The Journal of The DuPage County Bar Association

Back Issues > Vol. 15 (2002-03)

Planning For Medicaid Eligibility For The Elderly
By Eileen R. Fitzgerald

Planning for Medicaid eligibility for nursing home residents can be interesting and challenging work for the elder law attorney. When planning for Medicaid eligibility, the objective is often to qualify for Medicaid as soon as possible and to preserve assets for the well spouse and/or the children of the disabled person. Many elderly have, as their primary objective regarding their assets, to leave an inheritance for their spouse and children, often to the point of depriving themselves. The Illinois Department of Human Services, previously called the Illinois Department of Public Aid, administers Medicaid in Illinois; therefore, Medicaid is often called Public Aid in Illinois.

In order to qualify for Medicaid in Illinois, the individual must be an Illinois resident, a U.S. citizen or legal alien, 65 years or older, disabled or blind. The applicant must also meet asset and income limitations. The applicant’s countable monthly income must be less than the nursing home’s private pay rate. The countable income is all the income of the applicant, less certain deductions. Those deductions include a $30.00 per month personal needs allowance, the cost of medical insurance, medical bills not paid by Medicaid, and dependent, spouse and child allowances. The remaining income after subtracting the deductions is paid to the nursing home.

Medicaid classifies certain assets as exempt assets, depending on if the disabled individual is single or married. The exempt assets are those that the individual is allowed to keep and not spend on nursing home care. For a single person, the exempt assets include $2,000.00 in cash or other assets, a prepaid burial, and $30.00 per month from his or her income. The prepaid burial has its own limitations. It includes a limit of $4,502.00 for funeral home services, as long as the plan is an irrevocable burial plan. If it is not irrevocable, the limit for funeral home services is $1,500.00. The rules also allow an unlimited amount for burial merchandise, such as the coffin, vault, plot, grave opening, and marker. The Medicaid limits try to deter families from putting too much money in a prepaid burial, paying for the burial after the family member’s death, and then obtaining a refund from the funeral home.

Exempt assets for the well spouse, also called the "community" spouse, include the primary residence, $90,660.00 in other assets, a car, personal property, a prepaid burial, and $2,267.00 in income per month. The asset allowance for the spouse is called the community spouse resource allowance and it is increased every year. The income allowance is called the community spouse monthly maintenance needs allowance, and it also increases every year. Compared to other states, Illinois is generous. It permits the spouse the maximum asset and income allowances allowed by federal law.

When starting Medicaid planning, one of the first questions to consider is whether the planning should be done at all. If the person is elderly but not about to enter a nursing home, he may consider Medicaid planning. If the individual is in a nursing home or about to enter a nursing home, he may be more willing to do the planning. When the client discovers that while doing the planning he may lose control of his assets, he sometimes changes his mind. However, if the client wants to ensure that his spouse or children receive an inheritance, and he trusts his spouse or children, he may be willing to relinquish that control.

Oftentimes a child will come to the attorney’s office on behalf of a parent who wants to do the planning. The attorney must be very careful about who the client is when doing Medicaid planning. The client is the parent who is about to enter the nursing home. The parent is the person whose assets will be affected by any planning.

In many cases the child has a power of attorney that allows him to have access to the assets. In order to do Medicaid planning, that power of attorney should include the specific power to make gifts. The Illinois Statutory Short Form Power of Attorney does not have donative language. In order for the agent to make gifts, the form must be modified to specifically grant that power. Attorneys may want to address this issue with clients when preparing powers of attorney as part of the client’s estate planning.

In order to understand Medicaid planning, it is necessary to understand some of the terms used. The "lookback period" is the length of time that Medicaid will look back to determine what the Medicaid applicant did with his assets. The typical "lookback period" is 36 months. For trusts the "lookback period" is 60 months. Medicaid will look back at the applicant’s assets for 36 months (or possibly 60 months) to determine if the applicant has given away or transferred any assets in order to qualify for Medicaid. The intake clerk will review bank statements and brokerage statements. Any withdrawals over $500.00 will be scrutinized. If assets were gifted or transferred during the lookback period in order to qualify for Medicaid benefits, the transfer will be subject to Medicaid’s penalty. If the transfers or gifts were done for reasons other than to qualify for Medicaid, they should not be subject to Medicaid’s penalty. Many times a parent, while in good health, will make a gift to a child or grandchild just for the sake of making a gift. If the parent must enter a nursing home within a short period of time the gift will become the subject of Medicaid’s scrutiny. If the parent can prove with medical records that he was in good health and entering a nursing home was not imminent, Medicaid should not penalize the gift.

