“Did you hear that Joe lost his farmland and house to pay for his nursing home expenses?” The thought of losing the family farmland, home, or lake cabin to pay for nursing home expenses weighs heavy on the mind of many individuals as they reach retirement age. Often, parents desire to pass their real property on to their children when the parents pass away and are fearful of losing the property to medical expenses prior to such time. In order to alleviate some of that anxiety, this article provides insight on Medical Assistance (Medicaid), its impacts on assets, and some estate planning techniques to possibly address Medicaid’s impacts.
First, individuals need to understand that Medicaid is a joint federal-state program established to provide health care insurance for seniors, low-income children, and people with disabilities.1 Under Medicaid, each state creates its own state Medicaid system, but the state must comply with federal guidelines in order to receive federal money for the program.2 The federal monies cover approximately half of the costs of the program with the state left to fund the remaining half.3
In North Dakota, North Dakota Century Code (NDCC) § 50-24.1 and North Dakota Administrative Code (NDAC) § 75-02-02.1 provide the framework for the North Dakota Medicaid system. Additionally, the North Dakota Department of Human Services promulgates a Medicaid Program Policy Manual to assist state and local officials with implementing the program.4
In the absence of long-term care insurance or sufficient personal funds to cover nursing home expenses, elderly individuals must turn to the state Medicaid program for assistance with these costs. However, in order to become eligible for Medicaid assistance, an individual or a couple may only possess a certain amount of assets.5 This asset limitation requires an individual or a couple to use available assets (including land or the lake home) to pay for nursing home costs until the individual or the couple reaches the required asset limit.
In North Dakota, an individual can only have countable assets up to a value of $3,000 to become eligible for Medicaid for nursing home expenses.6 If the individual’s spouse is still living in the community, the spouse can retain half of the couple’s countable assets up to a current amount of $119,220.7 If the individual’s spouse is also applying for Medicaid, the spouse will have his or her own $3,000 limit.8
Certain assets are not “countable” — are excluded from being included in an individual’s or couple’s assets – when determining Medicaid eligibility. NDAC § 75-02-02.1-28 provides the list of excludable assets. Some of the common excludable assets are as follows:9
- A home (subject to occupancy and home equity rules).
- Personal effects, wearing apparel, household goods, and furniture.
- One motor vehicle if the primary purpose of the vehicle is to serve the needs of the recipient.
- Pre-burial contracts, prepayments, or deposits up to $6,000 per Medicaid recipient.
When examining an applicant’s countable assets for Medicaid eligibility, the law allows Medicaid state officials to review all transfers of property the applicant (and the applicant’s spouse) made in the previous five years for less than fair market value.11 This rule is known as the “Five-Year Look-Back Period.” “The look-back date is a date that is sixty months [five years] before the first date on which the individual is both receiving skilled nursing care, swing-bed, or home and community-based services, and has applied for benefits under [Medicaid], without regard to action taken on the application.”12 The purpose of this rule is to prevent applicants from avoiding payment for their own nursing home expenses by simply giving their assets away to other individuals or organizations before applying for state medical assistance.
The Medicaid rules refer to these transfers during the look-back period as “disqualifying transfers” because the transfers can disqualify the applicant for Medicaid benefits for a period of time.13 Instead of requiring applicants to undo these transfers, Medicaid rules allow the state to assess a penalty — or period of disqualification — against the applicant for these transfers.14 The penalty results in an extension of time in months and days before the otherwise eligible applicant will receive any Medicaid payments. This penalty period leaves (or forces) the applicant to seek a return of the assets from the recipients of the previous transfers in order to have funds available to private pay the nursing home costs during the penalty period.
