Medicaid Planning

Medicaid-Oriented Estate Planning

As the Texas population ages, and the cost of medical and long-term care soar, the number of estate planning clients who could benefit from some degree of Medicaid pre-planning also soars.  Estate planning professionals who do not provide full Medicaid planning services can still assist clients by helping them retain their flexibility to engage in Medicaid planning later in life and while they are incapacitated.

This article deals with Medicaid nursing home benefits.  These are the typical benefits of greatest concern and value to elderly clients.  Other Medicaid benefits (including long-term care waiver programs) have different eligibility rules, so the steps discussed in this article may not be applicable or appropriate for those separate programs.

Who Needs Medicaid Planning?

Every client does not need Medicaid pre-planning.  If you are wealthy, if you have health insurance through your former employer, or if you have family who can care for you in the event of illness, you likely don’t need Medicaid planning.    The federal estate tax exemption is so high, relative to the cost of local nursing home care, a client who is facing estate taxes can likely afford to pay for long-term nursing care privately for many years before needing to qualify for government benefits.

Even if a client would like to qualify for Medicaid instead of spending down their wealth, qualifying for Medicaid with high net worth involves big tradeoffs, such as dramatically different investment and retirement plans, or a loss of control over assets and life choices.  These tradeoffs can have the effect of leaving the wealthy client worse off than if she had simply used her wealth to privately pay for care.  Just where the “tipping point” is located can vary significantly, depending upon the client’s preferences and the local cost of care and they type of care available.

Most clients don’t have the luxury of weighing trade-offs between their great wealth and qualifying for government assistance.  The “average” person has a modest estate, perhaps a retirement plan, a home, and some limited investments.  In that case, an estate planning expert can help to modify the individual’s estate to better qualify the client for Medicaid eligibility, if it later becomes necessary.  The “big picture” issues are greater than just a medical crisis or the goal of saving money.  A health care crisis can become doubly traumatic for loved ones if the Medicaid eligibility process is complicated by legal lack of authority to take action or a lack of adequate records.

Legality of Medicaid Planning

When the Health Insurance Portability and Accountability Act of 1996 (hereinafter, “HIPAA”) was passed, the law made it a crime for anyone to make penalized transfers just to qualify someone for Medicaid.  After the American public protested the law, it was amended to punish only the attorney who provides the advice or assistance with a transfer that results in a period of ineligibility.  (See, 42 USC §132a-7(b)(a)(6).  Personally, I liked it better when it wasn’t the lawyer specifically who was being punished! J

There is a strong argument that the current state of the HIPAA law violates the free speech guarantee of the federal constitution.  Even the Congressional Research Service found before the law that the law would likely be found to be unconstitutional, in violation of free speech.  Seven months after the law took effect, the Attorney General (Janet Reno) told Congress that the Justice Department wouldn’t enforce the criminal prohibition on the provision of legal advice.  Subsequently, a federal district court issued a preliminary injunction prohibiting enforcement of the provision in question and that injunction was later made into a permanent injunction.

For the decade and one-half since the provision has been in place, most elder law attorneys continue to provide advice on Medicaid-motivated transfers.  To date, no one has been prosecuted, and neither the federal government nor Texas itself has threatened to pursue any prosecutions, at least to my own knowledge.  Therefore, the issue of criminal sanctions for advising clients about Medicaid planning and qualifications appears to be dead.

And, it should be noted that many of the things that estate planners do to help clients plan for Medicaid eligibility aren’t the type of things that the statute even offered criminal penalties for addressing.  The enjoined provision of HIPAA does not apply to the creation of a Miller Trust, a very common Medicaid qualifying mechanism.  Nor did the HIPAA provision apply to the making of exempt transfers or the purposeful purchase of exempt assets.  The idea that all Medicaid pre-planning is illegal is simply wrong.

Qualifying for the Medicaid Long-Term Care Program

This part of the brochure contains a general description of the Medicaid eligibility rules, to provide context for the estate planning of individuals who are not currently in need of nursing care. If you need to qualify for Medicaid in the very near future, you should consult with an estate planning specialist who can better help you.

