Medicaid, the federal-state program which pays for about half of all nursing home care in the United States, is governed by eligibility rules intended to discourage applicants from making gifts as a way of qualifying. For example, Medicaid penalizes most gifts for a period up to three years—though the actual penalty is usually shorter. Sometimes the penalty applies even when the applicant does not think she has given anything away.
Josephine Perna lived in a Pennsylvania nursing home when her husband Michael died in 1997. He had actually been living in New Jersey at the time of his death. New Jersey law permits a surviving spouse to claim a share of her deceased spouse’s estate even if his will leaves less (or nothing at all) to the surviving spouse—a process usually referred to as “electing against the will.” Mrs. Perna took no steps to make an election against her husband’s will.
Though Mrs. Perna had been receiving Medicaid assistance with her nursing home costs before her husband’s death, the Pennsylvania Medicaid agency determined that her failure to elect against her husband’s will amounted to a gift and terminated her benefits.
Mrs. Perna made two arguments on appeal. First, she pointed out that she would have had to make a claim against her husband’s estate in New Jersey, and that she lacked resources to travel to that state or to make her claim. Second, she argued that she and her husband had been living separate and apart from one another at the time of his death, and that she was not actually entitled to claim a portion of his estate under New Jersey law.
The Commonwealth Court of Pennsylvania, that state’s intermediate appellate court, disagreed. Whether it was difficult for Mrs. Perna to make her claim or not, ruled the court, she had a duty under Pennsylvania Medicaid law to seek her entitlement from her husband’s estate, and her failure to do so was really a gift.
On Mrs. Perna’s second point, the court opined that all the evidence indicated that Mr. and Mrs. Perna lived apart for medical reasons only, and were not truly separated. In fact, noted the court, Mrs. Perna was sending a portion of her income every month to support her husband, as she was permitted to do under Medicaid regulations; that fact supported the court’s finding that the couple was not truly separated. Perna v. Department of Public Welfare, August 22, 2002.
Arizona’s Medicaid program for long term care, the Arizona Long Term Care System (ALTCS), would probably have made the same determination if presented with Mrs. Perna’s circumstances. One big difference: the amount to which Mrs. Perna would have been entitled (and, therefore, the value of the “gift”) would probably have been much less in Arizona.
In addition to the danger inherent in powers of attorney (they can literally be licenses to steal) there can be another problem with the documents in practice. For at least some transactions (especially gifts) the use of a power of attorney is often viewed with suspicion, and even clear intentions can become murky.
Austin Stephens, a widower with two children, wanted to transfer his home into his daughter’s name. The evidence indicated that he understood what he was doing, that he wanted to make the gift and that he participated in the transfer. But after his death his son objected to the fact that the deed had actually been signed by Mr. Stephens’ daughter using a power of attorney, rather than by Mr. Stephens.
After Mr. Stephens’ wife died in 1988, his daughter Shirley Williams helped take care of him. His only other child, son Lawrence Stephens, moved out of town shortly after Mrs. Stephens’ death, and though he remained emotionally close to his father he was physically distant. After Lawrence Stephens moved out of town Austin Stephens signed a durable power of attorney, giving his daughter Shirley the power to handle his finances.
As Mr. Stephens’ glaucoma worsened his daughter began to take care of his affairs even more than before. Two years later, he decided he wanted to give the family home to her, and he instructed her to sign the deed for him—his advancing blindness made it too hard for him to do so himself.
After the deed was signed Mr. Stephens had several opportunities to confirm that it reflected his wish. He spoke with a neighbor and longtime friend, explaining that he had given the home to his daughter. He acknowledged the gift when someone from the County Recorder’s office called to ask if he really meant to make the transfer. Months later he visited his own brother and confirmed that he had taken the steps to “disinherit” his son.
Nonetheless, after Mr. Stephens’ death his son moved to bring the home back into his estate so that it would be divided between the two children. He argued that the fact that Shirley used her power of attorney to benefit herself was inherently suspect, and that she should be required to show that she actually had the power to make the transfer. The probate court refused to void the transfer, but the California Court of Appeals, though reluctantly, ordered the property returned.
The California Supreme Court has now ruled with Shirley in upholding Mr. Stephens’ transfer of the home. Although Shirley did not have the power to give herself the property using the power of attorney, ruled the state high court, Mr. Stephens’ repeated ratifications of her actions made the transfer valid. Estate of Stephens, July 25, 2002.
