Medicaid is a federally funded, state-administered welfare program restricted to the financially indigent. To qualify for Medicaid you must have exhausted substantially all of your non-exempt assets.

You are eligible for long-term care coverage under Medicaid if you are at least age 65, demonstrate financial need, and follow the Medicaid application procedures.

With respect to financial need, you may have assets of no more than $2,000 and limited income.

The following assets (sometimes referred to as “excluded assets”) are not considered for purposes of the $2,000 limit:

1. Your automobile;
2. Your principal residence (“homestead”);
3. Household goods, furniture and personal affects, including clothing and jewelry;
4. Up to $2,000 in a prepaid irrevocable funeral contract;
5. Cemetery plot;
6. Cash value of life insurance up to $1,500;
7. Income producing real property where the income derived from rents is at least 6% of the person’s equity in the rented property;
8. An actuarially sound annuity ; and
9. Miscellaneous other exemptions not relevant here.

With respect to income, there are two basic approaches depending on the state of your residence. In some states, if medical expenses exceed income, then the income test is met. Other states have strict income caps. In such states, if your income exceeds the limit set by the state, irrespective of your medical expenses, you are ineligible.

Income is defined as both earned and unearned income and thus includes interest, dividends, rents, social security benefits and retirement benefits.

Clients often ask “How does the state know what we have?” The simple answer to this question is that you must file an Asset Declaration Form with the state and provide independent verification of the ownership and value of each asset and source of income.

Two of the most misunderstood and complicated aspects of Medicaid eligibility are the Divestment Rules and Spousal Impoverishment Rules.

DIVESTMENT

Gifting assets in order to qualify for Medicaid is called “divestment,” and can be perilous. Recent legislation imposes sanctions on individuals (and their advisors) who divest assets in order to qualify for Medicaid. If you divest, you will be ineligible for Medicaid for a period of time illustrated in the example below.

You may also make yourself unattractive to the very nursing homes to which you hope to gain entry. The more desirable facilities are either entirely private-pay, or allow a limited number of Medicaid patients.

The Medicaid patients that are admitted typically start out as private-pay patients who have lived in the facility and have run out of money.

In light of the national shortage of skilled nursing care facilities and beds, patients attempting entry as Medicaid patients from day one may only gain entry at the most undesirable facilities.

Divestment is the transfer of countable (i.e., non-excluded) assets for less than fair market value within (36) months of applying for Medicaid nursing home benefits.

For transfers to or from a trust, a sixty (60) month look-back applies. It is important to understand that divestment does not occur if countable assets are converted to exempt assets of equal value.

For example, paying off the mortgage on your home, buying a new car or purchasing an irrevocable funeral arrangement does not constitute divestment.

The period of disqualification on account of divestment is measured by dividing the “uncompensated value” of the transferred assets by the average monthly private paid nursing home costs of the particular nursing home facility applied for.

Example: If on the eve of entering a nursing home and applying for Medicaid, you give your son $120,000, you will be ineligible for Medicaid for thirty-two months ($120,000 divided by the average monthly cost of long-term care in your state ($3,750 is the national average in 2000)). There is no limit on the length of disqualification resulting from divestment.

Finally, a rule that appears to have no logical basis is that the transfer of one’s homestead within the look-back period (unless the transfer is to a spouse or a disabled child), is considered a divestment. Transfer of exempted assets other than a homestead within the thirty-six (36) month period is not considered to be a divestment. Transfer of the one’s homestead to a revocable Trust is also considered a divestment.

SPOUSAL PROTECTION

In order to prevent the economic devastation of the community spouse, the Medicare Catastrophic Coverage Act enacted in 1988 treats the assets and income of a husband and wife as part of a common pot with the community spouse entitled to a guaranteed share.

With respect to income, the community spouse’s income may be supplemented from income of the resident spouse up to a minimum of $1,452 and a maximum of $2,175 per month in 2001. The community spouse is also entitled to one-half (1/2) of the countable assets (in addition to the excluded assets) not to exceed $87,000 but with a guaranteed minimum of $17,400. These values are indexed for inflation.

After the death of the patient, states are required to seek reimbursement for their outlay of long term care (Medicaid) benefits from the estate of the deceased Medicaid recipient. Some states define “estate” to include only the decedent’s probate estate.

Other states interpret the term estate more broadly to include jointly held property or even assets owned by the decedent’s revocable trust. As of the date of this writing, only Michigan and Texas do not attempt to recover long-term Medicaid benefits from the estates of deceased recipients.