Medicaid is a jointly-funded state-federal pro­gram. In 2009, the federal government provided 59.44% of the funding for the Texas Medicaid pro­gram, and the state of Texas funded the remaining 40.56% of expenses. The percentage of federal fund­ing decreases when our per capita income increases in comparison to national per capita income.  Congress, due to budget shortfalls, and Texas, due to similar budget constraints, are both currently jockeying to see if they can get the other to take on more of the load.  If neither one “blinks”, it is likely that there will be sharp cut-backs in Medicaid funding and eligibility starting in 2011 and beyond.

The federal government sets the minimum bene­fits that each state Medicaid program must provide in order to receive federal funds. However, each state has some flexibility in setting the rules for eligibility in that particular state. Thus, although some rules apply uniformly in every state, Medicaid law is large­ly state-specific.  I have been told that the Medicaid benefits are best in the nation in Florida and even know of some clients (grandparents who had to unexpectedly take in grandchildren) have relocated to the “Sunshine State” to take advantage of the better benefits available in Florida.

To receive Medicaid nursing home benefits, the applicant must qualify financially as well as med­ically. This differs from the Medicare program, which provides medical benefits to anyone who has earned 40 credits by paying Federal Insurance Contributions Act (“FICA”) taxes, regardless of that person’s income or resources.   (The Federal Insurance Contributions Act (FICA) tax (pronounced fie-kuh) is a United States payroll (or employment) tax imposed by the federal government on both employees and employers to fund Social Security and Medicare.  Generally, these are federal programs that provide benefits for retirees, the disabled, and children of deceased workers.)  However, Medicare does not provide benefits for long-term custodial care, and covers only one hundred (100) days of skilled nursing care.  If you continue to need care after the one hundredth day, you will need to qualify for Medicaid, instead of Medicare.

Is the Nursing Care “Medically Necessary”?

Medicaid long-term care benefits are available only if the nursing care is medically necessary.  Who gets to decide if the skilled care is “medically necessary”? HINT:  It’s not you!

For an individual to qualify for Medicaid coverage, they must meet all of the following requirements to demonstrate medical necessity:

(1)  The individual must demonstrate a medical disorder or disease or both, with a related impairment that:

  1. Limits his/her ability to recognize problems, changes in his/her condition, and the need for or side effects of prescribed medications;
  2. Is of sufficient seriousness that his/her needs exceed the routine care which may be given by an untrained person; and
  3. Requires nurses’ supervision, assess­ment, planning, and intervention that are available only in an institution.

(2)  The individual must require medical/nursing services that:

  1. Are ordered by and remain under the supervision of a physician;
  2. Are dependent upon the individual’s documented medical, physical, and/or functional disorders, conditions, or impairments;
  3. Require the skills of registered or licensed vocational nurses;
  4. Are provided either directly by or under the supervision of licensed nurses in an institutional setting; and
  5. Are required on a regular basis.

[See, 40 TAC § 19.2401.]

Medical necessity determinations are typically handled by the nursing home personnel, although the client might hire an attorney to assist in appealing a denial for lack of medical necessity.  There has been a recent shift in Texas with regard to Medicaid services.  Some services that can be provided at home (such as having an IV) used to require the individual be placed in a skilled nursing facility (either a rehab facility, a nursing home, or a hospital).  That unnecessarily drove up the cost and also inconvenienced the patient, who could be more comfortable at home, relying upon a part-time home health care nurse.  Texas has broadened the types of services that can now be offered at home and that should be a cost-savings to Texas and a comfort to many Texas families.

Patient Must Be in a “Medicaid Bed”

In Texas, in order to be placed in a nursing facility (such as a nursing home), a person must be in a Medicaid-certi­fied bed in order to receive Medicaid nursing home benefits. [See, 40 TAC §19.2604.]

