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November 10, 2005
U.S. SENATE APPROVES MEDICAID CUTS
This week I am still trying to figure out why President Bush and the Republican led House of Representatives are so eager to make about $10 billion in Medicaid cuts, a program that benefits the elderly and disabled, while at the same time trying to get about $70 billion in income tax cuts passed. That’s not to mention also being in favor of eliminating the estate tax, also known as the Paris Hilton Benefit Act. In order to pay estate taxes, you must have over $1,500,000 in assets upon your death. So let’s see, the Republicans want to cut benefits for seniors that have less than $2,000 in assets and then give out about $70 billion in tax cuts and eliminate estate taxes on those with over $1,500,000 in assets. After a week of trying to figure this out, I still don’t understand!
Last Thursday, the U.S. Senate approved Medicaid cuts recommended by the U.S. Senate Finance Committee by a 52-47 vote. While I am generally unhappy that the Senate decided to make cuts affecting the elderly and disabled, I think the cuts are ones that we can live with. The spending battle now heads over to the U.S. House of Representatives where a vote is expected sometime this week. Once the House passes their version, the House and Senate will have to work out a compromise version of their different cuts.
The U.S. Senate Medicaid cuts don’t affect Massachusetts residents too much. Most of the cuts affect other states that allow some very aggressive Medicaid planning techniques that are not allowed in Massachusetts. Here is a summary of the cuts:
DISQUALIFICATION PERIOD FOR GIFTS:
BACKGROUND - Whenever an individual makes a gift and that person then needs nursing home care, he or she is ineligible for MassHealth (Medicaid) for a certain period of time. The length of the disqualification period varies from state to state. In Massachusetts whenever a gift is made, a disqualification period is computed by dividing the amount of the gift by $232. The result is the number of days of disqualification for that gift. Also, whenever a gift is made, the gift is treated as though it were made on the first day of the month. This comes in handy when you make a gift at or near the end of a month.
Example: On December 31, Bob gives his son a $14,000 gift. In Massachusetts the disqualification period would be computed by dividing $14,000 by $232, and that results in a 60 day disqualification period. The disqualification period starts on December 1 and would end on January 29.
Change#1 In some states, if a gift is made and the disqualification period is less than one month, the gift is ignored. So, if a gift of $6,000 was made, it would be ignored because it results in less than one month of disqualification time. The Senate has decided that states should switch to the Massachusetts method that calculates the disqualification period in days.
Change #2 deals with multiple gifts. Some states allow the disqualification period to run concurrently when there are multiple gifts made. They look at each gift separately so that you can have multiple gifts that all have separate penalty periods running at the same time. The Senate has decided that you must add up all of the gifts and then divide the total by the daily disqualification rate. Massachusetts already does this.
BALOON PAYMENTS – Some states have allowed seniors to invest their money by giving it to their children and receiving a small monthly check back and a large lump sum at a later time. This later time would usually occur well after the senior had died. The large lump sum is referred to as the balloon. The idea is that if the senior is in the nursing home, the small monthly income payment that the senior is receiving would go to the nursing home and the large balloon payment would end up going to the children.
The change that the Senate has adopted, and that Massachusetts is already using, is that any arrangement of this type must provide for equal payments over the life of the senior. The result is that if the senior ends up in a nursing home and stays there for his entire life expectancy, all of the money ends up going to the nursing home.
ANNUITIES – The use of annuities varies widely from state to state. In Massachusetts, annuities are used predominately in the case of married couples when one spouse needs nursing home care. Any excess assets owned by the couple may be used to purchase an annuity for the healthy spouse. This converts the excess assets into income of the healthy spouse that is not looked at in determining the eligibility of the sick spouse for MassHealth.
The other annuity purchase situation arises when a single person needs nursing home care, has excess assets, and is very ill. This person would be allowed to purchase an annuity for their actuarial life expectancy. If this person had a 10 year life expectancy, but due to his illness was expected to die within a year, he could buy this annuity. Let’s say he dies in 10 months. The payments that he received during life would be paid to the nursing home. The balance of the payments would end up going to his children. The problems with plan are twofold; first, medical “experts” can be very wrong when trying to estimate how long someone will live. Lastly, people who are adopting this plan are betting on having a loved one die sooner rather than later. This is a bet that most people are unwilling to make.
Example: Bob’s life expectancy is 10 years. He has $100,000. He is in a nursing home and dies in 10 months. The nursing home costs $10,000 per month. If Bob does nothing, he will pay all of him money to the nursing home, 10 months times $10,000 per month. If, Bob buys an annuity, he would receive $833 per month ($100,000/10 years=$833 per month) and would pay that amount to the nursing home during the 10 months that he is alive. This means the nursing home would get $8,330 and his children would get $91,670. Not too shabby.
The change that the Senate has adopted would require that the state be named as the beneficiary of this annuity. The state would be reimbursed from the annuity to the extent that it had made payments for the senior’s nursing home care. The Senate’s change will put an end to this practice.
LIFE ESTATES – A life estate is the right to occupy a piece of real estate. In Massachusetts we often transfer a senior’s home to their children and have the seniors retain the right to occupy the home for the rest of their lives. The benefit is that the senior has protected his home in the event that he needs nursing home care and has also protected his right to occupy the home while he is healthy.
A very aggressive use of life estates has occurred when a senior needs nursing home care and has excess assets. He takes those excess assets and purchases a life estate in his son’s home. Even though the senior will never even spend a night at the son’s house, it is not treated as a gift. It is treated as a purchase for value based upon the actuarial values. The son ends up with the senior’s cash and the senior is left with an asset that may not be attached or liened due to nursing home costs. To the best of my knowledge this has not been used in Massachusetts and if tried here would probably be treated as a gift.
The change proposed by the Senate will require that the senior reside in the home for at least one year after the purchase of the life estate or it will be treated as a gift.
The final point to note is that these changes will apply only to transfers or gifts occurring after the enactment of these new laws. Seniors that have been contemplating making some changes to their estate plan might consider doing it sooner rather than later to avoid some of the draconian changes recommended by the U.S. House of Representatives.
Next week I’ll provide you with an update on how these changes are progressing through Congress and give you an update on the Senior Circuit Breaker Credit. This is a tax refund available to seniors who either rent or pay real estate taxes and have a low income. I provide free income tax preparation to seniors across Massachusetts if the only reason they are filing is to claim this refund. Last year I got over $30,000 in refunds for seniors.
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