Medicaid. Okay I said it. It is not as sexy a topic as investments, but it is important. We all know of someone that will be applying for Medicaid in the near future – be it ourselves, our parents, or our family or friends. This brief article discusses a few of the Medicaid changes that resulted from the Deficit Reduction Act of 2005, which was signed by President Bush on February 8, 2006.
One of the main issues that changed is the “look back period,” which changed from three to five years. This period is the period of time starting five years prior to the date on which a person applies for Medicaid. During this period, all gifts made by the person who applies for Medicaid (or the person’s spouse) will disqualify the applicant for Medicaid for a period of time. This is the so-called “Medicaid penalty.” Under the new law, transfers for less than full value (i.e., gifts) will result in a Medicaid penalty.The penalty starting date also changed under the new rules. Under the new rules the penalty period does not begin to run until the day that the applicant otherwise qualifies for Medicaid. Under the old law, the penalty period began to run the day that the gift was made. Thus, a person who finds themselves in need of Medicaid to cover the costs of a nursing home, may find that they do not qualify for Medicaid for an extended period of time due to their having made gifts as long as five years prior to the need arising.Luckily there are a few exceptions to these new draconian rules. For instance, applicants may exempt certain gifts that were not made to qualify for Medicaid. However, if it even appears that there is any expectation of establishing eligibility that could reasonably be inferred to be a factor in the decision to make a gift, the applicant will probably not be able to avoid the penalty.
In addition, the penalty period may be waived if there is an “undue hardship.” This exception may come into play where the applicant is unable to obtain medical care without the receipt of Medicaid benefits, gifted assets have been irretrievably lost and all reasonable avenues of legal recourse to regain possession of them have been exhausted, and application of the penalty would deprive the applicant of medical care that would endanger the applicants health or life.
Yet another change relates to home equity limits. Applicants with equity in a home that exceeds $500,000 will not be eligible for Medicaid. The old law had no such limit on ownership of equity in a home. Under this new rule, it may not make sense to take out a reverse mortgage (as the equity in the house, no matter how much, is exempt if other spouse is living in the house, and of course, if the applicant were living in a nursing home they would not qualify for a reverse mortgage).
One option that may still be viable is the applicant borrowing money from a family member in exchange for a security interest in the house, thereby reducing the equity below the $500,000 value. The borrowed money could then be spent down or gifted back to family members.
There are several other significant changes that one must consider. Visiting with or directing Medicaid applicants an experienced financial advisor prior to their applying for Medicaid will help ensure that the application is approved and, typically, save the applicant thousands of dollars.