Planning for Long Term Care
The Medicaid (MassHealth) Program
and the 2015 MassHealth Resource Transfer Rules
There are three programs that pay for in home care, the cost of an assisted living facility, and care in rehabilitation facilities and nursing homes: the MassHealth (medicaid) program, Medicare, and the Veterans Aid and Attendance Program. Medicare provides limited benefits for in home care and a short term stay in a nursing home or rehabilitation facility following a hospitalization. Medicare does not pay for long term care in a nursing home. See the Article titled Medicare Parts A, B, C and D for more information about the services provided by Medicare. Qualified veterans and their surviving spouses can qualify for a monthly benefit of up to $2,085 (in addition to their Veteran's pension) to pay for in home care or for the cost of an assisted living facility. The benefits for nursing home care are very limited. See the Article titled Veterans Aid and Attendance Program for details about this program. The only program that pays for the cost of long term care in a nursing home care is the Medicaid program, which is administered in Massachusetts as the MassHealth program. Eligibility for the program is based on medical and financial need. This Article will focus on the financial eligibility rules for long term nursing home care and the "resource transfer" rules, which disqualify an applicant from receiving MassHealth benefits for up to five years following gifts made to family members or friends.
The Basic Rules. In Massachusetts, there is no income limit. Eligibility for benefits is based on what you own at the time you apply for benefits. After you qualify for benefits, most of your income (social security and pension benefits, rental income, and investment income) must be paid to the nursing home each month. You may keep $72.80/month to pay for personal needs and the funds necessary to keep your supplemental health insurance policy (such as BC/BS Medex) in effect. The rest of your income must be paid to the nursing home. MassHealth will pay the balance of your monthly bill. If you are married, your spouse may keep some, or all, of your income. He or she may keep at least $1,991.25/month of your combined income and as much as $2,981/month, depending on his or her living expenses. Your spouse may also keep the primary residence and $119,220 of your savings. Any financial assets in excess of this amount may be used for permissible "spend down" items and an "immediate irrevocable annuity" owned by your spouse, as explained below. If you and your spouse own a vacation home or a rental property, it must be sold, and the proceeds spent on the nursing home, permissible spend down items and/or an immediate irrevocable annuity for your spouse. You, as the applicant, must spend down your assets to $2,000. If you are single, divorced, or widowed, you must reduce your assets, including any real estate owned by you, to $2,000. You may spend your excess assets, including the proceeds from the sale of your real estate, on your nursing home care, or for permissible spend down items and an immediate irrevocable annuity for yourself.
The Resource Transfer Rules. If you apply for MassHealth benefits to pay for your nursing home care, you cannot give away your assets one day and then file an application for benefits the next day, claiming that you meet the financial eligibility rules. Under federal and State regulations, there is a resource transfer penalty period, which can be as long as five years, if you give away what you own in order to qualify for MassHealth benefits. This rule does not apply to transfers made to your spouse, but it does apply to transfers made to your children, other family members, friends, charities, and your church. If you are not careful about when you apply for benefits after giving away your assets, your penalty period could be far longer than five years. The penalty period is imposed on anyone who has transferred assets without receiving fair value in return for the transferred assets. You cannot sell your home to your children for one dollar. The resource transfer penalty period is the number of days, months, or years, that you will not be eligible for MassHealth benefits after transferring your assets to someone other than your spouse.
Exceptions to the Resource Transfer Rules. There are some permissible transfers that you can make without disqualifying yourself for MassHealth benefits. There is no penalty period if you transfer any of your assets to: a) your spouse; b) a blind or disabled child; c) a trust established for a disabled child's benefit; or d) a trust established for the sole benefit of any disabled person under the age of 65 (even if the trust is established for your benefit). You may also transfer funds to a "pooled trust" that is administered by a non-profit organization approved by MassHealth. The funds that you transfer to the pooled trust may be used for your benefit during your lifetime, without disqualifying you for MassHealth benefits. After your death, most of the remaining funds will be retained by the agency administering the pooled trust. There are also exceptions for the transfer of your primary residence. There is no penalty period if you transfer title to your home to: a) your spouse; b) a child under the age of 21 or who is blind or disabled; c) a trust established for the sole benefit of a disabled individual under the age of 65 (even if the trust is established for your benefit); d) a sibling who has lived in the home during the year preceding your nursing home admission and who has an equity interest in the home; or e) a "resident caretaker child" who has lived with you in the home and cared for you in the two years preceding your nursing home admission. The value of these transfers doesn't matter. You may transfer as much as you want to any of these individuals or trusts. There is no penalty period following any of the transfers listed above.
