The Center for Medicare and Medicaid Services (CMS) has apparently rejected Michigan’s proposed estate recovery program. Michigan’s proposed legislation was unique not only for being last in the union to be enacted, but also for being exceptionally lenient. It is therefore reasonable to assume that Michigan will be required to enact a more aggressive approach to estate recovery.

This issue has been appealed by the state of Michigan with a hearing set for January. There will be much more to say on this issue as it develops.

Many veterans are unaware of the Aid and Attendance Pension that is available to help them with their medical expenses, which include the cost of assisted living. Some veterans are simply unaware of this benefit. Others have been told that they do not qualify based on “having too much money.” It is important to understand the scope of the Aid and Attendance pension as a starting point. It is also important to realize that veterans who meet the service requirement and who have significant, reoccurring medical expenses can be eligible for this valuable and well-deserved benefit with proper estate planning.

The aid and attendance pension is available to veterans who served during a time of war. It is not necessary to have participated in combat, but simply to have been in the military during a time of war. In addition to the service requirement, it is also necessary to be medically eligible and to meet the income and asset test.

Medical eligibility generally means that the veteran needs assistance with activities of daily living, such as grooming or eating. This requirement is often fairly easily met.

Finally, there are the income and asset tests. The income and asset tests can be the most difficult barrier to qualification for the aid and attendance pension. Among other things, the successful applicant will need to show that reoccurring medical expenses along with standard expenses of daily living exceed monthly income. Regarding assets, there are no hard and fast rules, but having more than $80,000.00 in cash or readily available assets is likely to disqualify a married applicant.

An elder law attorney can accelerate qualification for an otherwise eligible veteran who exceeds the asset or income thresholds. The asset test can be satisfied by use of an asset protection trust. This will allow assets to be preserved for future needs without interfering with qualification for benefits. Moreover, a plan of this kind will facilitate qualification for Medicaid in the future in case nursing home care is required.

Successful applicants for the Aid and Attendance Pension can receive more than $1,800.00 per month in assistance. This money, when combined with the social security and perhaps a pension, is often enough to pay for assisted living and to prolong assets almost indefinitely.

Question: I purchased an annuity in 2007 in the hope that it would be protected from nursing home costs. I have heard some things in the news that make me wonder whether that money will have to go to the cost of nursing home care. What is the truth?

Answer: By itself, an annuity is either an asset, in which case it will be subject to the asset test for Medicaid qualification or an income stream, in which case it will be subject to the owner’s monthly patient pay amount. There is nothing about an annuity that protects it from the cost of nursing home care. But annuities can be valuable tools in asset protection planning.

Exactly how the annuity is treated will depend on whether the annuity has been annuitized (turned into a monthly income stream). As noted in Wikipedia:

There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and the annuity phase in which the insurance company makes income payments until the death of the customers (the “annuitants”) named in the contract. It is possible to structure an annuity contract so that it has only the annuity phase; such a contract is called an immediate annuity. Annuity contracts with a deferral phase are similar to bank CDs and have a growth phase prior to distribution of income, and are called deferred annuities. The newest incarnation is the fixed, equity indexed product which can be either a fixed annuity or pure life insurance.

Annuities in the deferral phase would be treated as an asset and accordingly subject to either the $2,000.00 asset limit for individuals or the more complex rules for spouses.

This situation is complicated further by the new rules under the Deficit Reduction Act that requires you to name the state of Michigan as a beneficiary in order to avoid having the annuity treated as a gift and subject to a penalty period.

Does this mean that annuities cannot be used to shelter assets from the cost of long-term care? No. There are still viable methods of planning with annuities, but a successful outcome will require a thorough understanding of the rules for Medicaid qualification. It makes sense to have annuities reviewed by an elder law attorney prior to purchase. If you have already purchased an annuity and have questions about your exposure to the cost of long-term care, it makes sense to have your annuity contract reviewed by an elder law attorney.

Question: I approached my local Veterans’ Administration office for information about the Aid and Attendance Pension. They told me I had too much money to receive the pension. But I have reoccurring medical expenses of more than $1,000.00 per month. Is there anything I can do?

Answer: This is a delicate situation. On the one hand, some estate planning could allow you to qualify for the Aid and Attendance Pension. On the other, you would be mistaken to think that qualification for the Aid and Attendance Pension alone is sufficient. You need to be planning ahead for Medicaid long-term care at the same time that you are qualifying for veterans’ benefits.