Many of the facilities have both “Medicaid beds” and “non-Medicaid beds”, and they may have a long waiting list for the Medicaid beds. Facilities with waiting lists for Medicaid beds may give priority to patients in the non-Medicaid beds, as they likely can charge non-Medicaid patients more than they will be reimbursed from Medicaid. This results in a person having to be able to pay privately for a certain period of time while waiting to qualify for a Medicaid benefit in the facility of his or her choice.

One commentator has suggested that the Texas Medicaid bed system may violate federal Medicaid law.  I have never sued over it and don’t know anyone who has.  I do believe that it is likely that the Texas Medicaid bed system would not withstand federal scrutiny.

Resource and Income Limits to Qualify for Medicaid

Any individual applying for Medicaid is limited to $2,000 in “countable resources”. [See, Medicaid Eligibility Handbook, §F-1300 (available online at http://www.dads.state.tx.us/handbooks/mepd). For an explanation of what are “excludable resources”, see §5:14 of that same Handbook.] The Medicaid statutes and regulations use the general term “resources” in order to refer to the assets and property owned by the applicant.

The official income cap is $2,022 per month, and is adjusted by the federal government each January. [See 42 USC §1396b(f)(4)(C) (this figure is 300% of the maximum benefit available under the Supplemental Security Income program, which is indexed to inflation). See also http://www.ssa.gov/ OACT/COLA/SSI.html (noting that there was no cost-of-living adjustment in January 2010).]

However, Texans with higher incomes can still qualify for benefits if they set up a Miller Trust. The result is that the “effective” income limit is the actual cost of care.  Simply put, Medicaid will not provide benefits if the individual’s annual or monthly income is more than the cost of that person’s actual care. This results in a conundrum where it is possible to be eligible for Medicaid, but receive a benefit of zero dollars per month.

Because of the asset limitations, the typical Medicaid applicant can’t have significant investment income. For most applicants, their income usually consists of Social Security benefits, pension benefits, and payments from irrevocable non-deferred annuities.

If the individual applicant is married and the spouse is not also currently in need of nursing care, Medicaid also looks at the spouse’s resources and income in determining eligibility.  (So, if the husband needs care, but the wife does not, Medicaid will examine BOTH the income of the husband and the wife, even if the wife continues to live in the home and care for herself.)

For simplicity’s sake, the “applicant” is referred to as the institutionalized spouse, and the applicant’s spouse is referred to as the “community spouse”. Please note that this terminology has no connection to Texas’ community property laws; in this context “community spouse” refers to the spouse who is living out in the community instead of in an institution.

The community spouse can have an unlimited amount of income without disqualifying the institutionalized spouse. The community spouse can also have more than the $2,000 in countable resources, and the spouses can make unlimited asset transfers between themselves without penalty.

What Resources Are Excluded?

The following resources are not included in the countable resources subject to the $2,000 limit:

  • The client’s homestead, if it is not held in a revocable trust. The homestead exemption is unlimited if the homestead is occupied by a community spouse. Otherwise, the exemption is capped at $500,000 in equity, indexed for inflation.        The equity cap will be indexed to the Consumer Price Index in 2011.
  • One automobile, regardless of value. (Hint:  If you had too much money to qualify for Medicaid, could you throw a lot of that money at a “classic” (read: very expensive) automobile? Probably!
  • Certain categories of household goods and personal effects. [See, Medicaid Eligibility Handbook §F4222.] Exempt items include furniture appliances, medical equipment, computers, television sets, clothing, wedding and engagement rings, personal care items, books, and musical instruments. Items held for their investment value are not exempt. However, caseworkers are instructed not to evaluate non-exempt household goods and personal effects unless the applicant has reported any individual items valued at more than $500 on the application.  When putting a value on your application, you should be thinking of “what price can I get for this stuff in a garage sale or an estate sale”?  Don’t value it with replacement value and certainly don’t attach any sentimental value to it!
  • Term life insurance, regardless of face value.
  • Cash value life insurance, if the total face value of all life insurance policies is $1,500 or less.
  • Burial spaces, prepaid nonrefundable burial contracts, and segregated burial funds up to $1,500.
  • Rental property and mineral rights, if the total equity in all such assets does not exceed $6,000, and if each asset produces at least 6% of its equity value in income.
  • Retirement plan balances, if the funds can be withdrawn only upon termination of current employment or upon a determination of hardship, and neither condition has been met.

