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June 15, 2006
MASS CONFUSION
What would you do if the government passed a law and never told you about it? To make matters worse, what if this law only affected senior citizens and particularly those who are not in the best of health? This is exactly what happened on February 8, 2006 when President Bush signed the Deficit Reduction Omnibus Reconciliation Act of 2005 (DRA).
So, you ask, what is this law that you don’t know about? The DRA established a law that in essence says, you may not make any gifts if you need nursing home care within 5 years of making the gift.
The impetus for this law was the fact that many people who thought that they might need nursing home care were transferring their assets to their children to impoverish themselves, making them eligible for Medicaid, known as MassHealth in Massachusetts.
But let’s look at the facts. Prior to this law change, if an elder had not done any advance planning and needed immediate nursing home care, the best that could be done was to save about one-half of his assets. This was known as a half-a-loaf. Half of the elder’s assets were given away and he retained the other half to pay for the time he was disqualified for having made the gift. Depending upon the amount of the gift, he would have to privately pay for up to 3 years.
EXAMPLE: Dad has a home worth $350,000 and savings of $150,000. He has a stroke and enters a nursing home. The home would be sold and half of his assets given to his children(($350,000 + $150,000) / 2= $250,000). This $250,000 gift would result in a disqualification period, meaning Dad is not eligible for MassHealth and must private pay the nursing home, of about 34 months ($250,000/$246 per day = 33.88 months). This was known as a half-a-loaf. This rule did 2 things; 1) It set in stone how long you will be disqualified for having made a gift and 2) started the disqualification period on the date of the gift.
Under our new rules there is a different result. The new rules increase the look-back period from 3 years to 5 years and there is a delay in the start date for the disqualification period. The disqualification period will not start until you are in a nursing home and have less than $2,000 in assets. Here’s an example:
EXAMPLE: Same situation, Dad has a home worth $350,000 and savings of $150,000. He has a stroke and enters a nursing home. The house is sold and one-half of his assets ($250,000) are given to his children. After about 34 months Dad has less than $2,000, and it is at this time that the 34 month disqualification period will begin under the new rules. The only way that Dad will be able to stay in the nursing home is if the children return the $250,000 to Dad. Dad would then pay this money to the nursing home. The children are not entitled to anything.
So, how do you like this new rule? The Republicans said this was needed because spending was going out of control and this $11.8 billion in Medicaid cuts was absolutely necessary. It’s kind of like the $70 billion tax cut on dividends and capital gains that was passed last month was absolutely necessary. The $70 billion tax cut enables millionaires to pay 15% on their dividends and capital gains instead of 35%. But, the Republicans are not done. Their next project is to eliminate the estate tax. The estate tax generates $25 billion per year. Doesn’t the thought of Paris Hilton having to pay some tax on her parent’s estate bring a tear to your eye?
The regulations to implement these new changes have not been issued as yet by the Massachusetts Division of MassHealth. We expect them within the next week or so.
Will these rules apply to all gifts? Maybe. The regulations say that only gifts made in order to qualify for MassHealth will be considered disqualifying transfers. We are speculating that families who have a history of making annual gifts to their children or gifts to charities will not be disqualified for having done so. The determination of whether these gifts will be treated as a disqualifying transfer will be decided at a hearing.
How do these rules affect millionaires? Not too much. Gifts made over 5 years ago are ignored. So, if you have a couple million dollars, you could give away most of your assets and privately pay for 5 years. For those who don’t have a couple million, advance planning is the only way to protect your assets.
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