We have all had the experience of clients coming into our office and telling us things about Medicaid that they know for sure because someone told them. Often this “knowledge” is simply wrong. Sometimes, they have acted on this bad advice before we have a chance to intervene. If you don’t have a lot of experience in the area, you may in fact share some of these misunderstandings. The purpose of this presentation is to identify some of these myths and provide you with information to combat them.
Common Myths and Misconceptions related to Medicaid
"If I enter the nursing home, they will take all of my money."
Myth: Many people seem to believe that the minute that they enter the nursing home they will be required to give the facility all of their money. I’m not sure of the source of this myth, unless perhaps it is because they are thinking about facilities like Continuing Care Retirement Communities where there is a large up front fee.
Reality: All the nursing home wants is their payment on a monthly basis. Typically in the Madison area this is in the neighborhood of $6,000 per month (it varies around the state) plus ancillary charges. Over the long haul, the nursing home may in fact end up getting all of the money but in the short term it will not be taking all of the money (or the house, the farm, etc.)
"If I am old and have dementia I will have to go to a nursing home."
Myth: Everyone who is old with dementia or other illness ends up in a nursing home for a long term stay. They know this because it happened to a friend or relative 15 or 20 years ago.
Reality: Fifteen or twenty years ago, this may have been closer to the truth. Today, the reality of long term care has changed dramatically. Persons who were in nursing homes in the past are now being cared for at home or in assisted living type facilities. While this is generally a positive development, it presents problems from a long term care finance point of view. Our government programs, Medicare and Medicaid, are oriented towards nursing home care. Many of the older long term care insurance policies describe care that is today provided in CBRF’s but only cover care if it is provided in a nursing home (skilled nursing facility). Thus it is necessary to be careful to make sure that such policies are updated.
"If I give anything away, I can’t get Medicaid for five years."
Myth: A gift of any amount will bar Medicaid eligibility for 3 (or 5) years.
Reality: This has changed a bit under DRA 2005. Under the old (pre February 8, 2006) rules, if you gave something away, then they would apply the divestment formula and determine a period of ineligibility which would start to run in the month when the gift was made. Thus, if you applied after the period of ineligibility had expired, you could get Medicaid. This rule still applies for gifts made prior to February 8, 2006. Under the new divestment rules, the period doesn’t start to run until the applicant is (1) asset eligible for medicaid; (2) is receiving an institutional level of care (whether or not in a nursing home); and (3) there is an “accepted application.” Under the new rules, only after you are out of money and in the nursing home will the period of ineligibility start to run. Thus, at least for larger divestments, one solution may be waiting out the 60 months.
"If I‘m in the nursing home, I can’t give anything away."
Myth: Once an individual is placed in a nursing home, they are barred from giving anything away.
Reality: This is not true–the normal divestment rules continue to apply, whether you are in a nursing home, in assisted living or in the community. In fact, in some ways, it is safer to refrain from starting a divestment process until you are in the nursing home. Since nursing home Medicaid is an entitlement, once the individual is in the nursing home, it is safer to assume that upon eligibility there will in fact be Medicaid available. Thus, a divestment plan that will lead to financial eligibility makes more sense.
"If I‘m in a nursing home, I can’t spend anything."
Myth: Persons who are in nursing homes are barred from spending any of their assets, other than to pay the nursing home.
Reality: The only transfers that potentially bar future Medicaid eligibility are those that are for less than full and adequate consideration. Thus, if the money is spent in exchange for a good or service, it is not a divestment. Note that the transaction has to be for fair market value. Thus, if a child purchases something from a parent for less than fair market value, the difference will be a gift that may cause a loss of eligibility, applying the normal divestment rules.
"If my husband (wife) goes into the nursing home, I will lose everything."
Myth: All of a couple’s assets except for $2,000 have to be spent before the institutionalized spouse can get Medicaid.
Reality: Because of the spousal impoverishment rules, a non institutionalized spouse (called the community spouse) gets to keep the house, a car of any value, personal property of any value, a minimal amount of life insurance and a “community spouse resource allowance (CSRA).” The CSRA is equal to ½ of the couple’s assets on the date of institutionalization with a floor of $50,000 and a ceiling, this year, of $99,540. (Note that for home or community based placements, in most cases the upper limit is only $50,000.) The institutionalized spouse can keep $2,000, personal property and the small amount of insurance. The couple can also prepay each of their funerals. Thus, while there could be a significant reduction of assets, the community spouse will not be impoverished.