Protected Resource Amount for a Community Spouse

The Protected Resource Amount (hereinafter, the “PRA”) is the amount of “countable” resources that the community spouse can retain without disqualifying the institutionalized spouse.

The PRA is almost always more than the $2,000 limit that applies for the institutionalized spouse, but, it is not a set figure. Determining the PRA is a two-part process:

  • The initial calculation is based on the assets of both spouses.
  • Then, the income of both spouses is analyzed to determine whether they will be entitled to an increase in the PRA.

Initial Calculation

The initial calculation uses asset values as of the “snapshot date”. The “snapshot date” is the first day of the month in which the institutionalized spouse was first admitted to the hospital or nursing home and remained institutionalized for at least thirty (30) days.

The amount of the couple’s countable resources is divided by two. If the result is less than the mini­mum resource allowance ($21,912 in 2010), the cou­ple’s Protected Resource Amount is set at the minimum resource allowance. If the result is more than the maximum resource allowance ($109,560 in 2010), the couple’s PRA is set at the maximum. Any result in between those two fig­ures becomes the couple’s PRA.

The minimum and maximum allowances are set by the federal government and are adjusted yearly. Federally published Medicaid Handbooks are published annually and they are readily available online.

Although the couple’s assets are valued as of the snapshot date, the minimum and maximum figures used are the ones in effect as of the date of applica­tion.  If the institutionalized spouse has been institu­tionalized for multiple years, using the date of appli­cation figures allows the community spouse to keep more assets.

Performing the Income Analysis

After the PRA is determined by dividing the cou­ple’s assets by two and applying the maximum and minimum, the institutionalized spouse may be entitled to an increase in the PRA if the couple’s income is below the Minimum Monthly Maintenance Needs Allowance.  For this purpose, the income produced by their resources is not considered.

The Minimum Monthly Maintenance Needs Allowance (hereinafter, “MMMNA”) is $2,739 in 2010. The incomes of both spouses, minus the $60 Personal Needs Allowance, are added together and compared to the MMMNA.

If the combined income (minus $60) is less than the Minimum Monthly Maintenance Needs Allowance of $2,739, the Protected Resource Amount will be expanded to whatever amount is required to generate income suf­ficient to bring the spouse up to the MMMNA, using the current interest rate payable on one-year certifi­cates of deposit.

Example:

Bubba is the institutionalized spouse.  His wife, Bubbette, is the community spouse. They own $256,000 of countable resources. Bubba receives a Social Security benefit of $900 per month, and an employer pension of $698 per month. Bubbette receives a Social Security benefit of $500 per month and, unfortunately, she never worked outside the home and she has no employer pension.  Local banks are currently paying 3% on one-year CDs.

Their total combined income, minus the $60 Personal Needs Allowance, is $2,038.  This is less than the 2010 Minimum Monthly Maintenance Needs Amount by a shortfall of $701.  The amount of money required to produce $701 per month for each and every month at a 3% annual interest rate is $280,400.  Thus, the expanded PRA is $280,400.

Bubba qualifies for nursing home benefits while the couple keeps $282,400 (the expand­ed Protected Resource Amount, plus Bubba’s $2,000 resource limit), plus their home, and any other excluded resources.  Bubba is not required to spend any of his income on his own care, and each month is able to keep $60 and transfer the rest of it to Bubbette for her use as she continues to maintain their home.

What are Penalized Transfers?

Ineligibility Periods

To prevent applicants from qualifying for Medicaid nursing home benefits by giving away their countable resources, federal law penalizes uncompen­sated transfers by imposing periods of ineligibility.  How long the length of the ineligibility period lasts is based on the size of the transfer.  We will go over some of the most common transfers, to see how long the “lookback period” lasts.

