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

A New World for Medical Assistance Planning

Sidebars:

• Changes to Divestment Penalties
• A Brief History Leading to the Deficit Reduction Act

by James B. Noble & James A. Jaeger

n Feb. 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005 (DRA-05).¹ This Act contains several changes to the federal medical assistance (MA) statute that target MA planning. How much this new world for MA planning has changed cannot be known in any detail until the new law is interpreted and implemented by the states. This article summarizes some of the amendments to the federal statute made by the DRA-05 and discusses issues that will arise when the new federal requirements are implemented in Wisconsin. This is an unfolding story, and it is one that lawyers who have any elderly clients need to follow.

Medical assistance is the payor of last resort for long-term care for the elderly. For this reason, planning to obtain MA eligibility is essential for attorneys helping clients protect estates and assets. MA is a joint federal-state program, in which federal law sets the basic requirements and states implement these requirements by adopting a state plan. States have considerable latitude in how they implement the federal requirements. With the passage of the DRA-05, federal law has changed, and it remains to be seen how Wisconsin will respond.

Even though federal law has changed, the changes have not yet been implemented in Wisconsin. Thus, applications for MA are still being processed under pre-DRA rules. That Wisconsin law will be changed to conform to the Act is a certainty. When and how it will be changed is not certain at all; much is simply not yet known. Most prominent among the unknowns is what the effective date of the DRA-05 changes will be here in Wisconsin.

Changes to Federal Law

The DRA-05 made several changes to the law of divestment.² The Act made changes to the general rules governing divestments and also created some special rules. The changes to the general law of divestment are as follows:

Change in look-back period. The look-back period is the amount of time preceding the date of application for which MA applicants are required to report divestments. Under pre-DRA law, transfers not involving trusts were subject to a 36-month look-back, and transfers involving trusts were subject to a 60-month look-back. The DRA-05 provides that the look-back period will be 60 months for all transfers.³

Change in start date for penalty period. Under pre-DRA law, the penalty period resulting from nonexempt transfers begins in the month of the transfer. This start date made it possible for persons to transfer assets and wait out the resulting penalty period before applying for MA; much (although not all) MA planning consisted of figuring this out. Under the DRA-05, the start date of the penalty period will (in most cases) be the date on which the individual is eligible for and would otherwise be receiving assistance for long-term care but for the penalty period.⁴ In many cases, this change in start date will mean that an individual is in a nursing home, out of money, and not eligible for MA. What happens then is anyone's guess.

Imposition of partial months of ineligibility. Under pre-DRA law, penalty periods are calculated by a formula: dividing the amount of the gift by the average monthly nursing home cost ($5,339 in 2006) to yield the number of months of ineligibility. This method of calculation remains unchanged under the DRA-05. Calculating penalty periods under the formula nearly always results in a fractional remainder. Previously, Wisconsin rounded these fractions down to the nearest whole number of months. The Act prohibits states from rounding down or otherwise disregarding the fraction.⁵ In all likelihood, this prohibition will mean that penalty periods will be calculated in months and days.

Because the penalty period does not start until the person is otherwise eligible and because a state cannot round down fractions, even small gifts (such as gifts to churches or grandchildren at Christmas) will cause situations in which a person is in a nursing home, out of money, and yet not eligible for MA. Please see the accompanying article for examples of DRA changes to divestment penalties.

The Medicaid Eligibility Handbook⁶ (MEH), which is Wisconsin's rulebook for the MA program, recognizes an exception to the divestment rules for gifts made for purposes other than for obtaining MA. However, the MEH states that a person's verbal assurances about purposes of gifts are not enough. The applicant must show that expected institutional expenses would be paid by insurance or other resources. In addition, statements from physicians or insurance agents and other records must confirm the person's statements about other sources of payment.⁷

In addition to changes to the general rules governing divestment, the Act introduces some new specific rules regarding certain matters that also have figured in MA planning. In brief, these new specific rules are as follows:

Notes, loans, and mortgages. The Act defines assets to include funds of the MA applicant used to purchase a note, loan, or mortgage unless the note, loan, or mortgage: 1) has actuarially sound repayment terms; 2) provides for equal payments without deferral or balloon payments; and 3) prohibits cancellation of the balance at the death of the lender.⁸ If the note, loan, or mortgage meets these three requirements, payments to the lender are considered income, not assets. This treatment as income can be significant because while excess assets are a bar to MA eligibility, it is usually possible to obtain MA under the income rules. The purpose of this provision is to prohibit certain estate planning techniques, such as the use of self-cancelling notes, that have been adopted for MA planning. However, many ordinary commercial instruments provide for deferral, unequal payments, and balloon payments; lawyers will need to be mindful of the potential consequences of using such instruments.