In Arizona the result likely would have been different. Arizona law is very clear about the use of powers of attorney to make a gift, and any such power must be clearly listed in the power of attorney itself. Furthermore, the power to make a gift (along with any other power that might be used to benefit someone other than the person signing the document) must be separately initialed by the person giving the power and witnesses. Unless Mr. Stephens’ power of attorney included those provisions, its use to make a gift of the home would probably have been invalid in Arizona.
Like many seniors, Robert Anderson signed a financial power of attorney, giving his daughter and son-in-law power to manage his financial affairs. He may have understood that the power of attorney would avoid the necessity of court proceedings to appoint a conservator if he became incapacitated. Having a power of attorney, as it turned out, was not an effective way to avoid court involvement.
At first Mr. Anderson appointed his son Sam as his agent. Mr. Anderson’s estate was large, and so for two years Sam used the power of attorney to make gifts of his father’s property to himself, his sister Barbara, and both his and his sister’s children.
When Sam died unexpectedly, Mr. Anderson signed a new power of attorney. This time he named his daughter Barbara Lasen and her husband Paul as agents. Barbara and Paul continued to make gifts from Mr. Anderson’s property for the next two years—but now Sam’s children were excluded. In addition Barbara and Paul used Mr. Anderson’s residence and vacation home without paying any rent. Nothing in Mr. Anderson’s power of attorney permitted gifts, but Barbara and Paul insisted that they had discussed the gifts with Mr. Anderson and he had agreed.
Sam’s two daughters finally decided that enough was enough, and they filed a conservatorship petition. They asked the court to appoint a local bank to act as Mr. Anderson’s conservator. Barbara and Paul objected, arguing that no conservator was necessary because Mr. Anderson had given them the power of attorney. They also argued that they had priority to act as conservator if the court decided appointment of a conservator was appropriate.
The trial judge decided that Barbara and Paul had overstepped their authority as agents, and appointed a local bank as conservator. Barbara and Paul appealed.
The Nebraska Supreme Court agreed with the lower court. Barbara and Paul did not have the authority to make gifts because there was no specific language in the power of attorney. Once they violated their duties as agents under the power of attorney it was entirely appropriate to appoint an independent conservator to consider what steps to take—including possible action against Barbara and Paul for return of the money they had wrongfully taken from Mr. Anderson. Besides, Barbara and Paul had already shown that they were not trustworthy protectors of Mr. Anderson’s assets. Conservatorship of Anderson, June 22, 2001.
The result would likely have been the same under Arizona law. As in Nebraska, an Arizona agent may not make gifts using a power of attorney unless the authority to do so is clearly spelled out in the document (and, in fact, separately initialed by the principal). Mr. Anderson would almost certainly have had a conservator appointed if he lived in Arizona.
The federal-state Medicaid program was designed to make sure poor Americans would receive necessary medical care. It now pays for about half of all nursing home costs. Tragically, the program is so complicated that it often requires expert legal assistance to ensure that benefits are received in accordance with the program’s own rules. A recent Iowa case demonstrates that it can be a mistake to rely on even Medicaid’s own staff members for interpretation of those rules.
William and Lydia Ahrendsen knew as early as 1991 that they might face nursing home placement, and they wanted to keep the family farm in the family. On advice of their attorney, they “sold” the property to their two children for two dollars; the farm was worth about $240,000 at the time. Because the “sale” was really a gift to the children, Medicaid rules made the Ahrendsen’s ineligible for Medicaid assistance for a period of months.
The period of ineligibility for such a gift is determined by dividing the value of the gift by an amount set by the state. That amount, in turn, is intended to approximate the actual monthly cost of nursing home care. In the Ahrendsen’s case, the period of ineligibility worked out to be 72 months (six years).
Both Mr. and Mrs. Ahrendsen went into the nursing home shortly after making the gift to their children. A year later, at the suggestion of the nursing home social worker, their son Glen applied for Medicaid assistance. Because the gift was just over a year old their application was denied; the Medicaid worker advised Glen Ahrendsen that they would not be eligible until August of 1997—nearly five years later.
The Medicaid worker, as it turned out, was simply wrong. Federal law provides that gifts older than three years (in most cases) are not counted in calculating Medicaid eligibility. Although there has been some dispute about what that means for people who make an early application like the Ahrendsens, Iowa’s Medicaid rules were clear: the Ahrendsens would have been eligible in February, 1994.
Glen Ahrendsen learned of the mistake in September, 1996. He immediately filed for Medicaid eligibility for his mother and father, even though his father had died two years earlier. He sought reimbursement for the nursing home payments which would have been covered during the prior two years if he had not received incorrect advice from the state’s Medicaid worker.
