Medicaid Update - Law Firm Cushing & Dolan, P.C. Attorneys Boston, Massachusetts

MEDICAID UPDATE
A CLOSER LOOK AT SELECTED SECTIONS OF
THE DEFICIT REDUCTION ACT OF 2005 AS ADOPTED BY
MASSACHUSETTS REGULATIONS AND RELATED PLANNING
OPPORTUNITIES

By
Todd E. Lutsky Esq. LLM
Cushing & Dolan, P.C.
Attorneys at Law
1330 Boylston Street, Suite 100
Chestnut Hill, MA 02467
(617) 264-7999
lutsky@cushingdolan.com

Updated
September, 2007

A. Disqualification for assistance for individuals with substantial home equity 130 CMR 520.007(G)(3)

Fair market value and equity value: 130 CMR 520.007(G)(3)
Massachusetts regulation 130 CMR 502.007(G)(3) indicates that the fair market value and equity value of all countable real estate owned by the individual and the spouse must be verified at the time of application and when it effects or may effect eligibility. For applications received on or after January 1, 2006, equity interest in the principal place of residence exceeding $750,000, renders an individual ineligible for payment of nursing facility and other long term care services, unless the spouse of such individual or the individual's child who is under age 21 or who is blind or permanently and totally disabled resides in the individual's home. The allowable equity interest amount will be adjusted annually, beginning in January 2011. The adjustment will be based year-to-year on the percentage increase in the consumer price index.

a. The applicant or member must verify the fair market value by a copy of the most recent tax bill or the property tax assessment that was most recently issued by the taxing jurisdiction, provided that this assessment is not one of the following:

i. a special purpose assessment;

ii. based on a fixed rate per acre method; or

iii. based on an assessment ration or providing only a range.

b. In the event that a current property tax assessment is not available or the applicant or member wishes to rebut the fair market value determined by the MassHealth agency, a comparable market analysis or a written appraisal of the value of the property from a knowledgeable source will establish the fair market value.

Planning note

Query:

Answer

Impact of this legislation

B. Non countable assets: 130 CMR 520.008(A)

The home: Massachusetts regulation 130 CMR 520.008(A) provides that the home of the applicant or member and the spouse and any land pertinent to the home, as determined by the MassHealth agency, if located in Massachusetts and used as the principal place of residence, are considered non-countable assets, except when the equity interest in the home exceeds the amount described at 130 CMR 520.007(G)(3). The home is subject to lien rules at 130 CMR 515.012. If the home is placed in a trust or in an arrangement similar to a trust, the MassHealth agency will apply the trust rules at 130 CMR 520.021-520.024.

Planning Note: It is important to realize the home, although once a non-countable asset is now exempt from this status when the equity value exceeds $750,000.

C. Look back provision is extended to 5 years from 3 years for all transfer 130 CMR 520.019(B)

This regulation indicates that the transfers of resources are subject to a look back period, beginning on the first date the individual is both a nursing facility resident and has applied for/or is receiving MassHealth standard. This period generally extends back in time for 36 months. For transfers of resources occurring on/or after February 8, 2006, the period extends back in time for 60 months. The look back period for transfers of resources from a revocable trust to someone other than the nursing facility resident, or transfers of resources into an irrevocable trust where future payment to the nursing facility resident is prevented, is 60 months.

Planning Note: There appears to be no difference between the Federal Deficit Reduction Act language and the language as Massachusetts has adopted it in its current regulations. In essence, there is simply a 60 month look back period for all transfers whether they be made to an individual outright, into an irrevocable trust or out of a revocable trust.

D. Period of ineligibility due to a disqualifying transfer

Duration of ineligibility: Where the MassHealth agency has determined that a disqualifying transfer of resource has occurred, the MassHealth agency will calculate a period of ineligibility. The number of months in the period of ineligibility is equal to the total, cumulative, uncompensated value as defined by 130 CMR 515.001 of all resources transferred by the nursing facility resident or the spouse, divided by the average monthly costs to a private patient receiving nursing facility services in the Commonwealth of Massachusetts at the time of application, as determined by the MassHealth agency. (130 CMR 520.019 (G)(1)).
Example: If an individual transferred assets for less than fair market value to a child in the amount of $200,000, the related disqualification period would be approximately 26.0months ($200,000 ¸ $7,680). This calculation remains unchanged under both the deficit reduction act of 2005 and the newly enacted Massachusetts regulations adopting such act. The only difference is that the deficit reduction act prevents this ineligibility period from beginning to run on the date of the transfer.
Determination of the beginning date of this period of ineligibility: 130 CMR 520.019(G)(3){mis-numbered as (G)(1) in current regulations}
1. The date that the countable resources are transferred to someone other than the nursing facility resident or spouse; or
2. The latest of the following:
  1. The date that payment to the nursing facility resident or the spouse was foreclosed under the terms of the trust:
  2. The date that the trust was established; or
  3. The date that any resource was placed in the trust.

