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    Example of DRA changes to divestment penalties


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    The examples below examine how typical fact scenarios would have played out under the policies in effect before the Deficit Reduction Act of 2005 (DRA), and how they would work following the enactment of the DRA.

    Wisconsin LawyerWisconsin Lawyer
    Vol. 79, No. 5, May 2006

    Examples of DRA Changes to Divestment Penalties

    by Carol Wessels

    The examples below examine how typical fact scenarios would have played out under the policies in effect before the Deficit Reduction Act of 2005 (DRA), and how they would work following the enactment of the DRA.

    Carol J. WesselsCarol J. Wessels, U.W. 1988, practices in elder law at Wessels Law Office LLC, Cedarburg. She is on the Board of Directors of the State Bar Elder Law Section.

    The examples are based on the text of the federal law only. Implementing legislation and policies will have to be passed on the state level as well, and therefore it will be important to reexamine these scenarios after the passage of those implementing policies.

    All examples use the current divestment divisor of $5,339 - the average monthly nursing home cost in 2006.

    Case #1: The Smiths, a married couple

    The Smiths attend church regularly and give $100 to their church on the second day of every month. The Smiths also gave a $200 graduation gift to their grandson in May 2005 and a $500 birthday gift to their daughter in February 2005. In June 2005, they gave $10,000 to their son for a down payment on a house. In March 2006, they gave $6,500 to their daughter for a down payment on a house.

    The Smiths presently have total countable assets of $52,000. In March 2006, Mr. Smith had a stroke, and he now needs long-term nursing home care. He was admitted to a nursing facility in April 2006. Mr. Smith immediately meets the financial requirements for medical assistance (MA) under spousal impoverishment rules, and an application is filed.

    Pre-DRA: Using a 36-month look-back period, the total divestment during the 36 months would be $20,800 ($3,600 total for three years of monthly church gifts, plus the other gifts.) This calculation creates a penalty period of three months, because the fractional remainder is rounded down under present Wisconsin policy. Using the MA rule that starts the penalty period as of the earliest divestment when divestments are made in consecutive months or in overlapping penalty periods, the penalty period expired long before Mr. Smith entered the nursing facility, and Mr. Smith thus receives MA immediately upon application.

    Post-DRA (simple analysis): This analysis ignores the complicated split treatment of divestments that the Smiths made over three years and assumes that all gifts are subject to the new law. Under this assumption, the penalty period created by the divestments would be 3.9 months, because rounding down is prohibited. The penalty period begins when Mr. Smith is in the nursing facility and otherwise eligible for MA. Because he is immediately eligible, the penalty period will begin when Mr. Smith's application is processed. The 3.9 months of nursing facility care that would have been covered by MA presumably will have to be paid for out of his wife's community spouse asset share.

    Post-DRA (complex analysis): Assuming that the gifts occurred in 2005 and Mr. Smith entered the nursing home in April 2006, the gifts will be treated differently because some gifts were made under the old law and some were made under the new law. (This result assumes the new law was effective immediately on passage on Feb. 8, 2006.) The gifts made before Feb. 8, 2006, are under the old divestment provisions and do not create any present ineligibility for Mr. Smith because the period of ineligibility created by those gifts is already over. However, the church donations made in March and April 2006 and the $6,500 gift to the daughter in March 2006 would cause ineligibility for 1.25 months beginning when Mr. Smith is otherwise eligible and applies for MA.

    Example 2: Audrey Jones, a widow

    Mrs. Jones had $100,000 in countable resources. In 2005 she saw an attorney who told her she could start giving away $5,000 per month to "spend down" for eventual MA eligibility. She started the gifting in June 2005. As of January 2006, Mrs. Jones has given away $40,000 and has $60,000 left. In February 2006, she had a stroke and entered a nursing home. The private pay rate for the facility is $7,000 per month, and Mrs. Jones has $1,000 per month in income.

    Pre-DRA: Under the old law, Mrs. Jones could continue the monthly gifting pattern while in the nursing facility, while at the same time pay the monthly nursing home fee until she is down to $2,000 in assets. This would take about five to six months, assuming Mrs. Jones gives away $5,000 per month and spends $6,000 per month on the nursing home, with Mrs. Jones' income of $1,000 per month also going to the nursing home bill. At the end of the five to six months, Mrs. Jones will have given away about $70,000 of her $100,000 in assets instead of spending the funds on nursing home care.

    Post-DRA (simple analysis): First, post-DRA-05, a lawyer who advised Mrs. Jones to do monthly gifting would be committing a serious error. Assuming all gifts are subject to the post-DRA treatment, had Mrs. Jones gifted a total of $70,000 she would be facing a period of ineligibility of 13.11 months. She has no resources left to pay. She will be facing eviction from the nursing home.

    Post-DRA (complex analysis): This example echoes typical scenarios that involve clients who begin a monthly gifting pattern but become ill and need nursing home care before completing the spend down.

    Mrs. Jones began monthly gifting in June 2005, was admitted to a nursing facility in February 2006, and has $60,000 that she cannot divest. She does not have a current penalty period for the prior monthly gifts. She could pay for 10 months of private pay nursing home care and then apply for MA. Or, she could purchase a qualifying annuity that provides her with an income stream, and become immediately eligible for MA with a higher cost-share contribution due to her higher income. Other options may be available to Mrs. Jones as well, but continuing the monthly gifting is not an option. She can still purchase exempt resources, such as a prepaid burial arrangement, to enable spending down more quickly.