Many people have heard of the annual exclusion for gift tax, but there are several points on this issue that are easily confused. In order for an estate plan to be effective, various concepts must be taken into account. First, for most people gift tax will never be a concern. While it is true that there is a limit ($13,000.00 per person per year) that can be gifted each year without technically requiring a gift tax return, you must exceed $1 million in gifts above the annual exclusion during your lifetime before you will actually have to pay any gift tax. Estate tax will only apply to estates with more than $3.5 million in 2009 and there will be no estate tax in 2010. In 2011, the estate tax exemption is scheduled to go down to $1 million per estate. So these rules apply to very few people. The problem is that many people hear about these rules and believe that they apply to the Medicaid gifting rules.

Nursing home Medicaid rules in Michigan about gifting are completely separate from the tax concerns. For Medicaid purposes, any gifts made within five years of needing nursing home care will cause the state to deny Medicaid benefits for a period of time equal to the total gifts given divided by the average monthly cost of care. For 2009, that number is $6,362.00. So for example, if someone gave away $63,620.00, they would not receive state assistance with the cost of long-term care for 10 months.

On the often related issues issues of gifting, Medicaid, and taxes, it is very important to understand that giving away appreciating assets during your lifetime can have dramatic tax consequences. When an asset that increases in value is sold, there can be capital gains tax on the difference between the purchase price and the sale price. If an asset is given away at a person’s death, the person receiving that gift only has to pay a tax on the increase in value after the original owner’s death, not on the increase in value since purchase, regardless of whether the asset passes through probate or a revocable living trust. It is therefore important to consider tax consequences when doing any Medicaid planning. Gifting to a trust can typically eliminate the negative tax consequences of gifting during life while at the same time protecting the asset from the cost of long-term care.

The Department of Human Services for the State of Michigan has announced new numbers for 2009. Every year the numbers concerning Medicaid eligibility for long-term care are adjusted to reflect increases in the cost of living.

The new community spouse resource allowance is a minimum of $21,912.00 and a maximum of $109,560.00. This number is important for married persons with a spouse in the nursing home. It determines how much in cash and otherwise non-exempt assets the spouse living in the community will have to spend down before qualifying for Medicaid.

The community spouse income allowance, which is the income that the community spouse can keep each month and not have to pay to the nursing home has been increased from a minimum of $1,750.00 to $2,739.00. The new utility allowance (which provides additional income protection for the community spouse above the minimum protected amount) is $550.00 per month. However, it is important to note that these numbers do not adjust until April of this year.

Initially the state of Michigan did not include a new divestment penalty divisor in the 2009 figures. After much prodding by the elder law bar, it has been announced that the new penalty divisor is $6,362.00. What that means is that for every $6,362.00 gifted by a nursing home patient within the look back period, the state will withhold nursing home care for 1 month. So if a senior has given away $63,620.00 during 2009 and needs nursing home care, the state will impose a penalty of 10 months.

For many seniors, these numbers may be discouraging: particularly those related to the community spouse. DHS will require an unadvised senior to spend down to ½ of the family’s total assets with a maximum of $109,560.00 before qualifying for Medicaid. Furthermore, the income allowance is very seldom any higher than $1,750.00 based on cost of living expenses alone. With effective advocacy, however, it is not uncommon for these figures to be increased by court order.

It is very common to hear annuities described as “Medicaid friendly.” Most people hearing the words “Medicaid friendly” would assume that assets placed in such an annuity will be protected from the cost of long term care and indeed, they may even be told so by an insurance professional or financial advisor. But under Michigan law, an annuity by itself does nothing to protect assets from the cost of long term care. In fact, without careful planning, simply investing in a Medicaid friendly annuity may result in the unnecessary loss of assets. Understanding why this is the case requires some understanding of estate planning, elder law, and annuities. But taking the time to understand these things can easily save tens if not hundreds of thousands of dollars. Moreover, understanding these points can help you to see why your estate plan must work in conjunction with your financial plans in order to receive the full benefit of an annuity.

Estate planning is traditionally thought of as the field of law concerning the distribution of assets at the time of one’s passing. Modern estate planning encompasses planning not only for distribution on death, but also planning for disability and asset protection. Planning for disability will greatly increase the likelihood of having something to pass on to heirs, while at the same time reducing stress and maximizing one’s own independence. But in order to effectively manage a one’s affairs through a period of disability, there must be a close relationship between the estate plan and the financial arrangement, including the types of investments used.

Annuities can have many different features. Sorting them all out would be beyond the scope of this brief article, but it is important to note that without effectively combining the estate plan and the annuity, you cannot achieve the maximum benefit of either one. To understand why this is so, a few common features of annuities are worth mentioning.

Annuities can be either assets or income streams. When initially purchased, most annuities are like certificates of deposit with a longer term and a greater penalty for early withdrawal. Such annuities are assets and are said to be “deferred.” Money can be taken out of the annuity at this stage, but like a certificate of deposit, there will be a penalty or surrender charge imposed if the withdrawal is taken too soon.

Annuities can be converted into guaranteed income streams. Once this is done, the annuity no longer has any cash value, but will instead pay out a fixed sum of money on a regular basis for a period of time. This process is often called “annuitizing” the annuity. Once annuitized, the funds placed in an annuity can no longer be accessed. What has really happened here is that an asset, the annuity or cash used to purchase the annuity, has been converted into an income stream. This is a permissible form of spending down for Medicaid eligibility provided that the requirements of Medicaid law (described below) are met. An annuity that will meet these requirements is fairly described as “Medicaid friendly.”

According the Program Eligibility Manual (Section 401, pp.4-5) for the state of Michigan, an annuity must have several different characteristics in order to avoid being considered a divestment for purposes of Medicaid qualification, including:

1. The annuity must be irrevocable and non-assignable;
2. The annuity must pay out on an actuarially sound basis;
3. The annuity must pay out in level installments;
4. The state must be named as a remainder beneficiary to the extent of Medicaid benefits received.

