Nursing home Planning for the Procrastinator

A Guide to Protecting Real Estate and Money Last Minute from Annuities to Pooled Trusts to Personal Care Contracts for Care Givers

Cushing & Dolan, P.C.

Attorneys at Law

                   375 Totten Pond Road, Suite 200

Waltham, MA 02451

Tel: 617-523-1555

Fax: 617-523-5653

www.cushingdolan.com

tlutsky@cushingdolan.com

Todd E. Lutsky, Esq., LL.M

 

INTRODUCTION

Planning well in advance of entering a nursing home is always the best approach, for it takes five years to protect assets from the cost of long term care. The single best way to protect your assets, whether they are real estate assets such as your home, vacation home, rental property or your investment portfolio, is to transfer or retitle such assets to an irrevocable Medicaid trust. However, we all understand that folks tend to procrastinate and/or are simply faced with an emergency situation whereby a loved one suddenly needs nursing home care and no advanced planning has been done. The balance of this article is designed to offer some solutions that can be implemented last minute in an effort to save or at least slow the financial bleeding of the assets to the nursing home.

Look back provision is extended to 5 years from 3 years for all transfers – 130 CMR 520.019(B)

This regulation indicates that the transfers of resources are subject to a look back period, beginning on the first date the individual is both a nursing facility resident and has applied for/or is receiving MassHealth standard. This period generally extends back in time for 36 months. For transfers of resources occurring on/or after February 8, 2006, the period extends back in time for 60 months. The look back period for transfers of resources from a revocable trust to someone other than the nursing facility resident, or transfers of resources into an irrevocable trust where future payment to the nursing facility resident is prevented, is 60 months.

Planning Note: This 60 month look back period now applies for all transfers whether they are made outright to an individual, into an irrevocable trust or out of a revocable trust. This means that asset so transferred will not be fully protected from nursing home costs until the expiration of this five year waiting period following the transfer. Remember the old rule was only a three year wait, but by planning now you would likely be grandfathered into this new five year waiting period even if the law changes in the future, and such a bill is pending in which they are considering making this waiting period 10 years. This bill is known as house bill 6300. This also helps us understand why planning in advance of a health crisis is so important as otherwise all assets could be lost.

            Planning Note: IRS Present Interest Exclusion

Many people tend to equate the Internal Revenue Service rules with Masshealth eligibility rules, but they are mutually exclusive. For example, the IRS allows people to make gifts to other people in an amount that does not exceed $14,000 per year, per person without creating a taxable gift or even the need to file a gift tax return. However, such a gift would still be considered a disqualifying transfer for Masshealth eligibility purposes; thereby creating this five year look back period. Please remember that IRS rules and Masshealth rules are totally separate.

9-27-07 letter from the Deputy Medicaid Director at MassHealth regarding the imposition of transfer penalties – does every transfer create a penalty period or a lookback period?

In general, the MassHealth workers do not review transfers of less than $250 unless there is activity that the worker deems to be questionable and thus requires further investigation. In addition, Mass Health’s transfer review policy is to review all transfers of $1,000 or more. They only review transfers including birthday, anniversary, holiday and charitable gifts, below that amount if there appears to be a recurring pattern of inappropriate transfers. In other words, if you were to make $900 transfers the first Wednesday of every month, the state would look at these transfers and impose the five year waiting period.

Planning Note: If you are making gifts to your church or to anyone for birthdays, holidays or any other special occasions please be sure to keep these gifts under the $1,000 limit to avoid strict scrutiny by MassHealth. However, the good news from this letter is that at least some level of lifetime gifting can continue without necessarily creating a disqualification period or a look back period. Prior to this clarification it certainly appeared that all transfers of any amount would have resulted in at least a 5 year disqualification period in order to get beyond the lookback period.

Period of ineligibility and begin date of same due to a disqualifying transfer

1.     Duration of ineligibility: Where the MassHealth agency has determined that a disqualifying transfer of resource has occurred, the MassHealth agency will calculate a period of ineligibility. The number of months in the period of ineligibility is equal to the total, cumulative, uncompensated value as defined by 130 CMR 515.001 of all resources transferred by the nursing facility resident or the spouse, divided by the average monthly costs to a private patient receiving nursing facility services in the Commonwealth of Massachusetts at the time of application, as determined by the MassHealth agency. (130 CMR 520.019 (G)(1)).

Example: If an individual transferred assets for less than fair market value to a child in the amount of $300,000, the related disqualification period would be approximately 33.3months ($300,000 ¸ $9,000). This calculation remains unchanged under both the deficit reduction act of 2005 and the newly enacted Massachusetts regulations adopting such act. The only difference is that the deficit reduction act prevents this ineligibility period from beginning to run on the date of the transfer.

2.     Determination of the beginning date of this period of ineligibility130 CMR 520.019(G)(3)

Beginning date. For transfers occurring before February 8, 2006, the period of ineligibility will begin on the first day of the month in which resources have been transferred for less than fair market value. For transfers occurring on/or after February 8, 2006, the period of ineligibility will begin on the first day of the month in which resources were transferred for less than fair market value or the date on which the individual is otherwise eligible for MassHealth payment of long term care services, whichever is later. For transfers involving revocable trusts, the date of transfer is the date the payment to someone other than the nursing facility resident or the spouse is made. For transfers involving irrevocable trusts, the date of transfer is:

  1. The date that the countable resources are transferred to someone other     than the nursing facility resident or spouse; or
  2. The latest of the following:
    1. The date that payment to the nursing facility resident or the spouse was foreclosed under the terms of the trust:
    2. The date that the trust was established; or
    3. The date that any resource was placed in the trust.