Annuities. The Act provides that the purchase of an annuity will be a divestment unless the state is named as first beneficiary, or as second beneficiary behind only a spouse or minor or disabled child to the extent of MA paid on behalf of the annuity.⁹ In addition, an annuity will be considered an asset unless it 1) is purchased with retirement assets or 2) is irrevocable and nonassignable, is actuarially sound, and provides for equal payments with no deferrals or balloon payments.¹⁰ Finally, in connection with both the original MA application and annual recertifications of eligibility, both the annuitant and the community spouse must disclose any interest in an annuity so that the state can notify the issuer of the state's status as a preferred beneficiary.¹¹

The main use of annuities in MA planning is to convert excess assets into income for the nonapplicant spouse. The new rules do not affect this spousal annuity because the rules apply only to an annuitant who has applied for MA. However, the nonapplicant spouse may be required to disclose the annuity at application or recertification of the MA recipient. It appears that annuities with short pay-out periods for the community spouse will be important planning tools. This short pay-out period may result in high income for the community spouse. The Act did not change 42 U.S.C. § 1396r-5(b)(1), which provides that no income of the community spouse can be deemed to be available to the institutionalized spouse. However, the Wisconsin Department of Health and Family Services (DHFS) has proposed, although it abandoned, use of spousal support actions in the past and some Wisconsin counties continue to pursue support actions. Spousal support actions seek to force a community spouse to contribute from his or her income toward the expenses of the institutionalized spouse. Thus, practitioners should be cautious when using annuities.

Hardship waivers. The Act requires that the states must provide procedures for hardship waivers of the divestment rules for situations in which applying the rules would deprive an individual of medical care, food, clothing, shelter, or other necessities of life.¹² The procedures must include notice that the waiver exists, a timely process to determine if a waiver will be granted, and the right to appeal.¹³ The procedures also must permit a facility to apply for a waiver on behalf of a resident with the resident's consent.¹⁴ These waiver provisions adopt the interpretation of prior law by the Center for Medicare and Medicaid Services, the federal agency that administers MA, and so do not actually represent a change in the law. However, the federal grounds for waiver are much broader than Wisconsin's current standard, which requires a "serious impairment" to the person's "immediate health."¹⁵ The result of Wisconsin's narrow rule has been that hardship waivers have been rare. By including what had previously been only an interpretation by an administrative agency in the statute itself, the Act should help to eliminate Wisconsin's excessively narrow rule.

Homestead exemption. The Act changes the homestead exemption. Until now, the amount of the exemption was unlimited in favor of the community spouse or a minor or disabled child. Now, an individual will no longer be eligible for long-term care MA benefits "if the individual's equity interest in the individual's home exceeds $500,000" or, at the option of the state, up to $750,000.¹⁶ The rule will not apply if the community spouse, a minor child, or a blind or disabled adult child is "lawfully residing" in the home. The Act specifically states that nothing prevents an applicant from using a reverse mortgage or home equity loan to reduce equity. From the language of the Act, it appears the rule will apply only to proportionate interest in jointly owned property. The main impact of this rule in Wisconsin is likely to be on family farms and recreational property, which can have very high values.

Effective date. One of the most confusing aspects of the DRA-05 is the effective date. The Act specifically states that certain provisions, such as the new look-back period and new start date for the penalty period, are effective as of the date of passage (Feb. 8, 2006). However, another of the Act's provisions would give Wisconsin until Jan. 1, 2008, to implement changes.¹⁷ Because of this ambiguity, one of the most important issues is what the effective date will be in Wisconsin. The most that can be said now is that for purposes of long-term MA planning, practitioners should adopt a worst-case approach and assume that the effective date will be retroactive to Feb. 8, 2006.

Implementation Issues

Because many of the matters addressed in the DRA-05 are covered by specific provisions of Wisconsin statutes or regulations, and because there are issues of uncertain effective dates, the implementation of the DRA-05 in Wisconsin will not be simple. In addition, statutory ambiguities may need to be addressed. This portion of the article discusses some of these implementation questions.

