Outright transfers to third parties (other than the spouse); and

Transfers to or from a trust, if the trust was established on or after July 30, 1994 by (1) the individual, (2) his or her spouse, or (3) a person, including a court or administrative body, with legal authority to act on behalf of the individual or his or her spouse, or acting at the direction or upon the request of the individual or the spouse (for example, an agent or court-appointed guardian).

Current law severely limits the effectiveness of gift transfers of assets as a short-term planning technique.

If an institutionalized individual (or the spouse) has disposed of assets at less than fair market value on or after the applicable "look-back date," the individual will be treated as ineligible for Medicaid for a period measured by the amount transferred, without any statutory cap on the length of such ineligibility.

 

EXAMPLE: On June 1, 2008, Clara transferred title to her stock portfolio, valued at $345,000, to her children. On September 1, 2010 (27 months later) Clara enters a nursing home with assets of less than $2,400 and applies for Medicaid as a medically needy person. As a result of Clara's transfer of assets within the look-back period, she will be ineligible for a period of 1,516 days ($345,000 / $227.61), or more than four years.

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 Medicaid and would otherwise be receiving institutional level care based on an approved application for such care but for the application of the penalty period.

EXAMPLE:  On March 1, 2008 Mary, age 54, makes a gift of stocks valued at $186,300 to an irrevocable trust that she established for the purpose of providing for her grandchildren’s education. (Medicaid eligibility was not a reason for Mary creating the trust.)  Later in 2008, however, Mary suffers a severe stroke that requires her admission to a nursing facility.  By July 1, 2010 all of Mary’s assets have been spent on her nursing care, and she applies for Medicaid with total resources under $2,400. At that time the state's daily penalty divisor is $225. As a result of the gift to the education trust she made in March 2008, Mary’s stocks will be treated as a countable resource and she will be ineligible for a period of 828 days starting on July 1, 2010. Thus, Mary will be ineligible for Medicaid until October 2012, but with no assets to pay for her care in the meantime.

NOTE: Without question this is the most severe change made by DRA 2005, since it will severely penalize individuals for gifting assets within the new five-year look-back period, even if the evidence clearly shows that there was no intent to accelerate Medicaid eligibility by making such gift.

In the case of multiple transfer of assets, the starting period of ineligibility will be the first day of the month during or after which such assets were transferred and that does not occur in any other period of ineligibility.

Multiple transfers will result in potentially longer consecutive periods of ineligibility rather than concurrent or overlapping periods of ineligibility. If a new transfer would occur during an existing penalty period, the new penalty period will not begin until the existing period has ended.

 

EXAMPLE: Sam transfers some stocks to his children in May 2008 for which a penalty period of 12 months is imposed. In October 2008 Sam transfers additional assets to which another 12 month penalty applies. Because the second transfer took place within the first 12-month penalty period, the second penalty period does not begin until the first period expires, i.e., on April 30, 2009. Thus, the first penalty period runs from May 1, 2008 through April 30, 2009, and the second period runs from May 1, 2009, through April 30, 2010.

Assets held by the applicant and another person in the form of joint tenancy, tenancy in common, or similar arrangement will be treated as transferred by the applicant if a transfer is made by anyone that reduces or eliminates the applicant's ownership or control of the asset. This rule will apply even if the applicant did not contribute to the purchase of the joint asset nor personally make the transfer.

    Certain transfers are made specifically exempt from the asset transfer rules.

Transfer of Residence. No ineligibility will be triggered if the individual transfers title to his or her residence to certain family members who meet the law's eligibility requirements.

 

Inter-Spousal Transfers. Transfers of assets to the spouse or to another for the sole benefit of the spouse, and transfers from the spouse to another for the sole use of such spouse, are exempt.

Other Exceptions.   

Transfer of assets to a minor or blind or disabled child ("disability" is based on SSI criteria).

Transfer of assets to a trust "solely for the benefit" of such child.

Transfer of assets to a trust "solely for the benefit" of a beneficiary under age 65 who is also disabled.