There are several different ways that you could adjust your estate plan in order to qualify for the veterans’ benefits. It is not uncommon to hear of people hoping to convert their assets into income using an annuity in order to qualify for the Aid and Attendance Pension. But this sort of planning could be very short-sighted. If the veteran ever needs Medicaid, the money placed in the annuity will have to go toward payment of the nursing home care. What’s even worse, the state of Michigan will have to be named as a remainder beneficiary. That means that if there is any money left in the annuity at the time of the veterans’ death, it will go to the state of Michigan to repay any Medicaid benefits received. Annuities can have a place in long-term care planning, but they must be used carefully.

It is very often possible to accelerate qualification for veterans’ benefits, but it must be done by an experienced estate planner in order to avoid problems with Medicaid qualification later on.

The Michigan Department of Human Services has enacted several changes to the Medicaid eligibility rules recently that impact qualification for long-term care Medicaid.

Perhaps the most important change relates to divested assets (gifts) and the calculation of penalty periods. Generally speaking, the gifting of assets results in a period of ineligibility for Medicaid long-term care. Under previous policy, returning some of the gifted assets would result in a partial cancellation of the penalty period. For example, if a long-term care Medicaid applicant had given away $61,910.00, she would ineligible for Medicaid for 10 months ($61,910.00/$6,191.00=10 months). But if that same person returned $30,955.00 ($6,191.00 x 5), the penalty would be reduced to 5 months. This former policy was known as a “partial cure” of a penalty.

Under the new policy initiated on July 1, 2008, partial cures are no longer permitted. Instead, the penalty period will only be recalculated in those instances where all gifted assets are returned to the Medicaid applicant or full value is paid for the gifted assets.

This new policy is extremely harsh to Medicaid applicants who may have transferred assets, especially if it is impossible to return the entire amount given away because the money has been spent. These issues are extremely fact-sensitive, but a smooth transition to Medicaid assistance may still be possible. This is because some of the more sophisticated gifting techniques still remain viable under the new law.

Another consideration is whether Michigan has overstepped the boundaries of Federal law with this new rule.

The Federal law on point, namely 42 USC 1396p(c)(2)(C)(iii), reads as follows:

(c) Taking into account certain transfers of assets

(2) An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that—

(C) a satisfactory showing is made to the State (in accordance with regulations promulgated by the Secretary) that

(iii) all assets transferred for less than fair market value have been returned to the individual; or

I have clipped the appropriate sections above in order to make a complete sentence and placed the key phrases in bold. The question is whether “to the extent that” controls the phrase “all assets”. If so, the federal law requires states to allow partial cures of divestment penalties. On the other hand, if “all assets” is allowed to stand on its own, then the Michigan Department of Community Health has reasonably construed the federal statute. As a general rule of statutory construction, no interpretation that renders any phrase meaningless is a proper reading of a statute. Michigan’s interpretation of this rule that ignores the phrase “to the extent that” would generally be considered an improper reading of the law.

Michigan is in the minority of states to adopt the second, less favorable interpretation of this statute. Notes provided along with the amendment indicate that the policy change is in order to “bring the eligibility manual into compliance with the Federal regulations.” But as noted above, the federal statute on point is at least unclear and more reasonably read to require partial cures.

Medicaid applicants caught in the trap of having divested assets within the look back period that have now been spent or are otherwise unavailable will either have to find a way to cover the difference, seek a hardship waiver, which is extremely rare, or seek to challenge the state’s interpretation of the federal law. With regard to the first option, seeking a way to cover the difference, there are several planning opportunities that would, in a sense, stretch assets to cover the penalty period. But timely action and the proper timing of a Medicaid application would be necessary for these strategies to work.

For those now planning for their future needs, it is imperative to seek the advice of an elder law attorney well-versed in these issues.

Any adult caregiver who has control over a parent’s assets (such as by power of attorney, as a trustee, or through joint bank accounts) can be in a very dangerous position for several reasons.

First, adult caregivers who receive compensation are vulnerable to charges of undue influence, constructive trust and other damaging allegations. How do these arrangements become such a problem? Consider that in many families, it is common for one child to bear a disproportionate share of the caregiving duties. Second, realize that such a caregiver is generally closer geographically and sometimes emotionally to Mom and Dad. The opportunity for jealousy to develop is obvious as well as the opportunity for wrongdoing. And regardless of what actually happened, it is easy for there to be an appearance of wrongdoing. Finally, bear in mind that caregiving is extremely time-consuming, stressful and expensive for the caregiver. Just as a stay-at-home mother is worth well over $100,000.00 per year in terms of replacement cost, a caregiver often makes an economic sacrifice to take care of Mom and Dad rather than work at a job. When you consider all of these factors together, it is easy to see how there is an emotional thunderstorm forming around the care of many seniors. Money is a significant factor, but it is often less significant than the stress on, and the quality of, relationships among family members.

