Planning for Long Term Care and the Medicaid (MassHealth) Program

“Long term care,” as used in this article, refers to permanent placement in a nursing home or assisted living facility, as a matter of medical necessity. No one wants to move from their home and reside permanently in a long-term care facility. And no family member wants to admit a parent, spouse, or sibling to one of these facilities. Unfortunately, for some people, there comes a time when they must be admitted to a nursing home so that they can receive the proper medical care, supervision and assistance. In some cases, this decision is made by the family doctor who tells family members to start looking for a nursing home for a parent, sibling, or spouse who can no longer live at home safely. In other cases, it becomes apparent to family members that a spouse, parent, or a sibling can no longer live safely at home, and it is not possible for them to provide the care that is needed. This is the case, for example, when a family member is suffering from Alzheimer’s Disease. In some cases, Medicare will pay for a short term stay in a nursing home or rehabilitation facility. Temporary placement in a rehabilitation center or “sub-acute facility” will be recommended when physical and occupational therapy can assist a patient in recovering from a stroke, broken bone, or other condition that can improve. Permanent custodial placement will be recommended if a determination is made that the patient’s condition will not improve enough to allow them to live safely at home. In some cases, the home is evaluated to determine if making improvements, such as replacing stairs with a ramp, or installing other structures or devices to assist a handicapped person, will allow the patient to return home. If making improvements to the home will not be sufficient to allow the family member to return home, or if constant custodial care will be needed, the family is told that they must find a nursing home that will provide suitable care.

The family must not only find a suitable nursing home on very short notice; they must also face the realities of paying for nursing home care. The cost of a nursing home in the Boston area ranges from $315/day to $375/day, or $115,000 to $137,000 per year. Medicare pays for most of the cost of a temporary stay in a nursing home or rehabilitation center. See the Medicare Article for more detailed information about the benefits provided. Medicare does not pay for permanent custodial care in a nursing home or assisted living facility. And most supplemental health insurance plans, such as Blue Cross/Blue Shield Medex, do not pay for long-term custodial care. The only private insurance policy that provides benefits for permanent custodial care is “long term care insurance.” The benefits of the long term care policy include 1) funds for in-home nursing and home health aides; 2) funds to pay for an assisted living facility; and 3) funds to pay for nursing home care. The yearly premium for this type of insurance policy can cost thousands of dollars per year (depending on your age and medical condition) and is usually issued only to individuals who are fairly healthy. A few lucky individuals can purchase this type of insurance for a more reasonable cost, as part of a group, usually through their employer. However, most people either are not aware of the existence of this type of insurance or cannot afford to pay the yearly premium. And many seniors who have looked into this type of insurance are told that they are not eligible for coverage due to a pre-existing medical condition.

Under the current system, nursing home costs are paid for 1) by the Medicare program, if the charges are for a temporary stay in the nursing home or rehabilitation center; 2) by the Medicaid program, administered as the “MassHealth” program in Massachusetts if the charges are for permanent custodial care and the nursing home resident meets both the medical needs’ test and financial need requirements; or 3) by the patient, as a “private pay patient” if the nursing home patient does not meet the medical needs’ test and the financial need requirements of the MassHealth program. Most individuals and their families are not aware of the limits of Medicare coverage, or the financial needs requirements of the MassHealth program, until they are faced with the problem of paying for nursing home care. When a family learns that the government expects them to use their life savings to pay for nursing home care for a spouse, parent, or a sibling, they have many concerns. If the nursing home patient has little or no savings, how will he or she pay for the nursing home? Are other family members obligated to pay for the nursing home? What happens to the house? Does the nursing home resident have to spend their life savings on the nursing home before the government starts to pay? The purpose of this article is to answer those questions, and to describe some options that are available to you and family members if you wish to include advance planning for long-term care as part of your estate plan.

Medicare and Medicaid. The Medicare program is designed to cover the costs of hospitalizations, diagnostic tests, surgery, doctor visits and certain outpatient services. Medicare Parts A and B pay for some, or all, of these medical expenses. Recent federal legislation has provided limited benefits to pay for prescription medication. This program is referred to as Medicare Part D. Medicare is an entitlement program. It is not a financial needs-based program. If an individual has worked forty quarters (ten years) and has contributed to Medicare for that time period, he or she is eligible for Medicare benefits at the age of sixty-five. Medicare pays for approved medical benefits without considering the income and assets owned by the Medicare recipient, with the exception of Medicare Part D. Nursing home care is covered by Medicare only if the patient is transferred directly from the hospital to a nursing home or rehabilitation facility. Medicare benefits continue only if the patient continues to show signs of improvement. A steady or declining health status can immediately stop the Medicare benefits. See the Medicare Article for more detailed information about the benefits provided under Medicare Parts A, B, C and D.