Planning note: The Deficit Reduction Act of 2005 defined the beginning date of the period of ineligibility to be “the first day of the month during or after which assets have been transferred for less than fair market value, or the date on which the individual is eligible for medical assistance under the state plan and would otherwise be receiving institutional level care described in sub paragraph C based on an approved application for such care, but for the application of the penalty period, whichever is later (deficit reduction act of 2005, section 6011(B)(ii.)). Massachusetts’s regulations are similar but indicate that the beginning date would commence when “the individual is otherwise is eligible for MassHealth payment”(130 CMR 520.019(G)(3)). The confusion surrounds the meaning behind otherwise eligible. MassHealth is following the federal definition. Therefore we are of the belief that by following the Federal rules and applying for MassHealth benefits and getting denied for the sole reason of having an unexpired period of ineligibility would be the safest approach to ensure the beginning of the running of such period of ineligibility. The best approach is to simply relay on the five year look back period discussed above.

  1. Multiple Transfers Occurring on or after February 8, 2006. 130.CMR 520.019 (G)(2)(i)

This regulation indicates that for transfers occurring on or after February 8, 2006, the MassHealth agency adds the value of all resources transferred during the look back period and divides the total by the average monthly cost to a private patient receiving long term care services in the Commonwealth of Massachusetts at the time of application, as determined by the MassHealth agency. The result will be a single period of ineligibility beginning on the first day of the month in which the transfer was made or the date on which the individual is otherwise eligible for long term care services, whichever is later (130 CMR 520.019(G)(2)(i)).

Planning note. It would appear the multiple transfer rules for transfers occurring on or after February 8, 2006 are less restrictive than the old rules governing periods of ineligibility that overlap (see 130 CMR 520.019(G)(2)(b)). In this regard, the new multiple transfer rules limit the MassHealth agency’s ability to see multiple transfers to a period that exists only during the look back period. This distinction may offer planning opportunities.

Example: Preplanning: John and Mary are married, both 62 years of age, own a home worth approximately $500,000 and other miscellaneous investments and savings and checking accounts worth in total approximately $100,000. In addition, John has an IRA rollover worth approximately $900,000. Finally, their combined pension, social security and investment income is approximately $5,000 a month. Their objectives are to reduce the cost associated with the probate process, reduce and if possible eliminate their estate tax exposure, as well as protect their assets from the cost associated with long term care. Finally, they are especially concerned with the fact that they have a large amount of assets in an IRA which can be difficult to protect.

Solution: On August 1, 2009 two irrevocable grantor income only trusts were prepared and the home was transferred equally to such trusts. This transfer would begin the running of the 5 year look back period. Assume further that based on their taxable income, John is able to withdraw an additional $70,000 of assets from his IRA without pushing them into the next higher income tax bracket. Therefore, on January 1, 2010 John makes a $70,000 distribution from his IRA followed by a contribution of that money to the irrevocable trusts and further assume that this procedure is followed annually for the next 5 years. These actions would undoubtedly fall within the multiple transfers regulation mentioned above. Nevertheless, on September 1, 2014 the home would be effectively outside of the 5 year look back period and thus protected from the cost of long term care. Even though there was another transfer made on January 1, 2010, based on the definition of multiple transfers occurring only during the look back period, it would appear that this home would be outside of such look back period and thus outside of the reach of Massachusetts regulation 130 CMR 520.019(G)(2)(i).

Furthermore, on February 1, 2015, the first $70,000 transfer to the irrevocable trusts should also be protected from the cost of long term care as it is now outside of the 5 year look back period. The benefit to this approach is that although each $70,000 transfer has its own 5 year look back period, at the end of every succeeding year, each such transfer should be protected in its own right. This would be an effective approach to try and protect assets in an IRA that are generally otherwise unprotected. This would also be preferable to waiting 5 years until the home is protected, then transferring $350,000 of withdrawn IRA money, or some portion of it, to the trusts, which would trigger a new 5 year look back period at a time when your client may be much older and also trigger a much larger income tax liability.

WHAT CAN BE DONE WITH YOUR MONETARY ASSETS LAST MINUTE OR IF YOU SIMPLY GET SICK PRIOR TO THE EXPIRATIONOF THE FIVE YEAR WAITING PERIOD

Trends in the Annuity Rules since the Deficit Reduction Act of 2005

  1. Treatment of annuities established before February 8, 2006 130 CMR 520.007(J)(1): This regulation indicates that payments from an annuity are countable income in accordance with 130 CMR 520.009. If an annuity can be converted to a lump sum, the lump sum, less any penalties or cost of converting to a lump sum, is a countable asset. Purchase of an annuity is a disqualifying transfer of assets for nursing facility residents, as defined at 130 CMR 515.001 in the following situations:
    1. When the beneficiary is other than the applicant, member or spouse;
    2. When the beneficiary is the applicant, member or spouse, and when the total present value of projected payments from the annuity is less than the value of the transferred asset (purchase price). In this case, the MassHealth agency determines the amount of the disqualifying transfer based on the actuarial value of the annuity, compared to the beneficiary’s life expectancy, using the life expectancy tables as determined by the Mass Heath agency, giving due weight to the life expectancy tables of institutions in the business of providing annuities;
    3. When the terms of the annuity postpone payment beyond 60 days, the MassHealth agency will treat the annuity as a disqualifying transfer of assets until the payment start date; or
    4. When the terms of the annuity provide for unequal payments, the MassHealth agency may treat the annuity as a disqualifying transfer of assets. Commercial annuity payments that vary solely as a result of variable rate of interest are not considered unequal payments under 130 CMR 520.007(J)(1)(d).

Planning Pointer/Interpretation of the above rule:

In essence in order to have a qualified Medicaid annuity the annuitant must be either the healthy spouse or the institutionalized individual. The annuity must also ensure that the annuitant gets back all of the money over time that was used to purchase the annuity, which generally includes some interest. The time in which these payments must be made cannot exceed the life expectancy of the annuitant and must come out in equal installments. Finally, these payments must begin no later than 60 days after the annuity is purchased. However, an annuity that pays out in a term of years that is shorter than the community spouse’s life expectancy maybe advantages.