The Federal “Lookback Period”

A transfer is penalized only if it is within the “lookback period”. The lookback period is the five-year period ending on the date the application for benefits is filed. [See, 42 USC §1396p(c)(1)(b)(i).]

Note: Until February 8, 2006, the lookback peri­od was only three (3) years for many types of transfers. Transfers made before that date have been grandfa­thered under the old rules. All transfers after that date are subject to the five-year period.  So, if you applied for benefits today, you would look back for a period of five full years, to see what assets you used to have, but which you sold or transferred during that period.

It is very important to distinguish the “lookback period” from the “transfer penalty”. A large transfer within the lookback period could generate a period of ineligibility that is much longer than five years.

However, all transfers outside the lookback period are ignored entirely, regardless of their size.  So, if you gave away or sold significant parts of your estate six years ago, regardless of your motivation, no one will consider them when evaluating your eligibility for Medicaid coverage.  The lookback period is not intended to be imposed as a penalty, but instead it is a rule of administrative convenience that allows some applicants to avoid penalties altogether while capturing other applicants who weren’t so lucky with their timing.

The consequences of misunderstanding the lookback period can be severe, when applied to individual cases.

Example:

Suppose an applicant makes a transfer that would generate a 15-year period of ineligibility if penalized.  If the applicant files the application for benefits five years and one month after making the transfer, the applicant will be able to qualify immediately. But if the applicant files the application four years and 11 months and fifteen days after making the transfer, the applicant will lose 10 more years of benefits.

Applying too early is a common mistake made by individuals who are unrepresented or who are receiving Medicaid advice from non-lawyer advisors. It is not possible to “take back” or “unfile” a Medicaid application that was filed too early and your eligibility for benefits will be determined as of the date of your application.  Think carefully and consult with a trained professional prior to filing for Medicaid benefits!

Ineligibility Penalties

For transfers within the lookback period, the transfer penalty is calculated by dividing the amount of the uncompensated transfer (the numerator) by the penalty divisor.

Texas currently uses a daily penalty divisor of $130.88.   For example, a gift of $13,000 to a child or grandchild given just three (3) years ago will result in a period of ineligibility of 99 days ($13,000 divided by 130.88), or approximately 3.3 months.  This means that you would be ineligible for Medicaid coverage in a nursing home for a period of 99 days.  You would have to be a “private pay” patient for those 99 days.

The penalty divisor is set by the state and Texas says that it represents the average cost of private-pay nursing home care in Texas.  The state occasionally adjusts the divisor, but does not do so on a regular schedule.  In theory, the divisor could be adjusted downward, if the cost of care decreases.  (I can’t remember in my lifetime the cost of nursing home care being adjusted downward, but I suppose that it is possible.)  In calculating the penalty periods, the department will use the divisor in effect at the time of application, not the divisor that was in effect at the time of the transfer.

The Penalty Start Date — Prior to 2006

Before February 8, 2006, the penalty period began when the transfer was made.  As far back as I can remember, that was always the benchmark for calculating when the penalty period was measured.

Minimal and insubstantial gifts were likely to fall off the calendar by the time the Medicaid application was filed.  Regular gifts to a church or other charity were usually not an issue, unless they were large enough to trigger a substantial penalty.

This rule also made possible several planning strategies available to the potential applicant:

  • The applicant could make monthly gifts equal to the penalty divisor, and each penalty period would end before the next month started.
  • The applicant could use the “half-a-loaf” strategy, in which half of all assets are transferred to the donee (the person receiving the donation), and the remaining half are used to pay the nursing home during the penalty period.  If the calculations are done correctly, the penalty period will run out at the same time as the money, and all requirements for eligibility will fall into place at once.

Gifts made before February 8, 2006 are “grandfathered” under the terms set out in the old rules.