Medicare does not pay for long term custodial care, such as that required by an Alzheimer's patient or an individual with a permanent incapacity from a stroke or other debilitating disease. Medicaid, administered as the “MassHealth” program in Massachusetts, does pay for long term custodial care, but only if the financial need’s requirements of the program are met. If the nursing home resident is widowed or single, he or she will not qualify for MassHealth benefits to pay for nursing home care until he or she has $2,000 or less in “countable assets.” If the nursing home resident is married, his or her spouse, referred to as the “community spouse,” can keep up to $109,560 of the couple’s combined assets. If the value of the couple’s combined assets exceeds $111,560 ($2,000 plus $109,560), they will have to “spend down” the excess assets on approved expenses. The community spouse may continue to live in the primary residence, and may keep one car and personal items, such as the contents of the house. No MassHealth lien will be placed against the house as long as the community spouse lives there. In many cases, a married couple must spend a substantial amount of their savings in order to qualify for the MassHealth benefits.

Medicaid Eligibility Rules

Medicaid is a joint federal/State program. Medical and financial eligibility for medicaid benefits is determined by federal law and regulations, and the law and regulations of the State in which the medicaid applicant resides. Some Medicaid programs also have income limits. In Massachusetts, there is no income limit for medicaid benefits for nursing home care, although some of the MassHealth recipient’s income must be paid to the nursing home. In Massachusetts, the agency that administers the Medicaid program is the Division of Medical Assistance (DMA); the program is called “MassHealth.” Because MassHealth programs are needs-based programs, a MassHealth applicant must demonstrate that he or she meets both the medical and financial requirements of the program for nursing home benefits. The burden is on the applicant to prove that he or she meets the requirements. These requirements are described in detail below.

1. Eligibility for long-term care based on age or disability. At the present time, there are almost twenty different MassHealth programs. This Article deals only with the program that provides benefits for nursing home care for an individual who is 65 years or older, blind, or permanently disabled. The determination of need for long term custodial care is made at the time a MassHealth application is filed. The determination is made by the local Elder Services Agency, which reviews the medical records of the applicant. A nurse from the agency will perform a physical examination, and if necessary, will interview the attending staff and the patient’s doctor. An individual who is 65 or older, blind, or permanently disabled, and is determined to be in need of long term custodial care will qualify for MassHealth benefits to pay for nursing home costs, but only if he or she meets the financial need’s test described in Paragraph B below.
2. Financial Needs Requirements - Countable and Non-Countable Assets. The financial needs requirements of the MassHealth program limits the total amount of assets that a person or married couple may keep and still qualify for MassHealth benefits. In order to determine if an applicant meets the Assets Test, the MassHealth regulations have created two categories of assets: countable assets and non-countable assets. The general rule is that all assets are countable, except those that are expressly categorized as “non-countable” or those assets that are not “legally inaccessible” to the applicant or the married couple. A single person will qualify for MassHealth benefits when he or she reduces his or her countable assets to $2,000. For a married couple, the institutionalized spouse may keep $2,000 of countable assets and the community spouse may keep $109,560 of countable assets. The MassHealth recipient and his or her spouse may keep the non-countable assets, no matter what their value. The only exception to this rule is the primary residence. The burden is on the MassHealth applicant to prove that he or she qualifies for benefits. Following is a summary of countable and non-countable assets. Non-countable assets include:
   1. The principal residence, if it is occupied by one or more of the following individuals, and the equity in the house (the fair market value minus the balance due on any outstanding mortgages) does not exceed $750,000:
      1. The community spouse;
      2. A child under age 21, or a blind or permanently and totally disabled child;
      3. A brother or sister of the MassHealth recipient who is a co-owner of the real estate and has lived in the home for at least one year prior to the MassHealth applicant’s admission to the nursing home.
   2. Household belongings, furnishings, personal effect and jewelry. You cannot take advantage of this exception by buying a $50,000 diamond ring with countable assets; many have tried this technique and failed.
   3. A separate “burial needs account” funded with not more than $1,500.
   4. Burial plots for the individual or members of the family.
   5. A “reasonably-priced” prepaid irrevocable burial contract. (I recommend spending no more than $10,000.)
   6. A life insurance policy if the death benefit payable under the policy is less than $1,500. ( If the death benefits payable under a life insurance policy exceed $1,500, the applicant must produce proof of the cash value of the policy. If the policy has cash value, the policy is a countable asset.)
   7. Term life insurance policies with no cash value.
   8. One automobile of any value if used by the applicant’s family. You cannot go out and buy a $70,000 BMW with excess assets. If you own the car before the applicant is admitted to the nursing home, the value of the care should not be a problem.

   Countable assets include:

   1. The home, if it is not occupied by one of the following individuals and the MassHealth applicant does not intend to return to live at home, or if the applicant cannot return to live in the home:
      1. The community spouse;
      2. A child under age 21, or a blind or permanently and totally disabled child;
      3. A brother or sister of the MassHealth recipient who is a co-owner of the real estate and has lived in the home for at least one year prior to the MassHealth applicant’s admission to the nursing home.

      Because it is not easy to sell your home quickly, in order to qualify for MassHealth benefits, an applicant who owns a home will be approved for MassHealth benefits if he or she meets all of the other tests for eligibility. Under the MassHealth regulations, the applicant is given up to nine months to sell his or her home. In practice, this is not always the case. I have represented many MassHealth recipients who have not been ordered to sell their homes. In that case, if the family wants to keep the home, they will have to pay the expenses of maintaining the real estate. After qualifying for MassHealth, the recipient must spend all of his or her income (after deducting the $72.80 for personal needs) on premiums for supplemental health insurance (if he or she has any) and the nursing home. A MassHealth recipient may not use his or her income to maintain his or her home.