Calculating your Penalty Period. If you transfer assets to anyone not listed above, or to a Trust that is not listed above, there is a penalty period imposed by MassHealth. The length of your penalty period depends on a number of factors: the date or dates on which you made the transfer or transfers, the total value of what you have transferred, whether you are living in the community or are admitted to a nursing home, and the date on which you apply for benefits. Following are the basic rules.
- If you are not residing in a nursing home, your penalty period ends five years from the date on which you make the last transfer of assets. If you apply for MassHealth benefits after the five year period is over, you do not have to disclose the transfers on the MassHealth application. Only those transfers made in the sixty month period prior to the date of the application must be disclosed.
- If you are admitted to a nursing home before the five year period is over, your penalty period begins on the date on which are you residing in the nursing home and would otherwise qualify for MassHealth benefits if you had not made the resource transfer(s). In that case, your penalty period is based on the value of the what you have transferred, divided by the average daily cost of a nursing home in Massachusetts, as determined by MassHealth. In Massachusetts, the average cost of a nursing home is currently deemed to be $279/day. If you live in Eastern Massachusetts, that number seems low. But this is the statewide average. The result of this calculation is the number of days that you are not be eligible for MassHealth benefits to pay for your nursing home care. The penalty period begins on the date on which you are residing in the nursing home and have reduced your remaining assets to $2,000. The problem is the fact that you no longer have the funds to pay for your care. A better solution is to have the assets transferred back to you (if they have not been spent or sold). That way, the penalty period is "cured". You (and your spouse) will have to spend down your assets on your nursing home care, permissible spend down items and/or an irrevocable annuity for you or your spouse. If the assets cannot be transferred back to you, your family members will have to spend their own funds on your care. If they cannot, there is a "hardship exception", but MassHealth needs a lot of proof that no funds are available to pay for your care in order to grant this exception to the rules.
Curing the Penalty Period. You can undo a penalty period if the property or money that you have gifted or transferred is returned to you. This is referred to as "curing" the penalty period. In Massachusetts, children are not legally responsible for paying their parents medical bills. This law is overruled by the MassHealth resource transfer rules. If a parent transfers assets to a child and then needs nursing home care before the penalty period is over, the child has to find some way to pay for the parent's care until the penalty period is over. Following are some examples of how the penalty period is determined.
Planning With Gifting:
Example 1A: Ruth, a widow, has been diagnosed with the beginning stage of dementia.
She has been told that the disease should progress slowly. Her only symptom at this stage is short term memory loss, but she is able to understand legal documents if they are explained to her. Ruth owns her home, with an assessed value of $279,000 and no mortgage, and she has savings of $279,000. She wants to protect as much as possible, to pass on to her children. She meets with an attorney, with her children present, to review her options. She is told that she must spend down her savings to $2,000 and sell her home and spend the proceeds on her nursing home care in order to qualify for MassHealth benefits. She can transfer her home to her children and gift her savings to them, but there will be a penalty period after she makes these gifts. She is also advised that she can establish an Irrevocable Trust to hold these assets. In both cases, the penalty period will be the same. Ruth trusts her children to support her if she has to go into a nursing home. They have promised Ruth that they will not spend any of her savings. They will put it in a bank account and use it for her benefit if needed.
Ruth decides that the Trust is too complicated, so she transfers her home and some of her savings to her children. Ruth's income is not enough to pay all of her bills, so she keeps half of her savings to pay her larger bills, such as property taxes. The total amount of the assets transferred is $418,500 - the value of her home ($279,000) and one-half of her savings ($139,500). She keeps $139,500. The initial penalty period begins on the date that she signs the deed to transfer title to her home to her children and she withdraws $139,5000 from her savings account to give to her children.