From an estate planning perspective, there are several solutions to these problems. One is that a durable power of attorney or trust agreement can allow compensation. But it is important to keep a log of activities and a clear paper trail—periodic accountings may not be a bad idea in some cases—in order to avoid disagreements down the line. Second, caregiver contracts can go a long way toward establishing and meeting expectations. Putting duties and compensation in writing is a helpful way to avoid misunderstandings and insure that Mom and Dad receive the care that they need.

One word of caution here is that siblings are not the only ones who may want to examine compensation for care. Here in Michigan, the Department of Human Services will want to review all transfers made within five years of entering a nursing home and applying for Medicaid. In most cases, the DHS will take the view that payment for caregiving is a gift rather than an exchange for fair market value. It is possible to therefore have a penalty imposed and a period of ineligibility for Medicaid long–term care assistance. The position of the DHS on this point is discouraging to caregivers and really the families of all seniors who need assistance from family members in order to retain independent living as long as possible. With proper planning, however, it is possible to provide appropriate compensation without endangering Medicaid eligibility. But this will require a two-pronged estate plan: on the one hand, there will be a care contract among the family members to avoid disagreements down the line. On the other, there will be an asset protection plan that shields the compensation among family members from being treated as a divestment resulting in ineligibility.

UPDATE: This story reports  on a survey in Ireland that shows caregiving to be on the decline:

The tradition of relatives caring for sick, elderly or disabled loved ones at home is under severe threat, a new report warned yesterday.

Many of Ireland’s 161,000 carers are struggling to cope and feel over-burdened, unappreciated and unable to have a life of their own.

HT: Elder Law Prof Blog.

There are two apparently contradictory themes running throughout this blog and indeed the field of elder law in general. On the one hand, one is regularly advised to plan ahead for long-term care needs with asset protection trusts and similar techniques. On the other hand, the law changes so rapidly in Medicaid qualification that pre-planning seems impossible. For just a few examples consider that recently a cap has been placed on the value of the automobile you can buy, the state has to be named as a remainder beneficiary on annuities, and estate recovery has been enacted. The list of changes is seemingly endless and the pace of change is rapid. So how is it possible to advise people to plan ahead when the law could be different tomorrow?

The answer to this paradox is that while there are frequent changes in Medicaid qualification law, the changes are related to what is considered exempt when qualifying for Medicaid. But if the asset is no longer in the applicant’s name, it cannot be regulated by rule changes. Put another way, if your assets are in the name of a trust, you do not have to worry about changes in the rules affecting those assets. The rules don’t apply to assets that are not held in your name.

Michigan’s estate recovery law is currently under review in Washington. Exactly what form the law takes will be unclear for some time. And even once Michigan establishes clear rules for estate recovery, it is entirely possible that the rules will become more strict. Yet for those who have placed their home in an irrevocable trust, the final form of estate recovery does not really matter. Once the five year look back period has passed, the house will be fully protected from the estate recovery program.

It is still very possible to plan ahead even as the rules are changing. Indeed, because the rules are constantly changing to become more strict, pre-planning makes all the more sense.

When one spouse requires long-term care in Michigan, the Department of Human Services will do an assessment of the couple’s total resources. Without any planning or asset positioning, the spouse at home will be permitted to keep 1/2 of the couple’s assets as of the date the spouse needing long-term care entered either the hospital or long-term care, with a maximum of $104,400.00 and a minimum of $20,880.00 (in 2008). For example, a marital estate valued at $100,000.00 in non-exempt assets will be limited to $50,000.00 that the at-home spouse can keep. The remainder will have to spent on long-term care or converted to exempt assets before Medicaid will provide assistance with the cost of long-term care.

One simple estate planning technique to overcome this problem is to place the marital home in a revocable living trust before any health problems arise. Instead of being excluded from the total value of the estate, under Michigan law, the equity value of the home held in a living trust will be counted as an asset. So a couple with $100,000.00 in the bank and a home in a trust worth $150,000.00 will be treated as though they have $250,000.00 in assets when the asset declaration is completed. This couple will therefore be entitled to keep the full $104,400.00.

