Deficit Reduction Act Means Big Changes in Planning for Mass Health Long-Term Care

On February 8, 2006, President George W. Bush signed the federal Deficit Reduction Act of 2005 (DRA) into law. This new law may change the way individuals will plan for their retirement and long-term care needs. Decisions that individuals make now may have a significant impact on their future eligibility for long-term care financing through Mass Health. For example, if you make contributions or gifts to charities, churches or family members, you could be ineligible for Mass Health long-term care services for up to five years after you gave the gifts -- even if you had no intention of using Mass Health at the time. If you have already transferred assets in the past before the effective date of the DRA, you would be grandfathered under the prior law. Here is a snapshot of the five major changes in Mass Health long-term care eligibility: 1. All transfers are now subject to a 60-month look-back period. The look-back period is like a rear-view mirror on a motor vehicle. It is the period during DRA permits Mass Health to review financial transactions of the applicant, to determine whether any of those actions would result in disqualification from Mass Health eligibility. The look-back period begins on the date of application and goes backward in time. Financial transactions outside the look-back period (e.g. more than 60 months ago) are not part of the application process and cannot be a basis for disqualification for Mass Health eligibility. 2. Change in beginning date for period of ineligibility. Prior to the enactment of the DRA, the period of ineligibility for Mass Health long-term care benefits began on the date of the disqualifying transfer and continued based on the fair-market value of the asset transferred. This has meant that gifts and other uncompensated transfers have immediately triggered a period of ineligibility, which would end depending on the value of the transfer. This planning strategy, sometimes called 'half-a-loaf planning' or '50-50 planning,' enabled families to retain a portion of their assets while reserving another portion to pay privately for long-term care during the period of ineligibility. This strategy now appears to be lost under the DRA. The period of ineligibility now begins when the applicant is financially eligible or when he or she would have been financially eligible but for the transfer. In other words, the DRA begins the period of ineligibility at the time of application for Mass Health long-term care benefits. So, if an applicant gave his or her grandchild a gift of $25,000 within five years of applying for Mass Health long-term care benefits, the transfer would trigger a period of disqualification of approximately three and a half months at the time of application. At that point, the applicant would have to be prepared to pay privately for long-term care services during this period of ineligibility. 3. State now becomes a remainder beneficiary in Medicaid annuities. One common planning technique has been for the nursing-home spouse to purchase an annuity with excess assets -- that is, assets above what is allowed for the community spouse and the nursing-home spouse. This annuity provides income for the benefit of the community spouse. This has protected the community spouse from the loss of income and resources due the incapacity of the spouse who has moved to a nursing home. In the past, if the community spouse died prior to the annuity being fully paid out, he or she could name his or her children or other individuals to receive the stream of annuity payments after his or her death. Under the DRA, the state must now be named as the remainder beneficiary before the children. The state will now be entitled to be reimbursed for all payments made on behalf of the nursing-home spouse. At the time of this writing, however, this rule may apparently not apply to annuities purchased by the community spouse. Therefore, annuities may remain a viable planning option for married persons in most situations. 4. Home equity is limited to $500,000 under the DRA. Individuals could not establish eligibility for Mass Health if the individual's equity interest in the home exceeds $500,000. Fortunately, the DRA does permit individual states to increase this to $750,000 and it is widely expected that Massachusetts will adopt this larger amount. 5. Entrance fees for and assets declared on applications to Continuing Care Retirement Communities and Life Care Communities are resources that could be required to be spent down prior to applying for Mass Health. This could occur if an entrance fee can be used for the individual's care. If the entrance fee can be refunded or does not confer an ownership interest in the community, the entrance fee would be considered an asset for purposes of establishing financial eligibility for Mass Health. Individuals and families may be well advised to consider several strategies in light of the changes brought on by the DRA. For example, the DRA permits the use of conventional financing on the principal residence in order to reduce the value of the home equity. This might result in consideration of a home-equity loan or reverse mortgage when, in the past, these options may not have been favorably considered. The use of the funds from a home-equity loan or a reverse mortgage can fund personal-care contracts, to encourage seniors to remain at home. Also, large transfers for younger and/or healthier people may now seem more favorable while, in the past, such transfers might have been considered too aggressive. In addition, the DRA rules encourage the purchase of long-term insurance contracts '“ at least for the five-year disqualification period. As with all estate-planning decisions, you must make these choices, among others, only after a careful review of each individual's and family's objectives and goals. This material is intended to offer general information to clients, and potential clients, of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Fletcher, Tilton & Whipple, P.C. assumes no responsibility for any individual's reliance on the information disseminated unless, of course, that reliance is as a result of the firm's specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be re-verified from time to time to ensure it is still current. This information was last updated May, 2006.