Medi-Cal Planning for Long Term Care
A common inquiry we receive concerns Med-Cal planning. This article provides basic Medi-Cal information with the intent of helping you determine whether Medi-Cal planning would be beneficial to you.
What is Medi-Cal?
Medi-Cal is a need based program funded jointly with federal Medicaid funds and California state funds to help pay for medical care.
Medi-Cal Eligibility
When both spouses are going to live in a long-term care facility, to be eligible for Medi-Cal, each spouse has to show he or she is medically needy. In other words, that he/she has monthly income insufficient to pay for necessary medical care and has countable assets that fall below the California limits.
If one spouse will enter long term care and the other will remain in the community, between the married couple, they may keep a total equal to the Community Spouse Resource Allowance ("CSRA") in nonexempt resources.
There is no limit on the income of the community spouse, but the state sets a minimum monthly maintenance needs allowance (MMMNA) every year. The community spouse may supplement his or her monthly income to a set limit either by taking some of the institutionalized spouse's income or by keeping additional income-producing resources. Therefore, if the community spouse's income is less than the monthly allowance, the income of the institutionalized spouse's can be transferred to the community spouse up to that amount, and subject to the institutionalized spouse's right to $35 for his personal needs allowance. Note that this is an exception to the share of cost rules outlined below. For example:
John enters into a nursing home paid for by Medi-Cal. He has monthly income of $2000 from Social Security. John's wife, Kate receives $600 per month from Social Security. Mary is short of the MMMNA by $2000. John can allocate up to $2000 of his income to Kate to bring her up to the MMMNA and deduct it from his share of cost.
The community spouse can seek a CSRA that is larger than current allowed amount if monthly income generated from the CSRA is less than the MMMNA. The Department of Health Services must enlarge the CSRA if a shortfall is shown. However, the process to increase the CSRA is quite cumbersome in that Medi-Cal eligibility must be denied based on excess resources. Then, the claimant appeals based on a shortfall in income. It is not possible to simply work with county eligibility workers. Increasing the CSRA when income is insufficient accomplishes the congressional intent to protect the community spouse from impoverishment.
Income and Share of Cost:
While you are in long term care, you can have income of up to $35 per month, that is called the "maintenance need standard" which the state sets. If your income is higher than that, you may qualify nonetheless if you agree to pay the medical costs each month until you reach the $35 threshold, then Medi-Cal will pay the remainder, provided the services are covered. This is known as the share of cost. For example: if John enters a skilled nursing facility and his income is $1,200 per month from Social Security, John will have to pay $1,165 toward the cost of the facility, that will be his share of cost. John is entitled to only $35 of his $1200 per month Social Security check as his personal needs allowance.
What does Medi-Cal cover in terms of long term care:
Long term care will be covered if ordered by a physician, and "medically necessary." You should know that Medi-Cal will not cover assisted-living facilities and will not pay for a private room. Further, because nursing homes can charge private-pay residents considerably more, at times they may have admissions policies that discriminate in favor of private-pay residents. Applicants often fear that he/she will receive inferior care as a Medi-Cal recipient based on the knowledge that the facility gets paid considerably more from private-pay residents than from Medi-Cal. Of course the law requires equal treatment, but economic incentives continue to encourage facilities to favor private-pay residents.
Exempt Property:
Exempt property will not count when determining eligibility while, non-exempt or countable assets will effect eligibility. The following items are exempt:
- the home (as long as there is an intent to return to it and its equity does not exceed certain limits),
- home furnishings,
- clothes,
- home repairs,
- satisfaction of mortgages, or other debts,
- an exempt burial space, one vehicle, term life insurance,
- whole life insurance with a certain face value , and,
- qualified IRAs and certain annuities (which must be scheduled to exhaust the balance of the annuity at or before the annuitant's life expectancy).
Planning for Medi-Cal Eligibility:
If Medi-Cal is desired or necessary, many people accelerate eligibility by reducing their countable assets. The three most effective ways to reduce countable assets are to prove the assets are unavailable to pay for care, convert the assets into something that Medi-Care does not count (the equity in a primary residence by paying down a mortgage or improving the home), or give away the assets (giving away assets can result in a period of ineligibility though). Note that if countable assets are sold, the proceeds are counted, and if the assets are transferred in trust, Medi-Cal will usually count the trust assets too.
Demonstrating unavailability for purposes of Medi-Cal means that an asset cannot be liquidated or sold. That means that you made a good faith effort to sell for a reasonable amount of time, and the asset failed to sell. On the other hand, assets are generally considered available if the applicant has the legal right, power, and authority to liquidate them. Most assets will fit into the latter category and will not qualify as unavailable.
