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February 9, 2006
House Sends Budget Cutting Bill to Pres. Bush
On Wednesday, February 1st, the House passed the Defecit Reduction Act (DEFRA) by a vote of 216-214. The President is expected to sign the Act on Wednesday February 8 at a signing ceremony.
The people hurt most by this budget bill are the elderly and college students. The bill contains many cuts to MassHealth (Medicaid) and student loan subsidies.
What does this mean to seniors? It means that advance planning is more necessary than ever to protect your assets in the event that you ever need nursing home care. The extension of the look-back period from 3 years to 5 years combined with the inablilty to give anything away within 5 years of needing nursing home care mandates advance planning.
THE CHANGES
· Increase in Look-back Period – MassHealth will now look-back at all bank withdrawals for a 5 year period. Withdrawals from your bank account will be treated as gifts unless you can prove that it was a purchase for value.
· Delay in Disqualification Period – Once you are in a nursing home and have less than $2,000 the disqualification period will begin for all gifts made in the last 5 years. At this point the gifts would have to be returned and paid over to the nursing home.
· Home Equity Over $500,000 – Married couples who have over $500,000 equity in their homes are not eligible for MassHealth. This is a problem for many communities on both the East and West coast.
To try and demonstrate the effect of these changes let’s look at the following example involving a married couple that needs to place one spouse in a nursing home.
Example: Harry and Mary are married with 3 children and 6 grandchildren. They purchased their home for $20,000 in 1950 and it is now worth $650,000. They now have $150,000 in savings. In August of 2005 they gave a total of $50,000 to their grandchildren towards their college education. In August of 2007 Harry has a stroke and needs nursing home care. Will Harry be eligible for MassHealth (Medicaid)?
Problem #1 - Under both our new law and the old law, Mary has too much money. Mary is allowed to keep one-half of their assets (not counting the house) or $75,000 which means that she is over assets by $75,000. Let’s say that Mary privately pays the nursing home until she has spent this $75,000 excess. That fixes the over asset problem.
Potential Problem #2 – The $50,000 gift in 2005. Under the old law, this gift would have been assigned a disqualification period of about 7 months. This disqualification period would have started at the time of the gift and under the old law we would no longer be concerned with that gift because over 7 months have passed.
Under the new law, we have the same result because the gift occurred prior to the enactment of the Deficit Reduction Act. If this gift had occurred after the enactment date, February 8, 2006, the gift would be a problem for Mary. The disqualification period will not begin until Mary has spent down her $75,000 excess assets. At this point Mary could ask for the gifts to be returned, a difficult proposition since they have already been spent on college education or use $50,000 of her remaining money to privately pay until the disqualification period has passed.
Problem #3 – Home equity in excess of $500,000. Under the new law, Mary’s $650,000 equity in her home will make her husband ineligible for
MassHealth. Under the prior law, as long as one spouse continued to live in the home, it was non-countable.
In order to reduce the equity in Mary’s house, she will need to take out a mortgage. Let’s say Mary takes out a $175,000 mortgage that will reduce her equity to $475,000 ( FMV of house $650,000 less $175,000 mortgage = $475,000 equity). The only problem with this is now Mary has too much money again.
I should point out that in the example above, Mary had too much money to qualify for MassHealth and taking out the mortgage only made matters worse. Under both the old law and the new law she could have elected to purchase an immediate annuity, that would pay monthly benefits to her, instead of paying the funds over to the nursing home. This remains an acceptable method of reducing excess assets for married couples.
Next week I’ll try and explain how these new provisions affect single people who need nursing home care.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org