      
      

      After an applicant begins to receive MassHealth benefits for long-term care, the Estate Recovery Bureau of the Division of Medical Assistance will place a lien against the MassHealth recipient’s home, as long as none of the individuals listed above are living in the home. The lien is recorded in the Registry of Deeds where the deed for the MassHealth recipient’s home is recorded. When the home is sold, the MassHealth lien must be paid off from the closing proceeds. If there are funds remaining after the lien is paid off and the owner of the home is still living, those funds must be used to pay for his or her nursing home care. If the owner of the home is deceased, the remaining funds may be distributed to the beneficiaries of his or her estate.
      
      The home is also countable if the equity in the home exceeds $750,000. MassHealth will usually accept the assessed value of the home, as determined by the local Tax Assessor, as proof of the current fair market value. If you believe that the assessed value is too high, you can obtain an appraisal performed by a licensed appraiser. The balance due on any outstanding mortgage is deducted from the assessed or appraised value to determine the equity in the home.

      The home is also a countable asset if it is held in a Trust. This rule was enacted because MassHealth cannot place a lien against the home if it is held in a Trust. This problem can be remedied by transferring title to the home from the Trust back to the MassHealth applicant. This rule does not apply if the home has been held in certain types of Trusts for more than five years. See the “resource transfer” rules and information about the “Irrevocable Income Only Trust” below for more information about this planning option.

   2. All rental and investment properties, vacation homes, and time shares.
   3. All bank accounts, mutual funds, stocks, bonds, and other investments.
   4. IRA accounts, 401-K accounts, 403(b) annuities, Keogh plans and other retirement funds or accounts, reduced by any penalties for early withdrawal, and the income taxes payable because of the withdrawal.
   5. The cash value of all life insurance policies that pay death benefits of more than $1,500.
   6. Any interest in a business, partnership, or corporation.
   7. Annuities, unless they are irrevocable, and the cash value cannot be withdrawn by the MassHealth applicant or their spouse.
   8. Valuable collectibles (coins, stamps, etc.)

   The burden is on the MassHealth applicant to prove that he or she qualifies for benefits. In addition to filling out a MassHealth application, the applicant must also provide the following documents with the application:

   • Income and Gift Tax Returns
   • Bank Statements for the five years prior to the MassHealth application
   • Deeds for home, vacation property and rental properties, with proof of the value of these properties and the balance due on an outstanding mortgage
   • Documentation of all resource transfers (gifts) made in the five years prior to the MassHealth application
   • Proof of all sources of income
   • Personal documents, such as birth certificates and marriage certificates
   • Health insurance cards, proof of premiums paid for health insurance
   • Life insurance policies and proof of cash value
   • Copies of all Trusts established by the applicant or spouse

   MassHealth “Spend Down” Rules for a Single, Divorced or Widowed Person. If an individual who is widowed, divorced, or has never married, has more than $2,000 in countable assets, he or she has to “spend-down” the excess assets in order to qualify for MassHealth benefits for long-term care. Permissible spend-down items are as follows:

   1. All nursing home and medical expenses.
   2. The purchase of necessary personal items, such as clothing, toiletries, and items that will be used in the nursing home, such as a radio, television, air conditioner, or furniture.
   3. A reasonably priced irrevocable prepaid burial contract (not to exceed $10,000).
   4. A “burial needs account” of up to $1,500.
   5. Fees paid to an accountant or attorney for tax preparation or estate planning.

   Example: Frank is a 68-year-old widower with Alzheimer's Disease. After his wife’s death, it becomes apparent that Frank should not be living alone in his home. He forgets to wash, dress appropriately, eat regular meals, and take his blood pressure medication. Frank is admitted to a nursing home because his doctor insists that Frank requires twenty-four hour custodial care provided by a nursing home. Part of the admissions process includes a medical evaluation, which determines that Frank is medically eligible for MassHealth benefits for long-term care. However, Frank does not meet the financial need’s test for MassHealth benefits at the time of his admission because his countable assets exceed $2,000. At the time of his admission, he owns the following:

   Home (no mortgage):	$175,000
   Certificates of Deposit:	35,000
   IRA:	25,000
   Annuity (not irrevocable):	10,500
   Total:	$245,500

   Frank is admitted to the nursing home as a “private pay patient” and must pay the daily charge of $335 from his own funds. He will qualify for MassHealth benefits as soon as he "spends down" all of his cash assets, including his Certificates of Deposit, his IRA and his annuity, until his funds are $2,000 or less. He may spend these funds on nursing home costs, and medical and personal expenses (such as the purchase of clothing). The funds may also be used for a prepaid burial contract (not to exceed $10,000) a burial plot, and establish a burial needs account, not to exceed $1,500. Under the MassHealth rules, he may not gift any of his excess assets to family members. When his Certificate of Deposit, IRA, and annuity are reduced to $2,000, he will qualify for MassHealth benefits, even if he has not sold his home. As soon as he starts receiving MassHealth benefits, the Estate Recovery Bureau will place a lien on his home. In addition, the Estate Recovery Bureau may send Frank a notice ordering him to sell his home. If it is sold while he is alive, the MassHealth lien must be paid off and the balance spent on Frank’s care. If the home is sold after Frank’s death, the MassHealth lien will be paid off at that time and the balance of the proceeds will be distributed to the beneficiaries of Frank’s Will.