An applicant can "spend down" by paying for nursing home care until s/he is within the minimum asset range or he can purchase exempt assets and services such as a home, home furnishings, clothes, home repairs, satisfaction of mortgages, or other debts, an exempt burial space, one vehicle, term life insurance, whole life insurance with a face value of $1500, and certain annuities (which must be scheduled to exhaust the balance of the annuity at or before the annuitant's life expectancy or that of his spouse). Spending down on nursing care and then establishing eligibility is often a good idea because some facilities do not take individuals who immediately eligible for Medi-Cal on admission. However, if the goal is to avoid extinguishing the estate on healthcare, other strategies must be considered.
Annuities
New rules apply to annuities. Plan very carefully in the use of annuities.
Transferring and Gifting:
The Medi-Cal program has developed a complete set of rules to discourage people from giving away their assets in order to become eligible. Applicants must report transfers of assets, for less than fair market value, that occurred within the 60 months of application for benefits, known as the "look back rule." Namely, if you transfer non-exempt assets for less than fair market value, Medi-Cal will disqualify you for up to 60 months, the disqualification period to be derived by a formula which can be illustrated by the following example:
There are certain exceptions to the transfer rules if either the asset is exempt, or based upon the recipient of the asset. Exempt assets can be transferred if the purpose is other than to qualify for benefits and a purpose other than to qualify will be presumed. In addition, at this time, assets can be transferred without penalty to the community spouse, a disabled child of the institutionalized spouse and under other limited circumstances.
Tax Consequences of gifting assets:
Asset transfer strategies that involve assets other than cash, have the downside of depriving the recipient of a step up in basis to the date of death value. When property is transferred by gift, the recipient receives a carryover basis, in other words, the basis that the transferor had. If assets are transferred on death, the recipient receives a date of death basis in the property which helps eliminate capital gains on significantly appreciated assets. Often the residence has appreciated significantly and it is important to consider tax implications of transferring the residence by gift. Tax issues always must be weighed against the Medi-Cal estate claim which will be described below. An example follows:
Joe purchased a home 40 years ago for $25,000. The home is now worth $400,000. If Joe transfers the home to his son now, his son has a carry over basis of $25,000. When his son sells the home, he has to pay tax on the $375,000 capital gains. If Joe's son receives the home upon Joe's death, Joe's son receives a stepped up basis of $400,000 and can sell the home and pay no capital gains taxes. The downside is that if Joe keeps the home and receives Medi-Cal benefits, then Medi-Cal will make an estate claim against the house to recover the benefits received by Joe on the death of Joe. (This example assumes that Joe was 55 or older when he received Medi-Cal benefits and that neither a spouse, minor child, or blind or disabled child resides in the home upon his death).
Medi-Cal and the home
Although the home is only one asset that may be subject to an estate claim, it is the most common asset remaining in a Medi-Cal beneficiary's estate, and the easiest to collect on. Our main objective is to plan so that you can enjoy your residence while you are alive and avoid or decrease the estate claim after your death.
Note that placing property in joint tenancy no longer provides any protection from the estate claim because the Department of Health Services ("DHS") takes the position that it may recover against the decedent's interest in joint tenancy. Further, placing property in a living trust also provides no protection because California's recovery regulations specifically include assets in living trusts as subject to estate recovery.
The home can be transferred to the community spouse or another individual without causing disqualification. That is because the asset is exempt and there is no policy against transfer of exempt assets because you are not transferring the home for purposes of eligibility. There is no 60 month look back period of ineligibility because the home is not a countable asset. Note that if the house is sold before the Medi-Cal beneficiary's death, the community spouse is losing valuable tax benefits of exclusion of gain on the sale of a personal residence.
The concern with this strategy to an individual other than your spouse is that the person the home is transferred to ("transferee") now has control of the home, and unless you are somehow protected, the transferee can encumber the property or sell it without your agreement. In addition, the transferee may also have tax debts or other creditor problems that threaten the home. In addition, gifting your home can have negative tax consequences. The transferee?s basis is your basis. So if your basis is low (the home has appreciated), the transferee will incur significant reportable capital gain on the sale of the property. On the other hand, if the transferee receives the home as a result of your death, the basis is stepped up to the property's date-of-death value, thus reducing the gain on the later sale of the property.