The Penalty Start Date — After 2006

All of the Medicaid eligibility rules changed with the Deficit Reduction Act of 2005 (effective February 8, 2006). Under the new rules, the penalty period does not start to run until the Applicant is otherwise eligible for Medicaid benefits. [e.g., See, 1 TAC §358.401(d)(1)(D)(ii); 42 USC 1396p(c)(1)(D)(ii); Medicaid Eligibility Handbook §I-5200 (Examples)]

In general, under the new rules, “otherwise eligible” means that the applicant must be living in a nursing home and have no more than $2,000 of countable resources. This forecloses both the monthly gifting and half-a-loaf strategies described above because those strategies leave the applicant with excess resources during the period in which the applicant needs for the penalty period to run.

The old “half-a-loaf” strategy can be adapted to work under the new rules by using an immediate irrevocable annuity for the retained assets.  How do you accomplish that?  The applicant gives away the traditional half-a-loaf amount, but instead of keeping the remaining funds to pay the nursing home bill, she would use those funds to purchase an annuity calculated to pay back all of her money during the penalty period.  If the annuity term is short enough, then it is possible that the annuity payments may be large enough to pay the nursing home bill during the penalty period.

If the annuity meets all of Medicaid’s requirements, the purchase of the annuity will convert the assets into income, and this will bring the applicant’s countable resources below the $2,000 limit so that the penalty period will begin to run immediately. (The applicant may have to set up a Qualified Income Trust to keep the annuity payments from counting against the income limit, but that’s another matter.)

It is important to note that the annuity used for this strategy cannot be purchased in advance. The term and payment level that will be needed can’t be known until the applicant is ready to apply for nursing home benefits.  Furthermore, the annuity contract must meet specific requirements that standard annuities don’t always meet. If the applicant has previously purchased an irrevocable annuity for retirement planning purposes, this strategy may not be an option for attaining Medicaid eligibility because the other preexisting annuity may in and of itself block eligibility.

One of the things that you really need to recognize is that any planning strategies that work now may no longer work when a currently healthy client needs nursing home care years in the future.  Clients need to be prepared for the possibility that they simply will not be able to make gifts to qualify for Medicaid.  However, they also need to be prepared for the possibility that new planning strategies will become available only after they are incapacitated, in which case having an unusually-broad power of attorney in place which was given to a non-incapacitated person may be the only way to take advantage of all of their options.

Are there Any Exemptions to the Transfer Penalties?

Certain transfers are exempt from transfer penalties. Some of those exceptions are:

  • Transfers between spouses. [1 TAC §358.401(d)(2)(B)(i).]
  • Transfer of the home to a disabled or minor child. [1 TAC §358.401(d)(2)(A)(ii).]
  • Transfer of the home to a child who lived in the home for two years and provided care that delayed the client’s institutionalization (the “caregiver child” exception). [1 TAC §358.401(d)(2)(A)(iv).]
  • Transfer of the home to a sibling who has an equity interest in the home and who resided there for at least one year before the client became institutionalized.   {1 TAC
    §358.401(d)(2)(A)(iii).}
  • Irrevocable transfers to college savings plans.  (For children or grandchildren)
  • Transfers made exclusively for a purpose other than to qualify for Medicaid benefits. [1 TAC §358.401(d)(2)(C)(ii).]

The last exception (the “non-Medicaid purpose” exception) was not commonly used before February 8, 2006, because proving that a client wasn’t even considering the possibility of Medicaid eligibility when making a gift is difficult, and the conventional wisdom held that the Medicaid agency would never agree that a transfer met this exception.  Furthermore, the transfers that were most likely to meet this exception were likely to be modest and well in the past at the time of application, so that any penalty periods would have already run, making the issue moot.

However, now that penalty periods don’t begin to run until the client moves to the nursing home, this exception may find new life. Regular donations to a church, for instance, will generally meet this exception if the applicant can show a history of making similar donations.  Using the little envelopes that the church provides for tithing makes more sense now than it ever has!