   MassHealth “Spend Down” Rules for a Married Couple: There are different regulations that apply to married couples to determine if one of them meets the financial eligibility requirements of the MassHealth program. When a married person applies for MassHealth benefits, the countable assets of both husband and wife are considered together to determine the MassHealth eligibility of the spouse who is applying for benefits. It doesn’t matter which spouse owns the assets. All of the couple’s combined assets must be listed on the MassHealth application. When one spouse applies for and receives MassHealth benefits, the community spouse is entitled to keep a certain amount of the couple’s countable assets. The countable assets that the community spouse may keep are called the "community spouse resource allowance.” In 2010, the community spouse may keep $109,560 of the couple’s combined assets. The assets are valued on the date of the spouse’s admission to the nursing home. The MassHealth recipient may keep only $2,000 in countable assets. Therefore, under the current regulations, husband and wife may keep countable assets of up to $111,560 if one of them is applying for MassHealth benefits.

   • Example 1: Trudy and Bill own a home and have savings of $89,000 when Trudy is admitted to a nursing home in 2010. As long as Bill lives in their home, the house is not considered to be a countable asset. Trudy will immediately qualify for MassHealth benefits. Bill may keep the couple’s savings of $89,000. Trudy may not keep more than $2,000 in her name, so Bill must remove her name from their joint bank accounts.
   • Example 2: Jeanne and Joe own a home and have combined investments of $190,000 when Jeanne is admitted to a nursing home in 2010. Jeanne may keep only $2,000 of the couple’s assets. Joe may keep $109,560. As long as Joe lives in their home, the house is not considered to be a countable asset. Jeanne will qualify for benefits when they have “spent down” the excess assets of $78,440 ($190,000 minus $111,560).
   • Example 3: Paul and Mary own a home and a vacation home. They have combined investments with a total value of $450,000, when Paul is admitted to a nursing home in 2010. Paul may keep $2,000 of the couple’s assets. Mary may keep the maximum spousal allowance of $109,560. The couple will have to spend the remaining $338,440 ($450,000 minus $111,560) on Paul’s nursing home costs and permissible spend down items before MassHealth will approve him for benefits. They must also sell their vacation home and spend the sales proceeds on Paul’s nursing home care.

   If a couple has more than the maximum amount allowed as the spousal resource allowance, they may use the excess assets for the living expenses of the community spouse, and the nursing home costs, medical expenses, and other personal expenses of the MassHealth applicant. In addition, husband and wife may “spend-down” excess assets on the following items:

   1. A reasonably priced irrevocable prepaid burial plan for both husband and wife.
   2. A “burial needs account” of up to $1,500 for both husband and wife.
   3. The purchase of burial plots for husband and wife.
   4. A reasonably priced new car for the community spouse to replace an old car with high mileage in need of repairs.
   5. Repairs and improvements necessary to maintain the couple’s home. The spend-down period is the time to make major expenditures, such as replacing old appliances, installing a new furnace or water heater, painting the house, and replacing the roof. When one spouse qualifies for MassHealth benefits, the community spouse will be living on a reduced income, and will need to conserve the assets left after the spend-down.
   6. Fees paid to an accountant or attorney for tax preparation or estate planning.
   7. The purchase of an irrevocable annuity that will immediately start paying monthly or yearly benefits to the community spouse. The Commonwealth of Massachusetts must be named as the primary beneficiary of the annuity, so that if the community spouse dies before all of the annuity benefits have been paid out, MassHealth will be reimbursed, in full or in part, for benefits provided to the institutionalized spouse. After MassHealth has been reimbursed, the remaining annuity benefits (if any) will be paid to the contingent beneficiaries, such as the couple’s children.

   The immediate irrevocable annuity is the best last-minute planning tool for a married couple. Rather than spending the excess assets on nursing home costs, the excess funds can be used to purchase an “immediate irrevocable annuity” that will provide additional income to the community spouse. There is more detailed information about the irrevocable annuity below.

3. The Income Rules. Massachusetts has not yet set an "income cap" to disqualify individuals who are 65 or older from receiving MassHealth benefits for nursing home benefits. However, when an individual qualifies for MassHealth benefits for nursing home costs, he or she must spend most of his or her income on nursing home costs in order to receive MassHealth benefits to pay for the balance of his or her nursing home care and other medical expenses. A single person who qualifies for MassHealth benefits must pay all of his or her monthly income to the nursing home, with the exception of $72.80/month, which is deposited into a "personal needs account" to pay for his or her personal expenses. If the individual has a supplemental medical insurance plan, such as Blue Cross/Blue Shield Medex, at the time the MassHealth application was filed, the policy must be maintained. In that case, the monthly premium for the policy is paid from the MassHealth recipient’s income and the balance of the income, minus the $72.80 for personal needs, is paid to the nursing home. MassHealth pays the balance of the nursing home.

   Example: Richard has social security income of $1,725/month and a pension of $600/month. He pays $525 every quarter ($175/month) for Blue Cross/Blue Shield Medex. After he qualifies for MassHealth benefits, the amount payable to the nursing home, referred to as the “patient paid amount,” is calculated as follows.

