Long-Term Care Medicaid Changes for 2012 (Part I)

Most seniors who spend significant time (months or years) in a long-term care facility end up relying on Medicaid at some point during their stay. Nursing home costs can be a crushing burden, one that most seniors can’t shoulder alone for long.

Medicaid qualification has always been tough.  But seniors have usually been able to protect a few assets for their spouse or children, or to supplement their own care, on their way to getting Medicaid assistance.

Now, though, Illinois has implemented harsh new rules required by the Deficit Reduction Act of 2005 (DRA), a federal law that governs the state Medicaid programs.  These new rules apply to any Medicaid long-term care applications filed in Illinois after January 1, 2012.

If you’re close to retirement age, or have a parent or loved-one close to retirement age, knowing how these new rules work is critically important.

The changes are so big that we’ll need to cover them in several parts.  This first part deals with two concepts that our clients usually encounter first when researching Medicaid — “look back” and “penalty periods“.  The rules for both have changed dramatically.  And the changes could cost unprepared Illinois seniors tens of thousands of dollars in lost Medicaid long-term care benefits.

5-Year Disclosure Period (“Look Back”)

The old Medicaid rules required applications to be filed with three years of the applicant’s financial history, including bank records, tax returns, and information about sales or gifts of assets.  Anything that occurred more than three years prior to filing did not have to be disclosed for the most part.

Applications filed on January 1, 2012 or later must include five years of financial history.  That’s a big change (66% more), and when combined with the penalty period changes below, it makes planning for Medicaid much more complicated than under the old rules.

Penalty Periods

The primary purpose behind reviewing five years of financial history is to determine whether the applicant made any disallowed transfers.   Gifts, of course, are considered transfers.  But so are many other things that people often do, such as reimbursing family members for groceries or paying them for helping around the house.

When disallowed transfers are found, a penalty period is imposed.  While under a penalty, a senior is denied Medicaid benefits — even though they might otherwise qualify.  The senior must find another way to pay for the care until the penalty is over.  That can be difficult when the assets gifted or transfered can’t be recovered.

The new Medicaid rules made significant changes to the way penalty periods are calculated and applied.

Transfers Accumulated

The old rules treated every month with a disallowed transfer independently.  So the penalty for a $6,000 transfer in January was separate from the penalty for a $500 transfer in February.  This generally worked out in favor of the senior because of how the other penalty rules worked.  Small transfers spread among many months often didn’t even create a penalty at all.

Under the new rules, all disallowed transfers from the past five years are added together to calculate the penalty.  So very small transfers (even just a few hundred dollars) — if they are made regularly — can result in a huge penalty when added together.

No Rounding of Penalties

The length of the penalty period for a disallowed transfer is equal to the value of the transfer divided by the monthly private pay rate for the nursing home the senior resides in at the time of the application.  For example, a $9,000 transfer with a private pay rate of $5,000 results in a 1.8 month penalty.

The one month penalty is pretty easy to understand.  But happens to that fractional 0.8 months?

Penalties under the old Medicaid rules were calculated in whole months.  And fractional months weren’t rounded using the rules we were all taught in grammar school (round up 0.5 and above and round down anything lower).  Instead, fractions were simply dropped.  So a 1.8 month (or 1.9 month) penalty was applied as a 1.0 month penalty.

This obviously left open up all sorts of doors for creative asset protection.  But those doors have now been closed.

Fractions are no longer rounded down.  Penalties are calculated and applied to the half of a day.  A penalty of 1.8 months will be applied as a 1 month and 24 day penalty.

Penalty Periods Applied After Qualification

Applications under the old rules were often simplified by the fact that penalties were applied in the month of the transfer.

Imagine that a $15,000 transfer was made 24 months before applying and that the nursing home private pay rate is $5,000 per month.

  • Under the old rules, a three month penalty would have been applied beginning in the month of the transfer.  That means the penalty ended 21 months ago — in other words, long before Medicaid coverage was actually needed!
  • Under the new rules, the penalty starts only after the senior applies for Medicaid and meets all of the other qualification requirements.

As you can see, even fairly large transfers made many months (or years) before applying weren’t likely to cause problems under the old Medicaid rules.

Combining the Penalty Period Rules — An Example

Taken individually, the changes to penalty periods sound quite harsh.  But you really need to see an example to fully understand just how much the new rules will affect seniors.

