The Medicaid program has become an amalgam of provisions drafted with varied and often competing interests in mind. At times, Medicaid is viewed as a benefit program for which eligibility must be expanded and benefits increased to better serve the medically needy population. At other times, it is seen as a system wrought with fraud that leeches from other programs and whose funding should be cut as a budgetary and deficit management measure.
Throughout this article, the authors maintain perspective by evaluating the need from which the current Medicaid laws and regulations arise — the need to provide long-term care for America’s aging population. They also shine a light on ways in which the current system operates in a manner inconsistent with this need. Finally, they provide crisis planning solutions that demonstrate how the system can still work for elderly consumers of minimal or moderate means without eviscerating their life savings. The article serves as a useful survey of crisis Medicaid planning options through the use of Individual Retirement Accounts (IRAs).
America’s populace is aging fast. According to the U.S. Census Bureau’s 2017 National Population Projections, “all baby boomers will be older than 65” by 2030, thus “expand[ing] the size of the older population so that 1 in every 5 residents will be retirement age.” Based on the same projections, the population of U.S. citizens over the age of 65 will surpass the population of citizens under the age of 18 by the year 2035. As citizens over the age of 65 become a larger demographic, the need for elder and long-term care services will increase dramatically. As demand for services increases, so too will the demand for financial planning strategies that cater to the older population and their families as they struggle with the ever-increasing cost of care.
The Centers for Medicare & Medicaid Services (CMS) tracks National Health Expenditure Data, comprising annual amounts spent nationally and by state by type of health service, broken down further by age and gender estimates. National Health Expenditure Accounts offer “official estimates of total health care spending in the United States.” According to CMS, health care spending in the United States grew 4.6 percent in 2018. That same year, health care costs reached $3.6 trillion and represented 17.7 percent of the U.S. gross domestic product (GDP). This percentage is expected to reach 19.4 percent by 2027. For more information on what constitutes health expenditures for purposes of this data, CMS provides a document defining the germane services and funding sources.
A not insignificant portion of these costs can be attributed to long-term care services, specifically nursing home care. According to the U.S. Department of Health and Human Services Administration on Aging, individuals turning 65 in 2017 had “almost a 70% chance of needing some type of long-term care services and supports in their remaining years.” According to Genworth, which tracks the cost of long-term care across the United States, in 2018, the median cost of a semiprivate room in a nursing home was $7,441 per month and was $8,365 per month for a private room. However, many states’ median nursing home costs were much higher than these. The annual median cost of nursing home care increased 4.11 percent for a semiprivate room between 2017 and 2018. The annual median cost of a private room in a nursing home increased 3.00 percent over the same time period.
As the need for long-term care services and associated costs increase, particularly with respect to nursing home care, so too has the need for financial planning to account for those costs on both an anticipatory and emergency (crisis) basis. Elder law attorneys, financial planners, insurance agents, and accountants have banded together with the common goal of preserving clients’ assets while still achieving and maintaining their eligibility for Medicaid benefits when nursing home care becomes necessary (referred to hereinafter as Medicaid planning). This task is seldom easy in a legal framework wrought with state-specific rules, constant legislative and regulatory changes, and inconsistent application by local Medicaid offices and enforcement agencies.
The goal of this article is to elucidate a particularly troublesome area of Medicaid planning: using tax-qualified funds in a crisis planning situation. To accomplish this analysis, we will operate under three assumptions: 1) that an individual is in need of nursing home care; 2) that there had been no financial planning to account for the cost of nursing home care; and 3) that the individual has an account funded with tax-deferred money, specifically an IRA.
To provide a complete analysis of this issue, we first review the legal framework that has created the current Medicaid landscape. Then we turn to IRAs as resource and planning options and the circumstances under which they are considered countable for Medicaid eligibility purposes. The analysis wraps up with a discussion of Medicaid compliance, whether an IRA should be annuitized or simply liquidated, and additional considerations when engaging in crisis Medicaid planning with tax-deferred funds. Proceeding in this manner is intended to leave the reader with a better understanding of the world in which crisis Medicaid planning exists and how to navigate this world without going astray.