Federal Medicaid law limits retroactive coverage to the three months prior to filing of an application. The Iowa courts disallowed Glen Ahrendsen’s request for additional reimbursement, and the Iowa Supreme Court agreed. Because he relied on agency advice, the Ahrendsen family was simply out of luck. Ahrendsen v. Iowa Dep’t. of Human Services, July 6, 2000.
On December 14, 1999, President Clinton signed the Foster Care Independence Act of 1999. While most of the new federal legislation deals with foster care programs, it also changes the law and practice regarding so-called “Special Needs” trusts.
The Supplemental Security Income (SSI) program, administered by but separate from Social Security, helps guarantee a minimum income for disabled Americans. SSI provides a maximum of $512 per month (beginning in January, 2000) to disabled individuals who do not qualify for Social Security Disability Insurance. Because SSI is a welfare program, however, it requires that the recipient not have significant assets or income available from other sources.
Under prior law it was possible for most disabled persons to qualify for SSI fairly easily, however. For many years the SSI program did not impose a penalty on asset transfers by applicants; in other words, a disabled individual could satisfy the asset eligibility limitations by simply giving away most of his or her property.
In practice, this opportunity was usually exercised in one of two common ways—either the prospective SSI recipient gave assets to family members (who could be counted on to use the money for the original owner’s benefit), or the recipient established a trust for his or her own benefit and transferred the assets into that trust. These trusts—usually called “Special Needs” or “Supplemental Benefits” trusts—could be used to pay for the SSI recipient’s needs other than necessities. In other words, the trust could take care of everything but food, clothing and shelter, while SSI income could be used to pay for those items.
Because SSI recipients automatically qualify for Medicaid coverage, even a fairly wealthy disabled individual could secure medical care from the federal welfare system by use of a Special Needs trust or an outright gift of assets. The new law changes the rules permitting such a transfer. Beginning immediately, a gift of assets by an SSI applicant will disqualify the applicant from receiving benefits for a period of time based on the size of the gift. Transfers into most trusts will simply be ignored—if there is any circumstance in which the trust assets or income can be used for the benefit of the SSI applicant, it will be treated as an available resource (or income, as the case may be).
This does not end the usefulness of Special Needs Trusts, however. An exception in the new law expressly permits transfers of assets into such a trust—but only if the trust includes a provision reimbursing the government for any benefits received by the beneficiary upon the beneficiary’s death. Only trusts established after January 1, 2000, must include such “pay-back” provisions, so pre-existing trusts should not be affected by the new law.
It is (as of January 1) a federal felony for those facing nursing home placement to make gifts for the purpose of becoming eligible for Medicaid (in Arizona, ALTCS) coverage. Much has been written about the ambiguity and unenforceability of the new law. For example, Elder Law Issues, November 25, 1996, and August 19, 1996, focused on the meaning, history and poor drafting of the new enactment.
Now Congress is considering repeal of the two-week old criminalization provision. Congressman Steven La Tourette, a second-term Republican from Ohio, has introduced House Resolution 216, which would strike the new section of Medicaid law before the first prosecution could be threatened. Powerful forces in Washington, including the AARP and other advocacy groups, have lobbied forcefully for the repeal. Indications are that the threat of jail for middle-class seniors will now fade away.
The legislative assumptions underlying the original enactment of this punitive law have remained unchallenged, however. According to some in Congress (and, more importantly, lobbyists for the long-term care insurance industry), the practice of making gifts to qualify for Medicaid is widespread and is costing state and federal governments millions of dollars. Sadly, Congress appears to have bought into this myth without question, and in spite of the actual evidence.
In a study prepared for publication in the periodical Generations, Washington researcher Joshua Wiener of the Urban Institute has analyzed the actual incidence of transfers by seniors. His conclusion: both the numbers of persons making transfers and the amount of money transferred to obtain Medicaid eligibility are much lower than commonly thought.
Wiener notes earlier research which shows that three quarters of nursing home admittees are already impoverished, with less than $50,000 in assets other than their homes. Over half had less than $10,000 of cash available. In other words, the typical nursing home admittee is able to pay for less than six months of nursing home care (and less than two months in many communities, with sharply higher nursing home costs) in any event. It is unrealistic to expect any substantial cost savings for the Medicaid program from further restrictions on transfer rules.