Any annuity that does not comply with these rules will be considered a divestment and subject to penalty. But any annuity that does comply with these rules will go to pay the cost of nursing home care in two ways. First, the regular income from the annuity will have to be paid to the nursing home on a monthly basis. Second, if the owner of the annuity should pass away before the annuity has paid out the entire balance, the remainder would go the state to the extent that any assistance had been provided. The owner of the annuity will have to pay the entire nursing home bill sooner or later. Medicaid friendly indeed!

It is at this point that the need to consult with and elder law attorney regarding annuities becomes clear. Elder law is the practice of law related to serving the needs of senior citizens and their families. It often involves planning for health care costs and interactions with Medicaid and Veterans benefits. Medicaid law in Michigan and many other states has changed a great deal since the Deficit Reduction Act of 2005 was passed and this law has dramatically changed the meaning of “Medicaid friendly.” Great care must be taken under this new law to either avoid or carefully manage penalties for transferring assets and yet maximize the benefits available with annuities. Without proper planning, precisely because an annuity can be described as “Medicaid friendly” it would almost certainly have to be exposed to the cost of long term care. But a modern estate plan developed in consultation with an elder law attorney can avoid exposing funds placed in an annuity to the cost of long term care while still obtaining the other benefits of the annuity itself. Careful estate planning can render an annuity safe from spend down for Medicaid qualification and make it truly Medicaid friendly.

*Jerrold E. Bartholomew is a licensed attorney in the state of Michigan. He is not licensed for insurance products or securities.

Estate recovery has been permitted under the Federal law since 1965. In 1993, the Federal law was changed to require states to have some form of estate recovery. Since that time, many different kinds of estate recovery programs have been enacted in different states. Michigan became the last state in the union to enact estate recovery when it passed an estate recovery law in September of 2007. Despite being tremendously unpopular, the estate recovery law passed in Michigan during the state’s budget crisis in the fall of 2007.

There are probably two reasons why Michigan adopted estate recovery. First, with the state budget showing severe deficits, law-makers were interested in any possibility of increased revenues. Second, the Federal government was threatening to deny money to fund Michigan’s Medicaid program because Michigan had failed to comply with the 1993 mandate to enact some form of estate recovery. The loss of matching funds from the Federal government would have been a catastrophic blow to Michigan’s already ailing budget.

Whether estate recovery will do anything to balance Michigan’s budget is far from clear at this point. Estate recovery programs are costly to administer and the recovery is often meager. It is hard to say whether recovering an estimated 5% will be worth the trouble:

The Mackinac Center for Public Policy has estimated that Michigan could actually see a savings of up to $85 million per year if it implemented an estate recovery system, which was based on collections nationally from 2004 that totaled $362 million out of the $45.8 billion spent on nursing home Medicaid recipients.

“Oregon had the second highest rate of collection at 5.8 percent, or $13 million of its $238 million Medicaid nursing home care bill. Given the $1.7 billion Michigan spent on Medicaid nursing home care, a 5 percent recovery rate would save taxpayers $85 million,” wrote TaraLynn Velting, an estate attorney with Garan Lucow Miller in Grand Rapids and an adjunct scholar with the Mackinac Center.

There are always unintended consequences to laws that seek to increase revenues. The enactment of estate recovery is likely to contribute to anxiety among seniors and may actually result in more extensive Medicaid planning. Protecting a home from estate recovery often requires a combination of strategies that are only available to families who are proactive and begin the planning process sooner to avoid risk to the home. The net impact of estate recovery could therefore be an increase in the number of people receiving long-term care Medicaid.

I recently received a letter offering a “Certified Copy” of the deed to my home. The offer explains that the Federal Citizen Information Center recommends that every home owner have a certified deed and that the National Deed Service could provide a deed for just $59.95. There actually is an article at the Federal Citizen Information Center recommending that everyone have a copy of the deed to their home, which can be found here. And indeed, for estate planning, medicaid planning, or asset protection planning, it is a good idea to have a copy of the recorded deed to your home on hand. As the Federal Citizen Information Center article notes:

When was the last time you couldn’t find an important paper you knew you had carefully put away? How do people decide where to store and keep such records? And how do they know what to keep, what to throw away, and when? Do you have an easy to figure out system you or a loved one can refer to in case of an emergency?

If you take a look at the Medicaid Checklist, you will see that gathering important information can be a big job.

But the National Deed Service price of $59.95 for a copy of your deed is outrageous. Even the Federal Citizen Information Center has a warning about the problem. A copy of your recorded deed is available at your local register of deeds for $1.00 per page or less. In most cases, that is going to be just $2.00. Melissa Devaugh of the Lapeer County Register of Deeds echoes the warning about this deed scam here:

This company is not affiliated with Lapeer County Government in any way. This company is using tactics to persuade you to pay an outrageous fee (a whopping $69.50) to them and in return they will provide you with a copy of your deed. Please understand this company MUST obtain the Certified Copy from the Lapeer County Register of Deeds. Once they receive the certified document from US, they in turn provide it to you for the $69.50! Don’t be fooled! If you need a copy of your deed, please call the Lapeer County Register of Deeds. We will be happy to provide you a certified copy at a low cost of $1.00 per page plus $1.00 for the certification…A MUCH LOWER COST THAN WHAT THIS COMPANY IS ASKING!

It is unfortunately the case that scams like the National Deed Service take place every day. And indeed, the scams are often much more damaging than $59.95. Many of the victims of the scams are the elderly who cannot afford the unnecessary loss. Asset protection planning can help seniors to avoid falling victims to this and other more serious scams.

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.

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.