   Social Security Income (after medicare deduction):		$1,725.00
   Pension:		600.00
   Deductions: Personal needs allowance:	Personal needs allowance:	72.80
   	Monthly Medex premium:	175.00
   Total deductions:		-247.80
   Amount paid to Nursing Home (patient paid amount)		$2,077.20

In the case of a married couple, the spouse living at home (the “community spouse”) may keep all of his or her income. In addition, the community spouse may keep some, or all, of his or her spouse’s income. The community spouse is entitled to a “spousal monthly maintenance income allowance.” Currently the minimum amount that the community spouse may keep is $1,750/month. The maximum spousal needs allowance cannot exceed $2,739.00/month. The minimum and maximum spousal allowances are adjusted annually for inflation. There is an exception when the community spouse proves, at an administrative hearing, that there are exceptional circumstances that require a higher allowance, or there is a Probate Court order for support that exceeds the maximum spousal needs allowance.

The maximum amount that the community spouse may keep is referred to as the “maximum monthly maintenance needs allowance” or MMMNA . The MassHealth caseworker determines the community spouse’s MMMNA, which will fall somewhere between the minimum amount of $1,750/month and the maximum amount of $2,739/month. The community spouse must submit his or her budget with the MassHealth application, so that the MassHealth caseworker can determine if the community spouse needs some, or all, of the MassHealth applicant’s income to pay his or her living expenses. All expenses listed on the budget must be verified with copies of the mortgage, property tax, and utility bills. The decision of MassHealth regarding the spousal needs allowance can be appealed if the community spouse believes the amount allotted to him or her is not sufficient to pay for his or her expenses. The community spouse may keep the monthly maintenance allowance to pay his or her expenses; the institutionalized spouse may keep $72.80 each month for his or her personal needs. The balance of the couple’s monthly income must be used to pay the nursing home and the supplemental health insurance premiums. MassHealth will pay the balance of the monthly nursing home costs and the medical expenses of the MassHealth recipient that are not covered by Medicare or the supplemental health insurance.

Example: Bob and Helen, a married couple, have the following monthly income:

Bob is admitted to a nursing home in 2010. He passes the medical screening test and is determined to be in need of long-term care. The assets owned by Bob and Helen are very modest, so they meet the Assets Test described above. When Bob is approved for MassHealth benefits, the couple is told that Helen’s monthly spousal needs allowance is $1,925. Helen’s income is only $805, so she is allowed to keep $1,120 of Bob’s income. The couple is told they must keep Bob’s Medex health insurance in effect. This costs $525 per quarter, or $175 per month. The amount due to the nursing home each month is calculated by subtracting the monthly deductions from Bob’s and Helen’s monthly income, as follows. MassHealth will pay for the balance of Bob’s monthly nursing home bill and the medical expenses not covered by Medicare or Medex:

Planning Options

1. Long Term Health Care Insurance. Long Term Care Insurance is the best option for many people. There are very good policies that pay benefits for all of an individual’s nursing home costs. However, the insurance is expensive, and an individual with serious medical problems will not be approved for a policy. If you have reasonably good health, purchasing a long-term health care policy is often the best planning option, particularly with the passage of the new federal laws strictly limiting “resource transfers.” The cost of the policy will depend on the options that you choose. The options are:
   • the amount of benefits paid per day: the range currently available in Massachusetts is $150/day to $300/day
   • an inflation rider that will increase the amount of the daily benefit each year
   • the length of the waiting period while you are in the nursing home before benefits are paid (because Medicare will pay for up to 100 days in a nursing home or rehabilitation center for sub-acute care or rehabilitation, many policies offer benefits after a 100-day waiting period; choosing this option will decrease the yearly premium)
   • the term of the policy: a policy can provide benefits for as little as two years or as many as five years
   • benefits for in-home nursing care
   • benefits for community care, such as adult daycare
   • respite care benefits (a short term stay in a nursing home or custodial care facility that enables the community spouse caretaker or child to take a vacation or simply to rest)

   If you are interested in applying for a long-term care policy, you should talk to a financial planner or insurance agent who is independent, so that you can compare the features and cost of policies available from two or more of the better insurance companies. For an individual living in Boston or its suburbs, a recommended policy would provide for benefits of $300 or more per day (adjusted for inflation each year), for at least a three-year term. Choosing a 90 or 100-day waiting period for benefits will substantially lower the yearly premium for this policy. The yearly premium for the policy will depend on your age, medical history and current health status.

   The MassHealth regulations offer an incentive to those who purchase a long-term care policy. If you buy a long term policy with the minimum benefits required by the MassHealth regulations (daily benefits of $200 for a term of two years), the Estate Recovery Bureau cannot place a lien on your home and cannot order you to sell your home to pay for nursing home costs. By purchasing a policy with the minimum benefits, you can protect your home in the event you are admitted to a nursing home.