The state calculates the penalty period by dividing the total amount of the applicant’s countable transfers of income and assets in the Five-Year Look-Back Period by the average monthly and daily cost of nursing home care in North Dakota at the time of the individual’s application.15 Consider this example:
On February 1, 2012, Mr. Smith gifted $75,000 worth of farmland to his son. On March 1, 2013, Mr. Smith entered a nursing home and began to pay the nursing home costs out of his personal assets. By April 1, 2015, Mr. Smith had spent down his assets on nursing home expenses to the countable asset limit of $3,000 and applied for Medicaid. The average nursing home cost in ND at the time of his application was $7,500 per month. Looking back five years from April 1, 2015, state Medicaid officials determined the gift of land to be a disqualifying transfer. The penalty assessed was a 10-month disqualification period determined by dividing the $75,000 transfer by the $7,500 per month cost of nursing home care ($75,000 / $7,500 = 10 months). As a result, Mr. Smith will not receive any Medicaid benefits until February 1, 2016 (10 months from April 1, 2015).
The penalty period generally starts on the first day in which the applicant is receiving nursing care services, meets all of the Medicaid nonfinancial eligibility criteria, and has spent down the applicant’s countable assets to the Medicaid asset levels.16
Given the impacts of the penalty period, individuals should incorporate Medicaid considerations into their estate planning as they reach retirement age. A broad overview of some of those options is as follows:
Assess the Status Quo. A couple could simply assess their amount of assets, income (e.g. social security, retirement plans, cash rent from land, etc), long-term care insurance (if any), life expectancy (based upon current age and health), and projected nursing home costs to estimate how long these resources could cover their nursing home costs and what resources would be left based upon their life expectancy. In short, the couple could play the odds that they never need nursing home care or that they die before nursing home costs would consume a portion or all of their assets.
Purchase Exempt Assets. As noted above, certain assets are not counted for Medicaid eligibility purposes.17 Therefore, an individual could spend their money on these assets and the assets would not have to be sold later to qualify the individual for Medicaid. For example, the individual could purchase household items or a new car for their needs. Nevertheless, state Medicaid officials do have the authority to file a claim against a person’s estate for the recovery of medical assistance payments upon the individual’s death or upon the death of an individual’s spouse.18
Sell Property to Children for Fair Market Value. A transfer of property for fair market value does not result in any penalty period.19 Therefore, parents could sell the property to their children at fair market value at any time without any penalty. Nevertheless, this approach often runs counter to the parent’s desire to “give” the property to their children. Additionally, the parents would experience capital gains and income tax on the sale of the property if the property had appreciated in value.
Gift the Property to the Children Now. Parents could also consider gifting property to their children early enough to hopefully have the transfer fall outside of the five-year look-back period. Unfortunately, the children would not get a step up in basis on the property for capital gains and income tax purposes and instead would get their parents “carry over basis” in the property.20 Additionally, the land would immediately become subject to the children’s creditors upon the transfer. Furthermore, parents may find it difficult to give up control of land (or other property) to their children or to rely on their children to provide for the parents during the penalty period if the transfer does not fall outside of the five-year look-back period.
Transfer Assets now but Maintain Sufficient Assets to Cover Five-Year Period. Another strategy may be for the parents to gift a portion of their assets to their children now in order to start the running of the five- year look back period, but maintain sufficient other assets to cover nursing home costs during the five-year period. In short, the parents would be potentially sacrificing one asset to save another. This approach could be coupled with outright gifting above or a life estate deed and irrevocable trust below.
Deed Land to Children While Reserving a Life Estate. A strategy specifically for real property involves parents deeding the real property over to the children now while retaining a life estate in the property. The parent’s life estate interest would allow them to enjoy the use and benefit of the property for their lives. The parents would also receive the income from the property for their lives but part or all of the income would have to go toward Medicaid payments once the parents applied for Medicaid. The value of the life estate itself is an excluded asset.21 Upon the parent’s deaths, full ownership of the property would vest in their children and the children would receive a “step up” in basis in the property. Under this approach, the children would get a remainder interest in the property at the signing of the deed. The value of this remainder interest would be subject to the five- year look-back period.22 Additionally, the children’s creditors would have the right to pursue the children’s remainder interest in the property.