  1. Treatment of Annuities Established on or after February 8, 2006 130 CMR 520.007(J)(2) This regulation provides that in addition to the requirements in 130 CMR 520.007(J)(1), the following conditions must be met:
    1. The purchase of an annuity will be considered a disqualifying transfer of assets when:
      1. Someone other than the Commonwealth of Massachusetts is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the Institutionalized Individual; {used to say Annuitant}
      2. Someone other than the Commonwealth of Massachusetts is named beneficiary in the second position after the community spouse or minor or disabled children;
      3. Someone other than the Commonwealth of Massachusetts is named as such a remainder beneficiary in the first position if the community spouse or the representative of any minor disabled children in 130 CMR 520.007(J)(2)(a)(ii) disposes of any such remainder for less than fair market value.
    2. The purchase of an annuity will be considered a disqualifying transfer of assets if the annuity does not satisfy 130 CMR 520.007(J)(1) and (J)(2)(a) and if the annuity is not irrevocable and non assignable 130 CMR 520.007(J)(2)(b).
    3. The purchase of an annuity will not be considered a disqualifying transfer of assets if the annuity names the Commonwealth of Massachusetts as a beneficiary as required under 130 CMR 520.007(J)(2)(a) and if the annuity is:
      1. Describe in subsection B or Q of section 408 of the Internal Revenue Code of 1986;
      2. Purchased with the proceeds from an account or trust described in subsection A, C or P of Section 408 of the Internal Revenue Code of 1986;
      3. Purchased with the proceeds from a simplified employee pension described in subsection K of section 408 of the Internal Revenue Code of 1986; or
      4. Purchased with the proceeds from a Roth IRA described in subsection A of section 408 of the Internal Revenue Code of 1986 130 CMR 520.007 (J) (2) (C).

Planning Pointer/Interpretation of the above rule

This section deals primarily with who must be listed as the designated beneficiary on these Medicaid annuities whether they are used for married couples or single people. With regard to single people the law is very clear that the beneficiary following the death of the annuitant ( i.e. the person who bought the annuity and is in the nursing home) must be the state for at least the amount of money the state paid on behalf of that person. Any money left in the annuity after that state is paid can then go to family members.

However, with regard to married couples the law is not so clear. The regulations seem to indicate that the state would need to be named as the beneficiary following the death of the healthy spouse when the sick spouse is in the nursing home and receiving MassHealth benefits. However, since these new rules have been enacted, there have been some developments by the state that seem to allow the healthy spouse to purchase the annuity and name the kids or other family members as beneficiaries instead of the spouse following the healthy spouse’s death, provided the healthy spouse was not in the nursing home prior to death. If after the purchase of the annuity the healthy spouse were to enter a nursing home and apply for Medicaid benefits then they would be treated like a single person and would have to change the beneficiary to the state as discussed above. These developments are very important since it allows a much better chance of saving the assets not only for the healthy spouse but maybe even for the other family members. These recent state developments are explored below.

However, if the person purchasing the annuity has a disabled child or minor child, then they could be named as the primary beneficiary ahead of the state. Finally, these annuities must be irrevocable and non assignable.

9-27-07 letter from MassHealth Director of Federal and National Policy Management clarifying when to name the state as the Designated Beneficiary of an annuity.

The letter states that MassHealth generally does not like to address hypothetical questions. Nonetheless, if the community spouse is not receiving any MassHealth benefits and the community spouse is the owner and annuitant of a commercial annuity, so that the institutionalized spouse has no interest under the annuity contract, the current MassHealth policy is not to require the community spouse to name the state as the current beneficiary.

Caution:  This policy does not appear to be consistent with what the MassHealth regulation says and we recommend that you name the state as the designated beneficiary even when the community spouse purchases the annuity in order to avoid any unnecessary complications during the application process. However, over time we have experienced that the state is allowing the healthy spouse who purchases an annuity to name the kids or other family members as the beneficiary following the death of the healthy spouse and not the state. The bottom line is that you should seek guidance when purchasing these Medicaid annuities as following the rules to a tee is crucial to saving the assets and obtaining Medicaid benefits at the same time.

LAST MINUTE ANNUITY PLANNING FOR A MARRIED COUPLE IS ALIVE AND WELL EVEN UNDER THE NEW RULES

Example: A married couple, who are both age 75, own a home worth $500,000 and have investments of $500,000. Husband has a pension of $1,500 per month and the wife has social security income of $750 per month. Husband has just entered a nursing home with no advanced planning in place.

Planning Opportunities:

  •  Transfer the home to the community spouse:

This transfer still qualifies as a permissible transfer and will not create a disqualification period or a five year look back period pursuant to 130 CMR 520.019(D)(1). In addition, transfer assets in excess of community spousal resource allowance to the community spouse as this also qualifies as a permissible transfer. The community spousal resource allowance is currently $119,220. This is the amount of assets the healthy spouse is allowed to keep when the sick spouse enters a nursing home even though no advanced planning has been done.

  • Purchase Annuity in the name of the community spouse:

 

A) Amount of Annuity should be the total assets less the community spouse resource allowance [CSRA] which is the amount the institutionalized spouse is allowed to keep.