2. Transfer of Assets and the MassHealth “Resource Transfer” Rules. Another planning technique for preserving your assets, so that you can eventually pass them on to your children, grandchildren, or other individuals, is to make lifetime gifts. Many people make “tax-exempt” gifts each year to their children or grandchildren in order to reduce their liability for estate taxes. Under federal gift tax laws, every individual may make “tax-exempt” gifts of up to $13,000 per person per year. In addition, every individual may make unlimited tax-free gifts to pay for the educational or medical expenses of a child, grandchild, or other individual. Some seniors make gifts to family members to protect some of their life savings from future nursing home costs. And many parents and grandparents simply make gifts to help their children and grandchildren with college tuition, the purchase of a house, or to help a family member with financial problems. However, as you grow older, there are several factors that you should consider before making a substantial gift to an individual, a charity, or your Church.

   Under the MassHealth program, there are “resource transfer” rules in effect, which must be considered before gifts are made for any reason. The “resource transfer” rules do not prohibit an individual from making gifts. What the regulations do is disqualify a person from receiving MassHealth benefits for long-term custodial care in a nursing home for a certain time period after the applicant has made a gift. Under the current laws, an individual is disqualified from receiving Medicaid (MassHealth) benefits if he or she has made a gift (referred to as a “resource transfer”) in the five years before he or she is financially eligible for Medicaid benefits. Under these rules, the disqualification period begins when the MassHealth applicant is admitted to the nursing home and is “otherwise financially eligible for benefits.” A MassHealth applicant must disclose all resource transfers (gifts) made in the five-year period prior to the date of financial eligibility. When an individual has reduced his or her countable assets to less than $2,000, he or she will not be eligible for MassHealth benefits if he or she has made a gift for any reason in the five-year time period prior to reducing his or her assets to $2,000. In practice, a MassHealth applicant does not have to report birthday, Christmas, and graduation gifts, as long as they are reasonable. Most MassHealth caseworkers will ask about an unexplained transaction on a bank statement or passbook only if it exceeds $1,000. Others are more thorough and will question any unexplained transaction of $500 or more. Any amount less than $500 will probably not be questioned.

   Under the current disqualification rules, when an individual applies for MassHealth benefits, he or she must report all resource transfers that were made to individuals or to a Trust in the five-year period prior to the date of the MassHealth application (the “look-back period.”) In the case of a married couple, all resource transfers made by either spouse during the five-year look-back period must be disclosed. Even if the resource transfer is made by the spouse who is not applying for MassHealth benefits, the transfer still disqualifies the applicant spouse if the gift is made in the five-year look back period. If you make a resource transfer or transfer to a Trust during the look-back periods, you must list the recipient of the gift, or the name of the trust, the date of the gift or transfer to the trust, and the value of the gift to the individual or the transfer to a trust on the MassHealth application. In the case of a transfer to a Trust, you also have to produce a copy of the Trust. You do not have to report a gift to an individual or a transfer to a Trust if you are filing a MassHealth application after the five-year look-back period is over, no matter what the size of the gift to the individual or the value of the property transferred to the trust. When MassHealth determines that the applicant has made a disqualifying gift in the five-year time period prior to the date on which he or she has reduced his or her countable assets to less than $2,000, MassHealth will calculate a period of ineligibility. The number of days in the period of ineligibility is equal to the total value of the disqualifying gifts divided by the average monthly cost of a private nursing home in Massachusetts, as determine by MassHealth. In 2010, this amount is $274 per day. The result will be the period of ineligibility beginning on the date on which the individual was otherwise eligible for MassHealth benefits. Following are a few examples of how the rules work.

   Example 1: Charles was diagnosed with Parkinsons Disease in late 2004. He worries that he may have to be admitted to a nursing home in the future, and he would like to leave something to his nieces and nephews. On January 1, 2005, he gifted $100,000 to five nephews and nieces, and retained a stock portfolio worth about $50,000. He is admitted to a nursing home on February 1, 2010. After selling the stock and spending the proceeds on the nursing home, he applies for MassHealth benefits on July 1, 2010. On the MassHealth application, he does not have to disclose the gifts made to his nieces and nephews because they were made more than five years ago. Therefore, Charles is eligible for MassHealth.

   Example 2: Anna, a widow, was diagnosed with the first stages of Alzheimers Disease in 2008. The doctor predicted that it would progress slowly. Anna made a gift of $274,000 (almost all of her savings), to her three children on July 1, 2008, in an attempt to protect her savings from future nursing home costs. Just in case the funds would be needed, the children set the money aside in a bank account in their names. On February 28, 2010, Anna was admitted to a nursing home, when it became impossible for her children to care for her in her home. After paying for one month in the nursing home, purchasing a prepaid burial contract for $8,000, establishing a burial needs accounts, and stocking up on clothing and toiletries, Anna reduced her savings to $2,000 on March 1, 2010. She applied for MassHealth benefits, and disclosed the $274,000 gift on the application. She was told that she would not be eligible for benefits for a period of 1,000 days, beginning on March 1, 2010 (the date on which she was “otherwise eligible for MassHealth benefits”). This disqualification period was calculated by MassHealth, by dividing the gift ($274,000) by 274. Fortunately, Anna’s monthly income was more than $2,000. A combination of Anna’s monthly income, and the $274,000 that Anna’s children had set aside, was enough to pay for Anna’s care during the 1,000-day disqualification period. When the disqualification period was over, Anna qualified for MassHealth benefits.

