Medicaid Survey Results, Part 2: The Use of Reverse Half-a-Loaf

ElderLawAnswers recently surveyed elder law attorneys to learn how Medicaid law is being interpreted in different states and the strategies practitioners are employing.  The survey was conducted in spring 2012 and received responses from 66 attorneys in 42 states and the District of Columbia; our thanks to all who took the time to respond!

In general, the survey found that states are enacting tougher Medicaid rules, but many strategies still work.  We are publishing the results in installments.  Last week: estate recovery.  This week: the use of reverse half-a-loaf strategies.

The survey asked attorneys whether their states allow reverse half-a-loaf strategies such as gift and return, gift and promissory note, or gift and annuity. These strategies involve the client's making an uncompensated transfer that will incur a penalty period and then either returning a portion of the gift or using the remaining assets to purchase an annuity or make a loan using a promissory note. The income from the return, annuity, or promissory note is used to pay the nursing home during the penalty period.

According to the survey, two-thirds of states represented in the survey allow the gift and annuity strategy, about half allow gift and return, and close to 35 percent allow gift and promissory note. Gift and annuity seems to be rising in popularity while gift and promissory note is declining. Three years ago, about half of attorneys responding to our survey reported that each of the strategies is allowed in their states.  Respondents from seven states (Connecticut, Illinois, Louisiana, Massachusetts, Oklahoma, Tennessee, and Washington) did not check off any of the half-a-loaf strategies.

However, this area appears to be in constant flux. Attorneys from Pennsylvania disagreed over which strategies work in their state. According to one Pennsylvania attorney, whether a strategy works or not depends on where in the state the attorney is located, explaining, "Some counties are still allowing use of the gift/promissory note strategy, but this is contrary to the position of state policy. Short-term annuities have also been challenged in some cases, though this is not widespread yet." Attorneys from Florida, Indiana, Kansas, Minnesota, New Jersey, New York, and Ohio had similar discrepancies in their responses. Meanwhile attorneys in Idaho and New Hampshire responded that they believe some of the strategies might work in their states, but they haven't tested them yet.

A few attorney respondents reported that the rules in their states are getting tougher. While gift and annuity had been allowed in Maine, an attorney there noted that the state recently "said that any annuity for less than 1 year (no rule, just unwritten administrative policy) will be treated as a transfer, even if the annuity is DRA-compliant." Similarly Minnesota used to allow half-a-loaf strategies, but according to a Minnesota attorney, the state now provides that "if real property has been transferred and the value of the real property has decreased, the person returning the real property will have to pay cash for the difference between current and previously transferred market values." None of the half-a-loaf strategies work in Washington State, and an attorney there explained that "the only remaining strategy in Washington is to apply and be accepted for Medicaid, gift a portion of the house equity, disqualify, then sell the house and split the sale proceeds."

While the law is up in the air in a lot of states, almost 60 percent of survey respondents said they currently use reverse half-a-loaf in their practices. This is down from nearly 75 percent three years ago. Following are some examples of how the strategy works in various states:

• Arkansas: "We gift, apply to get the penalty and then give back a lump sum. The State has threatened to require full gift returns or no credit for any gifting back. However, we fought it and they have put that on hold. That is why we use the full lump return just in case they change the rule we don't have to go find who is paying back over time."
• Florida: "Gift to one or more people to make applicant financially eligible. Apply for benefits and get denial because of transfer to start penalty period. Gift back about half of original gift & sell/lend until reduced penalty period expires. Re-apply. If it is a loan, then make sure income and repayment is less than facility charge."
• Indiana: "Mom has $100,000. She gifts $60,000 which makes her ineligible for Medicaid for 12 months. She loans $39,000 which helps pay for her care for the 12 months. She must be in the nursing home, broke, and must apply for Medicaid to start penalty."
• Kentucky: "Get a resource assessment. Gift the excess. Apply for Medicaid and get denied, triggering the penalty period. Return assets to the community spouse as needed to fund nursing home care. Community spouse pays the nursing home. Apply for Medicaid again when the time expired equals the reduced penalty period."
• Mississippi: "Depends on situation and length of penalty. If it is less than 12 months, we typically use gift and return (partial cure); if it is 12 to 20 months, we use either gift/promissory note or gift/annuity; and if it is more than 36 months, we highly recommend using gift/annuity."
• Rhode Island: "We make a gift calculated to trigger an exact penalty, then a loan and promissory note with the rest of the exposed cash to get the client under $4K. We must be careful not to have the client's income, including the loan repayment, exceed the cost of the nursing home. Works every time."

If the return of the funds delays the running of the penalty period for the initial transfer, then reverse half-a-loaf planning is much more difficult.  More than half of respondents indicated that in their state returns do not delay the running of the penalty, although a few fear that this will become policy. Other respondents explained that the return of funds did delay the running of the penalty period, but only for a month. A New Jersey attorney stated that a Medicaid applicant in that state was "currently in federal court seeking to overturn the state agency 'policy' -- not regulation -- that a promissory note balance is available to the applicant and that penalty doesn't begin until it's paid back, adding many months to penalty. The state's theory is that it's not a transfer, but a trust-like device and thus available."

Next: The use of spousal annuities