How Assets and Annuities Determine Medicaid Nursing Home Care Coverage Eligibility Income.

While amounts vary by state and change periodically, one fact is clear. There is a limit on what you can receive while maintaining qualification for Medicaid coverage of nursing-home bills.  In most states, if you spend all your income on nursing-home costs – minus a small personal-needs allowance, typically less than $100 a month – Medicaid will cover the balance of the nursing home's charges. Many states also impose an income-cap to restrict eligibility to people who have monthly incomes below a certain level (which these states adjust annually with inflation). 

Your assets

The value of the assets you can keep also varies by state, though most set the limit at several thousand dollars for one person. Your house is also exempt if you expect to return to it after leaving the nursing home or if your spouse lives there.

If you enter a nursing home and your spouse doesn't, he or she can keep more income and assets than permitted under the eligibility rules summarized above. In general, Medicaid eligibility considers all assets owned by either spouse, then allows the spouse still living at home to keep half of the couple's assets up to state-by-state limits. Now here are the basics of giving away assets to qualify for coverage. You must get advice from an attorney who specializes in Elder Law before attempting any of these approaches:

Transferring assets to someone other than your spouse.

When you apply for Medicaid, you must disclose any gifts you've made to people other than your spouse within the past 36 months. Such asset transfers result in a period of ineligibility for Medicaid. Government bureaucrats calculate the waiting period by dividing the value of the assets you've given away by the average monthly cost of nursing-home care in your state or region. (You can ask your state Medicaid office for the average monthly cost of nursing-home care in your area.) For example, someone who disposes of $45,000 can't receive Medicaid for the next 10 months if the average monthly cost of a nursing home is $4,500. Applying for Medicaid during the 10 months is illegal. Transferring assets to an irrevocable trust. Trusts established to qualify you for Medicaid involve waiting periods too.

Though some exceptions apply to individuals defined as disabled under the Social Security laws, most people who dispose of their assets by putting them in a trust must work within tight constraints. For an irrevocable trust to be effective, says Boston attorney Alexander A. Bove Jr., author of The Medicaid Planning Handbook (Little Brown; $12.95), you must not have the option of tapping its principal. When you apply for Medicaid, you must disclose whether you or your spouse ever created a trust or whether either of you is the beneficiary of a trust. If you answer yes to either question, you must produce a copy of the trust document, plus records of all trust transactions and distributions that have occurred within 60 months of your Medicaid application. Again, transfers and distributions can create a waiting period. The length of time you must delay applying for Medicaid will depend on the amount of assets involved and the average monthly fees for nursing-home care in your area.

Annuities and Medicaid

Using annuities to protect assets has become very popular. Two recent books on the subject, The Medicaid Planning Handbook by Alexander A. Bove, Jr. and Avoiding the Medicaid Trap by Armond Buddish, specifically discuss the use of annuities to avoid Medicaid seizure.

Generally, if your assets exceed the Medicaid test limits, you may still be eligible for Medicaid by converting the assets to an immediate annuity income stream. Using an income annuity in this manner may be beneficial in the right situation if structured properly. Keep in mind that states' rules for Medicaid differ greatly and it is important to learn as much as possible about your own state's requirements. The annuity income stream must begin prior to applying for Medicaid. Under the Kennedy Kassebaum and OBRA '93 Acts, an annuity must have life expectancy payout rates that are in accord with the latest social security mortality tables (HCFA Tables). Many insurance companies' payout rates are not in compliance. You should contact an agent with experience in this field. (We recommend you call ImmediateAnnuities.com at 800-872-6684, the hosts of this web site.) Using a straight life annuity with no refund or no period certain guarantee will cause the income stream to stop on the death of the annuitant. Additionally, under the Estate Recovery rules passed by OBRA 93, any income that continues to heirs after the Medicaid recipient's death may be subject to recovery by the state.