Four years and seven months after she makes the transfers, Ruth's dementia has progressed to a stage where she needs nursing home care. She has used about half of her savings, so she has $70,000 remaining. She and her children find a nursing home, with a memory unit, that they like. The cost is $425/day or about $13,000/month. Ruth's monthly income is $2,000, so she must spend $11,000 from her savings to pay for her care. Her savings run out in about six months. With the help of an Elder Law Attorney, Ruth's children apply for MassHealth. When the application is filed, more than five years have passed since the resource transfers have been made. They do not have to be disclosed on the application. Ruth qualified for MasssHealth. Her monthly income, minus $72.80 for personal needs and $166 to pay for her Medex premium, must be paid to the nursing home. MassHealth pays the balance of the nursing home bill and covers some medical expenses not covered by Medicare and Medex.
Example 1B: This is the same example as above, except that Ruth must be admitted to the nursing home four years after the resource transfers are made. Ruth's children consult with an Elder Law Attorney and are told that they should not apply for MassHealth benefits to pay for Ruth's care until the five year penalty period is over. The remainder of Ruth's savings and her income pay for six months in the nursing home. Her children have not spent the funds that Ruth gifted to them ($139,500), so they use those funds to pay for Ruth's care for the last six months in the penalty period. After a year in the nursing home, the five year penalty period is over. Ruth can apply for benefits and she will qualify. Because five years has passed from the date of the transfers, the family does not have to disclose them. The home and some of the Ruth savings (about $73,000) have been protected.
Example 1C. This is the same example as Example 1B above, with one change. Ruth's children do not consult with an attorney. They apply for MassHealth benefits after Ruth's money runs out. They disclose the transfers that Ruth made four years and six months prior to her admission to the nursing home. The results are bad. They are told that Ruth has a penalty period of 1,500 days, beginning on the day that she reduced her assets to $2,000. Ruth's children can "cure" the penalty period by returning to Ruth everything that she has transferred to them - title to her home, as well as the $139,500 in savings that were gifted to them. These funds must now be spent on Ruth's care, and on permissible spend down items. Nothing will be protected. If the children had paid for Ruth's care for another six months, spending about $66,000 from the funds that Ruth gifted to them, the family home and the balance of the savings would have been protected.
Planning with an Irrevocable Income Only Trust:
Example 2: John owns a home worth $400,000, a vacation property worth $250,000, and various savings accounts, investments and pension accounts holding $650,000. He is diagnosed with Alzheimers Disease and is told that he may need nursing home care in two to three years. He consults with an elder law attorney to review his options. He is not comfortable making outright gifts to his two sons. One son is going through a divorce and the other has declared bankruptcy in the past. Instead, John establishes an "Income Only Irrevocable Trust" (described below) and transfers his home, his vacation home, and $300,000 of his savings to the Trust. He keeps about $350,000 of his financial assets. As advised by his attorney, he reserves a "life estate" (described below) in his home and vacation home. The total value of the transfers is $950,000. John's penalty period is 3,405 days or more than nine years.
John's sons are concerned about income taxes and gift taxes, so John and his sons schedule a meeting with the family attorney to review these laws. She explains that there is no income tax due from John's sons because of these transfers, and there is no gift tax due from John, or them, because of the new liberal federal gift tax laws. Under the new federal laws, John can gift $14,000 to each of his sons each year as a "tax-exempt" gift. In addition to that, John can gift up to $5,340,000 to his sons during his lifetime, without having to pay a gift tax. An informational gift tax return (Form 709) will be prepared and filed by the attorney, because the gifts exceed $14,000 to each son, but no gift taxes are due. John will use some of his federal estate and gift tax exemption (currently $5,340,000), but no estate taxes will be due after his death, because the combined value of the his lifetime gifts and the assets remaining in his name at the time of his death will not exceed the exemption. Massachusetts does not have a gift tax, so no gift tax is due to Massachusetts. The gifts have reduced the size of John's estate for Massachusetts estate tax purposes, so the estate taxes due to Massachusetts are reduced. Massachusetts imposes an estate tax only on the assets owned by John at the time of his death. For that reason, gifting is an excellent planning technique for a Massachusetts resident.