II. Inception, Expansion, and Contraction: Medicaid’s History
A. Born Out of Need
Grappling with managing high health care costs for the aging is nothing new. Legislative proposals to curb long-term care costs for the aging and disadvantaged garnered the requisite support for passage in the 1950s. Broadly, the Social Security Act Amendments of 1950 paved the way for extended coverage and benefits for public assistance and introduced the cost-of-living adjustment (COLA). Most important for our purposes, the 1950 Social Security Act Amendments put in motion changes to the existing Old-Age and Survivors Insurance program, thus extending coverage to more individuals, liberalizing benefits offered at the time, and introducing new benefits. The 1950 amendments also provided for federal funds to match state payments to health care providers.
As explained by Moore and Smith, the health care provider payments established in the 1950 Social Security Act Amendments were followed by the Medical Assistance to the Aged program created by the Kerr-Mills Act in 1960, which provided federal funding to the states to cover the indigent elderly. The Kerr-Mills Act declared itself:
An act to extend and improve coverage under the Federal old-age, survivors, and disability insurance system and to remove hardships and inequities, improve the financing of the trust funds, and provide disability benefits to additional individuals under such system; to provide grants to States for medical care for aged individuals of low income; to amend the public assistance and maternal and child welfare provisions of the Social Security Act; to improve the unemployment compensation provisions of such act; and for other purposes.
The Kerr-Mills Act “was really the template for Medicaid 5 years later.”
The Social Security Amendments of 1965 were signed into law on July 30 of that year. The need for the amendments arose from the confluence of rising health care costs and a lack of affordable options to pay for that care. Despite attempting to address these issues, the 1950 Social Security Act Amendments and the Kerr-Mills Act failed to provide the requisite support. Title XIX of the Social Security Amendments of 1965 replaced the Kerr-Mills provisions for the aged and created “a more effective program of medical care for needy persons … .” The description of the 1965 law follows:
An act to provide a hospital insurance program for the aged under the Social Security Act with a supplementary medical benefits program and an expanded program of medical assistance, to increase benefits under the Old-Age, Survivors, and Disability Insurance System, to improve the Federal-State public assistance programs, and for other purposes.
The Title XIX medical assistance program, Grants to States for Medical Assistance Programs, was established for “the purpose of enabling each State, as far as practicable under the conditions in such State, to furnish (1) medical assistance on behalf of … aged, blind, or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services … .” However, as stated by Moore and Smith, “Title XIX did not so much resolve tensions and strongly ground a new program as it ratified an existing situation, set some boundaries and rules, and left it to future partisans to resolve different agendas for the appropriate role of the program.” Furthermore, because Title XIX was a voluntary program, the states did not have to adopt its provisions (though there was incentive to do so). The result was a framework wherein the states were able to implement their own assistance programs under the Title XIX guidelines as long as coverage was given to the requisite groups of qualifying individuals. Moore and Smith described the 1965 Medicaid legislation as containing “all-or-nothing provisions” in that “if a State chose to participate, it had to include all the public assistance categories: Aid to the Blind, Aid to Families with Dependent Children, and Aid to the Permanently and Totally Disabled … .”
The system codified by the 1965 Medicaid legislation left a great deal of room for variability about how each state would provide coverage. Each state was left to implement its own standards for eligibility and the type and scope of services for the requisite coverage groups. Furthermore, the states were left to interpret the statutes and regulations as they pertained to their plans. Regardless of the inconsistencies and complexities generated by this federally funded and state-driven system, the main thrust of the rules that became known as Medicaid was to provide care for those who could not afford care; the 1965 legislation codified a system to aid the medically needy.
But what does it mean to be medically needy? What is taken into consideration when making a medically needy determination? Does a person have to deplete virtually all of his or her savings to meet these eligibility requirements? These questions are addressed next.
