There are a number of techniques and strategies to preserve your estate in the event you need long term nursing home care:

GIFTING

We don’t advise you to simply give your assets away to qualify for Medicaid. Although many of the strategies discussed in this Chapter Six involve some form of gifting, you should not make gifts in anticipation of needing long term care without the advice of a competent elder law attorney. A gift of countable assets (unless to a spouse) within the look back period is a divestment that will result in Medicaid disqualification for a period of months determined by dividing the value of the gift by the average monthly cost of a nursing home stay ($5,367 in 2005). Value of gift = months of disqualification 5,367

Gifting has a number of ancillary consequences including gift and income tax issues and loss of control that must be examined. Even though the Medicaid savings almost always outweigh these issues, you should know the full consequences of your actions. An elder law attorney can help you weigh the income and gift tax consequences of making gifts. Gifts of more than $11,000 in one year to any one beneficiary reduce your one million dollar gift tax exemption and will require the filing of a federal gift tax return (Form 709). Also, the recipient of a gift receives a carryover basis, and therefore loses the favorable stepped-up basis income tax treatment for assets received at death.

CONVERT COUNTABLE ASSETS TO EXEMPT ASSETS

A simple way to reduce your countable assets is to convert them to exempt assets. Changing assets from countable to exempt is not considered a transfer and therefore does not trigger a period of disqualification. Countable liquid assets could be used to pay off the mortgage on your exempt residence, purchase a car, prepay funeral bills, or to improve your residence (new roof, furnace, air conditioning, sun room, etc.). It is advisable to pay off all debts. The DHS does not allow a deduction for debts, even debts secured by exempt assets.

If you don’t own a home, consider purchasing one with countable assets. The home will be exempt if you can prove that you or your spouse actually moved into the home and used it as your principal residence. If you are married, the home should be purchased in the community spouse’s name so that if is sold at a later date the proceeds will not be counted as part of the applicant spouse’s assets. Countable assets should be converted to exempt assets after the snapshot date (for married applicants), and in all events prior to the filing of the Medicaid application.

PAY FAMILY MEMBERS FOR SERVICE

Generally, it is permissible under the Medicaid rules to pay friends and family members for personal services, housekeeping, home repair, and transportation. The law provides that payment for services to a “non-legally responsible person” are permissible (and not a transfer of counted assets) if commensurate with the services rendered. We recommend that you enter into a written caregiver agreement with your friend or family member to document the services to be rendered and the compensation to be paid. You will find a written agreement useful in many ways: to support the payments for Medicaid purposes, to preserve the caregiver’s claim for payment, to protect you from potential gouging, and to justify the payments to jealous family members.

SERIAL DIVESTMENT

Serial divestment is a technique that allows you to give away the largest possible amount, during the look back period, while incurring the shortest possible disqualification period. In serial divestment, you make monthly gifts to beneficiaries of your choosing in an amount that is slightly less than two times the average monthly nursing home cost. For example: If the average monthly nursing home cost is $5,367 (2005), a monthly gift of $10,000 results in a one month period of disqualification that expires on the last day of the calendar month in which the gift was completed.

Serial divestment works for the following reasons:

1. Michigan does not recognize partial periods of disqualification and rounds fractions down to the next whole number of months. A $10,000 gift results in a 1.86 month period of disqualification which is rounded down to 1 month; and
2. Each calendar month is a new gifting period for computing gifts. So, for example, a gift of $10,000 (which rounds down to a one month period of disqualification) on March 25th would cause disqualification for the month of March only. Gifts of $10,000 can be made each month, never causing a period of disqualification that exceeds 30 days.

Serial divestment is most appropriate if you are unmarried (married applicants will likely prefer use of the spousal annuity trust described below), and must be completed before the Medicaid application is filed.

Naturally, you must be comfortable parting with your hard earned assets. If you are concerned that your beneficiaries will waste your monthly divestments, you may contribute them to an irrevocable trust (of which you are neither the beneficiary or trustee).

Finally, although serial divestment can dramatically accelerate Medicaid eligibility, it usually takes several months if not years to complete. If you become disabled during the divestment process, your family may continue divesting on your behalf using the Medicaid friendly durable power of attorney (see Chapter One) you created exactly for such purpose.

Spousal Annuity Trust
A spousal annuity trust is an irrevocable trust that holds assets solely for the benefit of the community spouse during the community spouse’s lifetime. Spousal annuity trusts allow a married Medicaid applicant to convert excess assets (that would otherwise disqualify him or her from Medicaid) into a lifetime income for the community spouse. A spousal annuity trust allows a Medicaid applicant with excess assets to become immediately eligible for Medicaid.

