The other week, the Superior Court of New Jersey, Appellate Division, decided a case that sounds the death knell for caregiver agreements as a means of Medicaid planning. Medicaid is a health payment program for needy individuals. Unlike private health insurance programs, Medicaid will pay for long-term care, such as care in a nursing home.
In order to qualify for Medicaid benefits, a Medicaid beneficiary must have limited resources, typically less than $2,000. When faced with the prospect of paying a nursing home $12,000 a month, many people who never thought they would qualify for Medicaid—or want to qualify—seek to expedite their eligibility for the program.
Medicaid planning is all about expediting an individual’s eligibility for Medicaid. Many Medicaid planning techniques involving transferring assets away from a potential Medicaid beneficiary to his family. Because people give away their assets in the hopes of qualifying for Medicaid benefits, the Medicaid law has evolved in a way that punishes a Medicaid applicant who has given away his assets before filing an application for benefits.
If you know anything about Medicaid, you have probably heard of the “lookback period.” The lookback period is the period of time that Medicaid looks at to see if a Medicaid applicant has made any uncompensated asset transfers prior to applying for Medicaid. Since 2006, the lookback period has been five years.
From a practical standpoint what this means is, if a Medicaid applicant gave away any asset (money, stocks, bonds, a house, a car) during the five year period of time immediately before applying for Medicaid benefits, then the Medicaid office will punish that applicant by making him ineligible for Medicaid benefits. This punishment is known as a “penalty period.”
A penalty period is a period of time during which a Medicaid applicant is ineligible for Medicaid benefits. The length of the penalty period depends upon the value of the assets that the applicant gave away during the lookback period. For simplicity sake, for every $10,000 of asset value that an applicant gave away during the lookback period, he is ineligible for one month of Medicaid benefits. So, for instance, if Mr. Smith gave $50,000 from his checking account to his son during the lookback period, then Mr. Smith would be ineligible for Medicaid benefits for five months.
If Mr. Smith were residing in a nursing home, then he would have to find another means of paying for his care. If Mr. Smith did not have the ability to pay for his care, then the nursing home could evict him for non-payment.
Many people who file applications for Medicaid benefits have needed long-term care for years. Oftentimes, a family member has been providing this care to the Medicaid applicant. Sometimes, the applicant has paid the family member for the care that she provided to him. So, for instance, Mr. Smith might pay his daughter for living in the daughter’s house (rent) and for the care that the daughter provided to Mr. Smith (say at the rate of $15 per hour).
There is a New Jersey Medicaid regulation that creates a presumption that any care provided by a family member is provided for free unless the family member and the Medicaid applicant have a signed caregiver agreement. For years, elder law attorneys have used caregiver agreements as a means of transferring money from a potential Medicaid applicant (Mr. Smith) to his family (his daughter) by providing a reasonable rate of compensation to the family member who is providing the care.
In my practice, I have never used these agreements too frequently. When I tell clients that the child has to pay income tax on the compensation, clients have always shown a lack of interest in the technique. But some attorneys have used these agreement quite regularly.
For years now, our Medicaid office has consistently found reasons to shoot down the compensation provided under such agreements and claim that the money was gifted, and our courts have supported those holdings. The other week, the Appellate Division, once again, upheld the Medicaid department’s treatment of caregiver compensation as a gift, and quite frankly, I find the reasoning in the case to signal the death knell for planning with such agreements. This is not to say that agree with the decision, but the reasoning the Medicaid office and our courts have used is nearly impossible to overcome unless you are willing to sue the state in federal court.