   Example 3: This is the same as Example 2 above, with one exception. Anna’s children used a substantial portion of the $274,000. One child was laid off and needed the money to make mortgage payments. Another child withdrew funds from the account to pay for college tuition for her child. When Anna applied for MassHealth benefits and was told she had a 1,000-day disqualification period, the money was not there to pay for her care. She spent her monthly income and what remained of the $274,000 on her nursing home care and reapplied for benefits. Luckily, MassHealth has hardship provisions that waive some, or all, of the disqualification period if the disqualifying gift was made before the MassHealth applicant knew that he or she had to be admitted to a nursing home and the funds that were gifted are no longer available to pay for the applicant’s care. Under the hardship waiver rules, if an applicant will be endangered or deprived of “food, clothing, shelter or other necessities of life,” MassHealth benefits will be provided in spite of the disqualifying transfer. Anna applied for a hardship waiver, which was granted. She then qualified for MassHealth.

   At the present time, it is difficult to give advice about gifting. Many seniors make gifts without any intent of protecting their savings from future nursing home costs. However, I have seen too many cases of strokes and other medical catastrophes that can turn a healthy senior into a nursing home resident almost overnight. I can advise a gift under the following circumstances: you have sufficient funds to pay for five years of nursing home care (at the rate of about $120,000/year) after making the gift; or you are sure that the gift will not be spent during the five-year disqualification period. One way of making sure that the gift will be available if needed for nursing home care is to make the gift to a Trust, rather than simply giving it to your children or other family members. Establishing a Trust over which you have some control is the better way to make a gift. You may also retain the right to receive the investment income from the Trust, so you do not have to give up the investment income that you have been using for living expenses. Not all Trusts will protect the assets from nursing home costs. A Revocable Trust established by the MassHealth applicant will not provide any protection, because the applicant has too much control over the Trust and access to the assets gifted to the Trust. In order to provide protection, the Trust must be irrevocable, the MassHealth applicant must retain only limited control over the Trust, and the applicant may not have the right to withdraw trust assets. The “Irrevocable Income Only Trust” is usually the best planning option if your goal is to protect your assets from future nursing home costs.

3. Irrevocable Income Only Trust. If you are planning to make a substantial gift to your children or other family members to protect assets from future nursing home costs, the best option is establishing and funding an Irrevocable Income Only Trust. I prefer this option over the outright gift. The individual who establishes and funds the Trust, referred to as the “Grantor” of the Trust, has more control over the funds that are gifted. The Grantor may retain the right to collect the investment income (interest and dividends) earned by the funds transferred to the Trust. The Grantor may serve as Trustee with one or more family members or friends. The Trustees are responsible for investing the funds transferred to the Trust and making distributions to trust beneficiaries, as directed in the Trust Agreement. The trust principal (the funds originally transferred to the Trust or the investments purchased with these funds) may not be distributed to the Grantor. Usually, the Grantor names one or more individuals who are entitled to a distribution of the trust principal during the Grantor’s lifetime. This provision is important because the resource transfer rules outlined above also apply to a gift to a Trust. If the Grantor is admitted to a nursing home before the five-year look back period is over, the funds held in the Trust must be made available to pay for the Grantor’s care during the disqualification period. If the Trust is funded more than five years before nursing home admission, all of the funds in the Trust will be protected, with the exception of the income payable to the Grantor, which must be used for nursing home costs. After the Grantor’s death, the funds remaining in the Trust will be distributed in accordance with the Grantor’s instructions in the Trust.

   Example: Grace, a widow, has seen her mothers and father’s life savings spent to pay for their nursing home care. She does not want the same thing to happen to her. She has three children, all of whom she trusts. She is in good health, but still worries about the possibility of future nursing home admission. Grace visits her attorney with her three children to find out the best way to make a gift of Grace’s life savings, which is $246,600 in Certificates of Deposit. The attorney recommends an “Irrevocable Income Only Trust,” after reviewing Grace’s sources of income and her monthly budget. Grace has been using the interest from her Certificates of Deposit, in addition to her social security and pension income to pay her bills. Grace establishes the Trust on May 1, 2006 and transfers the funds in the three Certificates to the Trust. Grace and her three children are named as Co-Trustees of the Trust. The Trustees agree to invest the trust funds in three new Certificates of Deposit, with different maturity dates (six months, one year, and two years). Grace is entitled to a distribution of the income earned by the Certificates. The trust “principal” (the three Certificates of Deposit or the cash proceeds when the Certificates come due or are cashed in) may be distributed to any one of Grace’s children at any time during Grace’s lifetime. If Grace needs money over and above her social security, pension, and interest income from the Trust, a Certificate of Deposit can be cashed in and funds may be distributed to any one of Grace’s children, who will use the funds for Grace’s benefits (payment of outstanding bills, payment to a Contractor for a new roof or furnace, the purchase of a new car, or the cost of a cruise). After Grace’s death, the Trust will terminate, and the trust property will be distributed to Grace’s children, in equal shares. If Grace is admitted to a nursing home after May 1, 2011, she will have to disclose the fact that there is a Trust. However, only the trust income must be paid to the nursing home. The trust “principal” (the Certificates of Deposit) is not considered to be a countable asset - it is held in an Irrevocable Trust and Grace does not have legal access to it. It can only be distributed to her children. If Grace is admitted to a nursing home on May 1, 2009, the gift of funds to the Trust is a disqualifying transfer. Assuming she has savings in her name of less than $2,000 on the date of admission, her disqualification period will be 900 days ($246,600 divided by 274) or thirty months, beginning on May 1, 2009. Grace’s children have two options. They can distribute the full amount of the gift to the trust ($246,600) to themselves and then give it to Grace, “curing” the disqualifying transfer. Grace would then spend down this amount, and her income, on the nursing home, which charge’s $335/day. The other option is to pay the nursing home during the 900-day disqualification period, using Grace’s income and the funds in the Trust. Their choice will depend on the amount of Grace’s income:

