Strategies for Long-Term Care in California:
Medi-Cal and Nursing Home Planning
June 2003
This article provides general information
only and should not be relied on as a legal opinion. Each situation
is different and slight differences may have a large impact on
the result.
Medi-Cal is a combined California and federal program. Among other
things, it pays all or part of the cost of care at a skilled nursing
facility. It does not cover the cost of in-home care or residential
facilities that are not skilled nursing facilities. In other words,
assisted-living retirement facilities, residential-care facilities
or board-and-care facilities are not covered. Still, for families
with a member in (or headed toward) a skilled nursing facility,
Medi-Cal can be an immense help, especially since charges for
a skilled nursing facility can exceed $60,000 a year.
To plan for Medi-Cal as a part of long-term-care strategy, a
number of components must be managed in concert and with careful
attention to timing. This article is divided into the following
topics:
Medi-Cal planning can be very helpful, but sometimes it is preferable
to use private money to pay for all or part of skilled nursing.
This is particularly true when there are concerns about control
of the assets or when the cost of strategies to minimize private
payment is greater than the anticipated Medi-Cal payments. Medi-Cal
will pay for only a shared room, not a private room-and not all
skilled nursing facilities will accept Medi-Cal patients.
Medi-Cal does not cover assisted-living retirement facilities,
residential care facilities, or board and care facilities. Thus
planning should include use of private money and long-term care
insurance if it is reasonably available. An additional consideration
is that there is no guarantee that the Medi-Cal program will continue
indefinitely in its current form.
BASIC ELIGIBILITY REQUIREMENTS
[top]
Assets limited to $2,000 for patient and $90,600 for spouse
Financial eligibility for Medi-Cal for skilled-nursing-facility
payments is based on the "countable assets" of the ill
individual if he/she is single. If ill person is married, then
eligibility is based on the "countable assets" of the
couple. A revocable or living trust provides no shield when it
comes to counting assets. Single people are allowed countable
assets up to only $2,000. With a married couple, the ill spouse
is limited to $2,000 and the spouse is limited to a Community
Spouse Resource Allowance of $90,660. (The amount of this allowance
is adjusted each year for cost-of-living increases.) After the
ill spouse qualifies for Medi-Cal, additions to the well spouse's
assets do not affect Medi-Cal payments. An example would be additions
by inheritance or from interest or dividends. A frequent concern
is that the Community Spouse Resource Allowance of $90,660 may
not be enough to support the well spouse for the remainder of
his/her life.
Assets over the limits must be spent on the skilled nursing
facility
With some exceptions, Medi-Cal requires that amounts in excess
of these default limits be spent on the skilled-nursing-facility
fees. Medi-Cal requires this to continue until the remaining assets
fall within these limits. At that point Medi-Cal generally assumes
part of the cost of the skilled nursing facility.
Reducing countable assets
Medi-Cal planning involves reducing countable assets in one of
three legally permissible ways. One way is to transfer assets
in an exempt manner. A second way is to convert the assets so
that they are not countable assets. The third way is to increase
the asset limits to an amount greater than the Medi-Cal defaults.
Generally, all of these must be done before the ill spouse applies
for Medi-Cal.
Exceptions to transfer restrictions for other needs
Certain conditions or situations can provide an exception to the
transfer restrictions. Included conditions are if an applicant
is aged, blind or disabled, or in need of expensive surgery. (One
example is surgery that is not fully covered by insurance where
the patient does not need care by a skilled nursing facility.)
If these situations/conditions are present, the applicant can
simply transfer assets to become eligible for Medi-Cal without
affecting eligibility. It is still important to plan the transfers
carefully, though. If the transfers are not properly done, they
may have a negative impact if that person later needs to apply
for Medi-Cal for payment for a skilled nursing facility.
When a person can apply for Medi-Cal
An application for Medi-Cal may be submitted after the ill person
has been admitted to a skilled nursing facility. The Medi-Cal
payments can be retroactive for up to three months. It is also
possible to apply for retroactive Medi-Cal payments for someone
who has died.
Eligibility for Medi-Cal for persons who are not U.S. citizens
Qualified immigrants are eligible for Medi-Cal. Immigrants who
are eligible include: lawful permanent residents, persons granted
asylum, persons granted a withholding of deportation/removal,
refugees, persons paroled into the U.S. for at least one year,
Cuban/Haitian entrants, and certain battered immigrants (their
parents and spouses). California also provides long-term nursing
home care to immigrants regardless of their immigration status.
The income or resources of an immigrant's sponsor are not counted
in determining eligibility. All the other rules are the same,
including those regarding Medi-Cal attempts to recovery money
after the ill person dies.
"SHARE OF COST" AND ADJUSTMENTS
[top]
Patient must pay part of skilled-nursing-facility costs
Medi-Cal does not usually pay the full cost of the skilled nursing
facility. Normally the beneficiary is required to pay his/her
share of the cost. The Share of Cost is gross income minus a $35
personal-needs allowance and the cost of any health-care insurance
premiums. Gross income includes Social Security benefits, retirement
plan benefits, pension payments, earned interest and other income.