"If I make gifts, the government can take them back if I go into a nursing home."
Myth: The government has the right to get back gifts from the recipients if the person who makes the gift goes into a nursing home.
Reality: This is not true. The sole remedy for dealing with gifts when a person goes on Medicaid are the divestment rules that have been discussed above. Of course, the danger to the potential Medicaid recipient is that s/he cannot get the gifts back either. This means that if a gift is made, the person who makes the gift needs nursing home care and doesn’t have enough money and the recipients of the gift will not give it back, the person who makes the gift is basically out of luck. A nursing home is permitted to discharge a person for non payment, even if they can’t pay because they gave the money away. While Medicaid has “hardship” provisions, it is doubtful that they will apply to someone who has made an improvident gift. Thus, my rule of thumb is not to do a divestment unless there are assets available to pay for care for the period of ineligibility created by the divestment.
"I can only make gifts of $10,000 per year;" or "Can’t I make gifts of $10,000 per year?"
Myth: Gifts are limited to $10,000 per year; and gifts of only $10,000 per year are all right.
Reality: This myth confuses the tax rules related to “annual exclusion” gifts with the Medicaid rules relating to the treatment of gifts. Gifts of $12,000 per donee per year are not subject to federal gift tax reporting and don’t use any part of the lifetime gift tax exemption (now $1,000,000). One is permitted to make gifts in excess of that amount. However, the excess will be applied against the life time exemption. While these rules apply for tax purposes, they don’t apply for Medicaid. Annual exclusion gifts are still divestments and create periods of ineligibility. Thus, you must take potential Medicaid eligibility into account in any kind of gift program. In most cases where you are making gifts for tax planning purposes, Medicaid probably is not a concern.
"If I make a gift to my children, they will have to pay tax."
Myth: Gifts result in tax to recipients.
Reality: Receipt of a gift is not taxable income to the recipient. If there is a gift tax, it is paid by the donor. As a practical matter, in the cases we have, the estates are not big enough to generate a taxable gift.
"I have a prenuptial agreement–that will protect my assets."
Myth: Prenuptial or marital property agreements can protect assets from nursing home costs.
Reality: marital property agreement or a prenuptial agreement can be used to allocate responsibility for long term care costs between the spouses. However, if Medicaid is going to be involved, the pre nuptial agreement will not help. Even if the parties have an “opt out” marital property agreement, for Medicaid purposes the government will look at the couple’s combined assets to determine eligibility. Thus, in a second marriage situation, even with a pre nuptial agreement, the spouse with the higher assets may find him/herself contributing to the cost of the other spouse’s care or needing to do some Medicaid planning. One solution to this would be the use of long term care insurance.
"I’m too old for long term care insurance" or "Long term care insurance is too expensive."
Myth: For older clients long term care insurance is not a viable option.
Reality: It depends on the age and health of the prospective purchaser of long term care insurance. If the individual is healthy, long term care insurance is an option that a should be considered. Very often, the annual cost of the premium is less than one month in a nursing home or less than two months in assisted living. The principal advantage of long term care insurance is that it gives you the option of home based or assisted living based care rather than nursing home care. For more information, check out the OCI website: http://oci.wi.gov/pub_list/pi-047.htm and http://oci.wi.gov/pub_list/pi-047.htm. This latter publication contains a list of all policies of long term care insurance that are available for purchase in Wisconsin and compares them using the same format. It is a good starting point for looking at long term care insurance.
"I only need 5 years of long term care insurance because I can divest and get on Medicaid."
Myth: You only need 5 years of long term care insurance.
