Hope For Haiti — Despair for Mom?
January 25, 2010
The recent outpouring of support for the victims of the earthquake in Haiti highlights a question often asked about gifting and charitable contributions as it relates to Medicaid. For example, last week Mary called me to ask whether it is OK for Mom to make a charitable contribution to help the earthquake relief effort. You would think that helping out others in need is a good thing, something to be encouraged. Well, the answer is not so clear cut.
Mary’s mom is now living in a nursing facility and is in spend down mode. In her case, she will be eligible for Medicaid in 3 years if she lives that long. But to preserve her right to benefits she must do more than spend down her remaining assets. She must spend in such a way that she receives something of equal monetary value in return. Now, she’ll spend most of it on her nursing care but what about charitable contributions? Does Mary’s mom receive fair value back for the contribution? Or does she make a transfer for less than fair value which will then result in a Medicaid penalty — a period of ineligibility, which, by the way, doesn’t start until she has no more money left?
Certainly, Mom is getting a benefit. She is helping others in need, but that is not exactly something we can put a monetary value on. The same answer would seem to be the case for contributions to Mary’s favorite religious our civic charities. But what if she makes a small gift of, say, $100? Will that cause a penalty?
Applying the letter of the Medicaid rule as written, any transfer for less than fair value, no matter how small, will trigger a penalty. And think about it. If the State goes through 5 years of your financial records (that’s the 5 year lookback), how many of these charitable contributions and other transfers might it find? If we total them up it might turn out to be a pretty big number, causing a few months of ineligibility or more. And, don’t you think, if the State can delay paying for Mom’s nursing home care, at a time when our incoming New Jersey governor, Chris Christie, has declared the State to be nearly bankrupt, it would do so?
On the other hand, if Mom’s charitable contributions are small, infrequent and far enough in advance of her application for Medicaid, they most likely won’t cause a problem. But, that’s what makes the whole long term care system so frustrating. It’s the uncertainty, not knowing what you can or can’t do. That’s why it is so important to seek advice from a trusted advisor first You just don’t want to take the wrong step. In Mary’s case I told her a small gift would be OK. It didn’t make me feel good having to tell her that the government laws and rules in this case discourage charitable giving. But that’s a whole separate discussion for another time.
How the Medicaid System Differs From the Criminal System
January 18, 2010
“Mom and Dad have always been big believers in paying cash for everything. They don’t use credit cards”, John tells me. “Don’t buy on credit”, they always said. While that’s a pretty sound financial approach, it can get Mom and Dad into hot water when it comes time to apply for Medicaid. That’s because the Medicaid system works very differently than the criminal system. Let me explain.
First of all, you need to understand some basics about how Medicaid works. In order to qualify, one must spend down assets first. When essentially all your money is gone, (in the case of a married couple the healthy spouse gets to keep a small amount) then Medicaid will kick in. However, if you have made transfers for less than fair value, what most people would call gifts, then you won’t be eligible for Medicaid. The greater those transfers the longer your ineligibility period.
And before the government will step in and pay for your care it will insist that you show it how you spent your money. And by “show”, I mean on paper, by producing each and every financial statement dating back what will soon be 5 years from the date you apply for benefits. So, this is where my reference to the criminal system comes in. Everyone knows from grade school the concept of “innocent until proven guilty”. With Medicaid, however, that concept is turned around. You are “guilty” until proven “innocent” when it comes to transfers for less than fair value. By that, I mean to say, that if you can’t prove what you have spent your money on, then Medicaid will consider it a transfer for less than fair value, a “gift” in essence, causing a denial of benefits.
Let’s then, go back to John’s parents. As we know, cash is hard to trace. Think about it. If Mom and Dad have been withdrawing cash for their spending needs how hard is it going to be to prove, going back as many as 5 years, what they spent that money on. All we’ll see on their bank statements are cash withdrawals. No explanations. Who keeps all those receipts? Hardly anyone. But that’s what Mom and Dad need to do in order to preserve their eligibility for government benefits.
