Probate Section Report
Larry E. Ciesla

This month’s report will look at the recently enacted federal legislation popularly known as the Deficit Reduction Act of 2005 (the “DRA”) and its affect on Medicaid planning in Florida.

The DRA was passed by the House by a vote of 216-214 (following a tie vote in the Senate, the deciding vote in favor being cast by the Vice-President) on February 1, 2006 and signed by the President on February 8, 2006. The new law is effective as of February 8, 2006. In general, the DRA makes it more difficult for seniors to gain access to benefits for long-term nursing home care under the Medicaid program.

One of the main changes under the DRA concerns lengthening the so-called “look-back” period from three years to five years. The look-back period is the period of time which the Medicaid office will look (backward) for gifts of assets made by a Medicaid applicant prior to the date of application for benefits. Under former law, gifts made during the three-year period prior to the date of application will be reviewed by the Medicaid office (the Department of Children and Families (DCF) in Florida). Under the DRA, the Medicaid office must look backward for a period of five years prior to the date of application.

Another major change in the DRA concerns the method of treating gifts made during the look-back period. It should be pointed out that the law only affects gifts; transfers for value are not penalized. Under the old law, if the applicant made a gift during the 36-month period preceding the month of application, a penalty was imposed, based upon the following formula: $ amount of gift â $3,300.00 = number of months of disqualification from receipt of Medicaid benefits. The penalty period would begin in the month following the gift, with the maximum penalty period being 36 months (except for gratuitous transfers into a trust, in which case the maximum penalty was 60 months). Under the DRA, the same formula is used, except the look-back period is 60 months; the number of months in the penalty period is unlimited; and most importantly, the penalty period will not begin to run until the month of application for benefits. In addition, under the DRA, there is no rounding, resulting in partial months of ineligibility. A gift of $3,000.00 would now result in .91 months of ineligibility.

The DRA could result in harsh consequences in certain circumstances. For example, if a senior makes a $12,000.00 gift to a family member (relying on the current federal gift tax exclusion amount), and 59 months later is impoverished, with severe dementia or Alzheimer’s disease, and required round the clock care in a skilled nursing home facility having a monthly cost of $6,000.00, a penalty period of 3.64 months would be imposed, beginning on the date of the Medicaid application. This is a common misconception among many seniors and their families; they believe that since the IRS permits such gifts, they must be allowed under Medicaid rules as well. It is readily apparent that the DRA will also cause problems for Medicaid applicants in the areas of small gifts and record keeping. Under the new rules, all gifts made during the 60-months preceding the date of application must be disclosed. In addition, all banking records for the prior five years must be provided to DCF.

Since a large number of Medicaid applicants have substantial long-term memory deficits, and are not usually the best record keepers, they may not be able to remember their prior small gifts and they may not have all of the bank statements and cancelled checks from five years ago for review by the DCF. Depending on how the new rules are administered by DCF, applicants who may in fact be legally qualified and entitled to benefits could be deemed ineligible simply because they can’t remember what they’ve done in the past or don’t have all of the records to prove their eligibility.

Additional changes under the DRA include a newly enacted limit on an applicant’s exempt homestead. Under the old law, an applicant’s homestead was considered as an exempt asset for Medicaid purposes, regardless of value. Under the DRA, there is a limit of $500,000.00 for the equity in an applicant’s homestead. If the applicant’s homestead equity exceeds $500,000.00, the applicant becomes ineligible for receipt of Medicaid benefits (there are exceptions if the applicant’s spouse, disabled child or child under 21 lives in the home.)

The DRA has also changed the rules regarding treatment of promissory notes, mortgages and annuities owned by an applicant. Under prior law, these were typically treated as items of income, not assets. Since the income rules are fairly liberal, applicants were frequently able to qualify for benefits by converting an asset (such as cash) into an item of income (such as a promissory note or an annuity). The new law tightens the applicable rules of prohibiting “balloon annuities” and “self-cancelling installment notes”.

In summary, qualifying for nursing home benefits under Medicaid just became a lot harder and Medicaid planning has just become more complex. Practitioners with clients in this area are urged to proceed with caution.

The probate section continues to meet during the summer months on the second Wednesday of each month at 4:30 p.m. in the meeting room on the 4th floor of the civil court
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