Craig Smith, a long-time client, comes in for his usual financial services and planning advice. In the course of the meeting, you learn that his 82 year-old mother is going into a nursing home. Craig asks you, as his financial advisor, what he can do to protect his mother's assets. In the back of your mind, you know there are important changes regarding the Medicaid laws and asset protection rules. But what exactly are the changes and what does it mean to the client? As we all want to give our clients accurate information, accountants and financial advisors need to be well versed in the new Medicaid laws. So in a nutshell, here are the basics.
There are four major changes wrought by the Deficit Reduction Act of 2005 ("DRA"), which are effective as of February 8, 2006: 1) increased look-back period; 2) new commencement date for penalty periods; 3) changes to the homestead exemption; and 4) revised rules regarding treatment of annuities.
THE LOOK BACK PERIOD
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The DRA increases the look-back period to five years. Under the prior law, the look-back period was three years for transfers to individuals and five years for transfers to a trust.
The increased look-back period will be phased in over time in such a way that February 8, 2006 will always be captured. As such, documentation requirements will remain at three years until February 8, 2009 (because February 8, 2006 will still be "captured"). Thereafter, applicants will be required to produce three years plus one month of financial documentation for each month post-February 8, 2009 they are applying. In other words, there will be a sliding and ascending scale as to the number of months and years for which financial documentation must be provided, culminating on February 8, 2011 when the full five year look-back will be reached. All Medicaid applications filed on or after February 8, 2011 will contain the full five year review.
The increased look-back period means that individuals and families must plan five years before a health care crisis. Short of a crystal ball, no one knows when he or she may suffer a debilitating illness such that long-term care is needed. Early planning, while individuals are relatively young and healthy, is now even more imperative. The trick, of course, is balancing the desire to protect and preserve assets versus giving up control of those assets.
Note that the new look-back period is the same whether assets are transferred into trust or are transferred outright to family members. In the past, Elder Law practitioners steered clear of transferring assets into an irrevocable trust if the value of said assets would ultimately increase the penalty period from three years to five years because of the five year look-back on trusts. Now, trusts are far more attractive for asset protection and tax purposes with little or no downside since the look-back is the same five years across the board.
THE PENALTY PERIOD
The DRA delays the commencement date for a penalty period based on uncompensated asset transfers. Under prior law, the penalty period commenced on the first day of the month following the date of the asset transfer. As such, institutionalized Medicaid applicants transferred one-half of their assets to family members and maintained the other one-half to private pay for their nursing home care until the penalty period expired. With proper calculation, the individual's funds would run out at the same time the Medicaid penalty period expired and eligibility would thereafter begin (colloquially known as the "rule of halves").