Life Estate
A second option is to transfer the home and retain a life estate. This option gives you a great deal of protection by guaranteeing you the right to remain in the home and providing that the house cannot be sold or encumbered without your consent. A life estate includes the right to exclusive possession and the right to rents, issues, and profits. If you retain a life estate, the property will be included in your gross estate for federal estate tax purposes and therefore the recipient of the property enjoys a stepped-up basis. The concern with this option is that DHS has recently announced its intention to begin recovering against life estates as soon as it issues new regulations.
Agreement
A third option is to transfer the property with a "reserved right of occupancy" on the face of the Deed. This transfer should be exempt from any transfer penalty because you retain a right to return home and can claim the intent to return home that makes the residence exempt. This type of interest is less likely to be subject to an estate claim under current regulations than a life estate because it is such an attenuated property interest that it may prove to have no market value and be worthless for purposes of Medi-Cal estate recovery. The benefit is that a retained right of occupancy, gives you some degree of control because it will be impossible to sell the property or to borrow on it without your participation and agreement until you die. There is still a concern that a reserved right of occupancy on the face of the deed will fall under the definition of a life estate with the same concerns as expressed above.
A fourth option is to place a retained right in a separate agreement between the transferor and transferee and draft a deed conveying the property outright without any limitation. The disadvantage of this approach is that the IRS may be more inclined to disregard the right of occupancy as a sham if it is evidenced only in an unrecorded separate agreement. Odds are that DHS will always make a claim, but the IRS will only sometimes audit. Further it seems more likely that the IRS will be persuaded that the property is entitled to a stepped-up basis than that DHS will be persuaded that the property is free from an estate claim. The retained occupancy right gives grounds for a stepped-up basis, and just to be sure you can retain a special power of appointment in the agreement.
Irrevocable Trust
A fifth option is to do an irrevocable grantor trust. The trust gives the transferor no rights to the residence in the trust other than a right of occupancy, but it allows the trustee the right to sell the property. Because the trust is an irrevocable trust providing only for a right of occupancy, the sale proceeds will not be counted against the transferor?s Medi-Cal eligibility. Finally, the trust estate may escape Medi-Cal estate recovery claims. The results of this approach are promising but are still a bit unclear.
Estate Claim:
The reason why so many people consider transferring their home or other exempt assets is to avoid the Medi-Cal Estate Claim. After a beneficiary's eath, Medi-Cal may be entitled to recover the value of benefits it has paid. It does this by making a claim against either the estate of the former Medi-Cal beneficiary or the beneficiary's successor. The amount of the claim is the lesser of the payments for health care services received or the value of the property received by any recipient from the decedent by distribution or survival.
There are two situations when it is mandatory for the states to recover for Medi-Cal payments: when an individual was age 55 or older when she received medical assistance for nursing facility services, home and community-based services, or for other medical assistance at the option of the state; when the state determines, after notice and opportunity for a hearing, that an individual of any age who is in nursing facility cannot reasonably be expected to be discharged.
The claim will be made either on the death of the beneficiary on the latter described situation, no likelihood of returning home, provided that a spouse or disabled child are not residing in the home, and a few other situations. If a spouse or disabled child are living in the home, then the claim will not be made until the death of the spouse or disabled child.
Conclusion:
If a person decides to give all their assets away and does not engage in proper planning, this will result in ineligibility. this will have significant psychological effects, not to mention devastating tax consequences. The average age of someone going into a skilled nursing facility is about 62 years old, with a stroke. At age 80, for example, you have beaten the odds by 18 years, and statistics indicate that death will occur during sleep or after a brief illness. At that age, the odds of having a long-term care need are remote. That doesn't mean that it is not going to happen to you, but the statistics indicate that it would not. Obviously, your individual health at the current time would dictate whether or not you personally have the likelihood for that to happen to you. The point is, is that it is our policy that this type of planning is not appropriate unless the need for Medi-Cal is well-founded and imminent. In addition, you should consider that welfare programs such as Medi-Cal are always at a risk for attack due to fiscal difficulties.
Keep in mind also that DHS is constantly rewriting regulations governing what is and is not allowable. In fact, proposed regulations are currently being reviewed which if enacted would curb many of the planning opportunities currently available. There are many "Elder Law" Firms promising 100% success rates in qualifying clients for Medi-Cal irregardless of how large their estates are. Do not forget the old saying "If it sounds too good to be true, it usually is." As noted in a recent newspaper article one of the state's largest "asset protection firms" recently had its offices investigated with over 100 boxes of client files seized and accusations that the firm and its clients had defrauded Medi-Cal of over $50 million. We caution our clients not to participate in any aggressive asset protection planning without getting a second opinion from an experienced and conservative attorney well versed in all aspects of estate and tax planning.