Big Win for Medicare Recipients

This week the government settled a federal class action lawsuit involving the Medicare program.  The settlement will affect millions of Medicare recipients and involves those Medicare recipients who require rehabilitative services.

Every day, I meet with individuals who have a family member receiving rehabilitation services.  Rehabilitative services are commonly received in a sub-acute care facility or a skilled nursing facility.  In common parlance, a skilled nursing facility is a nursing home.

Rehabilitative services typically come into play in a situation such as the following:  Mr. Smith is eighty years of age and is a Medicare recipient.  Mr. Smith, who lives at home alone, falls and breaks his hip.  Mr. Smith is taken to the hospital and has surgery performed to mend his broken hip.  After spending several days in the hospital, Mr. Smith is discharged to a nursing home for skilled rehabilitative services.

The rehabilitative services that Mr. Smith receives in the nursing home are covered by the Medicare program.  The Medicare program will pay for up to 100 days of rehabilitative services for Mr. Smith.  The Medicare program pays the first twenty days of rehabilitative services in full.  Days twenty-one through one hundred have a co-payment.  Currently, the co-payment is $144.50 per day.  Many private health insurance programs cover this co-payment, so even if Mr. Smith receives the full 100 days of service, his rehabilitation may be fully covered by either the Medicare program or his private health insurance.

The 100 days of coverage is not a guarantee, meaning that no patient is guaranteed that he will actually receive 100 days of coverage.  Most Medicare recipients do not receive the full 100 days of coverage.

What the recent class action settlement involves is the standard that the Medicare program uses in order to permit a Medicare recipient to receive coverage under the Medicare program.  The law (federal regulations) has always stated that the rehabilitative services must be necessary in order to maintain the Medicare recipient’s health status.

In other words, if Mr. Smith needs rehabilitative services in order to maintain his current health status, he is entitled to up to 100 days of coverage under the Medicare program.   So, if Mr. Smith’s current health status would slide backwards if he did not receive rehabilitative services, then under the Medicare law as it has been written would permit Mr. Smith to receive Medicare coverage.

But that is not how the Medicare program has interpreted the law for many, many years.  The Medicare manual, a policy manual the federal agency that administers the Medicaid program drafted, has always said that rehabilitative services must be necessary to improve the condition of the patient.  In other words, unless the patient’s health status is improving as a result of the rehabilitation, then Medicare won’t cover the care.

The contrast is stark.  The law has always said that the rehab must be necessary to maintain the patient’s health status.  The government has always said that the rehab must be improving the patient’s health status.

I can tell you that a great number of patients who receive rehabilitative services do not improve but do require rehab to maintain their current health status.  For that reason, this settlement, which affects all Medicare beneficiaries, will have a very large impact, and a positive impact, for Medicare recipients.

Planning for Medicaid Is Serious Business

I have met with hundreds of people regarding Medicaid planning issues.  The stories, while always different, are also very similar in many ways.

Mom was living at home, fell, went to the hospital, is receiving rehabilitation now , and won’t be able to return home.  Assume that mom, we’ll call her Mrs. Smith for simplicity sake, has $200,000 in cash.  Mrs. Smith’s daughter comes to see me and she wants to preserve mom’s $200,000 and qualify her mother for Medicaid benefits.

Medicaid is a health insurance program for needy individuals.  It is a federal and state program.  Unlike most health insurance programs, Medicaid will pay for the costs associated with long-term care, such as care in a nursing home or assisted living residence.  Since care in a nursing home can cost upwards of $11,000 a month, many people would like to qualify for Medicaid when they require care.

In order to qualify for Medicaid benefits, an individual must have less than $2,000 in assets, so Mrs. Smith, who owns $200,000 in assets, has $198,000 too much.  What can Mrs. Smith do to preserve some of her assets?

Many of the people who come to me hoping I can help them save some of mom’s money will say to me something such as, “What if we give $13,000 to each of mom’s grandchildren to get rid of the money?”  It’s as if by simply getting rid of the money, mom will qualify for Medicaid benefits.