Amount paid to skilled nursing facility may change if patient
is married
If there is a spouse at home, the Share of Cost may be adjusted.
Each year California publishes a Minimum Monthly Maintenance Needs
Allowance. The allowance is $2,267 per month as of June 2003.
(This allowance may be greater if there are minor ore dependent
children, dependent parents or dependent siblings if they live
with the well spouse.) If the at-home spouse's income is less
than the allowance, that spouse can request an allocation of income
from the ill spouse's monthly income to bring it up to the $2,267
allowance. This reduces the Share of Cost that the ill spouse
must pay for the skilled nursing facility. (The well spouse may
have any amount of income and the ill spouse still be eligible
for Medi-Cal. But if the well spouse's income exceeds $2,267/month
then no income can be transferred from the ill spouse.)
| Example: |
Say the ill spouse has income
of $1,602 per month and his/her monthly health insurance
premium is $200 per month. In this case, the ill spouse's
Share of Cost would be $1,367. ($1,602 minus the $35 personal
allowance minus the $200 health insurance premium = $1,367.)
If the at-home spouse has income of $1,000/month, then
$1,267/month from the ill spouse's income may be transferred
to the at-home spouse. This would bring the at-home spouse
up to the Minimum Monthly Maintenance Needs Allowance of
$2,267.
This also lowers Share of Cost the ill spouse must pay
to the skilled nursing facility by the amount being shifted
to the at-home spouse ($1,267). In this example, the ill
spouse's Share of Cost is reduced to $100/month. ($1,367/month
initial Share of Cost minus $1,267/month shifted to the
at home spouse = $100/month.) Medi-Cal would then pay all
but $100 a month of the cost of the skilled nursing facility. |
| |
If income is received via a check listing both spouses' names,
then one-half the income is attributed to each.
Exceptions to share of cost rules
The ill person is allowed to deduct from his/her income the monthly
costs of necessary medical care that is not covered by Medi-Cal.
This includes treatments and pharmaceuticals not covered by Medi-Cal.
To qualify, such care and prescriptions must be part of the physician's
plan of care. The physician's prescription or order must be in
the medical records at the skilled nursing facility.
The ill person is also permitted to use his/her monthly income
to pay for all his/her medical bills, even if they were incurred
previously.
ASSETS EXEMPT FROM ELIGIBILITY CALCULATIONS
[top]
Assets that may be fully or partially exempt include the
home, other real estate, household goods, personal effects, jewelry,
cars, life insurance, burial assets, business real estate, work-related
pensions, annuities, and certain government payments.
Home
The home is a primary asset that is not counted toward the Medi-Cal
limits on assets ($2,000 for the ill person and $90,660 for any
spouse).
This includes not only houses but mobile homes, house boats,
or an entire multi-unit dwelling as long as any portion serves
as the principal residence of the person applying for Medi-Cal.
The home may be either inside or outside of California.
To use this exemption, the applicant (or the person filing for
the applicant) must state on the Medi-Cal application that the
applicant intends to return home. This is based on a subjective
intent to return home. There does not have to be a reasonable
expectation that the applicant will actually return home. Since
presumably virtually anyone in a skilled nursing facility would
like to return home if able, the box indicating the applicant
intends to return home should always be checked. If the box is
not checked, and the applicant (or his/her representative) later
makes a correction, the county must accept that correction.
While the home is exempt for eligibility purposes, the exemption
does not protect against California taking the home after the
ill person (and any spouse), has passed away.
If the ill person is single, generally he/she may not take deductions
from his/her income to maintain the house. Renting the house to
another party is often the only way for the ill person to deduct
maintenance costs.
Other real estate
Other real estate is valued at the lesser of assessed or appraised
value if it is located in California. (Property located outside
California is valued by employing the assessment method used in
that area.) If the real estate has been held for a significant
length of time, the assessed value may be greatly lower than the
appraisal value. The net value of the real estate for Medi-Cal
purposes in that case is the assessed value minus any encumbrances
on the property. If the net value of the property is $6,000 or
less and the beneficiary receives yearly income of at least 6%
of the net value, then the property is exempt from Medi-Cal calculations.
(The $6,000 limit still applies if there is more than one parcel
of other real estate; in other words, the total net value of all
the parcels must be $6,000 or less.) Providing copies of rent
checks that are made out to the applicant or his/her agent under
a power of attorney may be necessary.
| Example: |
If the ill person owns a house that
he/she is renting out, the assessed value is $100,000 and
there is a $95,000 deed of trust on the property, the net
value for Medi-Cal purposes is $5,000. Assuming the ill person
is receiving income in excess of $300/ year in rent (6% of
$5,000), the property is exempt. (Deeds of trust are made
according to the appraised value of the property. Get legal
advice if you choose to create a deed of trust.) |
| |
Net income from rent is added to the ill person's Share of Cost.