Many of the DRA-05 changes affect matters that are covered by statutes or administrative code provisions; therefore any changes should be implemented through legislation or formal rule making procedures under Wis. Stat. chapter 227. In the past, the DHFS, the Wisconsin agency that administers MA, made substantive changes through the MEH or operations memos.¹⁸ This practice circumvents the careful consideration that is given during the legislative process or the formal chapter 227 rule making process, both of which allow for public comment and input as well as legislative review. Some issues that will need to be considered include the following:

1) Will application of the 60-month look-back period be phased in? The Act could be interpreted so that an asset transfer made on Feb. 7, 2006, would have a 36-month look-back, whereas one made on Feb. 8, 2006, would have a 60-month look-back. When the Omnibus Budget Reconciliation Act of 1993 (OBRA '93) was implemented, the 36-month look-back was phased in. It is likely that the new extended look-back also will be phased in.

James B. Noble, Ohio State 1984, practices elder law in La Crosse and Iron River. He is on the Board of Directors of the State Bar's Elder Law Section.

James A. Jaeger, Georgetown 1975, practices elder law with Hill, Glowacki, Jaeger & Hughes LLP, Madison. He is a member of the Elder Law Section.

2) What guidance will the state or federal government provide concerning transactions that will not be treated as divestments because they were not for the purpose of obtaining MA? With the longer look-back period and the new start date provisions, it is likely that gifts that had nothing to do with MA eligibility (for example, gifts to help with childrens' college or medical bills) will have to be reported when applying for MA. Will there be some guidance to the local Medicaid agencies to disregard such gifts? Or, will attorneys be forced to take these cases to fair hearing?¹⁹ In addition, the extended look-back date and delayed start date for the penalty period will adversely affect efforts to keep farms and businesses and other real estate within families. The Wisconsin Legislature or the DHFS ought to provide relief for these kinds of transactions.

3) When does the period of ineligibility start to run in community waiver cases? In Wisconsin, MA for long-term care can be received by persons in the community as well as persons in nursing homes. Under the DRA-05, the penalty period starts to run when an individual is "eligible for medical assistance ... and would otherwise be receiving institutional level care ... but for application of the penalty period." How will this provision apply to individuals seeking community waiver care, since they are not "institutionalized" until they are participating in a waiver program? There need to be provisions to ensure that community waiver MA and nursing home MA are treated the same.

4) What hardship rule will be applied? As discussed above, the DRA-05 hardship rule is broader than the current MEH provision.²⁰ The MEH will need to be updated to reflect the new statutory provision.

5) How will annuities be treated under the DRA-05? The DRA-05 adds several annuity rules that are different from Wisconsin's. The major change is the requirement that the state be named a remainder beneficiary. Wisconsin statutes will need to be amended to incorporate this change. The state's current policy is that even annuities in pay status (that is, when the annuity has been annuitized) are assumed to be available assets unless the applicant can produce three letters from persons who buy annuities that they will not purchase this annuity. Because annuities provide a continuing source of income for community spouses after the death of the institutionalized spouse, the state should allow irrevocable annuities to be treated as income if they otherwise comply with the new law.

6) How will retirement annuities in pay status be treated? The DRA-05 clarifies the rules related to IRAs and other retirement annuities. The Act plainly states these are not available assets. This provision changes current Wisconsin law that an MA applicant must obtain three letters to prove the unavailability of the retirement annuity.

7) Will Wisconsin adopt the higher limit for homestead exemptions? The DRA requires a homestead exemption amount of at least $500,000 but the states have the authority to adopt a homestead exemption amount of up to $750,000. The lower exemption amount may preclude receipt of MA by owners of family farms and homes in some of Wisconsin's higher real estate cost areas and by owners of homes that also are a small business property. The higher exemption level can be adopted to address these situations.

8) What are the effective dates for the new provisions? Many attorneys, accountants, financial advisors, and members of the general public are just now learning about these new provisions. In fairness, the state should implement a delayed effective date. Under the DRA-05, it is possible that this date could be delayed to as late as Jan. 1, 2008, which would give time for careful consideration of the changes by both the Wisconsin Legislature and the DHFS.

Conclusion

The Deficit Reduction Act of 2005 has made significant changes to MA planning. Commonly used techniques to reduce (divest) assets to qualify for MA, such as "half a loaf" planning and making small monthly gifts, will no longer work. Whether comparable techniques will be viable under the new law cannot be determined until the Act is interpreted and implemented in Wisconsin. Clearly, a host of complex issues must be considered before the DRA-05 is implemented here.

Until the new DRA-05 rules are interpreted in Wisconsin, divestment planning is in a state of limbo. Practitioners who are not familiar with the complexities of MA law should hesitate to give advice or take actions without consulting with an experienced elder law attorney.

Endnotes

Wisconsin Lawyer