– Total Assets                                                                           $500,000

– Community Spousal Resource Allowance                       < 119,220 >

– Amount institutionalized spouse can Keep                    <     2,000 >

– Amount of Annuity                                                                  378,780

B) Result of Annuity Purchase

– Amount of Annuity                                                                  378,780

– Term of Annuity Not to Exceed                                       ¸     5 Years

Life expectancy of 75 year old

– Number of Months in a Year                                            ¸12 Months

– Amount of Monthly Payment                                                   $6,313

to the Community Spouse

Planning Pointer Regarding the term of the Annuity and Income Limits of the Community Spouse:

Whether the state is named as the remainder beneficiary or not on these annuities purchased by the community spouse, it is important to make the term of the annuity as short as possible. In this case a five year life expectancy was used even though her actual life expectancy is 12 years. Such an annuity would not result in a disqualifying transfer as it does not violate the annuity rules as provided above in 130 CMR 520.007(J)(1). Remember, the regulation simply says that the annuity must pay out for a term that is not longer than the annuitant’s life expectancy; it does not say anything about how short the term can be. By making the annuity term as short as possible helps to reduce the risk of there being any reminder left to go to the state following the death of the community spouse to pay for the benefits received by the institutionalized spouse. Plus, this shorter annuity term allows the money to be returned to the healthy spouse sooner to be either invested in a better way for her to live on or to be transferred to an irrevocable trust so that she can begin some advanced planning for her in the event she would need nursing home care prior to her death. Note that the community spouse is not limited to the amount of income he or she may have, so the large monthly payout in this example will not cause a problem in determining Medicaid eligibility for the institutionalized spouse. Therefore, the use of commercial annuities with a married couple still work very similar to how they used to under the old rules.

Benefit of Annuity Planning:

After the home is transferred to the community spouse and she purchases the annuity for the excess assets over the community spousal resource allowance of $119,220, as shown above, and the institutionalized spouse has only $2,000 in his name, he will be eligible for Medicaid benefits. In this case, that means that the healthy spouse will be able to keep the home and the total investment accounts of $500,000. The only thing the community spouse cannot keep is the sick spouses’ social security checks or pension checks.

LAST MINUTE ANNUITY PLANNING FOR A SINGLE PERSON IS TOUGHER UNDER THE NEW RULES BUT IS STILL WORTH A LOOK

Example: A single female age 75 has $302,000 and has just entered a nursing home. The private pay rate for the nursing home is $13,000 per month and she gets $1,500 per month social security and $500 per month pension. In addition, assume the Medicaid rate for the same nursing home is $6,000 per month. This means that her money would be used up in 27 months:

(a) Monthly Cost for Nursing Home                            $13,000

Less Social Security                                                   $ 1,500

Less Pension                                                                 $  500 

Amount short each month                                             $ 11,000

Total Cash Available                                           ¸$300,000

Numbers of month’s money will last              27.2 months 

  • Amount of Annuity: is $300,000 as the individual is permitted to keep $2,000 = [302.000 – 2,000]
  • Term of Annuity: A term certain not to exceed the individuals life expectancy pursuant to 130 CMR 520.007 (J)(1)(b)
  • Irrevocable: the annuity must be irrevocable.
  • (D) Remainder Beneficiary: must be the state in the First position unless there is a community spouse or a blind or disabled child in which case the state to be a remainder beneficiary in the second position behind the said minor, disabled child or community spouse. [130 CMR 520.007 (J)(2)(a)

 

Result of Annuity Purchase

– Amount of Annuity                                                                                      300,000

– Life Expectancy of 75yr old Female using HCFA tables                    / 12 Years

– Number of Months in a year                                                                / 12 Months

– Amount of Monthly Payment at risk to nursing home                      $ 2,083.33

Amount of Medical Lien

– Monthly Cost MassHealth Pays Nursing Home                                    $ 6,000

– Less Social Security                                                                                     $ <1,500>

– Pension                                                                                                          $ < 500 > Pension

– Less Annuity Payment                                                                                $ <2,083>

– Amount short each month that represents                                            $   1,917

the Amount of the MassHealth Lien Building

each Month

Planning Benefit:

If the individual stays in the nursing home for the full 27 months, which is how long the money would have lasted without the purchase of an annuity, the outstanding lien that the state would be entitled to would be $51,759 [1,917/month x 27 months]. In addition the annuity paid out $56,241[2,083 x 27 months]. The total amount spent out of the annuity was $108,000[51,759 + 56,241]. The total amount still left for the family would be $192,000 which is far better then nothing which is the amount that would have been left had the family not purchased the annuity. Finally, this approach at the very least will serve to reduce the cost of the nursing home by utilizing the MassHealth rate instead of the private rate.

Planning with Pooled Trusts In stead of Medicaid Annuities:

Medicaid annuities may not always offer the best last minute solution to save assets, especially when the individual entering the nursing home is very elderly. In these cases one should consider the use of a Pooled trust. This is a trust where an individual of any age seeking eligibility for Masshealth benefits may transfer the excess assets to such a trust and become immediately eligible for Masshealth benefits. This is considered a permissible transfer and will not trigger a five year waiting period. The individual must be the sole beneficiary of the trust and the assets can be used for his benefit for any reason other than food or shelter.

However, following the death of the individual, the trust must payback the state for the amount of benefits the state paid to the individual. In addition, the trust must make a charitable contribution to the Plan of Massachusetts and Rhode Island in the amount of 10% of the balance of the trust assets if the individual dies prior to 2 years after the trust is established or 20% of the balance if the individual dies more than 2 years after the trust was established. Any remaining balance in the trust after such payments have been made can be distributed to family members as the trust directs.   This technique enables the individuals money to be used for their benefit while increasing the chances of some assets being left for the family. This is accomplished by paying the Medicaid rate rather than the private pay rate. 

LAST MINUTE PLANNING FOR THE HOME, VACATION PROPERTIES AND RENTALS FOR A SINGLE PERSON AND A MARRIED COUPLE

The home and vacation properties are generally one of the largest assets a family has and most often times the ones they want protected. However, we often find ourselves in an emergency situation with no advanced planning in place. In the case of the home and other real property there are several limited exceptions to the Medicaid transfer rules. Under the Medicaid regulations all transfers are subject to a five-year look back period, with some limited exceptions. What this means is that if any property or cash is gifted away within the last five years, Medicaid will deny benefits to the person who made such gifts until the amount gifted has been spent on the individual’s care. These rules apply whether the individual is single or married. If married one would simply want to transfer the home to the healthy spouse as mentioned above at least to buy some time to do advanced planning, as such a transfer would temporarily protect the home but not the vacation home or rental properties.