Reality: Many folks think that they only need to buy long term care insurance with a five year term because they can use that time to divest and wait out the period of ineligibility. If nursing home care were the only concern, under current Medicaid law, that would make sense. However, as discussed previously, the nature of the long term care system is changing and more care is being provided at home rather than in nursing homes. While the average life expectancy for a nursing home resident is only about 2.5 years, people in assisted living or at home can be expected to live a much longer time and may never get to the top of the COP waiting list. Thus, you may wish to opt for a longer term policy to meet those needs. If you compare the premiums for longer terms, including lifetime, they are not that much higher than for the three year coverage. Also, in most cases it is wise to purchase an inflation protection rider for the policy to deal with medical inflation. These policies can be very useful in second marriages.
"If I go on Medicaid the state/county will take my house."
Myth: The state/county takes the homes of all Medicaid recipients.
Reality: The Medicaid lien, which applies to the personal residence, only applies to nursing home residents. In order to file the lien, the county has to demonstrate that there is no reasonable likelihood that the nursing home resident will return home and that there are no exempt individuals living in the residence. If the Medicaid recipient owns the home at the time of death, then it is subject to Medicaid estate recovery, again subject to a number of restrictions. One point to note: because the Medicaid nursing home rate is less than the private pay rate, it may make more economic sense to go on Medicaid, accrue the estate recovery claim and pay it off (at the Medicaid rate) rather than selling the house and privately paying. (Of course, if you can also do a “half a loaf” divestment, that might make more sense.)
"If I purchase an annuity it will protect my money from the nursing home."
Myth: Placing money in an annuity contract will protect the money from nursing home costs.
Reality: Purchase of an annuity, in and of itself, does not protect the funds. All the purchase does is to convert the annuity from one form of asset to another. In the past, if you annuitized the annuity with a guaranty period not to exceed the life expectancy of the annuitant, then you could convert the money in the annuity into a stream of income which would make the underlying value of the annuity a non countable asset. In 2004, that changed with the new annuity rules. Under those rules, you have to determine if someone is willing to buy the annuity (the “three letter” rule). If someone is willing to purchase the annuity, then it is an available asset at the value for which it could be sold. There has been some development in this area but not a lot of certainty at this point.
"I have a power of attorney, so I can do Medicaid planning."
Myth: An agent under a power of attorney can do unlimited Medicaid planning.
Reality: Under the Praefke case, an agent under a power of attorney cannot make gifts unless the power of attorney contains specific language permitting the making of gifts. Further, the agent cannot make gifts to him/herself unless that self gifting power is expressly granted. Also, the scope of the gifting power will be limited to that granted in the document. Further more, under Stanley B., guardians of single persons cannot make gifts. Under F.E.H. and Sec. 880.173, guardians of married persons can, with court approval. For these reasons, one of the first inquiries you must make in any case is whether there is a gift power in the power of attorney and if not, what is the mental status of the elder–can s/he execute a new power or an amendment to the current power? Since Praefke, there has been at least one fair hearing decision in which the Department prevailed in having a gift made by an agent with insufficient authority disregarded for purposes of asset eligibility. Thus, lack of authority is something you ignore at your peril. In your conventional estate planning practice, you need to look carefully at your gift clauses. Note that under the new Guardianship Law, there is a provision to permit gifts by guardians of single or married persons to make gifts. However, court permission is required and there are a number of steps and requirements.
"Elder Law Attorneys are getting millionaires on Medicaid."
Myth: Mostly wealthy people use Medicaid planning to shift the cost of their long term care to the public.
Reality: As reflected in a Wall Street Journal editorial a few months ago, there is a perception promoted in some quarters that nefarious elder law attorneys have developed a “cottage industry” to get rich people on Medicaid. While this is patently untrue, it has become the basis for much public policy “reform.” Even those promoting changes to the Medicaid divestment rules admit that they would save less .2% of federal expenditures and only a small fraction of the total State Medicaid budget. Simply put, “millionaires” don’t need Medicaid since they can afford to either privately pay for their care or purchase long term care insurance. Changes to the divestment rules will primarily adversely affect low and middle income/asset clients who are seeking to preserve a small part of their estates for their children, much in the same way that rich people seek to avoid the dreaded “death tax.” This focus on the chimera of millionaires getting on Medicaid detracts attention from the real problem–fixing the broken long term care finance system. What is needed, in this writer’s opinion, is a total systematic change that will include both public and private input as well as elimination of disincentives to family provided care.