Place Land into an Irrevocable Trust. Another often-used technique in Medicaid planning is to transfer assets into an irrevocable trust. The five-year look-back period starts on the date the Trust’s creator transfers each asset to the Trust. After the five-year period, the Trust income and principal are excluded assets unless the Medicaid applicant has access to them.23 A primary advantage of the irrevocable trust is that the Trust’s creator can designate terms for the management of the trust and the distribution of the trust’s assets to the beneficiaries in the Trust agreement. For example, the terms of the trust could state that the Trustee cannot distribute the land to the children until the youngest child reaches age thirty-five (35). On the other hand, the Trust is irrevocable and the Trustee becomes the legal owner of the property transferred to the trust.
The above information is not an exhaustive list and is only intended to highlight and provide a broad overview of some potential Medicaid planning techniques. These options are based upon North Dakota law and are not necessarily available in other states. Additionally, this information only references some of the advantages and disadvantages of each option. Given the different circumstances of each person’s estate and personal health, constant changes in federal and state Medicaid laws and regulations, and the complexity of these laws, an individual should strongly consider the assistance of a legal professional when examining Medicaid impacts.
The Estate Planning Section of Ohnstad Twichell, P.C., has the knowledge and expertise to assist clients with analyzing Medicaid impacts on their estates and with incorporating Medicaid considerations into a person’s estate plan. Therefore, if you need to update your estate plan, start an estate plan, or address specific Medicaid concerns, please contact our office at 701-282-3249 to schedule an appointment with one of our Estate Planning attorneys.
1 See 42 U.S.C. § 1396 et seq.; 42 C.F.R. § 430 et seq.; NDCC § 50-24.1 (establishing medical assistance for needy persons); N.D. Admin. Code (NDAC) § 75-02-02.1; see also Kaspari v. N.D. Department of Human Services, 2011 ND 124, 799 N.W.2d 348, at paragraph 7-8 (synopsizing the Medicaid program).2 See Kaspari, 7-8.3 See Medicaid.gov Website, subject Home>Medicaid>Topic>Financing and Reimbursement, available at www.medicaid.gov (last visited October 17, 2015) (explaining the Federal Medical Assistance Percentage [FMAP]).4 The Medicaid Program Policy Manual is available at the North Dakota Department of Human Services (www.nd.gov/dhs).5 See NDAC § 75-02-02.1-26.6 See id.
9 See id at § 75-02-02.1-28.
10 A Medicaid unit must occupy the home.Under the ND DHS Medicaid Policy Manual, Section 510-05-70-30, a home is “not occupied by an individual [Medicaid unit] in long-term care or the state hospital, with no spouse, or son or daughter who is under age twenty-one, or blind or disabled (any age), at home, unless a physician has certified that the individual is likely to return home within six months.” Additionally, the Deficit Reduction Act of 2005 established limits on the home equity excludable for Medicaid nursing care services for an individual who does not have a spouse, son or daughter under age twenty-one, or son or daughter of any age who is blind or disabled living at the home. The equity limit in ND is $543,000 as of January 1, 2015. See ND DHS Medicaid Policy Manual, Sections 510-05-70-27 and 510-05-70-30.
12 See id.
13 See id at §§ 75-02-02.1-33.1 and 75-02-02.1-33.2.
14 See id at § 75-02-02.1-33.2(2).
15 See id at § 75-02-02.1-33.2(5a).
16 See North Dakota Department of Human of Services Fact Sheet, “Medicaid Disqualifying Transfer of Assets and Income”, dated September 2010, available at www.nd.gov/dhs (explaining the penalty period).17 See NDAC § 75-02-02.1-28 (listing excluded assets).
18 See NDCC § 50-24.1-07 (allowing recovery from estate of medical assistance recipient).19 See NDAC § § 75-02.02.1-33.1(1) and 75-02-02.1-33.2(2).