On the other hand, taxes and assessments, insurance, interest
payments (but not payments of principal), maintenance and utilities
are deducted from the gross rental income to calculate net income.
Upkeep and repairs are allowed at the greater of the actual amount
or 15% of the gross monthly rental income plus $4.17/month. Different
calculations are used for rentals of rooms, units in a multiple
dwelling unit (for example an apartment or duplex), rentals providing
room and board or board and care, and other dwellings on the property
(such as a cottage in the back yard).
If the net market value exceeds $6,000, the first $6,000 of net
value is exempt if the property generates annual income of 6%
of the net value. The amount of the net value greater than $6,000
is countable.
One Medi-Cal planning strategy for real estate other than the
home is to place sufficient liens against income-generating property
so that the assessed value minus the liens leaves less than $6,000.
Another strategy is to transfer the property to the spouse as
separate property. This can be done if the ill person is married.
Secured debt
Unsecured debt (such as debt on an normal credit card) is not
deducted from gross assets to determine eligibility, but secured
debt is.
| Example: |
If a credit-card balance is paid
with a loan that is secured by a brokerage account, the brokerage
account is not counted to the extent of the amount owed. |
| |
Proceeds of real estate sales
Proceeds of real estate sales are exempt for six months if the
holder intends to buy a residence. This is generally shown by
providing a copy of a real-estate brokerage agreement.
Business property
Property used as a means of self support or as a business is exempt.
Proof of a business is generally proved by providing a business
tax return (IRS Schedule C or F). Rental property is not exempt
unless it is clearly held as a business and not just as investment
property. Business status must be demonstrated with tax returns.
Stocks and similar items are not exempt. What this means is that
a corporation, limited liability company or limited partnership
may have to be converted to a sole proprietorship to fall within
the business-property exemption.
Property in the process of being sold
If the applicant implements and continues a bona fide effort in
good faith to sell certain property, the property is exempt. With
personal property, this bona fide effort is shown by placing advertisements
in a local newspaper to sell the property. Real estate must be
listed with a licensed real estate broker for its fair market
value as set by a qualified real estate appraiser. The applicant
must provide proof of good-faith efforts to sell the property
every six months. With personal property this means there must
be an advertisement placed in a local newspaper every six months.
The applicant must notify Medi-Cal of all offers and accept any
bona fide offer, except that promissory notes secured by deeds
of trust from the sale of property owned by the ill person need
not be sold for at less than two-thirds (2/3) of their fair market
value.
Once the property is sold or the applicant quits making a good-faith
effort to sell the property, the property becomes available for
Medi-Cal purposes.
Household goods and personal effects
Household goods (including TV's, computers and VCR's) and personal
effects are completely exempt. Art work and collections (stamps,
coins, etc.) fall in this category if kept for personal enjoyment
rather than as an investment.
Jewelry
For a single person, wedding, engagement rings and heirloom jewelry
are totally exempt, and other jewelry with a total net market
value of $100 or less is exempt. When one spouse is in a skilled
nursing facility, all jewelry owned by both spouses is exempt
for determining the ill spouse's eligibility.
Automobiles
One car is generally exempt if used at least in part for the benefit
of the applicant (including visits to the ill person) or needed
for medical reasons.
Life insurance
Term life insurance is completely excluded. Other life insurance
is exempt if the face value (death benefits) of all policies combined
is $1,500 or less. If the combined values of the policies exceeds
this limit then the amount of the cash-surrender value of the
policies that exceeds the limit is counted.
Burial assets
Tangible burial assets like caskets, plots, crypts, etc. are fully
exempt. Up to $1,500 in designated burial funds (and interest
on them) is exempt if held separate from all other accounts. Irrevocable
burial trusts are fully exempt.
IRA, Keogh, 401k and other work-related pensions
Work-related retirement and pension funds held by an at-home spouse
are fully exempt even if no distributions are being made. This
includes IRA's established for the well spouse using the ill spouse's
money. Ownership is determined by whose name appears in the account
title.
Work-related retirement accounts held by the applicant are exempt
if certain minimum withdrawals are met. For Roth IRA's and for
accounts held by those who are 70 1/2 or older: if the IRS rules
for required minimum distributions from those accounts are met,
the Medi-Cal requirements are satisfied.
For other work-related retirement accounts, the California Department
of Health Services requires that one of two conditions be met.
One is that the financial broker or fund manager for each account
must verify in writing that the distributions from that account
meet the requirements for early distribution based on IRS life-expectancy
tables. The other is that periodic payments must be made and that
those payments include both interest and principal.
A letter to the pension fund requesting that these payments be
made is considered sufficient evidence that the required payments
will be made (assuming they are not already being made).
Only the minimum distributions should be taken out. The retirement
account should be preserved as much as possible, since it is exempt.