This type of “plan” is pure foolishness.  It is, in my opinion, the opposite approach one should take in trying to preserve Mrs. Smith’s money.

First of all, by giving Ms. Smith’s money to multiple people, such as her grandchildren, you are creating a high likelihood that Mrs. Smith will not get her money back if she needs it.  Medicaid planning is never an exact science and sometimes money needs to returned.   Furthermore, if the grandchildren are minors (under the age of eighteen), then legally they could not return the money.

Secondly, gifting $13,000 has nothing to do with Medicaid planning.  People are always telling me that they can only gift $13,000 a year.  The $13,000 a year figure comes from the federal gift tax annual exclusion amount.  For federal gift tax purposes, a person can only gift $13,000 a year per person.  But this statement is only half the story.  A person can only gift $13,000 a year without reducing her $5,000,000 lifetime credit against gift tax.  So, unless a person is gifting more than $5,000,000, gifting $13,000 a year has no benefit.

Lastly, planning for Medicaid eligibility is quite complex.  it’s not just a matter of giving money away.  If a person is going to make gifts, she must do it pursuant to a concerted and well-developed plan.  In order to be eligible for Medicaid, a person must have limited assets (typically less than $2,000), insufficient income to pay for her care, and she must need hands-on assistance with three activities of daily living (clothing, bathing, toileting, walking).  Only when a person meets all of these criteria and files an application for Medicaid benefits will Medicaid even begin to punish the person for any gifts she may have made in the last five years.

So, simply giving away $13,000 does nothing, until Mrs. Smith applies for Medicaid, has no money and needs assistance with three activities of daily living.  When that happens, Medicaid will punish Mrs. Smith for having made those $13,000 gifts.  The punishment is a period of ineligibility for Medicaid benefits, and that period of ineligibility is calculated by taking the aggregate amount of money Mrs. Smith gave away in the last five years, let’s assume $70,000, and dividing it by the statewide average cost of a nursing home room, which the state says is $7,757.  Based upon a $70,000 gift, Mrs. Smith would be ineligible for Medicaid for nine months.

If the nursing home costs $11,000 a month, that means Mrs. Smith will owe the nursing home $99,000 for the $70,000 she made.  Who is going to pay that $99,000 bill?  So, as I think you can see, this is why you need a plan, not just a bit of misinformation and a strong desire to save money.

Guide to New Jersey Death Taxes

As an elder law attorney, I am always surprised that no one ever talks aboutNew Jersey’s death taxes.  We hear a lot about the federal estate tax, comparatively-speaking, but very little about theNew Jerseydeath taxes.

New Jerseyhas two death taxes—the estate tax and the inheritance tax.  Many states, such asFlorida, have no death tax at all.  TheNew Jerseyestate tax, like the federal estate tax, is a tax on the gross value of the estate.  If a decedent’s estate exceeds $675,000, then his estate is subject toNew Jerseyestate tax.

The gross estate includes all of the assets that the decedent owned at the time of his death, including the death benefit of any life insurance policies that he owned.  Most people do not believe that the death benefit of life insurance is included for purposes of calculating a death tax.  One reason for this is that they have been told that life insurance isn’t taxable.

Life insurance isn’t taxable, in most instances, for income tax purposes.  But life insurance is very much includible in a decedent’s estate for estate tax purposes.

Furthermore, many people think that the gross estate only includes probate assets.  “Probate assets” are assets that the decedent’s last will and testament controls.  Accounts with beneficiary designations would not be probate assets because the beneficiary designation, not the decedent’s last will and testament, would control who receives the asset.

But what controls how an asset passes after a person dies—his Will or a beneficiary designation—has nothing to do with whether or not the asset was owned by the decedent at the time of his death and nothing to do with whether or not it is includible in his estate for estate tax purposes.  (I will discuss inheritance tax issues in a moment.)