Another term used by Medicaid is the penalty period, which is the length of time that a Medicaid applicant will not qualify for Medicaid benefits because of a transfer or gift. The penalty period is calculated by taking the amount of the gift and dividing it by the private pay rate at the nursing home.

The private pay rate at the nursing home includes room and board only. It does not include costs for extras such as incontinence, medicine, laundry, etcetera. The penalty period starts when the transfer is made, not when the individual applies for Medicaid or enters a nursing home. For example: If a parent makes a gift of $100,000 in January, 2003, and the private pay rate at the nursing home is $5,000 per month, the penalty period would be 20 months. The penalty period would start in January and end 20 months later.

One method used to transfer assets to qualify for Medicaid benefits is the 50/50 rule, also called the "half a loaf" rule. Using that rule, the applicant gives away one-half of his assets and uses the other half of the assets to pay for the nursing home care during the penalty period. This method is often used for clients who are about to enter a nursing home.

Another method used for Medicaid planning is to give away a large amount of assets and wait for the lookback period to expire. Once the lookback period expires, the client can apply for Medicaid and not have to disclose the transfers nor incur a penalty. In order to reduce the lookback period to 36 months, gifts should be made from an individual, not from a trust. If the penalty period would exceed the 36 month lookback, it is important that the client not apply for Medicaid during the 36-month lookback period. If the client did so, the larger penalty period would be used, rather than the 36-month lookback. For example: If a client gives away $200,000.00 and the nursing home private pay rate is $5,000 per month, the penalty would be 40 months. If the client made the gift in January 2000, the lookback period would expire on December 31, 2002. If the client applied for Medicaid in December 2002, Medicaid would use the 40-month penalty period and the client could not qualify for Medicaid until May 2003. If the client applied for Medicaid in January 2003, the client would not have to disclose the gift because it occurred more than 36 months prior to applying for Medicaid. The client could qualify for Medicaid in January 2003. Making a gift or transfer of assets and waiting for the 36 month lookback period to expire is used for clients who have larger estates or who are willing to do their planning prior to any plans to enter a nursing home. Other options for planning include a court order, administrative hearing, disability payback trust, and a pooled trust. Each situation is unique and should be evaluated by the attorney.

The individual to hold the transferred funds should be a trusted individual who will use the funds for the Medicaid recipient’s benefit, to the extent allowed. It should not be someone with financial problems, creditors, or someone who may be a defendant in a lawsuit. There is a risk when someone else holds the Medicaid applicant’s funds. That risk must be weighed against the risk of using all of the money for nursing home care.

The transferred funds should not be thought of as an "early inheritance" and spent on a child’s needs, if the child is the one who is receiving the transfer of assets. If the parent were not in a nursing home, the child would not be receiving his inheritance until after the parent’s death. The funds should be used for the parent’s benefit. Medicaid pays only for medical expenses; it does not pay for clothing, a private room, and trips out of the nursing home. The transferred funds can be used to pay for these expenses. They can also be used when the dentures or glasses of a nursing home resident are lost or taken by another resident and not recovered.

Of course, giving away assets is not without consequences unrelated to the Medicaid rules. In order to give away assets, a CD may incur an early withdrawal penalty, or an individual may have to liquidate an IRA, which would have serious tax consequences to the holder of the IRA. If the Medicaid applicant has paid nursing home costs during the year, these costs can be taken as a medical deduction and may offset some of the tax due from cashing an IRA. Other tax consequences include carryover basis of a gift. If the donee sells the asset, the donee will pay the tax on the capital gain accrued during the donor’s lifetime. And finally, if gifts exceeding $11,000.00 are made to an individual, the tax code requires that a gift tax return be filed by April 15th of the year following the gift. There should be no gift tax due if the individual has not made any prior gifts and his estate does not exceed $1,000,000.00, the current amount exempt from estate and gift tax.

When admitting a family member to a nursing home, it should be determined if the nursing home facility is a "distinct part" Medicaid facility. "Distinct part" means that if a resident runs out of money and the facility’s distinct part for Medicaid residents is full, then the resident will have to find another Medicaid facility that is willing to take the resident without any private payment. Other facilities may have a certain number of Medicaid beds but may not be a distinct part facility. Therefore, if the resident runs out of money, the facility will allow the resident to stay and file for Medicaid. Distinct part facilities make it difficult to know when the nursing home resident will be able to count on payment from Medicaid.

