Vol. 79, No. 5, May
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
Carol 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
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