Mary has been in good health and financially secure for years.  And she has been generous with her money.  Every year at Christmas, Mary gives $100 to each of her seven grandchildren.  A couple of years ago, Mary also gave $4,500 to her daughter, Susan, to help Susan through a period of prolonged unemployment.

Recently, though, Mary’s health has declined and she is now residing in a nursing home that costs $5,000 per month.  The rest of Mary’s assets have been spent, and she is now looking to Medicaid for her long-term care needs.

Everything Mary did is what many other grandparents would do — and have done — in the same situations.  But the Department of Healthcare and Family Services won’t look at what Mary did in the same light.

Under the new Medicaid rules, Mary made $700 worth of disallowed transfers each year (the Christmas gifts) plus a single disallowed transfer of $4,500 (the gift to Susan).  Adding up five years worth of transfers (remember, there is now a five year look back period) brings the total to $8,000.

The Department of Healthcare and Family Services will apply a 1.6 month penalty to Mary ($8,000 in transfers divided by the $5,000 private pay rate).  Mary’s nursing home will be looking to someone else to pay for Mary’s care during the penalty period.

What it All Means for Your Family

The new Medicaid rules have been described by some as “harsh”.  But that may be an understatement.  Completely ordinary behavior will now be penalized.  As a result, it is imperative that Illinois seniors suffering from declining health get counsel from an elder law attorney to make sure that they aren’t damaging their Medicaid eligibility.

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Looking back at 2011: all the rest

In Part 2 of our year-end review, we discussed the new Power of Attorney statute.  Next up are some changes affecting couples.

Tenancy by the Entirety

The first major change of 2011 provided new options to married couples in how they own their home.  Tenancy by the entirety was a special protection available for the marital residence.

Normally, a person’s house is completely exposed to their creditors apart from a $15,000 homestead exemption.  But married couples can own their primary residence (and only their primary residence) in tenancy by the entirety.

Tenancy by the entirety works the same as joint tenancy, meaning that when one spouse dies the other spouse inherits the entire property.  But it also adds some major creditor protection.  A home held in tenancy by the entirety can’t be lost to creditors of only one spouse.

Of course, creditors try to find a reason (any reason!) to drag the other spouse into the picture.  Even so, it’s a very strong protection.

Prior to 2011, tenancy by the entirety was only available to married couples who owned their homes directly or via a land trust.  Owning a home directly exposes the home to probate.  Land trusts were a common solution to the probate problem, but that usually meant paying annual fees to a bank to maintain the land trust.

Starting January 1, 2011, tenancy by the entirety protection became available to couples who want to own their home in a traditional revocable living trust.  It’s not automatic and it does not apply to people who transferred their home into their trust prior to January 1, 2011.  The trust and the deed need to be drafted with tenancy by the entirety in mind.

The new statute provides a useful alternative for married couples who want to: (1) hold their home in tenancy by the entirety; (2) keep their estates out of probate; and (3) avoid paying a bank for an expensive land trust.

Civil Union Act

On June 1, 2011, the Illinois Religious Freedom Protection and Civil Union Act went into effect.  That law made Illinois just the sixth state in the nation to recognize civil unions for same-sex couples. Civil union partners have the right to be treated as a spouse under the Probate Act.  They can also hold their primary residence in tenancy by the entirety (previously granted only to married couples—singles and same-sex couples were out of luck!).

While the Civil Union Act provides certain safeguards, its benefits don’t extend to every aspect of estate planning.  And at best, it means that same-sex couples get the same bad “default” Illinois estate plan as traditional married couples.  So it is important for same-sex couples to have a comprehensive estate plan that addresses their property and health care.

To 2012…and Beyond!

Those are the major stories from 2011.  There’s more to come for 2012, and we’ll be sharing it with you as it happens.  We look forward to a great year of serving you!

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Looking back at 2011: new powers of attorney

In Part 1 of our year-end review, we discussed the reemergence of the Illinois estate tax.  Next up are the changes to powers of attorney.

A new version of the Illinois Power of Attorney Act went into effect July 1, 2011.  The law changed the rules and statutory form for the Power of Attorney for Property and the Power of Attorney for Health Care.

No doubt, you are probably thinking, “what happens to the powers of attorney I signed 1 (or 2, 5, 10) years ago?”  Don’t worry.  If you have existing powers of attorney, you are not required to rush out tomorrow and sign new ones.