SPECIAL MEDICAID RULE FOR SPOUSES IN ILLINOIS

Illinois has an unusual rule with regard to the assets that the community spouse (the spouse who remains at home) is allowed to keep when the other spouse is in the nursing home. If spouses have kept their assets separate, i.e. not in joint tenancy, and if the community spouse has assets exceeding the current spousal asset limit ($90,660.00), the community spouse does not have to disclose his assets, and the spouse in the nursing home will qualify for Medicaid, assuming she meets all the other requirements. This is helpful in second marriage situations where the spouses have kept their assets separate so that the children of each spouse will inherit their parent’s assets. The community spouse does not have to spend his assets on the nursing home spouse’s nursing home care and the community spouse’s children will inherit the community spouse’s assets, assuming he never needs to pay for his own nursing home care. Another situation where spouses may have kept their assets separate is when one spouse has a large retirement account, such as an IRA. An IRA is in an individual’s name, not in joint tenancy. The community spouse does not need to disclose the IRA on the nursing home spouse’s Medicaid application.

The spouse in the nursing home may be the beneficiary of the community spouse’s IRA. The beneficiary can be changed without disqualifying the nursing home spouse from Medicaid because it is not a transfer of assets. The community spouse must disclose his income and if it exceeds the current income limit ($2,267.00 per month), the spouse must contribute to the nursing home costs. The contribution is not a dollar for dollar contribution.

Medicaid has a table in its manual1 that shows how much income must be contributed by the community spouse if his income exceeds the spousal income limit.

After the death of the Medicaid recipient, Medicaid seeks reimbursement for any benefits paid. If the community spouse’s assets go through probate after death, Medicaid can file a claim against the probate estate for reimbursement for any amounts paid. Medicaid will not seek reimbursement if the assets are not part of a probate estate (such as a living trust, joint account or account with a beneficiary). Many community spouses choose to sign a trust for their assets so they will not go through probate and Medicaid will not make a claim against the assets for reimbursement. Although federal law allows states to make a claim against assets that are in a trust or in joint tenancy, Illinois currently seeks reimbursement from probate assets only.

Another method used to reimburse Medicaid is to file a lien against the real estate. The lien will not be filed if the community spouse is living in the home. The Medicaid rules allow the community spouse to remove the nursing home spouse from the title to the home. However, if the community spouse does not remove the nursing home spouse’s name from the title and the community spouse dies first, Medicaid can file a lien against the home. If the spouse has been in the nursing home for over 120 days, Medicaid assumes that she will not return home and will require that the home be sold. The lien will be paid when the home is sold. There are other Medicaid rules that protect the home for family members other than the spouse.

When applying for Medicaid the applicant must provide a "paper trail" of her assets for 36 months (or 60 months if assets are in a trust). This can be difficult if the applicant did not use checks or did not keep copies of bank statements. Medicaid requests copies of any checks over $500.00 or requires an explanation of a withdrawal over $500.00. In order to reduce the number of documents being sent with the application, it helps to issue the checks for less than $500.00, if possible, or to have copies of any checks over $500.00.

Depending on where the application is filed in Illinois, there may be a telephone or a face-to-face interview with the Medicaid intake worker. That worker will review the application and ask any questions he or she may have regarding the documents provided. If any additional documentation is required, Medicaid usually gives 10 days in which to provide that information. It helps to be prepared with any anticipated back up information because it can be difficult to get information from a client or a bank and send it to Medicaid within 10 days. Medicaid must provide an answer approving or denying the application within 45 days after an application is filed.

It is important for the elder law attorney to obtain detailed, current asset and income information from the client in order to properly advise the client. This can sometimes be challenging when dealing with a family that did not retain its financial records or when dealing with the spouse who did not handle the family finances. The attorney must also keep abreast of the changing rules and cases that interpret those rules. Medicaid planning is a valuable service for clients and challenging but rewarding work for the elder law attorney.

1 Combined Workers’ Action Guide and Policy Manual.

Eileen R. Fitzgerald is a sole practitioner and has been practicing law in the western suburbs for over 17 years. She has been concentrating her practice in the area of Elder Law for the past ten years. Ms. Fitzgerald graduated from Valparaiso University School of Law in 1985 and was admitted to the Illinois and Indiana Bars that same year. She completed her L.L.M. degree in taxation, concentrating in estate planning, from John Marshall Law School in January 2002.


 
 
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