There are several cautions to using this technique. First of all, the home must be returned to the name of a natural person (not the trust) before applying for Medicaid. Failure to do so promptly can have horrific consequences. Second, relying on this technique can leave the home exposed to estate recovery. A more comprehensive asset protection plan is necessary well in advance of disability to be certain to avoid estate recovery. Third, this technique will not help with a home valued at more than $500,000.00. A variety of different asset protection techniques can be utilized in those circumstances. But for a married couple hoping to secure assets through retirement, placing a home in a revocable living trust can be quite helpful.

Sue Schiebel has written an excellent article on Medicaid Planning. While her article concerns MassHealth, which is the Massachusetts Medicaid program, the rules and ideas explained are the same in Michigan. She writes:

A lot of middle-aged people don’t realize Medicare, the federal health insurance program, pays for a very limited amount of skilled nursing home care. As we live longer, that means more of us will have to spend our own money for long-term care or must rely on MassHealth, the state health insurance for low income people. Many people wind up doing both — first using up many of their own assets to “spend down” to Medicaid limits so they are financially eligible for state help.

Medicaid qualification is a complex area of the law. To highlight just one counter-intuitive aspect, consider that donations to a church or charity are treated as gifts under the law. One making such a gift is technically creating a period of ineligibility for Medicaid. Strictly speaking, a person making significant donations to a church could be ineligible for Medicaid for several months after all other assets have been spent down. An elder law attorney helps families cope with these bizarre rules and avoid such unfortunate results.

Many of my clients are uneasy about placing their assets into a trust as part of an asset protection plan. In order to demystify the process and help you understand why you might consider having a trust drafted for your specific needs, I would like to explain some of the reasons you might consider having a trust and little bit of how a trust works.

Trusts are an important part of elder law and estate planning. Elder law is really the art and science of preserving personal and financial independence for seniors. Many forces threaten a senior’s independence, from ailing health to limited finances to extensive regulatory systems. The goal in creating comprehensive estate plans is to extend resources as much as possible and to create options. How is this possible? The right trust agreement is an important tool for achieving this goal.

Consider that property–whether a house, a car, or cash in the bank–can be owned by a trust. What this means is that a trustee will have control and legal title of property held in trust and a duty to manage that property according to the terms of the trust. This method of holding property has great flexibility and a number of important advantages.

To understand how this is possible, one must begin to see that under the law, ownership itself has many facets. It is possible, for example, not to own something for purposes of an obligation to a creditor, but at the same time to have full use and enjoyment of that same property. This apparent contradiction can be explained by the fact that beneficial enjoyment of property is not the same as simple ownership.

In general we tend to think about ownership like a baseball umpire thinks about a play at first base. Either the first baseman was holding the ball before the runner crossed first base or he wasn’t. In the same way, your name is either on the bank account number 5555551111 or it isn’t. Or so the everyday understanding of ownership goes.

If bank account number 5555551111 is held in trust for your benefit, whether you can be said to own that account will depend on whom you ask, when, and what the trust agreement says. The fact of the matter is that you can get very different answers about who owns what from the IRS and DHS, particularly with regard to property held in trust. In this way the rules of ownership with a carefully drafted trust will quickly start to seem more like juggling than baseball: you have control of the ball and sometimes you have the ball in your hand, but if you are a good juggler (or, to continue the analogy, you have a good trust) you will not be holding the ball at the critical moment. That is perhaps a tangled analogy, but it shows the delicate balancing that can be accomplished with a properly drafted trust (or a lot of practice juggling).

To give a more concrete example of how the various aspects of ownership can be effectively handled by a trust, consider that it is possible to have a trust with the following terms:

1. The principal placed in the trust will be unavailable for purposes of long-term care. Therefore, from the time property is placed in the trust, it will be out of the original owner’s name and the five year look-back period will begin to run.

2. For tax purposes, the principal held in the same trust will be owned by the original owner. The trust will not have to file a separate tax return, pay the higher rates that complex trusts are subjected to, or otherwise incur any additional tax liability for the original owner beyond the interest, capital gains, etc. that the original owner would otherwise have had.

3. The income generated by the principal held in the trust will be payable to the original owner. The assets held in the trust will therefore continue to provide support and income throughout retirement, but at the same time at least 50% of the assets held in the trust will be protected from the cost of long-term care. After 5 years, the entire principal will be protected from the cost of long-term care.

4. In some cases, this same trust can return the assets to the original owner. But only when the original owner decides it is necessary to do so.

A trust then, can be a legal document that allows you to enjoy your assets, but also to protect them. An attorney who understands the way that a trust will be read by the IRS, the Department of Human Services, the Department of Veteran’s Affairs and other government agencies can teach you how to juggle your finances and preserve your financial independence.