There are certain scenarios in which a last minute transfer of the applicant’s home and other real estate will be exempt from the transfer rules, if the transfer is to any of the following:

  • the applicant’s spouse,
  • a child under the age of 21,
  • a child who is blind or permanently and totally disabled, ( this also applies to the transfer of a vacation home or to a rental property),
  • an applicant’s sibling who has a legal interest in the applicant’s home and was living in the home for at least one year immediately before the date of the applicant’s admission to the nursing home, or
  • the applicant’s child who was living in the home at least two years immediately preceding the date of the applicant’s admission to the nursing home and who provided care to the applicant that permitted him or her to live at the home rather than in a nursing facility.

If any of these circumstances apply, the home may be transferred with no five-year look back provision, allowing the home to be given away immediately before applying for Medicaid, and thus protected. While these last minute transfers appear promising, often times the drawbacks of such a transfer will outweigh the benefits.

Pros and Cons Associated with These Last Minute Transfers

In the first scenario, a transfer of the home to the spouse is permissible without triggering a five year waiting period and the home will be protected if the spouse continues to live in the home while the applicant is in the nursing home. However, should the spouse move from the home or need long term care themselves, the home will no longer be protected. Therefore, advanced trust planning is necessary by the healthy spouse to protect the home entirely, following the MassHealth eligibility of the institutionalized spouse.

The second scenario is to transfer the home, the vacation or rental properties, and any assets to a blind or totally and permanently disabled child. This property can be given either outright or in trust, and none of this property will be available to the nursing home. However, there is a recent case in which the state said that the assets cannot be transferred directly to a disabled child but instead should be in a trust for the sole benefit of the child. The state’s position was that there was no way to prove that a transfer directly to a child was for the sole benefit of the child as such child could just give it away to his siblings the very next day. This was only a fair hearing and not a judicial decision, and the hearing was not appealed. This seems like it would be a stretch on the plain reading of the legislation. Planning Pointer: In a recent case, cash and investment accounts were transferred to a disabled child directly and the individual who made the gift was approved for Masshealth benefits which is much more consistent with the regulations.

However, it is important to note that a special needs trust may be the more appropriate vehicle for such a transfer anyway, since an outright transfer may not be suitable for a severely disabled individual and may affect the federal and state benefits the disabled child is currently receiving. A trust of this kind will also require a “pay back” provision, mandating that should any money be left over from the trust at the death of the child, the state will be paid back to the extent of the benefits paid on behalf of the child. One should consult an estate or elder law planning attorney before engaging in such a transfer in order to accomplish this in the best manner and with the least interference to the government benefits the child is currently receiving.

Caution must be taken when dealing with a transfer to a disabled child as any property given outright or in trust to the disabled child, results in disinheriting the other children, if any. Therefore, again pre-planning with a Medicaid irrevocable trust is best to avoid these drawbacks. For a more complete discussion on these special needs trusts, or Medicaid irrevocable trusts please contact Todd E. Lutsky at 617-523-1555.

The third scenario is a transfer to a sibling with an equity interest living in the home for at least one year prior to the applicant entering the nursing facility. For example, take the scenario of two siblings living in a two family house, one in the bottom unit and one in the top. In this case, the entire home may be transferred to the healthy sibling as long as they have lived in the home for at least one year prior to the sick sibling entering the nursing home. In order to satisfy the state’s requirement that the sibling have an equity interest in the property, it needs to be owned jointly, or as tenants in common, or at the very least one must have a life estate in the property. If these conditions are satisfied, the home can be transferred to the sibling without a five-year look back period being applied.

Caution: The drawbacks associated with such a transfer include the fact that the transfer to the sibling may result in a disinheritance of the children of the applicant. More importantly, if there are children of the sibling who entered the nursing home, they may not want or allow the home to be transferred to the other sibling. Either way if this transfer does not occur, the healthy sibling will end up with a lien placed on their home and may have to have the property converted into condos or buy out the other siblings’ interest to save their home. While the lien maybe placed on the entire property, the state can only take the part of the sale proceeds that belong to the institutionalized sibling. However, this provides little comfort to the healthy sibling who is still faced with the possibility of losing their home. Therefore, once again, prior trust planning is the better solution and avoids the negative consequences of a last minute attempt to save the home.

The last scenario is a transfer to a “caretaker child,” defined by the state as an adult child, who has lived with the parent for at least two years prior to their entry into the nursing home, and has provided care that enabled the individual to live in the home and remain outside of a nursing facility longer than the parent would have been able to do without such care. In order to prove these requirements the caretaker child must be able to provide two years of tax statements, a copy of their driver’s license, and vehicle registration, or some combination of the former, all showing that the parent’s home is, and has been for the past two years, their primary residence. In addition, in the old days a simple letter must be obtained from the applicant’s primary care physician attesting to the fact that the child provided care to the parent and if not for the care, the parent would have needed nursing home care sooner.

Caution: However, there have been several recent cases in which this regulation has been expanded to require that the caretaker child actually provide nursing home level care for the two-year period. This would include such things as assistance with eating, cooking, transferring, bathing, toileting etc. and not just the cleaning of the home or paying of the bills or running errands for the parent. In other words, the simple doctor’s note may not be enough to satisfy the requirements of this caretaker child exception. If all of these requirements are met, the home may be transferred to the caretaker child and thereby will not be available to the nursing home, and there will be no five-year waiting period.