Beginning date.

otherwise eligible

Planning note

but for

"the individual is otherwise is eligible for MassHealth payment"(130 CMR 520.019(G)(3))

E. Annuities

Treatment of annuities established before February 8, 2006 130 CMR 520.007(J)(1) This regulation indicates that payments from an annuity are countable income in accordance with 130 CMR 520.009. If an annuity can be converted to a lump sum, the lump sum, less any penalties or cost of converting to a lump sum, is a countable asset. Purchase of an annuity is a disqualifying transfer of assets for nursing facility residents, as defined at 130 CMR 515.001 in the following situations:
1. When the beneficiary is other than the applicant, member or spouse
2. When the beneficiary is the applicant, member or spouse, and when the total present value of projected payments from the annuity is less than the value of the transferred asset (purchase price). In this case, the MassHealth agency determines the amount of the disqualifying transfer based on the actuarial value of the annuity, compared to the beneficiary's life expectancy, using the life expectancy tables as determined by the Mass Heath agency, giving due weight to the life expectancy tables of institutions in the business of providing annuities
3. when the terms of the annuity postpone payment beyond 60 days, the MassHealth agency will treat the annuity as a disqualifying transfer of assets until the payment start date; or
4. when the terms of the annuity provide for unequal payments, the MassHealth agency may treat the annuity as a disqualifying transfer of assets. Commercial annuity payments that vary solely as a result of variable rate of interest are not considered unequal payments under 130 CMR 520.007(J)(1)(d)
Treatment of Annuities Established on or after February 8, 2006 130 CMR 520.007(J)(2) This regulation provides that in addition to the requirements in 130 CMR 520.007(J)(1), the following conditions must be met:
1. The purchase of an annuity will be considered a disqualifying transfer of assets when:
  1. Someone other than the Commonwealth of Massachusetts is named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the annuitant;
  2. Someone other than the Commonwealth of Massachusetts is named beneficiary in the second position after the community spouse or minor or disabled children;
  3. Someone other than the Commonwealth of Massachusetts is named as such a remainder beneficiary in the first position if the community spouse or the representative of any minor disabled children in 130 CMR 520.007(J)(2)(a)(ii) disposes of any such remainder for less than fair market value.
2. The purchase of an annuity will be considered a disqualifying transfer of assets if the annuity does not satisfy 130 CMR 520.007(J)(1) and (J)(2)(a) and if the annuity is not irrevocable and non assignable 130 CMR 520.007(J)(2)(b).
3. The purchase of an annuity will not be considered a disqualifying transfer of assets if the annuity names the Commonwealth of Massachusetts as a beneficiary as required under 130 CMR 520.007(J)(2)(a) and if the annuity is:
  1. Described in subsection b or q of section 408 of the Internal Revenue code of 1986;
  2. Purchased with the proceeds from an account or trust described in subjection a, c, or p of section 408 of the Internal Revenue code of 1986;
  3. Purchased with the proceeds from a simplified employee pension described in subsection k of section 408 of the Internal Revenue code of 1986; or
  4. Purchased with the proceeds from a Roth IRA described in subsection A of section 408 of the Internal Revenue code of 1986 130 CMR 520.007(J)(2)(C).

IMPORTANT FEDERAL LAW GHANGE UNDER THE TAX RELIEF AND
HAELTH CARE ACT OF 2006 AND REMAINING PLANNING
OPPORTUNITIES

Planning Note: President Bush signed into law the Tax Relief and Health Care Act of 2006 and as part of this act there was a clarification to the annuity portion of the DRA of 2005. The change was to remove from section 6012(b) of the DRA of 2005 the word "annuitant" and replace it with the words "institutionalized individual". It appears that this change is designed to allow MassHealth, upon the death of the community spouse, to recover Medicaid benefits paid on behalf of the institutionalized spouse even if the community spouse never received any Medicaid benefits. MassHealth Operations Memo 07-14 dated September 1, 2007 indicated that it will be issuing a revision to Mass Health regulation 130 CMR 502.007(J)(2)(a)(i) changing the word "annuitant" to "institutionalized individual".

Planning note: The Federal Deficit Reduction Act of 2005 had a notification requirement section for annuities that indicated a state must require as a condition of medical assistance that the application of the individual discloses a description of any interest the individual or community spouse has in an annuity, regardless if the annuity is irrevocable or was treated as an asset. It also indicated that the application must include a statement that the state becomes a remainder beneficiary under any such annuity or similar financial instrument by virtue of the provision of such medical assistance. (Deficit reduction act 2005 section 6012a) This notification section does not appear in the Massachusetts regulations adopting the deficit reduction act of 2005. The Massachusetts regulations mentioned above appear to track the Federal Deficit Reduction Act of 2005's section entitled Requirements for State to be named as a remainder beneficiary, with the exception of the recent federal law change mentions above. (Deficit reduction act 2005 section 6012b) However Massachusetts is expected to adopt this change to the federal annuity rules.

