Medicaid Rules

The Treatment of Annuities

The DRA added requirements for disclosing immediate annuities, which have been useful long-term care planning tools. In its simplest form, an immediate annuity is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life or a prescribed time period.

An immediate annuity can be used to convert assets into an income stream for the benefit of an institutionalized Medicaid applicant or the applicant's spouse. The state will not treat the annuity as an asset countable toward Medicaid's asset limit ($2,000 in most states plus up to $113,640 (in 2012) for the healthy spouse) as long as the annuity complies with certain requirements. The annuity must be: (1) irrevocable the annuitant cannot take funds out of the annuity except for the monthly payments, (2) non-transferable the annuitant cannot be able to transfer the annuity to another beneficiary, and (3) actuarially sound - the payment term cannot be longer than the annuitant's life expectancy and the total of the anticipated payments have to equal the cost of the annuity.

To these requirements, the DRA added an additional requirement. The state must be named the remainder beneficiary of any annuities up to the amount of Medicaid benefits paid on the nursing home resident's behalf. If the Medicaid recipient is married or has a minor or disabled child, the state must be named as a secondary beneficiary. The Medicaid application must now also inform the applicant that if he or she obtains Medicaid benefits, the state automatically becomes a beneficiary of the annuity.

In addition, all annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility.

Promissory Notes and Life Estates

Prior to the DRA's enactment, a Medicaid applicant could show that a transaction was an (uncountable) loan to another person rather than (countable) gift by presenting promissory notes, loans, or mortgages at the time of the Medicaid application. A promissory note is normally given in return for a loan and it is simply a promise to repay the amount. Classifying transfers as loans rather than gifts is useful because it allows parents to "lend" assets to their children and still maintain Medicaid eligibility.

Congress considered this to be an abusive planning strategy, so the DRA imposes restrictions on the use of promissory notes, loans, and mortgages. In order for a loan to not be treated as a transfer for less than fair market value it must satisfy three standards: (1) the term of the loan must not last longer than the anticipated life of the lender, (2) payments must be made in equal amounts during the term of the loan with no deferral of payments and no balloon payments, (3) and the debt cannot be cancelled at the death of the lender. If these three standards are not met, the outstanding balance on the promissory note, loan, or mortgage will be considered a transfer and used to assess a Medicaid penalty period.

Prior to the DRA's passage, another common estate planning technique was for an individual to purchase a life estate (a legal right to live in and possess a property) in the home of another person, such as a child. By doing this, the individual was able to pass assets to his or her children without triggering a transfer penalty. The DRA still allows the purchase of a life estate in another person's home, but to avoid a transfer penalty the individual purchasing the life estate must actually reside in the home for at least one year after the purchase.

Undue Hardship Exception

Before the DRA's passage, federal law allowed for an exemption from the transfer penalty if it would cause "undue hardship," but the law did not establish procedures for determining undue hardship and left it up to states to create their own. The DRA finally sets out some rules and requires states to create a hardship waiver process that complies with specific language in the federal law. The new law provides that undue hardship exists when enforcing the penalty period for asset transfers would deprive the Medicaid applicant of (1) medical care necessary to maintain the applicant's health or life or (2) food, clothing, shelter, or necessities of life.

If an applicant asserts an undue hardship, state Medicaid agencies must approve or deny the application within a reasonable time and must inform the applicant that he or she has the right to appeal the decision, and provide a process by which this can be done. In addition, the applicant must be told that application of the penalty period can be halted if undue hardship exists.

With the resident's consent, nursing homes may now pursue hardship waivers on the resident's behalf.

State Long-Term Care Partnerships

Many middle-income people have too many assets to qualify for Medicaid but can't afford a pricey long-term care insurance policy. So-called "partnership" programs, previously available in only four states California, Connecticut, Indiana, and New York -- offer special long-term care policies that allow buyers to protect assets and qualify for Medicaid when the long-term care policy runs out. In an effort to encourage more people to purchase long-term care insurance, the DRA allows all states to create such programs. For more on these programs, click here.

Continuing Care Retirement Communities

The DRA now expressly allows continuing care retirement communities (CCRCs) to require residents to spend down their declared resources before applying for Medicaid. However, the spend-down requirements must still take into account the income needs of the Medicaid applicant's spouse. The DRA also requires that three conditions be met before a CCRC entrance fee can be considered an available resource of someone applying for Medicaid coverage of nursing home care. The entrance fee must be able to be used to pay for the individual's care, the fee or any remaining portion must be refundable on the institutionalized individual's death or on termination of the admission contract when the individual leaves the CCRC, and the fee must not grant the individual an ownership interest in the CCRC.

For the full text of the DRA, click here (the long-term care provisions begin on p. 58). (If you do not have the free PDF reader installed on your computer, download it here.)