Of course, if they’re more than a few years old, you may still want to get them updated.  Banks sometimes question outdated powers of attorney (those more than 3 years old).  And if you’re over the age of 55, you’ll definitely want to consider a power of attorney with long-term care and elder law provisions (the statutory form which most people have does not address these issues).

While there are many technical changes to the Power of Attorney for Property, the most noticeable change is the ability to name multiple people to act as your agents simultaneously under a Power of Attorney for Property.  Your panel of agents can then act on your behalf by majority vote if you become incapacitated.

The new Power of Attorney for Health Care also provides broader access by your agents to your health care information if they need to act under the power of attorney.  These changes were made necessary by the HIPAA privacy rules that were published in August, 2002.  If you have a separate HIPAA authorization as part of your estate plan (and you do if we drafted your plan), you may not need to update your Power of Attorney for Health Care.

From a legal standpoint, I would describe the changes as a “solid upgrade”.  Something to be aware of, but not likely creating any need for action on your part—unless you were sorely lacking in the power of attorney department to begin with!

In Part 2, we’ll fill you in on the rest of the changes from 2011 and look ahead at what to expect in 2012.

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Looking back at 2011: the Illinois estate tax resurfaces

The past year ushered in many changes to the Illinois estate planning landscape.  There’s a lot to cover, so I’m breaking it into three posts.  First up is the Illinois estate tax.

The Illinois estate tax rules have caught many people by surprise.  So much attention has been paid to the federal estate tax (which currently has a $5 million exemption) that many have forgotten that Illinois has an estate tax too.

Under the 2009 and 2011 Illinois estate tax rules (there was no Illinois estate tax in 2010), a person dying with an estate of $2.5 million would owe no federal taxes.  But their estate would have to write a $128,518 check to the Illinois Department of Revenue.  That big number often shocks people who think of their estates as “just a little bit over the $2.0 million limit.”

Good news arrived last week, though, for Illinois families.  On December 20, Governor Quinn signed a law raising the estate tax exclusion (the minimum estate size before Illinois estate taxes are due) from $2.0 million (currently) to $3.5 million for 2012 and $4.0 million for 2013 and beyond.

Too many times this year I’ve had clients ask whether they should consider moving to another state to avoid Illinois estate taxes.  By narrowing the gap between the Illinois and federal estate tax rules, fewer families will need to consider advanced planning techniques.

But…the good news from Illinois is tempered by the uncertainty behind the federal estate tax rules that is still hanging over everyone’s heads.  The federal estate tax exemption for 2012 is currently $5.0 million, but it drops back down to $1.0 million for 2013 and beyond.  Several proposals have been made in Congress for a permanent solution.  So stay tuned!

In Part 2, we’ll fill you in on the changes to powers of attorney.

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Remembering Steve Jobs

It was with great sadness this week that we learned of the passing of Steve Jobs.  We have been using Mac computers in our firm since day one.  In some senses, using Macs has been more difficult than if we had chosen Microsoft Windows.  It’s always easiest to go with the flow.

Our choice to use Macs was about more than just what software our computers were using.  It impacts how we do everything that we do.

In an interview with Business Week in May, 1998, Steve explained his philosophy:

“That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

And during an interview with Fortune magazine in 2000, Steve said:

“We don’t have good language to talk about this kind of thing,” Mr. Jobs replied. “In most people’s vocabularies, design means veneer. It’s interior decorating. It’s the fabric of the curtains and the sofa. But to me, nothing could be further from the meaning of design. Design is the fundamental soul of a man-made creation that ends up expressing itself in successive outer layers of the product or service. The iMac is not just the color or translucence or the shape of the shell. The essence of the iMac is to be the finest possible consumer computer in which each element plays together. … That is the furthest thing from veneer. It was at the core of the product the day we started. This is what customers pay us for — to sweat all these details so it’s easy and pleasant for them to use our computers. We’re supposed to be really good at this. That doesn’t mean we don’t listen to customers, but it’s hard for them to tell you what they want when they’ve never seen anything remotely like it.”

We have tried to bring that same sense of design to our practice.  Real design that makes things simpler and more understandable—not just decoration.  To “Think Different”.

The feedback we have received from our clients suggests we have been quite successful in that.

But we know that we have only scratched the surface.  And we say thanks to Steve Jobs for showing us just how deep that hole goes.

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