Query: Can a healthy spouse purchase an annuity with excess assets after the institutionalized spouse has entered a nursing home, without being concerned about passing away prior to the expiration of the annuity, whether it is before or after the institutionalized spouses death, and having the balance of the annuity used to pay for any Medicaid benefits received by the institutionalized spouse?

Answer: We believe that the answer must be based on the assumption that Massachusetts adopts the new federal language changing the word Annuitant to Institutionalized individual, as mentioned above. In this regard then when the community spouse dies during the term of the annuity it appears that the state would be able to recover from that annuity any MassHealth benefits paid on behalf of the institutionalized spouse.

Annuity planning benefits remain: All annuities purchased on behalf of the community spouse should be as short a duration as possible. This approach would increase the chances of the community spouse outliving the annuity, thus eliminating the issue as to who the remainder beneficiary is as there would be no annuity left.

F. Half a loaf coupled with an annuity

Example: Jane is 80 years old, has $302,000 in assets and no real estate and has just entered a nursing home. She has monthly income of $750 consisting of social security and a small pension. The nursing home costs $9,000 per month. She would very much like to save some of her assets for her family.

Solution: Jane should make an immediate gift of $150,000 to her children and the balance, less the $2,000 she can keep, should be used to by an immediate annuity in accordance with regulation 130 CMR 520.007(J)(1) and (J)(2)(a). This gift would create a disqualification period of 19.5 months (150,000/$7,680 per month). (See 130 CMR 520.019(G)(1)) The annuity should be purchased with the remaining $150,000 and the term must equal the 19.5 months disqualification period created from the transfer. This annuity would be paying to Jane approximately $7,692 per month for the next 19.5 months. In order to get this disqualification period running, Jane would need to apply for MassHealth benefits and get denied for the sole reason of the recent disqualifying transfer. Massachusetts regulation 130 CMR 520.019(G)(3) indicates that the begin date for a period of ineligibility will be the first day of the month in which the transfer occurred or the date on which the individual would have been otherwise eligible for MassHealth benefits. In this example, Jane would have made a disqualifying transfer, a resident of a nursing home, had less than $2,000 following the transfer and would have been "otherwise eligible" for benefits thus triggering the start of the 19.5 months disqualification period. Note that Jane's income, although being used to pay the nursing home during the disqualification period, will be approximately $558 ($9,000 nursing home cost -$750 income -$7692 annuity) per month short of the full private pay amount. Arguably, if Jane could full pay the nursing home she would not be "otherwise eligible" for benefits and the disqualification period would not begin to run. Once the 19.5 months has expired, the annuity would be exhausted and the transferred money should be protected and Jane would then be eligible for MassHealth benefits.

Success but continue to proceed with Caution. This approach is currently being tested and is only a recommendation, but appears to be in accordance with the Massachusetts regulations. After implementing this technique, we have recently received two denial letters that confirm MassHealth will trigger the running of the penalty period as long as the income is below the private pay rate amount. As of June 2007 we have received an approval letter following the reapplication for MassHealth benefits in which MassHealth acknowledged the running of the penalty period as of its original begin date and approved the applicant for benefits effective at the expiration of that originally created penalty period. This is only one approval from the Taunton office therefore caution with this approach should remain the rule at least until we have several more approvals from the other MassHealth locations and other case workers.

CAUTION: All non-commercial annuities, private promissory notes, and personal lifetime-care contracts must be sent to legal for review before determining eligibility for long term care benefits. (see MassHealth eligibility operations memo 07-14)

Based on a recent legal brief by the legal department of MassHealth, (note not a fair hearing decision yet) it appears that MassHealth is attempting to argue that private annuities must not only comply with MassHealth regulation 130CMR520.007J(1)(2), but must also be equal to fair market value of the assets transferred and meet all the requirements of contact formation. MassHealth is now looking at the fact that assets were transferred close in time to an applicant applying for MassHealth instead of using them to pay for their care and thus should be a considered a disqualifying transfer pursuant to MassHealth regulation 130 CMR 520.019(C ). MassHealth is attempting to argue that the applicant would need to show that this transfer was for some other reason than to qualify for Medicaid. After all, a disqualifying transfer is ".....any action taken that would result in making a formally available asset no longer available 130CMR520.019(C).

Furthermore, MassHealth is scrutinizing the use of durable powers of attorney in creating private annuities as well as the document itself. For example, if the attorney in fact is acting as the annuitant and as the obligor on the private annuity, MassHealth believes this creates a conflict of interest which would void the annuity contract. They are also looking to see if the power of attorney had a self dealing clause, otherwise they argue that there would be no capacity in which the attorney in fact cold have acted therefore making the annuity void.