A transfer to a spousal annuity trust works for two reasons: first, the transfer is not a disqualifying transfer if the trust meets the requirements set out below, and, second, distributions from the trust to the community spouse are not counted as the applicant’s assets as long as distributions under the trust commence after the Medicaid application is approved.

A transfer to a spousal annuity trust is not treated as a divestment under Medicaid if the following conditions are met:

1. The trust is irrevocable;
2. Other than trustee fees, all trust income and principal must be used for the community spouse; and
3. The trust must make distributions at least annually to the community spouse that are actuarially calculated to use up all trust assets during the spouse’s lifetime using life expectancy tables provided in the regulations. Note that distributions in excess of the required minimum annual distribution are permitted.

A spousal annuity trust may be created even after you have entered the nursing home. Timing is important: the trust should be funded after the snapshot date (to get the greatest CSRA), and before the Medicaid application is filed (so the assets are not counted). The community spouse typically creates the trust for her own benefit using countable assets (of any kind including liquid assets, real estate, notes receivable, etc.). To preserve the integrity of the trust, it is advisable that neither the community spouse nor the applicant act as trustee. Assets remaining in the trust on the death of the community spouse, if any, are distributed to the beneficiaries named in the trust or to the revocable trust of the community spouse.

HALF A LOAF

As noted above, the length of disqualification for transfers during the look back period is calculated by dividing the amount transferred by the average cost of private pay nursing home care in Michigan. The fact that the disqualification period is based on the monthly cost of nursing home care creates an interesting mathematical phenomenon: if you give away half of your countable assets, the half you keep will sustain you in the nursing home for a period equal to the disqualification period.

For example: Adam Baum, a widower, has $100,000 in a money market and no other assets. He knows he will have to enter a nursing home in the near future and would like to preserve as much of his $100,000 for his family as possible. If he does nothing, he will enter the nursing home and privately pay until his $100,000 is reduced to $2,000, at which time Medicaid will take over. If, instead, he gives $50,000 to his children (creating a nine-month disqualification period), he will have the remaining $50,000 to cover his nursing home costs during that time.

The net effect is that Adam preserved $50,000 for his family that otherwise would have been lost. Adam’s example is a little simplistic. Actually, Adam’s patient pay amount –which is derived from his monthly income – would offset a portion of his cost allowing him to gift more than half the loaf. Serial divestment and spousal annuity trusts result in virtually no disqualification period, and are therefore preferred over the half a loaf technique (with its roughly fifty percent disqualification period). The half a loaf technique is rarely used in Michigan since serial divestment will always produce a better result. However, the half a loaf tool may become useful in the future if Michigan’s serial divestment rules change.

ANNUITIES

Excess countable assets can be converted to income through the purchase of an actuarially sound annuity. To be actuarially sound, the annuity cannot be guaranteed to extend beyond the life expectancy of the applicant. The purchase of the annuity is not a divestment because it is a transfer for value. By converting countable assets to income, you become immediately eligible for Medicaid.

Despite the fact that the income payments from the annuity are counted as part of the patient pay amount, substantial savings result by immediately removing the entire purchase price of the annuity from the applicant’s countable assets.

Purchase of an annuity is a planning tool of last resort to be used when you have already entered the nursing home and cannot use the spousal annuity trust (if you’re not married), serial divestment (which may take several months to implement), or other techniques that involve advance planning.

To minimize the impact of annuity income on the patient pay amount annuities were often structured to pay a minimal amount of income up to the date of the applicant’s life expectancy. If the applicant survived, the balance of the annuity value would be distributed in a balloon payment shortly before the end of the applicant’s life expectancy (giving rise to the term balloon annuity. The use of annuities in Medicaid planning is likely to be limited as a result of action by the Michigan Department of Community Health.

Effective June 1, 2005, the purchase of an annuity is treated as a divestment unless annuity payments are made in equal installments and the State of Michigan is named as the beneficiary of any amounts of remaining on the applicant’s death.

RETIREMENT ACCOUNTS

Retirement accounts, such as IRAs and 401(k)s present special planning problems. Retirement accounts – which can constitute a substantial percentage of your assets - are considered countable assets even when owned by a community spouse. Added complications when dealing with retirement accounts include the fact that distributions are subject to income tax, and that the required minimum distribution rules of the Internal Revenue Code must be met if you are age 70 ½ or older. All of these factors must be taken into consideration when retirement accounts are involved.

