living trusts. When both spouses are healthy and there is no current indication that skilled nursing facility care will be needed in the future, it is often best to employ or keep the same estate-planning documents that are in effect. Only one major change should be made: the trusts and powers of attorney need to be structured so that the agent can make gifts from the trust.
So-called defective irrevocable trusts can protect assets from being counted for Medi-Cal eligibility purposes, but are complex and require careful planning.
Once Medi-Cal eligibility has been established for the ill person, often the well spouse will want to create a living (revocable trust) to hold his/her property. It is essential that this trust not make the ill spouse a beneficiary, since that would terminate his/her eligibility. Many well spouses understandably want to provide for the ill spouse in the event the well spouse passes away first. One way to accomplish this is to have the well spouse’s living trust "pour back" the assets into the well spouse’s probate estate if the well spouse dies first, coupled with a will by the well spouse that creates a testamentary trust for the ill spouse. Since the Medi-Cal rules do not cover such testamentary trusts, no ineligibility is caused for the ill spouse.
Planning for nursing homes is very complex, and changes to real estate and other legal documents must be handled with awareness of the consequences to the rest of the Medi-Cal and estate planning strategy
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