Think of it this way, if having a beneficiary designation on an asset prevented it from being taxed, the government would pass a law the next day simply including assets with beneficiary designation in the gross estate.  It’s so simple that it’s rather silly and it’s rather silly because it’s simply a myth.

The exemption amount, $675,000, is quite low.  If a person dies with a house, a brokerage account, and some life insurance, his estate could easily exceed $675,000 and be subject to theNew Jerseyestate tax.

If a person dies and leaves his estate to his spouse, there is no tax because a surviving spouse is exempt from the estate tax; however, without proper planning, which goes outside the scope of this article, the children of the couple may unnecessarily pay tax when the wife dies.

New Jerseyinheritance tax is a tax primarily based on the relationship of the person to whom you leave your estate.  There are four “classes” of beneficiaries—A, C, D, and E.

Class A beneficiaries are the surviving spouse, children, grandchildren, and parents.  Because most often a person’s beneficiaries are people who fall into these categories, most estates do not pay inheritance tax or have to file an inheritance tax return.

Class C beneficiaries are siblings and son-/daughter-in-laws.  These individuals receive a $25,000 exemption.  After that, they pay inheritance tax at rates between 11% and 15%.

Class E beneficiaries are charities andNew   Jerseygovernment entities.  These organizations pay no tax but the decedent’s estate must file an inheritance tax return.

Class D beneficiaries are all other possible beneficiaries.  They pay tax at rates between 15% and 16% on everything they receive if they receive more than $499.

All assets of which the decedent died owning are taxed except life insurance that names a beneficiary.  Unlike with estate tax, life insurance that names a beneficiary is not subject to the tax.

The Home as an Exempt Asset

I meet with at least one spouse a week who is fearful of losing her house to the costs of long-term care for her husband.  “I don’t want the nursing home to take my house,” the client will tell me.

The fact of the matter is, the home is an exempt asset, meaning that the spouse can retain the home and her husband can qualify for Medicaid benefits.  This is true irrespective of the value of the home.  The wife could be living in a $200,000 home or a $2,000,000 home, she can retain the home as an exempt asset.

When dealing with a single person who is living at home, there is a limit on the equity value of the home.  In order to be exempt, in New Jersey, the equity value of the home (the fair market value less encumbrances such as a mortgage) cannot be greater than $750,000.  So, if a single person is living at home and seeks to qualify for Medicaid benefit at home, for instance, having Medicaid provide a home health aide to her, the equity value of her home must be no greater than $750,000.

If the equity value is greater than $750,000, then the value the exceeds $750,000 is a countable asset that could disqualify the individual from receiving Medicaid benefits.

A Diligent Inquiry

Why do I need a last will and testament?

Most people believe that if they die without a Will, their estate passes to the state of New Jersey.  This is untrue.  The reality is, if you die without a Will, there is a series of statutes that determines who receives your estate.  Those statutes dictate that your closets relatives receive your estate.

For instance, if you die with a spouse, your spouse will receive your estate in most instances.  If you die without a spouse but with children, your children receive your estate.

Now, first of all, some people don’t want to leave their estate (or their entire estate) to their spouse, and some don’t want to leave their estate equally to their children.  Some people want to disinherit a child for one reason or another.  Others might want to create a trust for a child because the child is disabled or has problems with drugs or alcohol.

Secondly, what if a person dies without any close relatives?  Assume that Mr. Smith dies without a wife, children, or even siblings, who is going to receive his estate?

I have seen estates where individuals die without a Will and the closest relative the individual has are cousins.  The cousins might live in any part of the world, and there could be hundreds of cousins to the decedent.

Finding these relatives falls upon the administrator of the decedent’s estate.  An administrator is similar to an executor; however, a person can only have an executor if he has a Will because an executor is someone who the decedent nominated in his Will to serve in that role.  Without a Will, the decedent couldn’t have nominated an executor, so someone must be appointed as administrator of the decedent’s estate.