One of the problems with this technique is that the transfer will be considered a gift and will have carry over basis issues resulting in a capital gain when the child sells the property. For example, when the property is given to the child if the basis in the hands of the parent, including capital improvements, was $150,000, the child will receive the same basis that the parent had. If the property has appreciated and the child sells the property later for $500,000, the child will have a gain of $350,000 on which they will have to pay taxes. If the child has lived in the property for two years after the property is transferred to him or her, then the child will have a $250,000 capital gains exclusion. This means that in the above scenario they will only pay taxes on $100,000 ($350,000 – $250,000). If the child does not live in the property or has not lived there for the full two years, the child will end up paying taxes on the full $350,000 gain. After the fiscal cliff of 2012 that new rate, including the state tax, would be 28.8% resulting in a capital gains tax of approximately $100,800

In order to reduce or eliminate these capital gains you can have the parent retain a life estate in the property and transfer the remainder interest in the property to the caretaker child. However, while the parent is on Medicaid, the state will place a lien on the property. The lien will disappear when the life estate ends at the death of the parent, and the property will pass to the child outside of probate and free from any liens or Medicaid estate recovery rules. In addition, once the parent dies the children will receive a full step up in basis to the property’s full fair market value as of the date of death. If the child sells the property soon after the parent dies they may have to pay no capital gains tax. For example, when the parent dies, having retained a life estate in the property, and the property is worth $500,000 that will be the new basis in the hands of the child who owns the remainder interest. In the event that child sells the property soon after the death of his parent for the same $500,000 the full fair market value, there is no gain and thus no capital gains tax due. However, the downside to the maintenance of a life estate is that if the property is sold during the life of the parent, a portion of the proceeds that is attributable to the value of their life estate will have to be given to them and will then be available for the nursing home.

Another downside to the caretaker child transfer is that once again the other children are disinherited from any interest in the home. While one can hope that after the parent passes away the child will share the home with the other siblings, we know that this is not always the case. Since the sole benefit test does not apply to this transfer, you could have the child transfer the home to siblings even prior to death of the parent. Transfers by the caretaker child will have gift tax consequences. Therefore, although this will save the home it is not as ideal as advanced trust planning which allows for the protection of the assets, ensures that no children are disinherited allows the parent to maintain control over the trust assets while able, and avoids all these unintended income and possible estate tax consequences.

Transfer of the Home to Purchase A Life Estate: 

Sometimes a parent may have sold their home and may gift the money to a child in order to buy a life interest in the child’s home so that the parent can live there. The general rule indicates that the state agency considers the purchase of a life estate in another individual’s home made on or after April 1, 2006 a disqualifying transfer, unless the purchaser resides in the home for a period of at least one year after the date of purchase. This sounds great in that the waiting period for this type of transfer is only one year instead of the standard five years for all other transfers. However, like with all things that sound to good to be true, you may find that the drawbacks to this type of arrangement outweigh the possible benefits.

Planning Example: It appears that this statute offers some planning opportunities by offering only a one year waiting period rather than the newly enacted five year look back period provide you meet the rules of tis exception. For example, if a parent had recently sold his home and had approximately $150,000 that he wanted to give to his child, it would result in a five year look back period for Medicaid eligibility purposes. However, if this individual instead purchased a life interest in his child’s home for the same $150,000, it would be protected from the costs of long-term care in one year provided he is able to reside in that home for one year from the date of purchase.

Caution: It is however important to note that in the event the child would need to sell his or her home while their parent is in a nursing home and on Medicaid, that a portion of the proceeds based on the institutionalized individuals age at the date of sale would be allocated to that parent. Those proceeds would then be available to pay the costs of long term care. Furthermore, it is possible to actually expose more assets to the costs of long term care at the time of sale than were ever transferred to the child. For example, if the child sells the home for $500,000 and based on the age of the parent at that time, and tables and interest rates in effect on the date of sale, could result in the parent’s life interest in the property being worth approximately 40% of the proceeds (i.e. $200,000) which would be allocated to the life tenant i.e. the parent and thus as risk. The amount at risk will always vary depending on the age of the parent and interest rates in effect on the date of the taxable event such as the sale of the assets.

Income Tax Caution: Internal Revenue Code Section 121(d)(8) indicates that the sale of a life estate interest in the taxpayers primary residence does not qualify for the capital gains exclusion associated with the sale of the primary residence IRC 121(d)(8). Therefore, the sale of a life interest by a child to a parent is subject to capital gains tax, and the child would not be able to offset any of the gain with either the $500,000 capital gains exclusion for married couples or $250,000 exclusion for single people associated with the sale of the primary residence.

Advanced Planning: There Really is no Substitute:

While all of the above techniques offer some benefits when nothing else is available and certainly should be considered and may be implemented. The use of advanced planning with irrevocable trusts remains the best way to save your assets from the costs of long term care. The use of an irrevocable trust will allow for the protection of the assets, ensure that no children are disinherited and permit the parent to change how the assets of the trust are to be left to the family even after the trust is created. It also allows the parent to maintain control over the trust assets( including selling and buying new real estate inside the trust and managing and investing the trust assets) as the parent sees fit while at the same time avoiding all these unintended income and possible estate tax consequences. A full discussion of these irrevocable trusts is beyond the scope of this article, but for more information on them or on these last minute transfer techniques please contact Todd E. Lutsky Esq. LLM at 617-523-1555.

Additional Techniques to Protect the Home, Vacation and Rental Properties From the Costs of Nursing Homes

Business Property Essential to Self Support 

(a.k.a. The Technique to Protect Rental Property and Vacation Homes)

The general rule is that business and non-business property that generate income essential to self-support is considered a non-countable asset. This means that any rental property or a vacation home or a home that you rent will be allowed to be maintained by the nursing home applicant, while the income it generates will be paid to the nursing home as part of the applicant’s patient pay amount. The property will also be subject to the state’s lien rules. However, since this property is generating income, the amount of the lien will be greatly reduced. Since the applicant will be on Medicaid the rate you pay to the nursing home will be much lower than the private pay rate, all of which means more of the property will be able to be saved. Remember, even in a last minute situation, you can rent out your vacation home and even your home in order to generate this income to make that particular asset non countable currently in an effort to save more of the asset than would otherwise be possible.

