If you or a loved one are elderly and might need long term care in the near future, 2015 was a year to forget. The Ohio Supreme Court decided two cases that set back long term care planning for Ohio’s middle class elderly population and presented new obstacles to protecting one’s retirement and/or home. These two cases were Atkinson and Koenig.
In Atkinson, the Ohio Supreme Court decided that if a couple’s home is in their revocable trust at the time one spouse enters a long-term care facility, the house is not an exempt asset and is countable when determining financial eligibility. In Koenig, the Ohio Supreme Court decided that after one spouse enters a long-term care facility, an annuity cannot be purchased for the community spouse to convert what would otherwise be deemed a “resource” into a stream of income, thus achieving Medicaid eligibility.
In addition to these court cases, the Ohio Department of Medicaid changed the rules that allowed individuals to mitigate the impact of an “improper transfer” by prohibiting partial return of gifts. This means that the entire gift must be returned to the Medicaid applicant, otherwise a penalty period will be imposed on the entire amount of the resources that were initially gifted.
All of these changes have resulted in severely limited planning options for individuals who require immediate eligibility for long term care. In turn, proactive planning (well before a nursing home stay) is of greater importance than ever.
Here are three quick examples that demonstrate how proactive planning could save you or your loved ones tens of thousands of dollars, or even your home:
1. Creating Lifelong Income for the Healthy Spouse BEFORE Institutionalization of the Ill Spouse
Dan and Susan are both in their mid-80s and are in relatively good health, however, Dan is beginning to show noticeable signs of dementia and it appears to be a rapid decline. They own their home with a home equity loan. Their assets total approximately $450,000, consisting of cash and investments. The sum total of Dan’s income is $3,000 per month between his Social Security and pension. Susan’s income consists of $900 per month from Social Security.
Dan and Susan purchase a Medicaid-compliant annuity for Susan for $200,000 using the cash and investment resources that they have, which increases Susan’s $900 monthly income to $2,900 per month, to be paid out for the remainder of her life. Susan uses this extra income to pay for in-home aides to care for Dan once a day for an hour or two. Eventually, Dan requires more care than Susan and the in-home aides can provide, and Susan decides to permanently place him in a nursing facility close to their home.
When Dan was admitted to the nursing home, he and Susan had about $250,000 in available resources (besides their home and vehicle). After paying for one month of private room and board at the nursing home, purchasing pre-paid irrevocable funerals and burials, paying off their home equity loan and other miscellaneous debts, and also getting a newer, safer car for Susan, they “spent down” to their maximum resource allowance of $119,220 in order to financially qualify for Medicaid.
In this scenario the end result was that Dan was approved for Medicaid. Almost all of his monthly income is paid to the nursing home (Medicaid pays the difference in the cost). Susan keeps the home, the car, and her maximum spousal resource allowance of $119,220 (this is a 2016 figure). Additionally, Susan has eliminated her debt and increased her monthly income from $900 to $2,9000. Had Dan and Susan not engaged in proactive Medicaid planning and waited until after Dan needed to go into a nursing home, Susan would not have been able to benefit from the Medicaid-compliant annuity planning strategy and the couple would have needed to spend down $330,000 instead of only $130,000. However, Dan and Susan’s proactive planning allowed Susan to maximize her income for the remainder of her life, provided extra time and care for Dan in the home, and ensured that Susan to remain in the community without extraordinary debt.
2. Ensuring Your Home is Protected
Imagine if Dan and Susan would have held their home in their Revocable Family Trust that they established years ago for probate avoidance (before ever thinking that one of them would require Medicaid benefits). When Dan entered the nursing home, the value of the home would have been countable for purposes of determining Medicaid eligibility, which would obviously place them over the $119,220 resource allowance to financially qualify for benefits.. In light of the Atkinson case, after Dan entered the nursing home, even if they took the house and transferred it back into their own names, the State would impose a penalty period due to an improper transfer of assets. Luckily, Dan and Susan held title in their home jointly, with right of survivorship, with their trust designated as the transfer on death beneficiary (after the survivor of them dies), which they changed at their last annual review of their estate plan with their Elder Law Attorney.
3. Mitigating the Impact of Unplanned “Improper Transfers”
Imagine if Dan and Susan gave their grandson $20,000 for a college graduation present two years prior to applying for Medicaid. When Dan and Susan did finally apply for Medicaid, they would be penalized for making the $20,000 gift within 5 years of applying (due to Medicaid’s five-year lookback rule). Medicaid would refuse nursing home payment for a little over three months ($20,000 gift divided by the Medicaid penalty divisor, which is currently $6,327).
Let’s assume that Dan and Susan made arrangements with their grandson to get as much of the $20,000 gift back as they could. However, their grandson was able to give only $19,000 back. Due to the new rule that says partial gift returns will not be honored, Medicaid would not lessen the duration of the penalty period even though 95% of the gift was returned. Had the grandson returned 95% of the gift BEFORE Dan and Susan applied for Medicaid, the penalty would have been negligible.
Now more than ever, the elderly and disabled should meet with their elder law attorney each year to assess the risk of a long-term care event. As planning options are eliminated or changed by the Department of Medicaid and our courts, planning early and often is critical. While many of these issues are in legal flux and resolutions are on the horizon, proactive planning provides the elderly and their families with far more options than attempting to engage in crisis planning after someone has entered the nursing home, or any long-term care facility.
Update: As of February 16, 2016, the Department of Medicaid as issued an internal guideline that fixes the problem of having one’s home in their revocable trust. While the law remains unchanged at this time, it does appear that Medicaid has amended their policy as it relates to the “Atkinson” problem mentioned above. We still urge caution and encourage advice from an elder law attorney, because the policy change is merely internal and the law has not changed.
Second Update: In late February, the Ohio Department of Medicaid released its Medicaid Eligibility Procedure Letter No. 112, which changes their policy treating the purchases of annuities by an individual or the individual’s spouse after the date of institutionalization, but before the eligibility determination date. The agency will presumably now allow these purchases in amounts above the Community Spouse Resource Allowance without imposing an improper transfer penalty. Like the procedure letter regarding the home in the trust issue in Atkinson, this policy letter is not a rule and does not itself abrogate the Ohio Supreme Court’s recent decision regarding annuities. While this appears to be good news and a correction to the norm, early planning is still advised.