Be aware that financial institutions often suggest a figure higher
than the minimum.
Annuities not related to work
Non-work-related annuities purchased prior to August 11, 1993,
are considered unavailable if the applicant is receiving periodic
payments of interest and principal.
Non-work-related annuities purchased between August 11, 1993,
and March 1, 1996, that cannot be modified to meet the current
requirements are considered unavailable. The agent or company
who sold or issued the annuity must provide written verification
that the annuity cannot be modified for this strategy to be successful.
For annuities purchased after March 1, 1996, the applicant or
spouse must receive periodic payments of principal and interest
such that the annuity is exhausted by the end of the annuity-holder's
life expectancy. In some cases the annuity payments must be level
or increase by no more than 5% a year. If the guaranteed period
exceeds life expectancy, the excess is a countable transfer.
Special government payments
Certain special government payments are exempt, regardless of
whether they are held by the ill person or spouse. These include
crime-victim payments, Nazi war-victim payments, and Japanese
internment camp payments. These amounts do not have to be held
separately, but can be part of a mixed account or asset.
PROPERTY TRANSFERS AND INELIGIBILITY
PERIODS [top]
Property gifts and some property sales can cause penalties
Transfers of property that are made as a gift or with inadequate
compensation (less than fair market value) are subject to penalty.
The penalty is a period during which the ill person is not eligible
for Medi-Cal. The period of ineligibility is determined by dividing
the amount of the uncompensated part of the transfer by the Average
Private Pay Rate, which is currently $4,415. The period of ineligibility
is rounded down to the nearest whole month.
| Example: |
A gift of non-exempt property worth
$7,500 would result in ineligibility for one month, while
a gift of property worth less than $4,415 would not cause
any ineligibility at all. |
| |
The period of ineligibility begins on the first day of the month
in which the transfer takes place. This means that if the transfer
occurs enough months prior to the application for Medi-Cal, there
is no period of ineligibility.
| Example: |
For example, a gift of $11,000 would
result in ineligibility for two months ($11,000 divided by
$4,415 is 2.49, which is rounded down to 2). If the transfer
is made at least two months prior to the application for Medi-Cal,
there is no period of ineligibility. |
| |
The maximum period of ineligibility under the current regulations
is 30 months. (This is in the process of being changed to 36 months
for transfers made prior to the application and to an unlimited
time for post-application transfers.) So for the moment, gifts
in excess of $132,450 (30 x $4,415) still only create a period
of ineligibility of 30 months, even if the gift is as large as
$1,000,000 (for example) as long as the transfer is made prior
to the application for Medi-Cal.
There is a tough 60-month look-back period for certain transfers
from trusts. Still, this rule is relatively easy to avoid by either
dissolving the trust or removing the asset from the trust before
it is transferred. In that case, the 30-month (soon to be 36-month)
look-back period still applies.
MEDI-CAL RECOUPMENT OF PAYMENTS AFTER
BENEFICIARY' DEATH [top]
California Department of Health can attempt to obtain reimbursement
after the beneficiary dies
The California Department of Health Services has the right to
recoup Medi-Cal money spent on skilled nursing facilities. It
can make a claim against the estate of a person who received benefits
(before death) for living in a skilled nursing facility unless
there is a surviving spouse or a minor, blind, or disabled child
. The estate includes assets conveyed through joint tenancy, tenancy
in common, living trust, will, community property, etc. As a result,
many families wish to find legitimate ways to move property, such
as the principal residence, out of the name of the beneficiary.
Claim limited to estate or benefits received, whichever is
lower
The Department of Health can only claim the lesser of the beneficiary's
estate or the amount of benefits received. If property is in joint
tenancy, recovery is limited to the amount of the beneficiary's
interest (rather than the entire value of the property). If there
is a deed of trust on the property, the amount of that debt is
subtracted first.
Property and payments exempt from claims
The Department of Health cannot recover payments made prior to
October 1, 1993, or from property held in living trusts, joint
tenancies, or community property where the other party died prior
to October 1, 1993.
Revocable versus irrevocable life estates
The current policy of the Department of Health is to recover from
revocable life estates, but not from irrevocable life estates.
Both are created by deeds involving real estate.
Annuities
The Department of Health is trying to expedite regulations to
recover any survivor's interest in a deceased beneficiary's annuity.
Still, as of April 2003 no regulations have been adopted. Once
such regulations are adopted, annuities will have little benefit
for Medi-Cal planning.
Children of deceased living in family home
While there is no official exemption for children of the deceased
Medi-Cal beneficiary where those children lived continuously in
the beneficiary's home for at least two years and provided care
that delayed the beneficiary's entry into a skilled nursing facility,
the Department of Health will in fact consider this factor.
Recoupment claim cannot be filed before the surviving spouse
dies
The Department of Health cannot recover while the spouse of a
deceased Medi-Cal beneficiary is alive. But once the surviving
spouse dies, the Department may recover any property left to the
surviving spouse by will or community property from the original
Medi-Cal beneficiary.