His medical diagnosis is accurate. Three years after he funds the Trust, he is admitted to a nursing home, which costs $450/day, or $164,250/year. John's monthly pension, social security benefits, and his savings are used to pay for his care. After two and a half years, John savings have been reduced to $2,000. His son consults the family's elder law attorney about applying for MassHealth benefits. She tells the son that he must disclose all "resource transfers" made in the five years preceding the date of the MassHealth application. She checks the dates of the deeds for the transfer of his father's home and vacation home to the Trust, and the date on which his father deposited $300,000 into the Trust account. She confirms that more than five years have passed since the transfers were made, and she assists the son in completing the MassHealth application. The transfers to the Trust do not have to be disclosed on application because more than five years have passed since the transfers were made. If the son did not consult with the attorney and made the mistake of applying before five years had passed, his father's penalty period would be more than nine years. The children would have to come up with the funds to pay for their father's care for another four years.
After approving John for MassHealth benefits, the Estate Recovery Bureau (a division of MassHealth) places a lien against John's life estate in his home and vacation home. John's sons are concerned about this and are told by the attorney that the liens are only a problem if the real estate is sold during John's lifetime. She advises them not to sell either property until John passes away. One son moves into the family home and pays the bills for maintenance and upkeep. Both sons and their families use the vacation home and share the expenses of maintaining it. When John passes away, two years after he qualifies for MassHealth benefits, both his life estate and the liens against the life estate extinguish, by operation of law. The family attorney obtains a release of both liens from the Estate Recovery Bureau in about two weeks, after sending in a certified death certificate.
The attorney informs the sons that their cost basis in both properties is "stepped up" to the date of death value because their father reserved a life estate in both properties. When they sell the family home, they do not have to pay any capital gains taxes. If John had not reserved the life estate, his sons' would have to pay capital gains taxes when they sold the real estate.
See the Articles titled "The 2015 Changes to Income Tax, Capital Gains, and Estate Tax" and the "The New Medicare Surtax Laws" for more information about current income tax, capital gains, gift and estate tax laws and the new medicare surtax laws.
Planning with A Community Spouse:
Example 3: George, who is married, has a stroke and must be admitted to a nursing home. After the stroke, he needs assistance with bathing, dressing, and transferring from his bed to his wheelchair. He can no longer walk and there is no hope that he will be able to return home. He is able to talk and he understands what has happened to him. George and his wife, Helen, own a home, and have savings of $140,000. George's pension and social security benefits are $2,300/month. Helen has social security benefits of only $600/month. She is told that the nursing home costs $425/day. She is scared that after a few years she will run out of money and the State will take her house. The social worker advises Helen to apply for MassHealth benefits. After looking at the 14 page application, Helen decides that she needs help. Her son finds a local elder law attorney, and they visit the attorney together. After reviewing their financial information, the attorney advises Helen that her house is protected as long as she lives there. She advises Helen to talk to George about taking his name off the deed, so that MassHealth cannot put a lien against the house if Helen dies before George. This transfer will not disqualify George from receiving MassHealth benefits. Spouses can make unlimited transfers to each other without a penalty period. Helen explains this to George and he agrees to sign the deed.
Helen may keep all of their personal property and their car and she may keep $117,240 of their financial assets. George must reduce the financial assets in his name to $2,000. Helen may also keep some of George's income. She is allowed to keep a minimum of $1,939 of their combined monthly income and up to $2,931/month, depending on her living expenses. Using George's Power of Attorney, Helen withdraws everything from George's IRA account and takes his name off of all of their joint bank accounts, except for their checking account, where George's pension and social security benefits are deposited. Helen reduces the balance in that account to $2,000. They are still over the asset limit of $119,240 ($117,240 for Helen and $2,000 for George), so Helen purchases a prepaid burial contract for each of them ($7,500 for each contract), opens two "burial needs accounts" with $3,000, and pays some bills. This reduces their financial assets to $119,240, and George qualifies for MassHealth benefit to pay for his care.
