How a Tax Refund Can End Up Costing You Big
June 27, 2011
Janet and Murray have been married for 50 years. Murray is in advanced stages of Alzheimer’s Disease and Janet finally was forced to place him in a nursing home. Murray recently received Medicaid approval and Janet got to keep the house and $100,000 in assets. She filed a joint income tax return for 2010 and recently received a $10,000 refund check payable to her and Murray. Janet’s question, or really statement to me, was “I can keep that money right”? “No so fast”, I replied.
It’s a good thing Janet called when she did. Half the refund is hers, no question, but the other half is Murray’s money. If Murray now has $5000 isn’t that more than the $2000 Medicaid asset limit? Will he now lose his benefits? Or is it considered income to Murray, requiring him to turn it over to the nursing home? Or is it possible that Janet can keep it all?
This is a very tricky situation, and a clear illustration of how so complicated Medicaid is, even after you have been approved. First of all, Medicaid rules state that an income tax refund is not considered income so giving Murray’s half to the nursing home isn’t necessary. OK, so it’s an asset. Well, then, can Janet keep it? No, she can’t. While she can keep any asset she had when Murray was approved for Medicaid (ie. the house and $100,000) and any asset she receives after that point (ie. her half of the refund), Murray cannot transfer his half to Janet. He would lose is Medicaid benefits. This is what is called a “post eligibility transfer”.
So, what options remain? Janet could spend the money for Murray’s benefit on things he needs, such as clothing, a TV, a companion to assist him etc. However, she must spend it by the end of the month he received the refund. Anything left unspent the following month will be added to his other assets. If Murray is over $2000 in assets that next month he will lose his Medicaid unless he turns the money over to the state.
It was a good thing Janet called when she did. Can you imagine if she kept that $5000 and Medicaid found that out the next time she had to complete the paperwork to annually renew Murray’s eligibility? Losing Medicaid would have cost her $10,000 a month, the private pay rate at the nursing home. Janet could have potentially lost tens or hundreds of thousands of dollars, sending her to the poorhouse. Luckily, she sought the proper advice. But, it just goes to show you there are infinite ways that the Medicaid rules can trip you up. The problem is you just don’t know what you don’t know.
Will I Be Responsible for My Parents’ Nursing Care?
June 20, 2011
That’s a question of real concern for many and one we are hearing more about as the population ages, increasing the number of Americans needing long term care, and federal and state budget deficits continue to grow. Can nursing homes pursue children for unpaid nursing home bills? Can the State deny Medicaid benefits, taking the position that the children ought to pay?
These questions refer to what is known as family or “filial” responsibility laws. More than half the states have some type of law that requires family members to pay for the care of other indigent (poor) family members. There is a long history of filial responsibility dating back to 17th century England. The English Poor Relief Act of 1601 required parents, grandparents and children of every poor person to financially support that individual to the extent possible.
In most states that currently have such laws, they have never been enforced. Pennsylvania is an exception, but even there it is by no means easy to do. As I often explain to clients, just because the state passes a law or makes a new policy or regulation doesn’t mean it is enforceable, legally or practically.
The Medicaid program is a hybrid in the sense that there are federal laws and state laws that both govern the program. States sometimes pass laws or regulations that may violate other federal laws, which they can’t do. Federal Medicaid laws, for example, state that in determining financial eligibility the assets and income of the applicant and spouse shall be considered. Adult children aren’t part of that equation. So, if a state now says that children should pay for care before Medicaid pays, it is making the federal eligibility test more restrictive than what Congress intended, which, again, it can’t do.
Although I haven’t examined each state’s filial responsibility law, I would say it is likely that no 2 laws are written exactly the same, which will also factor into any outcome. In New Jersey, the law provides that a child who has “financial means” must pay for the parent. But what does that mean? The law doesn’t establish a number or even a method to determine who can afford to pay. Obviously, these are not easy questions to answer and no one has yet attempted to enforce the law.
So, what is the final word on filial responsibility? There isn’t any right now but, it is important to keep an eye out for trends and changes in the coming years. And it is important to have someone on your side, such as a competent elder law attorney, to be able to help you navigate through and around the pitfalls that pop up with regularity in the long term care world.