Transferring the property before death can help
On the other hand, if the property is transferred out of the Medi-Cal
beneficiary's name while he/she is alive (via power of attorney,
court order, or deed where the beneficiary has capacity), there
is no recovery.
Hardship waivers
It is also possible to file a hardship waiver within 60 days of
the notice of the recovery claim, if the claim would cause substantiated
hardships to the dependents or heirs of the Medi-Cal beneficiary.
If the waiver is denied, the applicant may request an administrative
law hearing within 60 days of the denial. That hearing can be
appealed if needed to the appropriate court.
STRATEGIES FOR ELIGIBILITY
[top]
Caution regarding making changes too soon
Although Medi-Cal planning can be very useful, often it is disadvantageous
to engage in too many asset transfers before the ill person has
entered a skilled nursing facility. The reason is that many skilled
nursing facilities will admit a patient only if he/she has what
the institution considers to be a reasonable amount of assets.
Pay Down Debt First
Payment of debts does not constitute a transfer that results in
a period of ineligibility, so one of the first planning measures
is to pay down debt. The exception is medical expenses, since
generally the applicant's ongoing income can be used to pay those
- thereby lowering the share of cost that the applicant must pay.
Spending money on exempt property
Another Medi-Cal planning approach is to use money that would
otherwise be countable for Medi-Cal purposes by purchasing or
"improving" property that is exempt.
For example, since the principal residence is exempt in calculating
Medi-Cal eligibility, money can be used to pay down loans secured
by the principal residence. (With a married couple, usually only
money in excess of the $90,660 Community Spouse Resource Allowance
is used for this purpose.) Amounts in excess of the allowance
can also be used for repairs, improvements, and outstanding maintenance
on the principal residence, along with home furnishings. These
amounts can be used to pay bills or prepay health insurance premiums
as well.
Because one vehicle is exempt, existing cars can be sold and
excess funds used to buy a new, perhaps more-expensive, vehicle,
ideally as the separate property of the well spouse. The car does
not have to be used for transportation, but the ill person's name
must be on the title. (Vehicles used in a business may fall within
the exemption for property used in a trade or business.) Additional
vehicles are valued by multiplying the DMV license fee by 50,
then subtracting any money owed on the vehicle.
Money in excess of the allowance may also be spent on burial
assets, including up to $1,500 in designated burial funds, caskets,
plots, crypts and burial trusts that are irrevocable.
Real estate transfers to children
Even though gift transfers to children of real estate (other than
the principal residence) may result in periods of ineligibility,
they may not be as painful as originally anticipated. If the real
estate has a high fair-market value but low assessed value, the
penalty is calculated only on the assessed value. In addition,
any liens against the real estate are subtracted before the calculation
is made. In some situations the liens against the property may
exceed the assessed value.
Promissory notes
A promissory note generally can be valued three ways: face value,
appraised value, or market value. Since promissory notes generally
sell at a significant discount, a note may be worth much less
than its face value indicates. If the promissory note is unsecured
and is from a family member with few assets, it may have no market
value. Some counties will deem a promissory note "unavailable"
if the person who owes the money makes a sworn statement that
he/she is unable to pay.
Special rules apply to promissory notes that are secured by deeds
of trust and that arose from a sale of the applicant's real estate.
These promissory notes are reated as "other real property".
They are exempt from Medi-Cal calculations only if the net value
of the note is less than $6,000 and the beneficiary receives yearly
income of at least 6% of the net value.
Creation of businesses
In some cases the Department of Health Services has accepted a
business created with the assets of the ill person, so long as
a business tax return (IRS Schedule C or F) is filed regarding
the business.
Transferring joint property to another
When there is cash in a joint account, all of that cash is counted
for purposes of determining the ill person's eligibility.
Non-cash joint accounts (and property held as community property)
are counted as the ill person owning one-half. In other words,
the value of one-half of that property is counted as part of the
ill person's assets for determining eligibility for Medi-Cal.
As a result, it is often useful to transfer ownership to another
person as separate property. Generally this requires that the
property be exempt or that the transfer itself be exempt, as transfers
to spouses are.
Selling an asset held in joint tenancy (or community property)
results in each of the two owners receiving one-half the net proceeds.
This can disqualify the ill spouse for Medi-Cal, at least for
a substantial period of time. It is often better to transfer full
ownership in the property to another party first (first); then
that party (which may be the well spouse) can sell the property.
Non-work-related annuities
Another possible planning strategy is to establish one or more
annuities, although this approach has some disadvantages. Annuities
not related to work that are purchased after March 1, 1996, are
exempt if the holder (whether the ill person or the spouse) receives
level periodic payments of principal and interest that exhaust
the annuity by the end of the holder's life expectancy as established
by the Health Care Financing Administration. That income will
generally be counted in calculating the ill person's Share of
Cost and any spouse's Minimum Monthly Maintenance Needs Allowance.