A transfer of funds after February 8, 2006 that are used to purchase an annuity will be treated as exempt if the annuity is a commercial annuity contract purchased by or on behalf of an annuitant who applies for Medicaid and if it is purchased either as part of, or with proceeds from, a qualified retirement account, or if it is:

Irrevocable and non-assignable;

Actuarially sound, as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration; and

Provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.

 

        DPW as Beneficiary of the Annuity

In addition, for the annuity purchase to be an exempt transfer it must name DPW as the remainder beneficiary in the first position for at least the total amount of medical assistance that will be paid on behalf of the institutionalized individual. 

In the alternative, DPW can be named as beneficiary in the second position if it follows the community spouse or a minor or disabled child, but in such event is named in the first position if such spouse or a representative of such child disposes of any such remainder for less than fair market value.

Funds used to purchase a promissory note, loan, or mortgage during the look-back period will be treated as an exempt transfer if the note, loan, or mortgage:

Has a repayment term that is actuarially sound, as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration (In this context, "actuarially sound" means that the term of the note must not exceed the lender’s life expectancy);

Provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and

Prohibits the cancellation of the balance upon the death of the lender.

If a promissory note, loan, or mortgage does not satisfy all three requirements, the value of such note, loan, or mortgage shall be the outstanding balance due as of the date of the individual's application for medical assistance.

Attack By Pennsylvania Act 42.  DPW considered the LERP-type transaction to be abusive, and in Act 42 Pennsylvania attempted to curtail the use of this technique.

Act 42 provides that, as a condition of eligibility for medical assistance, every applicant or recipient who owns a life estate in property with the retained rights to revoke, amend or re-designate the remainderman of a life estate must exercise those rights as directed by DPW.

The acceptance of medical assistance would constitute an assignment to DPW of any retained right to revoke, amend or re-designate the remainderman of a life estate in property.

In effect, the Medicaid applicant's retained powers would be exercised on his or her behalf by DPW so that the property would be retitled back in the sole name of the recipient, thus ensuring that the Medicaid estate recovery program would cover the asset at death.

Retained Power of Sale. It is noteworthy that a retained power of sale is not specifically mentioned among the retained powers that are proscribed by Act 42. To date DPW has not indicated whether it will interpret the statute so as to include the power of sale within the general right to revoke the life estate. From a practical viewpoint, DPW may be unwilling to take on the responsibility of actually selling the life tenant's residence pursuant to a presumed assignment of the retained right of sale, as opposed to a simpler paper transaction of revoking the life estate or re-designating the remaindermen.

DRA 2005 appears not to be addressing the LERP-type of life estate, which deals with the Medicaid applicant's own residence, but rather with the situation of an applicant, such as an elderly parent, buying a life estate interest in the home of his or her child.  DRA 2005 essentially requires that the parent live in the child’s home for at least one year in order to have the funds used to purchase the life estate be treated as an exempt transfer.

 

Practical Issues. There are some practical issues that may arise in connection with the use of this technique. 

First, a life estate generally gives the life tenant the exclusive right to possess and use the entire property.  If a parent purchases a life estate interest in a child's home, on what legal basis would the child have the right to continue to reside in the home along with the parent? 

Second, if the life estate interest either as defined in the deed creating it or in practice does not encompass the exclusive use of the entire property, but in reality the parent exclusively occupies only a bedroom or specific "granny quarters," should the limited nature of the parent's life estate interest cause its value  to be similarly reduced? 

Planning Opportunity. At a minimum, in the situation where an elderly parent who will not be in need of skilled nursing home care for the foreseeable future wants to move into a child’s home, DRA 2005 will allow the parent to essentially buy a life estate interest in the child’s existing home. To avoid any gift treatment, the purchase price for the life estate interest should be based on the parent’s life expectancy and a reasonable valuation of the property.

 

EXAMPLE. Alice, age 75, and her daughter Mabel agree that Alice will come to live with Mabel and her family. Mabel and her husband own a home that has a fair market value of $100,000. Given Alice’s age and an assumed AFR of 5.8%, her life estate would have a value of $42,477. If Alice pays Mabel and her husband that amount in exchange for a life estate interest in their home and she lives in the home for at least one year, the $42,477 payment will be treated as an exempt transfer.