Furthermore, historical data indicates that seniors infrequently give away their assets to become eligible for nursing home assistance. Between 1988 and 1992, Congress substantially liberalized the rules for married couples to become eligible for Medicaid, while simultaneously clarifying the transfer rules. During that time, the portion of nursing home residents covered by Medicaid increased by only two percentage points. Wiener notes that the increase should be almost entirely attributable to the change in married couple rules, suggesting that the number of people making gifts to become eligible must be almost insignificant.
Finally, Wiener notes that the administrative costs attendant on any plan to reduce transfers must be considered. In the case of Congress’ ill-conceived plan to criminalize gifts, for example, the costs of administrative rule-making, prosecution and incarceration might exceed any reduction in Medicaid costs.
On a related issue, Wiener also assesses the effect of new, stronger federal rules on estate recovery. As a practical matter, estate recovery programs rely on Medicaid recipients retaining an interest in their homes throughout their nursing home stay; research suggests that only 14% of Medicaid recipients own their homes at the time of institutionalization, so the possibilities for recovery are not high. In Oregon, the state with the best record of estate recovery, about 2.5% of Medicaid costs are recovered.
Last August, President (and Candidate) Bill Clinton signed the Health Insurance Reform Act, better known as the Kassebaum-Kennedy bill after its two principal sponsors. Much has been written about the effect of the new legislation on the elderly, but most of the focus has been on the bill’s provision making it a crime to transfer assets for the purpose of gaining Medicaid eligibility. Other provisions of the new law have potentially far-reaching effects as well.
The Good News
The primary focus of the new legislation is “insurance portability.” Many workers have found that they are unable to change jobs (even to higher salaries and better positions) because of the inability to secure medical insurance coverage for pre-existing conditions. The new law should eliminate that problem; insurers must cover pre-existing conditions for workers who have maintained continuous medical insurance coverage, and there is a time limit of one year for most pre-existing condition exclusions in any event.
The new law also forces insurance companies to make policies available to smaller employers, and expands the right of workers to continue their insurance programs after leaving employment. Both of these changes are intended to make insurance more widely available to the small-company employee and self-employed workers. This goal is further advanced by increasing the income tax deductibility of health insurance premiums for the self-employed.
The most important new provision for seniors, however, is to make clear that nursing home and home health care costs are fully tax-deductible. While many practitioners advised claiming most or all such long-term care costs as medical deductions in previous years, the law was unclear. The new provision removes any uncertainty and provides clear tax relief to long-term care patients, at least those with incomes high enough to be concerned about taxes.
Similarly, the cost of long-term care insurance will now be an income tax deduction, just as health insurance has been for years. This provision may encourage at least some taxpayers to purchase long-term care insurance, and may help make the industry more robust and effective. Unfortunately, the tax break is only going to apply to those with relatively high incomes, and so will provide little relief for low or middle-income citizens.
The Bad News
Of course, the most dramatic bad news for those faced with long-term care costs is the criminalization of some gifts. Under the new law, anyone who “knowingly and willingly” transfers assets (that is, makes a gift) to qualify for Medicaid may have committed a felony. Even in the face of this somber news there remains a ray of hope, however; the new law is so poorly written and so ambiguous that it seems unlikely to result in any prosecution or administrative action. Still, those who would otherwise consider planning to make themselves eligible for long-term care assistance must now seriously consider the possible punitive effect of the new law.
Even as the new law encourages the development of long-term care insurance as another option for financing nursing home (and home health) care, it also opens the door to a new kind of abuse. Insurers are permitted to sell overlapping and redundant policies, without any requirement of disclosure or review of existing long-term care insurance. Observers who recall the abuses by insurance companies (and agents) selling multiple “Medigap” policies prior to government regulation may well cringe at the prospect of another insurance feeding frenzy, preying on the legitimate concerns and accepting manners of a burgeoning elderly population.
Most observers expect further changes to be debated in Congress again this year. Stay tuned.
Seniors concerned about the high cost of nursing care often transfer assets, sometimes even including their homes, to their children. Such transfers may actually make paying for nursing care more difficult, since Medicaid (ALTCS) eligibility does not count the residence as an asset, but does count the transfer to children as a disqualifying gift. Nonetheless, many elderly homeowners choose to transfer the home.
Elder law attorneys have long been concerned about another aspect of this practice. Every state has some form of a law making it illegal to give away assets to avoid creditors; do such laws prevent transfers to avoid future nursing home claims against the seniors’ assets? The so-called “fraudulent transfer” rules have not been widely tested, but a recent Tennessee case suggests that most such transfers are permissible.