Another problem is that annuities frequently provide a much lower
rate of return than other comparable investments.
A major problem with annuities with an ill single person is the
income that they generate. One solution to this is for him/her
to purchase an "immediate annuity" (one with periodic
payments that is irrevocable) that makes small payments at first
and a balloon payment at the end. The Department of Health Services
counts as available the "cash surrender value" of annuities
that have payments that increase by more than 5% a year, the cash
surrender value of an immediate annuity (versus the more common
"deferred" annuity, which is more like a certificate
of deposit) is almost always zero.
If a well spouse's income is below the minimum monthly maintenance
needs allowance, income shifting (from the ill spouse) or enlargement
of the community spouse resource allowance for assets is usually
better, since an annuity will raise the well spouse's income.
On the other hand, where the well spouse's income already exceeds
the minimum monthly maintenance needs allowance, an annuity may
be more attractive.
For a well spouse a short-term annuity is generally best, since
it will return control of the money to the well spouse sooner.
California has stated that it is preparing regulations that would
allow recovery of annuities. The risk of recovery is relatively
low where assets are used to purchase an annuity as separate property
of the well spouse. With a single individual, the risk of recovery
is great.
Transfers to a well spouse
Transfers between spouses are generally exempt under the Medi-Cal
rules (with the exception of certain transfers of their principal
residence). The transfers may be used to raise the well spouse's
separate property up to the $90,660 Community Spouse Resource
Allowance, to purchase an annuity for the well spouse, etc. In
certain circumstances, the well spouse can also transfer assets
to other family members. As a result, transfers from the ill spouse
to the well spouse are often a key part of Medi-Cal planning.
Property held in joint tenancy or as community property must
be transferred to the well spouse as separate property before
being sold. Otherwise some of the proceeds will be attributed
to the ill spouse. This property may include stock, promissary
notes, life insurance, rental property, a second home etc. Simply
changing the name on the property to that of the well spouse alone
is likely to be ineffective, since under California law property
that is held in the name of one spouse can still be community
property. Instead the ill spouse (or his/her agent, if there is
a proper power of attorney) should waive, release and/or quitclaim
any interest in the property in writing.
Expanding the Community Spouse Resource Allowance
If the well spouse's income is less than the Minimum Monthly Maintenance
Needs Allowance, the well spouse may obtain an order increasing
the Community Spouse Resource Allowance (CSRA) (currently $90,600),
allowing him/her to keep additional assets sufficient to produce
the minimum amount of income. This must be authorized by a court
order or at a hearing before an administration law judge. The
court or administrative law judge must order enlargement of the
CSRA if the additional assets are needed for the minimum amount
of income. On the other hand, procedures to obtain an expanded
CSRA are time-consuming, cumbersome and frequently frustrating.
As a result, the approach is usually most effective when the well
spouse has little or no separate income.
Non-income producing assets for a well spouse
If there is a well spouse who does not need additional income,
often that spouse will want to convert his/her assets into investments
that do not produce income but instead appreciate in value, such
as zero-coupon bonds. This can maximize the amount of income that
the ill spouse can transfer to the well spouse (so that the well
spouse reaches the monthly minimum maintenance needs allowance)
and the ill spouse's share of cost of the skilled nursing facility
payments are minimized. The income is taxable but (because it
is considered unavailable) it is not countable as income for Share
of Costs purposes, even when the bond matures, assuming the money
is again invested in zero-coupon Treasure bonds.
Assuming it is best to pursue an expanded CSRA, six-month Certificates
of Deposit are particularly attractive right now, given that they
carry only about a 2% rate of return.
| Example: |
The allowance is currently $2,267
per month, so if the well spouse had $1,000 of income from
other sources, with a six-month Certificate of Deposit earning
2% annual interest, the well spouse could keep $760,200 in
that CD ($760,200 x 2% divided by 12 months = $1,267). |
| |
SPECIFIC STRATEGIES FOR TRANSFERS
OF ASSETS [top]
Transfers of exempt assets
The transfer rules generally cover only assets that are not exempt.
If an asset is exempt, it usually can be transferred. One major
exception to this approach is the principal residence, since by
special statute the transfer rules apply to the home. On the other
hand, an exempt automobile, for example, may be given to another
person without incurring a transfer penalty.
Current and upcoming regulations
California has been using regulations based on revisions to the
Medical Catastrophic Coverage Act ("Catastrophic Act")
rather than the Omnibus Budget Reconciliation Act ("Omnibus
Act"). California is in the process of adopting regulations
that conform with the Omnibus Act, but currently the more generous
Catastrophic Act regulations are still in effect. When the Department
of Health adopts regulations based on the Omnibus Act, they probably
will apply only to transfers that occur after the date the new
regulations are issued.
Breaking gifts into smaller pieces
Under the Catastrophic Act rules, each gift or transfer for less
than fair market value creates its own separate period of ineligibility.