It is clear that to take advantage of this new rule, the individual must have actually lived in the third party’s home for at least one year following the purchase of the life estate interest. Thus, funds used to purchase a life estate will cause ineligibility if the parent is forced to move from the child’s home for health reasons, even if the life estate was purchased at fair market value.

Asset transfers made during the look-back period will be presumed to have been gifts, which will result in a period of ineligibility unless there is convincing evidence that one of the following applies:

The applicant intended to dispose of the assets either at fair market value.

The assets were transferred exclusively for a purpose other than to qualify for Medicaid.

The transferred assets were returned to the applicant.

To successfully rebut the presumption that a proscribed gift was made, the applicant should be prepared to provide DPW with evidence that fair market value was in fact received in exchange for the property transfer. 

In the absence of such proof, the applicant can submit evidence of the circumstances that caused him or her to transfer an asset at less than its fair market value.  Such evidence could include the following:

The purpose (other than Medicaid eligibility) for transferring the asset.

Attempts to dispose of the asset at its fair market value.

The reasons for accepting less than fair market value for the asset.

The means of, or plans for, the applicant’s self-support after the transfer.

The applicant’s relationship to the transferee.

Examples of transfers that would overcome the presumption of a disposition of assets to qualify for Medicaid:

Unanticipated Disability or Unexpected Loss of Assets. After the transfer of the asset, the transferor becomes disabled or has an unexpected loss of assets, which results in the need to apply for Medicaid.

De Minimis Transfer. If the transferred assets would still have been below the income and resource limits for Medicaid eligibility during each of the months in the period of ineligibility which would otherwise apply. 

Court Order or Legal Action. If the transfer was the result of a court order or written settlement of a legal action. A copy of the court order or written settlement will be required.

Third-Party Trusts. It is important to keep in mind that, except in limited circumstances, the rules do not apply to trusts created and funded by persons other than the Medicaid applicant, even if the applicant is a beneficiary of the trust.

Transfers TO a Revocable Trust. No transfer penalty will be imposed in the case of transfers to a trust created by the applicant in which he or she has reserved a right of revocation, because the trust assets will continue to be considered an available resource, and any payment to or for the benefit of the applicant will be considered countable income.

Transfers FROM a Revocable Trust. Distributions made from a revocable trust to a third party (for example, a trust with multiple beneficiaries) will be treated as a transfer for less than fair market value, and trigger the look-back period.

Transfers TO an Irrevocable Trust. While it is difficult to comprehend the Congressional intent underlying the rules governing irrevocable trusts, it seems clear that the look-back period will apply to transfers to an irrevocable trust if the trust instrument provides that there is any portion of the principal or income from which no payment could be made to the grantor under any circumstances. In this case, the date of the transfer is deemed to be the date of the establishment of the trust or, if later, the date on which payment to the individual was foreclosed.

Transfers FROM an Irrevocable Trust. Federal law provides that if there are any circumstances under which payment of principal or income could be made from an irrevocable trust to or for the benefit of the applicant, then such principal or income will be considered an available resource, and payments to or for the benefit of the individual will be treated as income.

Under these rules it does not matter what degree of discretion is given to the trustee. No matter how restrictively the discretionary standards may be defined, the presence of any standards for the benefit of the applicant will result in the trust assets being treated as an available resource.

This means that the trust property will remain a countable resource even after the look-back period would have expired.

Payments made from the trust "for any other purpose," such as distributions to beneficiaries other than the grantor, will be considered a transfer for less than fair market value, and will trigger 60-month look-back period.

"Special Needs" vs. "Supplemental Needs" Trusts. The trust defined above is sometimes referred to as a "special needs" trust. It is important to distinguish this kind of trust from a "supplemental needs" trust, which is a type of trust created by a third party to provide a Medicaid-eligible beneficiary with benefits not covered by Medicaid, where it is the third party's assets, and not the beneficiary's, that are used to fund the trust.

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DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

IRS CIRCULAR 230 DISCLAIMER:   Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

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Copyright © 2008 Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1435

Last Updated: 06/12/08