Ruth Bryan, 71, owned a modest home in Tennessee and had a savings account of about $10,000. She had given her daughter a power of attorney to manage her affairs if she became incapacitated. When Ms. Bryan’s condition worsened and she was hospitalized, her daughter used the power of attorney to quit-claim Ms. Bryan’s home to herself and her brother (Ms. Bryan’s son).
Ms. Bryan improved enough to be discharged to Imperial Manor Convalescent Center, where she incurred a bill of $10,000 which she was unable to pay. Upon her release from Imperial Manor, she filed bankruptcy, claiming that she owned no assets.
The Tennessee court, at the bankruptcy trustee’s request, initially ruled that the transfer of Ms. Ryan’s home to her children was fraudulent, and set it aside. On appeal, the Tennessee Court of Appeals disagreed.
According to the appellate court, Ms. Ryan’s transfer of the home was not fraudulent for two reasons. First, it did not render her insolvent (remember that she also had a small bank account). More importantly, perhaps, she did not owe anything to Imperial Manor at the time of transfer (which was made while she was still in the hospital), and the bankruptcy trustee had not shown that Ms. Ryan’s daughter did not act for the express purpose of making her unable to pay her debts. At the time of the transfer, the daughter did not know that her mother’s debts would accrue beyond her ability to pay. Crocker v. Ryan, Tenn. Ct. App. (1995).
Arizona’s fraudulent transfer law is quite similar to Tennessee’s. Arizona Revised Statutes §44-1004 makes a gift fraudulent if the transferor “intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”
In applying this law to the common practice of gifting one’s home to children, two questions come to mind:
Does the gifting parent have a basis to believe that he or she will soon incur a debt for nursing care?
Does the possibility of qualifying for Medicaid (ALTCS) assistance affect the expectation of the gifting parent?
There are two common circumstances where a senior who has given his or her home to children may qualify for ALTCS. In the first, the parent will have stayed out of the nursing home for three years following the gift. In the second, ALTCS eligibility rules expressly permit gifts of residences to children who have lived with the applicant and provided care for two years. Though there are other, rarer circumstances where transfer of the home is advisable, the fraudulent conveyance law makes it more difficult to recommend that seniors quit-claim the home to children.
In 1988 George W. Pittman, Jr., signed a power of attorney giving his wife Rose the ability to handle his financial affairs. On the same day, Mr. Pittman’s attorney also prepared a deed giving Mr. Pittman’s interest in South Carolina real property to his two sisters; Mrs. Pittman signed the gift deed using Mr. Pittman’s power of attorney.
Mr. Pittman died two years later. His daughter Diane Whitford sued to set aside the transaction, alleging that Mr. Pittman was incompetent when he signed the power of attorney. Ms. Whitford also argued that the power of attorney did not specifically include the power to make gifts.
The North Carolina Court of Appeals neatly side-stepped the issue of Mr. Pittman’s competence by finding that the power to make gifts must be expressly included in a power of attorney before such transfers will be valid. Consequently, the transfer by Mrs. Pittman was invalid, and his real estate became part of his estate. Whitford v. Gaskill, South Carolina Court of Appeals, August 15, 1995.
The result in the Pittman case is consistent with the general rules governing powers of attorney. For most purposes, a power of attorney which does not explicitly include gift-giving powers can not be used to make transfers without receiving payment. This is the long-standing view of the Internal Revenue Service, which is frequently called upon to determine the validity of gifts made just before the death of the principal. The Arizona rule would almost certainly be the same; most form powers of attorney do not contain language permitting gifts, and transfers (even to a spouse) will therefore be suspect.
Who IS Buying Long-Term Care Insurance?
Many seniors consider purchasing long-term care insurance as a way of avoiding ALTCS (Medicaid) eligibility limitations. But what are the characteristics of the typical person who actually buys such insurance? A recent survey by the Health Insurance Association of America looked at buyers over age 55; the survey was based on 1994 purchases.
Not too surprisingly, given the cost of insurance, most purchasers are wealthier than the average older person. 41% have liquid assets of more than $100,000. Surprisingly, however, 28% have less than $30,000 in liquid assets.
Insurance buyers are also better educated than their uninsured peers. More than one-third (over twice the percentage of the general elderly population) of purchasers are college graduates.
According to the survey, the average annual premium was $1,500. Two-thirds of all policies included home health care benefits, about twice the rate reported in a similar study just four years earlier.
Almost half of policy buyers were over age 70. And only one in five of all those over age 55 even considered buying long-term care insurance; three of every five reported having “little or no awareness” of the availability or usefulness of such insurance.