Separate periods can run concurrently. Medi-Cal ineligibility
can be minimized by breaking gifts into smaller pieces. Various
planning strategies involve concurrent disqualification periods.
The Omnibus Act rules will end the simultaneous running of disqualification
periods and make the disqualification periods run one after the
other. This will invalidate some of the planning techniques discussed
here. In addition, some of the Catastrophic Act techniques require
substantial periods of time, and the Omnibus Act rules may be
in effect before an application is made.
Issues with transfers to third parties
If assets transferred to third parties are used for the ill person's
or a well spouse's benefit, Medi-Cal may find that a trust has
been created, subjecting the assets to the 60-month look-back
period that applies to trust assets. On the other hand, there
may be immense bad feelings in the family if the transferred assets
are not used for the spouses' support.
Transfers to Disabled and Minor Children
Both the Catastrophic Act and Omnibus Act rules provide an exemption
for transfers to the Medi-Cal applicant's minor or disabled children,
as well as to trusts for disabled children.
Gift tax returns
If the value of a gift exceeds the recipient's annual exclusion
amount ($11,000 in 2003), the recipient is required to file a
gift tax return. There is generally no tax to pay unless the donor's
unified credit amount is exhausted.
Change of title
The Department of Health Services requires that the ill spouse's
name be removed from transferred assets within 90 days after the
determination that the ill spouse is eligible for Medi-Cal.
Transfers to spouses and then to others
Transfers from the ill spouse to the well spouse are generally
exempt (with the exception of certain transfers of their principal
residence). The question is what transfers the well spouse may
make of the property without causing Medi-Cal ineligibility.
The well spouse can freely transfer any or all of his/her separate
property assets (assuming they were not received from the ill
spouse) without any effect on the ill spouse's eligibility.
Under the Catastrophe Act there is no problem with eligibility
if the well spouse receives assets from the ill spouse at any
time but waits until the ill spouse has entered a skilled nursing
facility before transferring them to a third party.
This will change under the proposed regulations based on the
Omnibus Act. Assets will still be able to be transferred from
the ill spouse to the well spouse without penalty. What will be
new is that the well spouse will not be able to transfer the assets
to others without creating a period of ineligibility for the ill
spouse.
TRANSFERS OF THE PRINCIPAL RESIDENCE
[top]
As long as a Medi-Cal applicant states that he/she intends to
return home (whether that is realistic or not), the principal
residence is exempt. Still, Medi-Cal will attempt to recover the
house once both spouses have passed on.
Transfer of principal residence to spouse
Transfer of the principal residence to the well spouse can avoid
Medi-Cal's recovery of the home so long as the spouse is willing
to lose the stepped-up tax basis that would otherwise occur on
the ill spouse's death. Once the home is transferred to the well
spouse, he/she can rent it out, sell it and borrow against it.
(It is often important to transfer the home while the ill spouse
still has the mental capacity to sign documents.)
Timing of home transfer to spouse
The well spouse usually must not sell or borrow on the principal
residence before the institutionalized spouse is eligible for
Medi-Cal. If this is done, the cash raised will be considered
as part of the well spouse's countable assets. The well spouse
needs to wait until the ill spouse is receiving Medi-Cal before
selling or borrowing against the home. In addition, if the well
spouse plans to sell the house, there are capital gains taxes
issues that should be considered in advance.
Transfer of principal residence to others
Because the principal residence has exempt status, it can also
be transferred without Medi-Cal penalties to children or third
parties. In any case, the donor must intend to return home for
the home to be exempt. Stating this intent can be accomplished
through a variety of methods, including an affidavit, declaration,
or agreement of right to return to live at home signed by the
recipient. Frequently this agreement is also used to state which
party will receive any rents from the property, since otherwise
it may be unclear.
If a transfer to others is going to be made, it is often best
to pay down the loans on the house and make any needed repairs
before making the transfer. Doing so maximizes the value of the
transfer and increases the basis of the property.
Tax issues
Gifts of real property also raise tax issues. Unless the house
has a high tax basis, the transfer can ultimately imposes substantial
income taxes. If the recipient receives the property upon the
donor's death, the recipient's tax basis in the property is the
date-of-death value. If the recipient receives the property before
the donor passes on, the recipient receives the donor's basis
(usually the amount the donor paid for the house, plus any the
cost of any improvements). If the property has substantially appreciated
in value, that means the recipient will eventually face taxes
on that appreciation.
While there are many ways to force a new tax basis, the most
common is for the donor to transfer the property but retain for
his/her life the right to possess, use, or obtain income from
the property. This approach will work until new federal tax basis
rules go into effect in 2010. While having the donor retain a
life estate has been put to similar use in the past, the Department
of Health Services has said that it intends to issue new regulations
that will allow it to recover against life estates.
In addition to income-tax issues, the real estate may be reassessed
and the property taxes may increase unless the transfer is made
to a child or children.