For instance, an individual owns a residential property that he rents out. Since this property generates income that the individual uses for his support, he will not be required by to sell it and may keep it in addition to the home if there is one. However, whatever rental income that is generated will be paid to the nursing home after deductions for “business expenses.” “Business expenses” include carrying charges (taxes and homeowner’s insurance), cost of fuel and utilities provided to tenants, and any maintenance and repair costs. The amount left over is paid to the nursing home and thereby reduces the amount of Medicaid contribution each month, thereby reducing the lien on the property at the same time. Again, the last thing a family member should want to do with real estate is to be forced to sell it when the state says to sell it; preserving it always leaves more options for the family later. In addition, the forced sale may result in adverse income tax consequences that maybe eliminated if the asset is sold after the date of the individuals death.

Example:

            Jim owns a residential property that he rents out, but Jim is sick and now required to enter a nursing facility. Jim’s property is a three family in Malden worth about $600,000 and he rents out all three units for a total of $6,000 in income each month, or $72,000 per year. Jim’s property taxes are $10,000 a year, his homeowner’s insurance is $5,000 a year, he does not pay for the tenant’s heat or utilities, but he does spend $15,000 a year to maintain the property. In order to calculate how much Jim would need to pay the nursing home, we would take the total yearly rental income, $72,000, and subtract this by yearly expenses, $30,000, leaving a total of $42,000 in rental income each year to be paid to the nursing home, or approximately $3,500 each month. Finally, assume Jim has social security income of $1,500 per month which would also go to the nursing home thereby further reducing the lien amount by $18,000 a year.

This rental payment reduces Medicaid’s monthly care contribution by the same monthly amount, thereby reducing any lien on the property by $42,000 per year plus the social security payment for a grand total reduction in the lien amount of 60,000 per year. In other words, the nursing home would be receiving a total of $5,000 ($3,500 net rent + $1,500 social security) per month. Let’s assume the Medicaid rate for the nursing home is $6,000 per month. That would mean that the total lien on the property per month would only be $1,000($6,000-$5,000 being paid in). Even if the applicant lived for 3 years in the nursing home there would only be a lien on the property in the amount of $36,000. This is a huge savings, for at the end of the applicant’s life the children could simply take out a mortgage for the lien amount and the building would be saved. Who would not want a building worth over $600,000 for a cost of $36,000? Plus the property would be protected and that always offers more options to the family that would otherwise be the case. Finally, by not selling the property the kids would get it with a full step up in basis so even if they wanted to sell it there would be little or no capital gains tax to be paid. Remember, if you were forced to sell the rental that probably had a very low basis due to depreciation of approximately $100,000 that would have resulted in a gain of $500,000. The combined federal and state capital gains tax rate would be 28.8% resulting in a tax of $144,000 and this does not account for depreciation recapture tax. The lesson here is to not just sell property when a person enters a nursing home to pay for their care.

The only downside to this technique is that there is a lien placed on each property and the state can recover for the benefits they have provided. If, on the other hand, advanced trust planning had been done previously, all of the property could have been completely protected while maintaining control over the property and preserving income and estate tax benefits.

Additional Planning Benefit for the Home or Vacation Home:

            If the applicant owns no rental property at the time they enter the nursing facility, but they do own their home or vacation property, they may utilize the same renting technique. They can convert the home or vacation home into rental property and, as described above, reduce the amount of the lien placed on the property.

Personal Service Support and Maintenance Contracts

Today many people are finding themselves caring for loved ones in one way or another. There is a whole industry of in home care providers to help our seniors stay in their homes longer than would otherwise be the case. In addition, we are seeing parents move into the homes of children so the children can help care for the parents. Children are often balancing their career with providing care for their parents. Finally, children are even often times having to leave jobs and move in with the parents to provide care for them. This trend is only going to increase as our baby boomers continue to age. This does not have to be a negative and can even be turned into a planning opportunity through the use of personal care contracts, but one must understand the dos and don’ts of such contracts to ensure they are honored at the time a person may enter a nursing home.

A personal care contract is a contract between the senior and the care provider detailing exactly the type of services needed, the term of the contract, and the way in which the care provider will be compensated. The focus of this article will be on contracts between the parent and a loved one. As mentioned above, the child often times may have left their job to provide this care and will need to be compensated. Most parents that are being cared for really want to pay their child or loved one for the service. When drafting these contracts it is very important to lay out the details as to the type of services to be rendered and the number of hours you estimate spending on these services. Also, it is crucial for the child (or loved one as the care provider) to keep a log of what they did each day as a person’s needs often change and the contract cannot provide for everything. This level of detail will not only help to ensure the contract is honored but also helps to justify more money being transferred than originally anticipated.

An example of such services, (which is not an all inclusive list), that might be provided or information the care provider should keep in their daily log is as follows:

a) Physical Assistance. PROVIDER shall physically assist PURCHASER with activities of daily living, including, but not limited to, eating and assistance with nutritional and dietary needs, bathing, personal hygiene, grooming, toileting, dressing and undressing, range-of-motion exercises, mobility and transfers, and assistance with medications, medical equipment, and other health-related needs, and any other services as necessary.

b) Management Tasks. PROVIDER shall physically assist PURCHASER with management tasks that are instrumental to the care of PURCHASER, including, but not limited to, household maintenance including laundry, shopping, and housekeeping, meal preparation and clean-up, completion of paperwork, transportation to health care and other providers, facilitation of financial transactions, and any other special needs which are instrumental to PURCHASER’s physical and mental health.

c) Secure Health Care. PROVIDER shall attempt to secure services and treatment of appropriate health care providers, including, but not limited to, physicians, nurses, nurse’s aids, nursing home services, mental and physical health specialists, and occupational and physical therapists, which PROVIDER deems necessary and reasonable to assess PURCHASER’s physical and mental health status and render treatment, care and services to meet such physical and mental health circumstances of PURCHASER due to illness, discomfiture or mental health as found to exist from time to time.