   Option 1. Grace’s monthly social security income ($1,500), pension income ($800), and interest income (from the Trust) ($700) totals $3,000/month. The monthly cost of the nursing home is about $10,000/month. This means that an additional amount of $7,000 per month will be needed for the disqualification period of 30 months. The amount needed from the Trust for 30 thirty months at $7,000.month is $210,000. After thirty months, there will be funds remaining in the Trust. Grace’s children decide to keep the Trust in effect and distribute funds on a monthly basis, as needed for their mother’s care.

   Option 2. If Grace’s monthly income was far lower and the nursing home charged more it would make more sense to “cure” the disqualifying transfer by distributing the original gift of $246,600 to Grace’s children, who would then give it back to their mother. Assume that Grace has social security income of $800/month and interest of $700/month, for a total of $1,500 per month. The nursing home the children have chosen costs $365/day or about $11,000/month. The amount needed from the Trust per month is $9,500 or a total of $285,000 for the 30-month disqualification period. This exceeds the amount in the Trust. This means that the children will have to come up with the balance. They would be better off giving the $246,600 back to Grace to “cure” the disqualification period. When Grace spends down this amount on the nursing home, in about 26 months, she will be eligible for MassHealth benefits.

   Not all Irrevocable Trusts will protect your assets. A recent Massachusetts case, which was upheld on appeal, determined that assets in an Irrevocable Trust were countable assets, even though the MassHealth applicant did not have the right to invade principal. There were other trust provisions that the Court relied on to determine that under certain improbable circumstances, the trust principal might be distributed to the applicant. If you are considering this option, you should retain an attorney who specializes in this field. This type of Trust must be drafted very carefully.

4. Irrevocable Immediate Annuity. An individual applicant or the community spouse may use excess funds to purchase an immediate irrevocable annuity. This is not a disqualifying resource transfer. The applicant or the spouse is simply converting countable assets to a stream of income. The annuity can be purchased at any time. Purchasing the annuity makes the most sense when it is purchased by the community spouse, who may keep all of the income paid out under the annuity contract. The annuity must be irrevocable, which means that the community spouse cannot cash it in. The annuity must be immediate - payments must start immediately after the annuity is purchased. There can be no “balloon” payments at a future date. The annuity may not be transferred to another individual, and the Commonwealth of Massachusetts must be named as the primary beneficiary of the annuity. If there are any undistributed funds remaining after the death of the owner of the annuity, those funds must be used first to reimburse the Commonwealth of Massachusetts for MassHealth benefits paid for the owner of the annuity or his or her spouse. Following is an example of how this annuity works:

   Example: Jack is admitted to a nursing home in February 2010. He and his wife, Joyce, own their home and they have about $18,000 in a joint savings account. Joyce has $100,000 in an IRA account and Jack has $345,000 in a 401-K account. Joyce may keep $109,560 of the couple’s assets. She decides to keep her IRA account and half of their joint savings. Jack must reduce his 401-K account to $2,000 in order to qualify for MassHealth. His accountant calculates the federal and Massachusetts taxes that Jack must pay when he withdraws $343,000 from his 401-K. Jack withdraws $343,000 and pays estimated taxes of $87,000. With the balance of $256,000, Joyce purchases an irrevocable annuity, choosing a monthly payment of $1,200, that will start one month after she purchases the annuity. She chooses a guaranteed term of twenty years. As required by law, she names the Commonwealth of Massachusetts as the primary beneficiary of the annuity and her three children as the contingent beneficiaries. If Joyce dies before the twenty year term is over, the funds remaining in the annuity must be paid first to the Commonwealth of Massachusetts, for reimbursement of the amount spent on Jack’s care in the nursing home. If any funds remain after the reimbursement, they will be distributed to Jack and Joyce’s children.

   Jack dies six months after his nursing home admission. The MassHealth program has paid out $55,000 in benefits for his nursing home care. If Joyce dies shortly after Jack’s death, there will be sufficient funds remaining in the annuity to reimburse the Commonwealth of Massachusetts for the $55,000 spent on Jack’s care. The funds remaining after the Commonwealth has been reimbursed will be distributed to Jack’s and Joyce’s children over the remainder of the twenty year term. If Joyce lives twenty years or more after purchasing the annuity, there will be no annuity funds remaining to reimburse the Commonwealth. All of the funds will be distributed to Joyce during her lifetime.

   Your financial advisor or insurance agent will be able to give you more detailed information about the irrevocable immediate annuity and will assist you in purchasing one if it is appropriate for your situation. It is advisable to obtain quotes from more than one company that issues annuities.