One solution is to simply liquidate a portion or all of the retirement account, pay the income tax on the withdrawal, and then use the techniques discussed in this Chapter Six, such as serial divestment, to become Medicaid eligible. Naturally, there would be a substantial income tax liability that would have to be weighed against the potential Medicaid savings. The tax consequences of the distribution could be softened if you qualify for special ten year averaging on the distribution. You would also be eligible to offset some of the tax liability by deducting your private pay amount.

Another solution is to roll the retirement account into an irrevocable qualified annuity that meets both the income tax and Medicaid minimum distribution requirements. Michigan’s proposed annuity policy, discussed above, reduces the desirability of this option since it requires that the State of Michigan be named as the beneficiary of the annuity upon your death. This approach could still be viable, however, for smaller retirement accounts that could be distributed in a relatively short period of time, and where you are married and the distributions are paid directly to your spouse (and therefore not added to your patient pay amount).

Still another solution is to initiate an irrevocable distribution scheme directly from the retirement account that meets both minimum distribution requirements. This, in effect, turns the retirement account into an annuity. It is not clear if and how Michigan’s proposed annuity policy would affect this technique.

MEDICAID APPLICATION

The Michigan Department of Human Services (DHS), formerly known as the Family Independence Agency (FIA), formerly known as the Department of Social Services, administers the Medicaid program in Michigan. DHS offices in your area can be located on the DHS web site: http://www.michigan.gov/dhs Form FIA 4574 is used to make application for nursing home benefits, and form FIA 1171 is the appropriate form when making application to the MI Choice program. If you are married, Asset Declaration form FIA-4574B must be also filed (containing financial information as of the snapshot date).

Forms are available at any local DHS office and are now available online. All forms require detailed financial information as well as supporting documentation to verify each financial entry. Your spouse, family member or guardian may sign your application if you are unable to do so. If someone other than you signs the application he is referred to as your authorized representative.

If you qualify, Medicaid benefits begin on the first day of the month in which the application is filed. If it is coming to the end of the month, you should submit your application - even if you haven’t supplied all of the supporting documentation – to preserve benefits for that month.

You may submit the information when later requested by the DHS office. You will not prejudice your application if you supply the information within the requested time frame (you may even be able to get an extension).

You may also apply for retroactive Medicaid benefits for the three months prior to the month of filing if you submit a Retroactive Medicaid Application Form FIA-3243. The DHS has 45 days from the date of your filing to either grant or deny Medicaid benefits.

ANNUAL REPORTING

You must continue to meet Medicaid’s medical and financial eligibility requirements after your initial qualification. There is much to do after initial qualification:

1. You are required to immediately report any changes that would affect your eligibility such as receipt of an inheritance or the sale of an exempt asset (which as a result of the sale would become countable);
2. You must disclose and verify your assets annually on form FIA-4574. Note that you are not required to disclose the assets of your community spouse, if any, after initial qualification; and
3. Your assets may not exceed $2,000 in any month.

FOLLOW UP FOR MARRIED APPLICANTS

To avoid inadvertent disqualification, the community spouse must do the following after the applicant spouse’s Medicaid application is approved:

1. The community spouse has one year (starting the first day after the Medicaid application is filed) to physically transfer her community spouse resource allowance into her sole name. If the CSRA is not moved before the end of the one-year period (called the presumed asset eligibility period) it will be counted as part of the institutionalized spouse’s assets causing disqualification;
2. Exempt assets should also be transferred to the community spouse. Although the one year presumed asset eligibility period does not apply to exempt assets, all exempt assets should be transferred to the community spouse as soon as possible. Moving exempt assets to the community spouse accomplishes two objectives: first, the competent community spouse is better able to manage the assets; and second, it allows for the sale of the exempt
3. Any joint trust created by the couple for estate planning purposes must be revoked during the presumed asset eligibility period; otherwise the entire trust will be considered to be available to the nursing home spouse;
4. The community spouse must disinherit the nursing home spouse. It is not uncommon for the community spouse to predecease the nursing home spouse. If the community spouse leaves his or her assets to the nursing home spouse, the inheritance would cause disqualification. If the community spouse would like to make assets available to the nursing home spouse at death, a testamentary special needs trust may be used for this purpose.
5. The community spouse may wish to do her own Medicaid planning using the techniques described above; and
6. The spousal income allowance, if applicable, must be removed monthly from the institutionalized spouse’s account to avoid have the nursing home spouse accumulate assets in excess of $2,000