Planning with an Immediate Irrevocable Annuity:
Example 4. Frank, who is married, has a stroke and must be admitted to a nursing home. Like George, he needs assistance with bathing, dressing, and transferring from his bed to his wheelchair. He is able to talk and he understands what has happened to him. Frank and his wife, Joan, own a home, and have savings of $640,000. Joan is Frank's second wife. She is twenty years younger than Frank and is concerned about her financial security. She has been told that she has to spend more than $500,000 of their savings in order to qualify for MassHealth benefits to pay for Frank's care. Joan consults an elder law attorney about what to do. After reviewing their financial information, the attorney advises Joan that her house is protected as long as she lives there. Frank agrees to sign a deed to take his name off the home. The attorney reviews their financial assets and confirms that Frank will not qualify for benefits until they reduce these assets to $119,240. The attorney suggests that Joan should use these funds to purchase an immediate irrevocable annuity. The annuity will pay Joan a monthly benefit during her lifetime. The $500,000+ in excess assets will be converted into additional income of more than $4,000/month for Joan for her lifetime. The purchase of the irrevocable annuity reduces Frank's and Joan's countable assets to less than $120,000 and Frank qualifies for MassHealth benefits. Even though most of their savings belonged to Frank, he was allowed to give the funds to Joan to purchase the annuity.
Planning With a "Resident Caretaker Child": Example 5: Joe had a stroke, but was allowed to return home. He didn't have much in savings to pay for a home health aide, so his son, Joe, Jr. moved in with him to care for him. After three years, Joe has another stroke, which left him unable to walk, and he was admitted to a nursing home. His son consulted an attorney about paying for his father's care. His father didn't have very much in savings (about $30,000) and Joe Jr. was concerned about losing the house. He mentioned that he had cared for his father after the first stroke. When the attorney learned that Joe Jr. had been living with his father and caring for him for more than two years, she told Joe that the house could be saved. His father was allowed to transfer title to the home to Joe Jr., who is referred to in the MassHealth regulations as a "resident caretaker child". This is one of the exceptions to the resource transfer rules. Title to the primary residence may be transferred to child who has lived with and cared for the MassHealth applicant at least two years directly prior to the nursing home admission. After purchasing a prepaid burial contract, funding a burial needs account, and paying for one month in the nursing home, Joe's assets were reduced to $2,000 and he qualified for MassHealth benefits to pay for his care. Joe was able to transfer title to his home to Joe Jr. without any penalty period.
Planning with a Sibling with An Equity Interest in the Home:
Example 6: Michael has lived with his brother John, for many years. They own their home, as joint tenants and they have joint savings and checking accounts. Both of them contributed funds for the down payment and closing costs when they purchased the house. They both added their salaries to the joint checking account to pay house expenses, including the mortgage payments. They are now retired and their pensions and social security payments go into the joint checking account. Michael has a 401(k) account and John has an IRA account. When Michael has a stroke and must be admitted to a nursing home, John is concerned about losing the house and their joint savings. He consults an attorney and is told that title to the house may be transferred to him. He is a sibling with an equity interest in the home. John is still concerned about the money in the joint bank accounts. The attorney tells him that he must demonstrate how much he has contributed to theses accounts in order to keep some, or all, of the money. This part is not easy. John has to obtain written verification of his sources of income and bank records going back as far as available. Under current laws, banks are required to keep only seven years of records. With these documents attached to an Affidavit drafted by the attorney, John demonstrates that he has contributed half of the funds in the joint accounts. He is allowed to keep these funds, as well as the house and the funds in his IRA. Michael will qualify for MassHealth benefits when he reduces his funds to $2,000 by paying for permissible spend down items and his nursing home care.
Planning with Long Term Care Insurance, Gifts, Life Estates, and Income Only Irrevocable Trusts.
As mentioned in the above examples, there are planning techniques available to protect your assets from future nursing home costs. There is also insurance, referred to as Long Term Care insurance, which will provide benefits for in home care, assisted living facilities, and nursing home care. Following are the available planning options. All of these options require that you plan in advance.