d) Monitoring. PROVIDER will monitor and oversee the provision of services, treatment and care by such health care professionals for the benefit of PURCHASER to assure a continuum of care and treatment of adequate and comprehensive nature.

e) Goods and Wares. PROVIDER, with funds as may be made available by PURCHASER from time to time, shall shop for PURCHASER to obtain clothing, shoes, personal hygiene, beauty, hobby, and entertainment supplies, and other goods, wares, and services for PURCHASER’s use and enjoyment.

f) Maintenance of Real Property or Rental Property. PROVIDER shall oversee and at times participate in the maintenance of all real property owned by the PURCHASER and/or rental property in which PURCHASER may live, such services including, but not limited to, plowing, shoveling, mowing, housework, and any other services as necessary.

g) Financial Management. PROVIDER will oversee PURCHASER’s bank accounts and assets to the extent PURCHASER shall make such information available to PROVIDER and PROVIDER will assist PURCHASER in investments, bill-paying, and daily money management to the extent funds of PURCHASER are available therefore and to the extent PROVIDER may have access to such funds to accomplish such services.

h) Living Arrangements. PROVIDER will monitor PURCHASER’s health status, recommend and properly place, from time to time, PURCHASER in life care facilities, nursing homes or other environments necessary for PURCHASER to receive a continuum of care commensurate with perceived needs.

i) Life Care Facilities. PROVIDER will be in constant contact with personnel and administration of life care facilities wherein PURCHASER shall be a resident to maintain quality of care, services and resident rights, as well as continue to provide additional personal support, care, and maintenance services and all previously mentioned services as required by PROVIDER.

j) Personal Needs. PROVIDER will periodically assess and evaluate the personal needs and desires of PURCHASER as to social, physical activity, entertainment, hobby, recreational activity, personal hygiene, beauty maintenance, and other personal factors and seek to provide services of others, equipment, apparatus, supplies, goods, and wares so those needs and desires are met.

k) Visitations. PROVIDER shall periodically visit with PURCHASER, wherever PURCHASER shall be, to provide the services required of PROVIDER herein, to provide social interaction and entertainment, and, further, will seek visitations of families and friends of PURCHASER with PURCHASER.

l) Resident Rights. PROVIDER shall oversee the safeguard of resident rights and benefits, as set forth in law, allowed to PURCHASER while PURCHASER shall be a resident in a hospital, assisted living facility and/or nursing home.

Planning Pointer: Please do not make the mistake of just paying your loved one for the care being provided without having a personal care contract in place.   If a child is simply providing care for a parent and the parent is paying the child money without a care contract in place, such payments will be considered gifts which will create five year waiting periods for Medicaid eligibility purposes for each such transfer. There are court cases here in Massachusetts that indicate when a loved one provides care to another loved one without a personal care contract in place that such services were intended to be done for love and affection and not for payment. In order for the transfer of money from the parent to the child not to be considered a gift so as to avoid any five year waiting period for Medicaid eligibility, there must be a personal care contract in place. Finally, it is also helpful but not critical to have not provided such care in the past without a contract in place.

While putting together the detail of the services for these contracts is important, it is equally as important to discuss the amount of and the way in which compensation for such services will be paid. The safest way to get paid is on a pay as you go basis such as weekly or biweekly. It is important for the parent to set up a payroll type system and actually issue checks with taxes and social security withheld along with a form W-2 at the end of the year, if this person is going to be an employee. Generally, it is ok to treat this person as an independent contractor and simply issue a form 1099 at the end of the year.

The current acceptable hourly rate for an in home care aid is around 17-20 dollars per hour.   This is the amount that the state will accept in such a contract, allow the contract to stand, and still approve the parent when applying for Medicaid benefits provided all other aspects of Medicaid eligibility have been met.

Tax Planning Pointer: While the benefit of using these contracts is to allow money to transfer from the parent to a child and avoid the five year Medicaid look back period, the down side is that all such money transferred must be picked up on the child’s or provider’s personal income tax return.

Final Thoughts and Drafting Pointers:

The other option for payment is via a lump sum based on the amount of time you expect to devote to this person over the remainder of his or her lifetime. This is not a recommended approach as these are often challenged by the state when the time comes as being transfers for less than fair market value. It is important to draft all personal care contracts as legally binding and reasonably enforceable to support the fair market value for the services rendered, especially lump sum oriented personal care contracts.  Generally, to ensure the contract is valid make sure that it is clear as to the hours to be worked, the duration of the contract, and the services to be rendered. Try to avoid conflicts such as indicating you are providing 30 hours of work a week for the parent while your own job demands over 40 hours of your time per week. Other inconsistencies to avoid would be stating that you prepare her lunch and give her meds regularly through out the day when it is clear that you are at work all day long. Finally, and especially with lump sum contracts, do not use terms like “the provider can terminate the contract if the parent becomes unable to assist in her own care etc.” and then allow the care giver to keep all the lump sum money transferred. These types of inconsistencies will likely result in the contract lacking enforceability and or fair market value and being disregarded.

Closing Planning Pointer: Personal care contracts are very helpful for folks who have not done any planning or have a loved one who they do not think will make it five years prior to needing nursing home level care. This technique allows money to be transferred to the child or other loved one who is providing the care and not be subject to the five year look back period. For example, if a loved one is providing substantial care for a parent for one full year before nursing home services are needed and was receiving $3,500 per month, that would allow $42,000 to transfer to that child without a five year look back period applying. For more information on these personal care contracts please contact Todd E. Lutsky at 617-523-1555.

Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors. Armstrong Advisory Group, Cushing & Dolan and The Securities America Companies are unaffiliated. Representatives of Securities America Inc. do not provide legal or tax advice. The scenarios provided are for illustrative purposes only and not intended to represent client experiences of Armstrong Advisory Group or the Securities America companies. Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state. 01/2015 – AT 1086659.1