One big difference between an executor and an administrator (aside from the fact that one is nominated to serve by the decedent and one is not) is that an administrator must ensure he is distributing the decedent’s estate to all of the decedent’s heirs who are entitled to share in his estate.  (An executor need only follow the Will with regard to distributions.)   At first making distributions to an individuals heirs may sound simple, but as discussed above, if the decedent had no close relatives, this may be more difficult than it appears.

I have had several estate for which I either served as administrator or was appointed as administrator in which I had to hire a genealogist to search for the decedent’s heirs, and as stated, those heirs may be anywhere in the world.  I have had searches conducted in Ireland, England, and France, as well as the United States.

The cost of the genealogist is borne by the estate, and the time it takes to conduct a diligent search can be considerable.  Many of these searches have delayed the distribution of the estate for years.  The law states that an administrator must conduct a diligent search for known heirs and the search must be commensurate with the value of the estate.

An administrator who fails to conduct a diligent search can be liable to an heir who fails to receive his share of the estate.  Imagine a decedent who has 100 heirs all of the same degree of relation and the administrator fails to conduct a diligent search, finding only eighty of the 100 heirs.  The administrator could be held liable to the twenty heirs he failed to find and to whom he failed to make distributions.  In other words, the administrator could be pulling money out of his own pocket to pay these heirs, which is not a good thing.

All of this can be avoid by hiring an attorney and expressing your wishes in a written last will and testament.  If you clearly express your intentions and nominate an executor to handle your estate, your executor won’t have to face any of these problems and the people you wished to benefit from your estate actually will benefit, not some unknown relative in another country.

New Jersey Expands Medicaid Program

The Centers for Medicare and Medicaid Services (CMS), the agency of the federal government responsible for administering the Medicaid program, recently approved a comprehensive waiver to the state of New Jersey’s Medicaid program.  The Waiver permits the State to expand Medicaid institutional-level Medicaid services to individual residing at home or in an assisted living residence.

What does this mean?  New Jersey has provided Medicaid services to individuals residing at home or in assisted living residences for about 15 years; however, only individuals with income no greater than a certain level, called the “income cap,” could qualify for Medicaid at home or in an assisted living residence.  Currently, the monthly income cap is $2,094, meaning that if your gross income exceeds that amount by one penny you will not qualify for Medicaid at home or in an assisted living residence.

The Waiver permits the State to offer Medicaid services to individuals whose income exceeds the cap.

The Waiver also limits how the State will look at an applicant’s finances if the applicant’s income is below the income cap.  If an individual’s income is below the amount of the income cap, the Medicaid Office will only ask the individual to sign a statement saying whether or not he has transferred assets in the last five years.  If the applicant swears that he has not transferred assets in the last five years, then the Medicaid Office will not examine the applicant’s finances.

Of course lying that you have not transferred assets when you have may come back to haunt you, because the Medicaid Office does cross-checks with the Internal Revenue Service, so Medicaid may be calling you within a year or two when they discover that you had a number of assets within the five year period of time prior to applying for benefits and suddenly did not have those assets when you applied for benefits.

Save Those Bank Statements

Now, more than ever before, it is imperative that applicants for Medicaid benefits retain their financial records.  In 2006, the federal laws governing the Medicaid program were changed extending the looback period from three to five years.  The “lookback period” is the period of time that the Medicaid Office examines to determine whether or not an applicant for Medicaid benefits has made an uncompensated transfer of an asset.

An uncompensated transfer occurs anytime that an individual gives something of value away and does not receive an equivalent dollar value in return for the item.  In other words, if you give your car to your son and your car is worth $5,000, you made an uncompensated transfer of $5,000.

When an individual makes an uncompensated transfer of an asset during the lookback period and applies for Medicaid benefits, the Medicaid Office imposes a penalty period, or period of ineligibility for Medicaid benefits, based upon the dollar value of all transfers made during the lookback period.  In other words, if you gave away $1,000 in December 2008, $5,000 in March 2009, and $12,000 in June 2010, the Medicaid Office will aggregate those transfers ($18,000) and assess a period of ineligibility for Medicaid benefits based upon the aggregate transfer.