Exemption for Transfers to UTMA Accounts

The Texas Medicaid program currently does not impose transfer penalties on transfers to accounts established under the Uniform Transfers to Minors Act (“UTMA”).  This exemption is not required by federal or state law; it is a Texas agency policy that could change without advance warning. So, you could help to “spend down” your estate in order to qualify for Medicaid by putting money into eligible accounts for minors.

The Texas Health and Human Services Commission has also announced its willingness to exempt from transfer penalties any direct payment of college tuition of a child or grandchild, provided that the payment is made for the immediate semester.  (So, you can’t pre-pay next year’s tuition, but you can pay for the current semester that the child or grandchild is enrolled in.)

General Rules

The federal government requires all state Medicaid programs to seek reimbursement from the estates of nursing home benefit recipients. [See, 42 USC 1396p(b)(1).]   Unfortunately, assets that are non-countable for eligibility purposes are not necessarily exempt from estate recovery.   For example, the homestead that clients were allowed to keep while receiving Medicaid nursing home benefits may have to be sold after their death to repay Medicaid.  As the home is usually an elderly person’s biggest asset, losing the home in order to repay Medicaid has very serious consequences for their heirs.

Just as Texas held off complying with the federal highway administration’s requirement to lower speed limits, Texas was one of the last states to implement estate recovery, and it still has a relatively narrow estate recov­ery program. [See 1 TAC 373.101 et. seq. (Medicaid Estate Recovery Program).]  Only probate assets are subject to estate recovery, and only to the extent of the dollar amount of the benefits that were actually received by the Medicaid recipient.  Anyone who initial­ly applied for Medicaid before March 1, 2005, is grandfathered and is not subject to estate recovery in Texas.  Furthermore, no estate recovery will ever be pursued if the applicant left a surviving spouse.  (That is because of Texas’ very strong homestead laws.)

Avoiding Recovery May Prevent Eligibility

Some strategies that would avoid estate recovery may prevent eligibility, and that result makes estate recovery a moot point.  For example, putting the family home in a revo­cable trust avoids estate recovery by avoiding pro­bate. However, it renders the home a countable asset, and this may prevent eligibility in the first place.  If you don’t become eligible, you’ll never have to repay Medicare, but how will you pay for skilled nursing care?

Similarly, the transfer of a remainder interest in the home allows the home to pass outside of probate and avoid estate recovery.  However, the transfer may result in a penalty that will also prevent eligibility.

Hooray for Lady Bird Deeds!

One strategy that both avoids estate recovery and maintains eligibility is to transfer a remainder interest in the home, but render the transfer fully rev­ocable through what is known as a “Lady Bird deed.”

The Texas agency that administers the Medicaid program has confirmed orally that no penalty will be imposed for a transfer of a remainder interest if the applicant retained the right to revoke the trans­fer as well as sell the property and keep the proceeds.   It is true that the agency’s policy could change at any time, but so far, since Texas has begun to pursue estate recover.

This approach has the added important benefits of letting clients change their minds after making the transfer (during their lifetimes), and protecting them from the creditors and also ex-spouses of the transferees.

The revocable transfer of a remainder interest can be made after eligibility, as well as before, and can be made even after the client loses capacity, if the client has given someone a power of attorney authorizing the transfer.

WARNING!

These rules that are discussed in this article may change at any time!  This area of the law is very fluid and hard to keep up with.  Do not rely on what you have read here without consulting a legal specialist!

The state has the authority to expand estate recovery to non-probate assets, and might do so in the future. For example, other states recover against life estates, making Lady Bird deeds useless. Clients need to understand that the current rules are not written in stone.

By the way, Lady Bird Deeds are so named because Lyndon Baines Johnson gave property to his wife, Lady Bird, using the form of deed that we are discussing here.  Because she was the first of many to have similar deeds, the type of deed became known as a “Lady Bird Deed.”

This article is not intended to be legal advice and is not a substitute for legal representation by an attorney. You are encouraged to seek the advice of your own attorney to answer any specific legal questions you may have.