Common Strategies Used in Medicaid Crisis Planning Cases

Written by Jill Roamer, JD

Chances are that individuals over the age of 65 will need long-term care at some point in their golden years. In fact, 70 percent of seniors will. Part of elder law is helping clients plan for the possibility of requiring long-term care; elder law planning provides clients with options for funding such care.

Medicaid is the only public benefits program that pays for long-term care for non-Veterans. Medicare will only pay for brief nursing home stays under limited circumstances. Before the Deficit Reduction Act of 2005, qualifying for long-term care Medicaid benefits was relatively easy. However, since that law became effective, the rules regarding Medicaid eligibility have become much stricter. 

The most successful elder law approach is for a client to proactively plan. This involves planning at least five years before care is needed. In this scenario, an elder law attorney can usually implement strategies that protect most, if not all, of the client’s assets. If the client waits to plan until the need for care is imminent, the elder law attorney must instead engage in crisis planning. Crisis planning options are more limited, and quite often, only some of the client’s assets can be protected.

To become eligible for long-term care Medicaid, there are several tests that an applicant must meet:

• Medical test. The applicant must need institutional-level care. 
• Income test. The applicant must have income less than their private cost of care. Because Medicaid is a cost-sharing program, the applicant will be required to pay nearly all of their income to the nursing home every month to maintain eligibility. Additionally, in certain states, if the applicant has income exceeding the applicable state limit, then additional planning must be implemented to garner eligibility. 
• Transfer test. If the applicant transfers assets for less than fair market value during the applicable look-back period (five years prior to the date of the application in all states except California), then the applicant will be assessed a penalty for that transfer and will be ineligible for Medicaid benefits for a period of time dependent on the amount of the transfer. 
• Asset test. The applicant’s countable assets must be below their jurisdiction’s limit, usually $2,000 for a single person and between $30,828 and $154,140 for a married couple where there is one spouse who is not applying for Medicaid eligibility.

The following is a discussion of common legal strategies that could be used in a crisis planning case to reduce the client’s assets below the asset limit threshold. The overall goal is that all planning strategies combined will reduce the client’s countable assets below the asset limit in their jurisdiction. Then, the client can qualify for Medicaid nursing home care benefits if they also meet the medical, income, and transfer tests.

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Spend Downs and Purchasing Exempt Assets

The first strategies to consider in a crisis planning elder law case are advantageous spend downs and purchasing exempt assets. 

Spend Downs

If the client spends funds and receives fair market value in exchange, then the expenditure is not penalized. Therefore, the first step is to analyze the client’s situation to determine if they could benefit from spending down their assets on needed goods or services. Do they need a new wheelchair? Does the client have outstanding debts that need to be paid? Are there repairs needed to their primary residence? 

In addition, each state has a list of exempt assets for eligibility considerations. As a result, a client can purchase an exempt asset to spend down their excess funds. Exempt assets commonly include the following:

• one vehicle, regardless of age or value
• irrevocable burial contract for the client
• one burial plot per family member 
• life insurance with cash value up to $1,500
• household goods and personal effects

Exempt Transfers

After the client has spent down any funds on things they need and purchased exempt assets, an elder law attorney can explore exempt transfers. This strategy enables excess assets to be transferred to certain recipients penalty-free, thus reducing the overall total of assets held in the client’s name. 

Primary Residence

Per 42 U.S.C. § 1396p(c)(2)(A), the primary residence may be transferred to the following recipients without incurring a penalty:

• The spouse
• A child under age 21
• A child who is blind or permanently disabled
• A sibling with an equity interest who has lived in the primary residence for at least one year prior to the applicant’s institutionalization
• A child caregiver who has resided in the home for at least two years immediately prior to the applicant’s institutionalization and provided care such that permitted the applicant to stay in the home for those two years

Other exempt transfers include those to a sole benefit trust or self-settled special needs trust, as discussed below.

Sole Benefit Trust

A sole benefit trust is authorized by 42 U.S.C. § 1396p(c)(2)(B), which states that assets can be transferred to certain individuals, or for their benefit, and not be penalized. That class of people includes the applicant’s spouse, a blind or disabled child, and a disabled person under 65 years of age. 

Under HCFA Transmittal No. 64, a trust is considered to be established for the sole benefit of a spouse, blind or disabled child, or disabled individual if the trust benefits no one except that person, whether at the time the trust is established or at any time in the future. This requirement will be satisfied if the trust provides for the spending of the funds involved for the benefit of the individual on an actuarially sound basis based on the life expectancy of the individual benefiting. Any potential exemption from the applicable penalty is void when the trust does not include this provision. However, some jurisdictions have permitted the use of a sole benefit trust if the funds remaining in the trust at the individual’s death are made payable to the estate of the individual or a payback provision reimbursing the state up to the amount expended for nursing home care is included in the trust.

Self-Settled SNT 

A self-settled special needs trust (SNT), also known as a first-party SNT or d4A trust, is funded with the beneficiary’s own funds. Per 42 U.S.C. § 1396p(d)(4)(A), the funding of this type of trust is not penalized. However, the beneficiary (who is also the individual funding the trust) must be under age 65 and disabled. In addition, a payback provision is required stating that the state will receive any funds remaining in the trust upon the beneficiary’s death, up to the amount that the state expended on their nursing home care during their life. 

Promissory Note or Annuity Strategy

Both promissory notes and annuities are authorized by federal law. However, as any seasoned elder law attorney knows, states have a mind of their own when interpreting and applying federal law. Some states allow (or prefer) either promissory notes or annuities but do not allow both. Do not rely on the federal rules when planning; instead, determine which strategy is acceptable in the relevant jurisdiction.

There are strict rules about structuring both instruments, so an elder law attorney must ensure that the instrument used complies with the rules. A promissory note must (1) be actuarially sound, (2) have payments in equal amounts, and (3) prohibit cancellation upon the death of the lender. An annuity must (1) be irrevocable and nonassignable, (2) be actuarially sound, (3) name the state as the remainder beneficiary, and (4) require payments in equal amounts. State rules may include additional requirements.

The concept underlying the use of a promissory note is to protect approximately half of a lump sum of assets. The other half must be paid towards the applicant’s cost of care and thus is not protected or preserved. A lump sum is transferred to a friend or family member, who is also the borrower in the promissory note. Half of the funds are paid back to the applicant-lender to pay for their cost of care during the penalty period that is caused by the lump sum transfer. The other half of the funds belong to the friend or family member. 

An annuity can be used in exactly the same way: make a lump sum transfer and set up the annuity to pay back roughly half of the lump sum to the applicant to pay for care during the penalty period caused by the lump sum transfer. For married couples, the annuity can also be used in another way—to convert assets into an income stream for the community spouse. The purchase of the annuity is not penalized because the applicant is receiving something of fair market value in return for all of the transferred funds. In addition, under the “name on the check” rule, the community spouse is allowed to retain any amount of income that is solely in their name.  

Encourage Clients to Plan Early 

Clients who plan early will benefit from the opportunity to protect most of their assets, if not all. However, many clients who do not plan in advance must later engage in crisis planning legal strategies if nursing home care is needed. Crisis planning cases are more complex and tedious, but there are a plethora of legal strategies for an elder law attorney to choose from. When deciding which strategies to engage in for a particular case, the elder law attorney should consider whether the client is married or single, whether the client has a class of eligible recipients to make exempt transfers to, their jurisdiction’s Medicaid state and local rules, and which types of assets the client needs to plan for.