Elder Law Article

On February 8, 2006, the Deficit Reduction Act of 2005 (DRA) became law. This Act changes many of the rules for medicaid planning and long-term nursing care.

Before DRA, the Pennsylvania Department of Public Welfare (DPW) could look back three (3) years to see if you had made any gifts. Under DRA, the look-back period is now five (5) years.

If you make a gift during the look-back period to protect some of your resources from the nursing home, DPW will assess an ineligibility penalty for medicaid benefits. Under the current penalty, you will be ineligible for medicaid benefits for one (1) month for every $6,757.67 you give away. This figure is adjusted annually. Before DRA, the penalty period began to run on the date of the transfer. For example, if you gifted $30,000 to your grandson in August, 2006 to help pay for college, you would be ineligible for medicaid for 4.44 months, or until approximately mid-December, 2006. At that time, you would become eligible for medicaid if you had spent down your resources to the permitted level of $2,400.

Under the DRA, the penalty period does not begin to run until the date on which you would have been eligible for medicaid, but for making the gift. What does this all mean to you? In the example above, the penalty on the $30,000 gift would not begin to run until you have spent down all of your excess resources and have applied for medicaid. At that time, you will have no money and will also have incurred a penalty period of 4.44 months, before you can qualify for medicaid. This could be a real problem for you and your family.

The law does, however, provide exceptions which may help. There is no look-back penalty if you make gifts to a spouse or disabled child. Also, you can transfer your home without a penalty to your spouse, a disabled child, a sibling with an equity interest in the property, or a caregiver-child who has lived with you for two (2) years.

Additionally, there will be no penalty if you can prove that you made the gift exclusively for a purpose other than to qualify for medicaid benefits. For example, you are in good health when you make the $30,000 gift to your grandson's college fund. Then, three (3) years later, you suffer a debilitating stroke. Under the DRA, the penalty for the $30,000 gift will not begin to run until you become eligible for medicaid. However, since you were in good health when you made the gift, you will have a strong case that the gift was not made to qualify for medicaid benefits, but was made exclusively for the benefit of your grandson.

DPW will also not assess a look-back penalty in the above example if it would result in an undue hardship to you. An undue hardship exists if you would be deprived of essential medical care and food, clothing, shelter, or other necessities of life. An undue hardship does not exist if you would only be inconvenienced by assessment of the penalty.

Since gifting is now limited in protecting your resources, you should consider entering into a life care contract with a child. In this arrangement, your child would provide certain care to you such as shelter, cooking, cleaning, shopping, and financial management, etc. in return for a fee. The contract should be in writing and the fee received reasonable. Your child would be responsible for paying income tax on the fee, but you would protect a portion of your estate by paying your child.

Before the DRA, if you were single, your home, regardless of its value, was considered an exempt resource if you planned to return to it upon discharge from the nursing home. The DRA puts a $500,000 cap on the amount of equity you can now have in your home if you live in a nursing home. This cap, however, does not apply if you have a spouse or a disabled child living in your home.

Although the DRA became law in February, 2006, all the states must now implement its provisions into their medicaid laws. The Pennsylvania Department of Public Welfare has not published anything to date; however, it appears the provisions of the DRA will become effective on February 1, 2007. Cases filed before that date will be controlled by prior law, including the gifting rules. Therefore, there is a closing window of opportunity to make gifts in cases which will be filed before the end of the year.

Given the changes to the medicaid laws by passage of the Deficit Reduction Act of 2005, it is now more important than ever before that you plan ahead to protect your assets.