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.

The reality is that families faced with the chronic illness or disability of a loved-one often have few options but a traditional long-term care facility. Aside from the financial devastation that this usually entails, there is the fact that a traditional nursing home is a difficult place to be in. It is good therefore to see nursing home alternatives emerging, such as described in this story about a new nursing home developing near Grand Rapids, Michigan:

Differing from a traditional “hospital-style” nursing home, the so-called green house concept features smaller facilities designed to create a home-like setting with private rooms, baths and other amenities. Residents still receive the daily assistance and medical care they need, though their activities are not regimented nor predicated on their medical needs.

While the article is silent on the cost of care at this facility, it is not unreasonable to assume that it will be more expensive than traditional nursing home care. If it were otherwise, the article would be trumpeting both higher quality care and lower costs. The fact is that this sort of care remains out of reach for most seniors whose savings would be quickly depleted by the cost of this higher level of assistance. Perhaps the best chance most seniors will have at this sort of care is begin planning early in order to maximize assets.

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.

Retirement for many people is defined as the time when they are able to live off of the income from their assets combined with Social Security and perhaps a pension. But anything from a car accident to a stay in long-term care can quickly deplete retirement assets and jeopardize the fruits of a lifetime’s work. This can be particularly devastating for a married couple when one of the spouses falls ill and the assets of both must be devoted to the care of one. Medicaid law permits the Community Spouse (the spouse not in long-term care) to retain a maximum of $104,400.00 in non-exempt assets, but without planning, in many cases that amount can be lower.

Modern estate planning offers solutions to this problem and provides financial security in retirement. This form of estate planning is far more than naming beneficiaries on accounts or providing a list what is to go to whom. It is a matter of restructuring an estate to be sure that assets are protected and preserved for their intended purposes. These techniques allow security, tax benefits, and even asset protection for one’s heirs.

One often hears of estates consumed by the cost of long term care. See, for example this story. A modern estate plan can help you to ensure that you will receive the benefits of your assets without exposing those assets to the claims of creditors or the cost of nursing home care.

Under previous Medicaid policy, applicants for long term care were given the benefit of a doubt most of the time. In some cases, a demonstrated intent to complete asset conversion, which is the process of converting non-exempt assets into exempt or excluded assets and is the heart of Medicaid planning, would be enough to pass scrutiny.

Today, one should expect to have every aspect of a Medicaid application scrutinized and one should be prepared to provide timely and extensive documentation of all assets and recent transactions. Michigan is still fairly mild in its requirements alongside states like New York, which according to some reports requires a full five years of bank records and an explanation of all transactions over $1,000.00. But Michigan has tightened requirements considerably.

You should expect to have to provide third party documentation (statements from financial institutions and the like) for all significant assets. If asset conversion is being employed, expect to have to show what the asset was both before and after the conversion.

The trick here is that financial institutions move slowly and often with indifference to the fact that time is money–$6,500.00 a month or more in most cases. Sometimes it makes sense to cash in small insurance policies before long term care is an issue, just to avoid having a life insurance policy with a cash value of $2,400.00 put the nursing home patient over the asset limit and prevent qualification for Medicaid for a month or more.

Furthermore, an elder law attorney can often earn his keep just by knowing how to move quickly when a nursing home crisis strikes.

Pre-planning for long term care or nursing home care is always best. It is at that point that assets can be consolidated to allow for nimble reactions to changing circumstances.

But above all, gather your documents now. Birth certificates (to prove citizenship), a marriage license, discharge papers, deeds to real estate, etc. You will need all of these things for a Medicaid application and you will need them when you have many more important things to worry about. See this page for a complete list.

Many Elder law attorneys advise loving couples to pursue divorce as a method of asset protection. I have never found the technique necessary and, frankly, find the approach ethically questionable. Alternatives exist for both pre-planning and crisis planning that avoid the murky waters of a consensual divorce between an otherwise happily-wed pair. It is my view that you should not have to pretend to be something that you are not in order to protect assets. I always counsel my clients to disclose everything on the Medicaid application. Failure to do so can be considered fraud and even carry federal penalties. It is my job as an estate planning to arrange my client’s estate in a manner that allows qualification. But that is not a matter of hiding assets–nor is it a manner of simply spending down. I have helped countless couples protect their estates from the cost of long-term care and there has never been a reason to resort to divorce.