Timing the sale of the house
If selling the house after it is transferred from the ill person
is needed or useful, an irrevocable grantor trust may be the best
option. The trust gives the donor only a right of occupancy, but
allows the trustee to sell the property. Because this is a grantor
trust, the sale proceeds fall within the donor's residential exemption.
Because the trust is irrevocable and provides only for a right
of occupancy, the sale proceeds do not count against Medi-Cal
eligibility. The trust may escape Medi-Cal estate recovery claims,
although this is not definite.
Title problems due to lack of capacity
A title problem can arise from transfer of the home when the ill
person lacks the legal capacity to make the transfer himself/herself.
Usually standard powers of attorney do not solve this problem.
One reason is that powers of attorney do not always include the
power to make gifts. By statute, gifts of real estate are not
allowed by power of attorney unless the power of attorney expressly
authorizes the making of gifts.
Even if the power of attorney authorizes gifts, the person holding
the power of attorney frequently is going to receive title to
the house. This makes the gift of the house a "self-dealing"
gift. Authorizing power to "self-deal" presents the
danger that the power may be abused. In addition, clauses that
allow self-dealing make the assets taxable in the estate of the
person holding the power of attorney - even though that person
does not own them - if he/she dies before the owner.
If the ill person still has capacity, it may be possible to create
power of attorney provisions that avoid this problem. If not,
a petition may need to be made to the court in order to obtain
the power to transfer real estate.
POWERS OF ATTORNEY [top]
Trusts
Trusts often state that only the trustor can exercise power over
the trust assets. If the donor becomes incapacitated, it can be
extremely difficult to transfer trust assets, since a power of
attorney only covers assets outside of the trust unless the trust
says otherwise. In addition, most standard powers of attorney
do not include the power for the agent to make gifts. If they
do, they do not permit the agent to make gifts to himself/herself.
This is an issue because often the agent is a family member and
Medi-Cal planning frequently calls for transfers to family members.
Trusts need a special gift provision
For Medi-Cal planning purposes, trusts need a special provision.
This should state that the powers to amend or revoke the trust
or make gifts of the trust property, including to the attorney
in fact, may be exercised by the attorney in fact or a conservator
acting according to the doctrine of substituted judgment.
Preventing abuse of gift provisions
To thwart the possibility of this provision being abused, a list
of individuals who may receive gifts may be specified. Often a
provision is added stating that no amendments to the trust or
gifts of trust property may be made that affect the ultimate disposition
of trust assets. In other words, gifts may only be given to the
trust's beneficiaries.
Power of attorney should include changes to trust
The power of attorney should state that it includes the power
to create, modify, or revoke a trust on behalf of the principal
and to make or revoke gifts of the principal's real estate (and
other property) in trust or otherwise, including to the agent.
Often a provision is added stating that the agent may only make
gifts to those persons who are the principal's heirs or beneficiaries.
Taxes on the gifted assets
One problem with these gift clauses is that they can make the
estate of the agent liable for the taxes on the assets if the
agent dies before the ill person. This can be solved by making
sure that the agent is not also a potential beneficiary. For example,
a friend of the family could be named the agent. Another solution
is to have the power of attorney name a special agent with the
power to make gifts to the general agent. If neither of these
is practicable, it may be sufficient to state that the power of
attorney may be exercised only if the trustor is incapacitated
or no longer competent.
TRUSTS [top]
Revocable or "living" trusts do not prevent the assets
from being counted for Medi-Cal purposes unless the assets they
contain are all exempt in and of themselves. When planning for
Medi-Cal eligibility, often one of the first acts is to revoke
any living trusts. When both spouses are healthy and there is
no current indication that skilled nursing facility care will
be needed in the future, it is often best to employ or keep the
same estate-planning documents that are in effect. Only one major
change should be made: the trusts and powers of attorney need
to be structured so that the agent can make gifts from the trust.
So-called defective irrevocable trusts can protect assets from
being counted for Medi-Cal eligibility purposes, but are complex
and require careful planning.
Once Medi-Cal eligibility has been established for the ill person,
often the well spouse will want to create a living (revocable
trust) to hold his/her property. It is essential that this trust
not make the ill spouse a beneficiary, since that would terminate
his/her eligibility. Many well spouses understandably want to
provide for the ill spouse in the event the well spouse passes
away first. One way to accomplish this is to have the well spouse's
living trust "pour back" the assets into the well spouse's
probate estate if the well spouse dies first, coupled with a will
by the well spouse that creates a testamentary trust for the ill
spouse. Since the Medi-Cal rules do not cover such testamentary
trusts, no ineligibility is caused for the ill spouse.
CONCLUSION [top]
Planning for nursing homes is very complex, and changes to real
estate and other legal documents must be handled with awareness
of the consequences to the rest of the Medi-Cal and estate planning
strategy.
Copyright 2003 Methven & Associates.
All Rights Reserved.
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