So how do they avoid this potentially catastrophic result? They need to better prepare themselves for the possibility of needing long term care, well before they need it time and consult with a knowledgeable elder law attorney who can tell them how to spend down their assets and establish a clear paper trail, while preserving their ability to qualify for government benefits.
How a Call From Mary’s Attorney Saved Her $90,000
January 11, 2010
One of the common themes I repeat often, when it comes to Medicaid, is that timing is everything. A recent call we received from Mary’s personal injury attorney, Bill, illustrates the point. Mary’s husband, John has dementia and is about to enter a nursing home. Mary and John don’t have much in the way of assets, about $100,000, but Bill is pursuing a claim on Mary’s behalf for injuries she received in a car accident. Bill, recognizing the potential Medicaid issues, called me to ask if John’s situation impacts Mary’s claim. I told him he reached out to me at the right time. Here’s why.
In the case of a married couple, Medicaid considers the assets of both the healthy and ill spouse in determining eligibility. The questions then becomes “what point in time do we value their assets?” That is what is called the “snapshot date”. Medicaid values the assets as of the first day of the first month of continuous institutionalization. Bill told me that he was close to settling Mary’s case and asked whether pushing the case to settle would be helpful.
I explained that if Mary receives the settlement proceeds before John is approved for Medicaid it would count as part of the spend down and she would only be able to keep, at most, one-half of the money. We don’t want the case to settle until after John gets Medicaid because at that point there is a “division of assets”. Mary keeps the $50,000 of assets that they have left after the spend down and whatever other assets she receives after that date.
Once Bill understood the best sequence of events he recommended that Mary contact us to guide her on how to spend down and to handle the Medicaid application. And that’s what we did. In a few months time, John received Medicaid, Mary kept $50,000 of their savings and then Bill settled the case, providing Mary with $150,000 of additional funds to support her, money she especially needs since she most of John’s income must be paid to the nursing home. So when we talk about timing being everything, in Mary’s case it meant, an extra $90,000 in her pocket.
What’s So Good About Eliminating Federal Estate Tax?
January 4, 2010
Many of us didn’t think we’d see 2010 but I guess we were wrong. I’m not talking about any apocalyptic predictions of the end of the world but, rather, about the elimination of federal estate tax under the 2001 tax bill that President Bush signed into law. Elimination of any tax is a good thing, right? Well, maybe not, because what the government gives with one hand, it usually takes back with the other. And that is certainly the case here.
What hasn’t been talked about much is that the same law that wipes away estate tax also has eliminated the step up in basis. If, for example, you inherited at your dad’s death his house or stocks that he held for many years, the basis for calculating capital gains tax was not what he paid but the value of the assets at the date of his death. So, if you sold those assets shortly after his death you owed no capital gains tax.
Now, however, there is no step up in basis. Instead, the first $1.3 million in capital gains will be excluded from tax ($3 million for assets transferred to a surviving spouse). More Americans will pay this new capital gains tax, however, than will avoid estate tax. That’s because with a $3.5 million exemption last year most Americans never would have paid any federal estate tax. It is estimated that 6000 estates will avoid estate tax in 2010 that would have paid tax based on the 2009 exemption. However, 71,000 estates could face a capital gains tax. Very simply, wiping out estate tax benefits the wealthy. Needing to offset the loss of tax revenue, Congress has instead imposed a new tax on less wealthy Americans.
Congress attempted to amend the law to make the $3.5 million exemption permanent but couldn’t get it done before the end of year. Talk of passing this amendment in 2010 raises other issues about whether Congress can role the clock back and apply the law retroactively. And for many states, New Jersey and New York included, there is still a state estate tax to contend with. Finally, the elimination of federal estate tax is for this year only. Without further changes, the estate tax comes back next year on estates over $1 million. So for most Americans, at best, they won’t feel any effect from the elimination of a tax they never needed to concern themselves with in the first place. At worst, they face a new capital gains tax they wouldn’t have had to pay under the previous law. Just another tax bite for the average American.