You must be careful that the combined monthly income from the annuity together with your other social security and pension payments stays under the allowable federal limits. Otherwise, the purchase of too large an annuity income stream could inadvertently take you even slightly over the limit and completely disqualify you from Medicaid. For example: Say you want to reside in a nursing home that costs $4,500 per month. In order to pass Medicaid qualification tests, you use a significant portion of your assets to purchase an immediate fixed annuity that pays $800 per month for life. Your only other income, from Social Security and pension plans, is $525, making your combined monthly income total $1,325. Be careful that this total remains below the federal guidelines. If the federal limit were $1,315, then you would be $10 over the limit and be ineligible for Medicaid coverage. Better to purchase LESS annuity income to stay well below the threshold than more income.

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uirement in the profit-sharing plan will permit the participant to designate beneficiaries of the non-QPSA 50% portion of the account without spousal consent. This could avoid an uncomfortable or confrontational situation that the participant might encounter with his or her spouse in an attempt to obtain the required consent for a deviation from the 100% spousal benefit.

The point is that a profit-sharing plan subject to the REA survivor annuity rules provides a greater opportunity for flexibility for estate planning purposes, because the participant can designate an individual or entity as a beneficiary other than the surviving spouse for 50% of the account.

A recent case shows how the QPSA provision works in a profit-sharing plan. In National Automobile Dealers and Associates Retirement Trust v. Arbeitman (9th Cir.July 10, 1996-No. 95-3137), the decedent-participant was employed by two auto dealerships, each of which adopted identical profit-sharing plans pursuant to an industry-related master pension and profit-sharing plan and trust.16

Prior to divorce, the participant designated his then wife as the beneficiary of one plan; this beneficiary designation was not changed after the divorce. The plan's terms specified that the QPSA rules were applicable, so that 50% of the value of the account balance had to be distributed to the participant's new wife as the surviving spouse. The surviving spouse argued that the remaining 50% could not be distributed to the ex-wife and that she (the surviving spouse) was entitled to the entire account balance, because she (the surviving spouse) had not consented to the designation of the ex-wife as the beneficiary of the no-QPSA 50% portion of the account balance. The court pointed out that spousal consent was not necessary to permit the non-QPSA 50% portion of the account balance to be distributed to any beneficiary designated by the participant. Accordingly, the court held that the ex-wife was entitled to 50% of the account balance. The message of this article is simple. Foremost, we estate planners must determine what our clients want. We should not assume that a client who is a participant in a profit-sharing plan which is not subject to the REA survivor annuity rules actually wants his or her surviving spouse to receive the entire account balance, in effect, as a lump sum. If the client does not want that result, you should consider making the profit-sharing plan subject to the REA survivor annuity rules as one method of achieving your client's goals.17

Endnotes

1-There are five conditions for a profit-sharing plan to be exempt for the REA survivor annuity rules:

  1. the non-forfeitable account balance must be payable in full to the surviving spouse
  2. the participant does not elect a payment in the form of a life annuity
  3. with respect to the participant, the plan is not a transferee or offset plan
  4. the benefit is available to the surviving spouse within a reasonable time after the participant's death
  5. the benefit is adjusted for gains or losses occurring after death consistent with the plan rules governing such adjustments for other plan distribution. Code Sec. 401(a)(11)(b)(iii); Reg. § 1.401(a)-20 Q&A-3(a) and (b)

2-Reg. § 1.401(a)-20 Q&A-8(a). The QJSA rules apply not only to the retirement distributions, but to all distributions made during the participant's lifetime. Reg. § 1.401(a)-20 Q&A-9.

3-Reg. § 1.401(a)-20 Q&A-8(a); Reg. § 1.401(a)-20 Q&A-10(a).

4-Reg. § 1.401(a)-20 Q&A-20.

5-See, National Automobile Dealers and Associates Retirement Trust v. Arbeitman, (8th Cir. 7/10/96, No. 95-3137) discussed below.

6-The author has been told that employers, particularly large employers, seem to prefer profit-sharing plans which are not subject to the REA survivor annuity rules, because such plans are easier to administer by reason of the lump-sum distributions at the participant's death. The issue is whether this convenience to the employer outweighs the potential adverse effect to the participants' estate planning goals caused by the lump-sum payments.