How Getting the Right Advice Can Save You $500,000
June 13, 2011
A recent client of ours presented the following very common fact pattern. Jack and Diane are in their early 60’s. Diane was diagnosed in her 50’s with early onset Alzheimer’s Disease and now needs nursing home care. The couple have a primary home, a small vacation home at the Jersey shore and several hundred thousand dollars of other investments. A classic crisis case, as we call it. We are helping Jack with the immediate task at hand, getting Diane quality care and protecting as much as possible for Jack who is in good health. Jack could have been in a much better place, however, had he talked to us several years ago.
That’s when he went to see an estate planning attorney. As I often explain to people, estate planning focuses on “what happens if you die”. Jack and Diane executed a plan that will help eliminate estate taxes through the use of trusts, and will leave their assets to each other and alternatively to, or for the benefit of, their children, one of whom is disabled and is incapable of managing money. They missed a really big opportunity, however, one that could end up costing them as much as a half a million dollars or more. The estate attorney didn’t raise the question of “what happens if they don’t die”, meaning they live and get sick and have $120,000 a year in long term care expenses or more, a very real possibility at that time, because Diane had already been diagnosed before they visited that attorney. They didn’t realize that long term care costs could “solve” their estate tax problem.
Had Jack and Diane come to us then, we would have started them on the very same plan we are putting in place now. But, since we know that the government won’t help out until 5 years (because we are transferring assets into trusts and there is a 5 year Medicaid waiting period) Jack must pay for Diane’s care during that time. Diane’s care now costs $120,000 per year and will only continue to rise. 5 years ago, however, Diane’s care costs were minimal because she was still in the early stages of Alzheimers’, a progressive disease.
That’s the mistake Jack and Diane made. Diane’s care costs over the next 5 years will be hundreds of thousand of dollars more than they were in the last 5 years. You want the 5 year look back to run when your costs are less. Certainly when Diane received her diagnosis that should have been the alarm sounding that they should work with an elder law attorney to protect what they have, especially when you consider that Jack could live another 30 years and will need to support his special needs child.
Are You Walking into the Medicaid Office Blindfolded?
June 6, 2011
Here’s the scenario. Mary calls because Dad’s money is going to run out in a few months. She is anticipating the need for Medicaid but wants to get the jump on things by applying now because she heard it can take several months to qualify. My answer is that you generally don’t want to rush to apply. It’s like walking into the Medicaid office wearing a blindfold.
It all goes back to the Medicaid 5 year look back, the penalty and how it is calculated. When Mary applies for Medicaid she will have to provide 5 years of financial statements for every account that Dad had in existence during that time period. The State will look for any transfers for less than fair value, meaning transfers for which Dad did not receive anything of equal monetary value back. Those transfers are totaled up and then divided by the average monthly cost of nursing home care. That third number is the Medicaid penalty, the number of months Dad will be ineligible for Medicaid benefits from the date he has applied going forward.
And this is the reason why you don’t want to rush to apply. Surprisingly, what is considered a transfer triggering a penalty is not always easy to define. It could be because there isn’t a clear paper trail to establish where money went. Cash transactions aren’t easily explainable so the State may say they are subject to a penalty and Mary may not have the documentation at hand to prove otherwise. There are many other examples, too numerous to list here.
If a Medicaid penalty is set, the only way to eliminate it is to return all the money. Now, you might think, “OK, what’s the big deal”? Well, if the Medicaid caseworker tells you to explain a particular transaction and you have 10 days to do it, will you be able to get all the necessary documentation together? Probably not, especially since, in Mary’s case, she wasn’t in charge of Dad’s finances until he entered the nursing home and he was a very poor record keeper. She may be stuck with a penalty simply because she didn’t have enough time to get the answers.
There is however, a greater risk. Let’s say Dad made a transfer of $100,000 to Mary, for her to hold, 4 ½ years ago. If she applies for Medicaid now, Dad will be stuck with a penalty of 13.7 months. Mary would need to figure out how to pay for his care for over a year. On the other hand, if, as I recommend, we do a Medicaid review first, and find that transfer before we apply, then the better course of action is to wait until the 5 year Medicaid look back expires.
Why? Because if we wait another 6 months then that transfer won’t fall within the 5 years so there won’t be a penalty. We will, in other words, qualify Dad for Medicaid 7.7 months sooner, saving Mary approximately $80,000 in long term care costs. Keep in mind that each case is different and the Medicaid laws are quite complex but it does illustrate, again, why you must have a trusted guide throughout the Medicaid process.