Additionally, MassHealth is attempting to apply the rules of contract formation to the formation of a private annuity. In this regard they are attempting to determine whether or not there has been valid consideration given in creating the annuity. In this regard, MassHealth argues that affection for a person or the desire to make a provision for a person is not valid consideration for a promissory note or a contract and thus should not be valid for the creation of a private annuity either. MassHealth is also checking to ensure that reasonable interest has been applied to the private annuity for without it they believe that it would tend to show a further lack of consideration and would also impact any fair market value determination.

Finally, MassHealth is analyzing the family circumstances surrounding private annuities in terms of the illusory promises that are made in creating them. In this regard, they believe that the enforcement of a private annuity is questionable and that the risk of nonpayment appears to be born entirely by the applicant/annuitant. The argument is that the obligor, who is likely a family member, will not sue himself on behalf of the annuitant for failure to pay. Similarly, in the event of nonpayment the applicant is unlikely to sue the obligor, who is likely a son or daughter. Finally, MassHealth believes that since these private annuities are generally unsecured that even if payment was pursued there would be nothing to attach or lien to recoup payment. Therefore, they argue that any such transaction that places all the risks on one party cannot be viewed as having fair market value and thus invalid. (130 CMR 515.001). A copy of MassHealth's brief can be found in the appendix to this material.

Does MassHealth operations memo 07-14 prohibit the use of private annuities?

While MassHealth's operation memo 07-14 does not prohibit the use of private annuities it certainly tells planners to proceed with caution. In this regard it is important to take a closer look at the operations memo itself along with the actual MassHealth regulations that govern annuities. Finally, it is important to note that it does not appear that commercial annuities are under any additional scrutiny.

The memo indicates the when processing a long term care application that includes an annuity established on or after February 8, 2007, that the following steps must be followed. Review the annuity to see if it:

is actuarially sound according to the social security administration tables;
has equal payments;
is irrevocable;
is non-assignable; and
has no deferral or balloon payments.

The memo further indicates that if the annuity meets all of these requirements then complete the notice of preferred remainder beneficiary (ANN-2) form and list either the issuing company or the private annuity owner. (A copy of this form is can be found in the appendix to the material.) Also list any preferred beneficiaries, such as a spouse , disabled child or minor child. MassHealth operations will then log in this annuity and send a copy of this form to either the issuing company or to the private annuity owner. Finally, the form notes that if there is a preferred beneficiary then Commonwealth will be named as beneficiary in the second position otherwise the commonwealth will be named as the beneficiary in the first position. (See MassHealth operation memo 07-14 a copy of which can be found in the appendix to these materials).

Planning Note:

No where in the MassHealth operations memo 07-14 does it prohibit the use of private annuities and in fact is seems to provide for there use as it directs that the preferred remainder beneficiary form to list the private annuity owner and to send a copy of such form to the private annuity owner. It also does not appear the procedures for the use of a private annuity is any different than that of a commercial annuity other than the fact that a private annuity is to be sent to legal for review.

Based on recently received denial letters involving the use of private annuities, it appears that MassHealth is denying such applications based on the applicant having made a disqualifying transfer pursuant to MassHealth regulation 130 CMR 520.019C. This regulation defines a disqualifying transfer as ".... any action taken that would result in making a formally available asset no longer available." (130 CMR 520.019C) It would appear that this regulation is all encompassing except that MassHealth has provided a specific exception when the assets transferred are exchanged for an annuity which meets the requirements of MassHealth regulation 130 CMR 520.007(J)(1)&(2) supra.

It is important to note that this regulation does not provide for a distinction to be made between private and commercial annuities as they both must meet these same requirements. Furthermore, MassHealth regulation 130 CMR 520.007(J)(1)&(2) does not require the rules of contract formation to be applied to the formation of the private or commercial annuities. This regulation does not require an analysis of family circumstances nor does it require that either the private or the commercial annuity be secured or even be equal to fair market value. With regard to fair market value the regulation simply requires that the total present value of the projected payments not be less than the value of the transferred asset (purchase price). By applying an applicable interest rate to the term of the annuity, which shall not exceed the life expectancy of the applicant or spouse, should ensure that the amount returned will not be less than the value of the assets transferred.

In conclusion it does not appear that MassHealth operation memo 07-14 prohibits the use of private annuities nor does any current MassHealth regulation. Furthermore, as of the date of this printing the author is not aware of any fair hearing decision that has denied the use of a private annuity or deemed it to be a disqualifying transfer. Nevertheless, it is important to note that MassHealth is scrutinizing them more closely than in the past.

Updated September, 2007

Updated
September, 2007