7-Reg. § 1.401(a)-20 Q&A-33(a).

8-Reg. § 1.401(a)-20 Q&A-24(a)(1), confirms that loans can be made without spousal consent because the profit-sharing plan is not subject to Code Sec. 401(a)(11). See, also, note 3 and Reg. § 1.401(a)-20 Q&A 33(A) (account balances can be used as security for loans).

9-Reg. § 1.401(a)-20 Q&A 3(b)(1); Reg. § 1.401(a)-20 Q&A 22(b). These regulations provide that 90 days after the date of death is considered to be a reasonable time, that a longer period may be acceptable under the circumstances, and that the distribution to the surviving spouse is to receive the same timing treatment as any other distribution to a participant.

10-Under the so-called "Rule of 72" any combination of years multiplied by the interest rate (here, 8 x 9%) which produces "72" will double the amount at the start of the measuring period.

11-In the case of a large employer, the wishes of a client (and even a number of other employees) may not be sufficient reason to persuade the employer to change a profit-sharing plan which is not subject to the REA survivor annuity rules. But, for the client who has a significant role in the employer's business, the change should be easy to accomplish given the estate-planning importance of having a profit-sharing plan subject to the REA survivor annuity rules.

12-Of course, the participant and spouse could execute a waiver and consent whereby the spouse agrees to some other form of disposition of the profit-sharing plan's account balance at the participant's death.

13-This issue was discussed in the author's prior article appearing in the August 26, 1996 issue of Pension and Benefits Week in the context of qualifying for the so-called spousal "rollover" for individual retirement accounts.

14-If the participant believes that some other form of distribution to the surviving spouse is desirable in place of the 50% QPSA annuity, there is an alternative to a waiver and consent which may be acceptable to the participant. The plan can give the surviving spouse the right to change the form of distribution to any other form permitted by the plan (e.g. lump-sum or installment payments that satisfy Code Sec. 401(a)(9)). Reg. § 1.401(a)-20 Q&A 31(b)(3).

15-There is always the question as to whether the waiver and spousal consent has been done correctly. See Lasche v. George W. Lasche Basic Retirement Plan, 870 F.Supp. 336–(SD FL 1994)(Merrill Lynch plan consent form held invalid).

16-Although the court's opinion is not clear, the briefs in this case clearly disclose that two profit-sharing plans were involved. The facts do not state whether the participant-decedent was aware of the QPSA provision and affirmatively decided that his former wife should have the non-QPSA 50% amount or just forgot to change the pre-divorce beneficiary designation. The trial court found that, after the divorce, the participant and his ex-wife maintained an amicable relationship and that the participant provided more support to the ex-wife and his children than he was legally obligated to provide. Whatever the reason for not changing the beneficiary designation, the case is important if only because it illustrates how the QPSA rule works in a profit-sharing plan. Actually, because of the almost bizarre fact situation involved, this case also illustrates the beneficial effect of the flexibility resulting from a profit-sharing plan that is subject to the QPSA rule. The brief of the ex-wife's counsel stated: "By the time of Harold's [the participant's] death, Donna [participant's second wife] and Harold each had petitioned to dissolve their marriage, had fought throughout their divorce proceedings, and were living apart from each other." Without the QPSA rule being applicable, the entire profit-sharing plan account would have gone to the second wife; the ex-wife, who continued to have an amicable relationship with the participant and the mother of his two children, would have received nothing. With regard to the second profit-sharing plan involved in Arbeitman, the participant did not name a beneficiary, so that benefit went to the surviving spouse under the beneficiary-default provision in that plan.

17-One approach would be to amend the plan to provide that an amount up to 50% of a participant's account balance as of his or her death shall be distributed to any beneficiary designated by the participant. This would violate one of the conditions necessary for establishing a profit-sharing plan which is not subject to the REA survivor annuity rules. See note 1, above.

Reprinted with permission of Pension and Benefits Week, October 14, 1996. Research Institute of America. Subscriptions: 800-421-9025, $250/ yr.

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