- Purchasing a Long Term Care insurance policy. A Long Term Care policy pays for in home care (such as home health aides), the cost of an assisted living facility, and the cost of nursing home care. When you purchase the policy, you have to choose a daily benefit, and the benefit period (the number of years that the benefits will be paid to you). You will also have to decide if you want to add an inflation rider, which will increase the daily benefit by a certain percentage each year. The daily benefit chosen is the amount that will be paid for your nursing home care. If you need in home care or funds to pay for an assisted living facility, the policy will pay you one-half of that amount for these types of care. The cost of the policy will depend on the daily benefit that you choose, the benefit period, and whether or not you choose an inflation rider. The problem with Long Term Care insurance is the difficulty in obtaining the policy if you have an existing medical condition (the list of disqualifying medical conditions is very long) and the cost of the policy. A good policy (such as $300/day for nursing home care for 3 years with an inflation rider) will costs thousands of dollars per year. You can obtain a policy for these benefits at age sixty-three for approximately $3,500/year, but only if you have excellent health. If you are older or have medical problems, the price can be as high as $10,000/year or more. The other problem is that you may never need the benefits. For those reasons, very few people currently have Long Term Care coverage.
- Making outright gifts to children or other family members. This is a risky option, considering a current divorce rate of 50% and the recent economic problems and unemployment rate. A child, through no fault of their own, may be laid off and have creditor problems. Or the child may be surprised to learn that his or her spouse is not happy and wants a divorce. In both of these situations, the money or the house that you have gifted to the child is at risk. A creditor can attach any real estate in the child's name (including your home) and any bank accounts in the child's name (even if you gifted the funds in the account to the child). A soon to be ex-spouse can argue that the house or the money that you gifted to your child five years ago should be deemed to be "marital property" and half of it should be given to him or her. For these reason, a transfer to an Income Only Irrevocable Trust is a safer choice if you want to protect assets by gifting them to your child or children. However, if you feel that your children are in stable marriages and are financially secure, outright gifting is an option. After the five year "look back" period, you may apply for MassHealth benefits without disclosing the gifts that you have made.
- Deed Title to Your Home or Other Property to Family Members with a Reserved Life Estate. If you are comfortable making outright gifts to children and other family members, a good choice for gifting real estate is deeding to family members, but reserving a life estate for your self and your spouse. The life estate gives you the right to live in the home during your lifetime. You are responsible for paying the costs of maintaining the real estate (utilities, insurance, property taxes and routine maintenance and repairs). If you have reserved a life estate in a rental property, you are entitled to collect the net rental income. The real estate cannot be rented, mortgaged, or sold without your consent and signature. Upon your death, your life estate extinguishes, by operation of law. Only a certified death certificate needs to be recorded to establish that your life estate has extinguished. When you and your spouse have passed away, title belongs to those family members named in the deed. If there is a lien against your life estate (such as a MassHealth lien), it will also extinguish upon your death. Those family members who become the owners after your death receive a "stepped up" cost basis after your death, which results in their paying little or no capital gain when they sell the real estate (see Example 2 above). If the real estate is sold during your lifetime, the sale proceeds must be allocated between you (and your spouse, if he or she reserved a life estate) and those family member to whom you have deeded title. This is done using life estate tables published by the IRS. Your life estate has value - you are gifting only a partial interest in the real estate. Usually, this planning technique is used when the family intends to keep the property until the owners of the life estate are deceased. After the five year "look back" period, you may apply for MassHealth benefits without disclosing the transfer of the real estate. The value of what you have gifted is less than the fair market value of the real estate, because you have reserved a life estate, which has monetary value.
- Gifting to an Income Only Irrevocable Trust. If you wish to gift to one or more family members, but are concerned about protecting the assets that you are gifting, this is a good option. After some recent unfavorable Appeals Court decisions regarding MassHealth eligibility and irrevocable trusts, it is best to be conservative in drafting the Trust. Your children or other family members should serve as Trustees. You should not. You may be a beneficiary, entitled only to income distributions. The trust "principal" (the real estate, money or investments that you have transferred to the Trust) may be distributed to those family members named as "principal beneficiaries". If any of those beneficiaries have financial problems or are divorcing, the trust assets cannot be touched by them. Until a beneficiary receives a distribution from the trust, the trust assets are protected. The five year penalty period applies to transfers made to this type of Trust.
If you would like more information about planning to protect your assets from future nursing home costs, or need help in applying for MassHealth benefits, please contact us to schedule an appointment.