The penalty period is calculated by taking the aggregate transfer amount ($18,000) and dividing it by a divisor number, which is supposed to represent the average statewide cost of a nursing home room.  The divisor figure is $7,282.  So, $18,000 in uncompensated transfers will result in approximately two and one half months of ineligibility.

When you file an application for Medicaid benefits, the Medicaid Office asks you if you have made any uncompensated transfers.  (The application asks if you have made any uncompensated transfers in the past thirty months.  The lookback period hasn’t been thirty months since around 1990, which is, I suspect, the last time that the application form has been updated.  But the lookback period is now sixty months.)  You must disclose any transfers that you have made.

Not being ones to simply count on your honesty, however, the Medicaid Office also requests financial statements from you.  Through these financial records, the Medicaid Office can ascertain whether or not an individual has made any uncompensated transfers.

An issue that has become more pronounced with the increase of the lookback period from three to five years is the availability of bank records.  When I apply for Medicaid on behalf of a client, I like to supply the Medicaid Office with copies of each and every bank statement for the past five years as well as copies of the checks that coincide with the statements.

The hope is, that by providing these documents, the Medicaid Office can more quickly resolve, and approve, the application.  By law, the Medicaid Office must process an application in forty-five days.  From a practical standpoint, that timeframe is more of a dream than reality.

When you have a $10,000 a month nursing home bill accruing, you want as fast of a result as you can obtain, but you also want the result to be correct.  For these reasons, I supply the Medicaid Office with a full financial picture of the applicant.

The problem for client is, five years’ worth of financial records is burdensome to produce.  Most people destroy their financial records after a few years and banks frequently charge exorbitant amounts to reproduce these records.  The moral of the story is save your records, particularly after you have attained the age of seventy.  You never know when you might need them.

Big Win for Annuities in the Context of Medicaid

On October 2, 2012, the United States Court of Appeals for the Second Circuit decided a case involving non-assignable annuities in the context of the Medicaid Act.  The case is entitled Lopes v. Starkowski.

In my opinion, this case puts to bed an issue that has been litigated in several different states and decided by several different federal appeals courts.  Every federal appeals court that has decided the issue has come down in favor of the Medicaid applicant.  There are no conflicting decisions and since four or five federal appeals courts have ruled on the issue, I think the issue is now resolved.

Essentially, the issue is this:  Is an irrevocable, non-assignable annuity an income item or a resource item?  The issue is very important, and I will demonstrate why in the context of a hypothetical.

Assume that Mr. and Mrs. Smith are married.  Assume that Mr. Smith resides in a nursing home and will continue to reside in the nursing home for the remainder of his life.  Assume that Mr. Smith has pension and Social Security income of $3,500 a month.  Assume that Mrs. Smith has Social Security income of $500 a month.  Assume further that Mr. and Mrs. Smith own a home and $400,000 in bank accounts.

Medicaid would tell Mrs. Smith that she can retain the home and approximately $113,000 of their cash assets.  The remaining assets must be used to pay for Mr. Smith’s care in the nursing home before he will qualify for Medicaid, according to the Medicaid office.

Assume Mrs. Smith comes to me for advice.  I advise her to set up a Medicaid-complaint annuity, which, among other things, is irrevocable and non-assignable with all of her cash assets above $113,000.  So, Mrs. Smith, being intelligent, takes my advice and purchases such an annuity for $287,000.

The next month, Mr. Smith qualifies for Medicaid because by purchasing the annuity, Mrs. Smith converted the $287,000 in excess assets into a stream of income that belongs only to her.  Mr. Smith no longer has too many assets to qualify for Medicaid.  Mrs. Smith now has sufficient income to live.

States, obviously, hate that I can do this for Mrs. Smith, but the Lopes case and several other federal appeals court cases say I can do this for her.  This case is a big win for the elderly and disabled.