Medicaid Dangers of Making Gifts
In 2006, Congress made drastic changes to Medicaid that are now being implemented. Eligibility is radically curtailed due to punitive new penalties for gifts. Michigan Department of Human Services (DHS) has adopted harsh rules that affect estate and financial planning for anyone of retirement age. Attorneys, CPAs, and financial advisers must warn anyone over 65 who provides funding for college for a child or grandchild, gives money for the down payment for a home, makes a substantial donation to a charity, or gives more than a pittance to a candidate or cause. Every transfer of money or property is subject to review by the DHS if the transferor needs Medicaid within five years.
Any gift will be subject to a five-year look-back. Furthermore, a gift results in a Medicaid penalty that begins when the person who made the gift is otherwise eligible for Medicaid.
Let's assume that Rosco, a widower, is in good health when he gives his grandson $25,000 for college. After the gift, he still has $75,000 in savings. Two years after the gift, he suffers a stroke and enters a nursing home. His cost of care as a private-pay patient is $6,500 per month and his income is $1,200, so he has to withdraw $5,300 per month to pay for his care. Three years and three months after the gift, he runs out of money. Under the new rules he cannot get assistance with his nursing home bill for a number of months computed by dividing the $25,000 gift by a number that represents the average cost of private-pay care in a nursing home. In 2010, DHS calculates the penalty using $6,362 as the average cost of private-pay nursing, so he is ineligible for 3.93 months, or three months and 27 days.
This penalty provision applies without regard to the reason for a gift. Donations to one's church, one's alma mater, or one's younger, opposite-sex caregiver are all penalized. It would be the same whether Rosco gave his daughter money because she wheedled it out of him or because she needed help paying for a liver transplant.
The penalty cannot start until the applicant has made an application for Medicaid and been determined to be eligible. What is Rosco to do if he is penalized after he has run out of money? More to the point, what is Rosco's nursing home to do when Rosco cannot pay? The nursing home can discharge him for not paying his bill, but only if they can find another appropriate placement. How likely is that, if he is broke and Medicaid will not pay the bill? It is crucial for Rosco's family to consult an Elder Law attorney when he enters long-term care, not when he runs out of money.
Many people put their children's names on the homes, bank accounts, stock portfolios, annuities, and other investments to avoid probate on their death. These changes may cause problems in the Medicaid application process. The inability to qualify for Medicaid for nursing care could subject donees to clawback by the nursing home under such theories as fraudulent transfer and unjust enrichment. Even without gratuitous transfers, family members are often sued by nursing homes under filial responsibility law or because the family member signed the contract as "guarantor" or "responsible party." Any estate plan where the net worth is less than $2 million must consider the potential need for Medicaid and the client must be warned that any gift could come back to haunt the donor and the donee up to five years later.
No Safe Harbor, Minimum Gift, and No Maximum Penalty
All gifts are required to be lumped together to establish a penalty period, even if the gifts consist of small amounts in successive months. The state does not round down or disregard fractional months. Furthermore, there is no maximum penalty.
No Partial Cure
The penalty can only be cured if all of the divested property is returned to the applicant. The extreme unfairness of this rule is easy to see. What happens if Rosco gave a block of stock to his nephew and the stock tanked? Only if the nephew can return the same shares of stock to Rosco, or can pay the full value of the shares as of the date of the gift can the divestment be cured. Gifts to several people can only be cured if all of the gifts are returned. Making matters worse, these oppressive new rules apply to gifts made before the policy was created!
The rules can create impossible situations. Assume that Hazel gave $150,000 out of countable assets of $350,000 to her children shortly before her husband Chester entered long-term care. She applies for Medicaid and is denied. She must hope that Chester will expire soon because the penalty will not start until the countable assets are below $109,560. Because the penalty is based on a greater amount than remains to her, Chester will not receive long-term care Medicaid until several months after Hazel is totally broke.
No Undue Hardship
Congress requires the states to create reasonable undue hardship waivers for divestment penalties. However, DHS essentially says, "There is no such thing as undue hardship unless there is a medical or psychiatric emergency." This test is irrelevant to the situation where the resident of a nursing home has no money and Medicaid is denied, based on a divestment. DHS is acting contrary to federal requirements, but such cases can take years to resolve.
As the discussion above explains, there have been dramatic changes in Medicaid for nursing home residents. Before purchasing an annuity or making a gift, anyone over 60 should be carefully advised regarding the possible Medicaid consequences in case the person or the person's spouse ever needs care in a nursing home.