B. A System in Transition
In the decades following the passage of the 1965 Social Security Amendments, legislative changes to the Medicaid program largely came in the form of expanding benefits to include additional services, extending coverage to more individuals, making changes in funding, and providing for care in various types of facilities. Legislation included the Social Security Amendments of 1967, the Social Security Amendments of 1972, the Omnibus Reconciliation Act of 1980 (OBRA 1980), OBRA 1981, and the Tax Equity and Fiscal Responsibility Act of 1982.
One key piece of legislation for purposes of our analysis is the Medicare Catastrophic Coverage Act of 1988 (MCCA), which, among other goals, sought to reduce the risk of spousal impoverishment as a result of nursing home care costs. MCCA established rules for income and assets that would allow a community spouse to remain in the community without suffering a drastic change to his or her standard of living. MCCA was repealed less than 2 years after it was enacted due to “a ground swell of negative public reaction” related to the Act’s imposition of additional taxes on the elderly to finance the proposed changes to Medicare coverage. Despite this, “[o]ne noteworthy benefit enhancement was not repealed by Congress: liberalization of Medicaid regulations to allow the spouse of a nursing home resident to retain enough income to avoid impoverishment.”
Following MCCA, the next significant piece of legislation impacting the sphere of Medicaid planning was OBRA 1993, which placed significant limitations on transfers of assets. Specifically, OBRA 1993 prevented individuals from rearranging their assets for the purpose of obtaining Medicaid eligibility and benefits. With few exceptions, under OBRA 1993, individuals could not transfer assets within a 3-year look-back period from the date of their Medicaid application without being penalized. The law did carve out an avenue in the form of irrevocable special needs trusts to enable individuals with disabilities to preserve assets without incurring a penalty.
In 1994, the U.S. Department of Health and Human Services Health Care Financing Administration issued what has become known as Transmittal 64, which provided instructions on the treatment of assets for less than fair market value in determining Medicaid eligibility. Importantly, Transmittal 64 set forth requirements for certain financial instruments such as annuities. As stated in Transmittal 64:
Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed actuarially sound.
Thus, the actuarially sound test was born, requiring that the “average number of years of expected life remaining for the individual … coincide with the life of the annuity.” The reasoning behind this requirement was that annuitants would not receive fair market value for their investment if they were not “reasonably expected to live longer than the guarantee period of the annuity.” The actuarially sound test created another hurdle in Medicaid eligibility planning.
During the late 1980s and into the 1990s, Medicaid was a system in transition. Despite its beginnings as a benefits program that was expanded and extended to cover more individuals and account for the drastic costs of aging, Medicaid became a web of complexities seemingly incongruous with its original spirit and intent.
C. The Deficit Reduction Act, the Patient Protection and Affordable Care Act, and the Current Legal Landscape
The Deficit Reduction Act of 2005 (DRA), signed into law on February 8, 2006, instituted sweeping changes to the Medicaid program, further restricting asset transfers, extending the look-back period for transfers for less than fair market value from 3 to 5 years, and changing the penalty period start date from the date of the last transfer in the look-back period to the Medicaid application date. The net impact of DRA was increased scrutiny on long-term care and crisis Medicaid planning and further roadblocks to Medicaid eligibility, all in the name of the federal budget. Although many of the changes effectuated by DRA were cast as fraud prevention measures intended to prevent crafty lawyers and financial planners from obtaining benefits for wealthy clients who were not medically needy, the ripple effect was more like a tidal wave as families and individuals of minimal or moderate means saw their life savings evaporate before their eyes.
For many, if not most, individuals whose Medicaid eligibility was jeopardized by DRA, long-term care insurance premiums remained cost prohibitive. As a result, savings and retirement accounts intended to support individuals through their twilight years and to maintain some assets for transfer to future generations upon death became accounts earmarked for payment of nursing home costs. Rather than operating for the benefit of the medically needy, DRA turned Medicaid into a program that facilitates medically needy status; individuals are forced to exhaust their life savings, including those whose savings are modest or a pittance, to obtain eligibility.
Although DRA has had the most powerful and lasting impact on Medicaid of all legislation since the program’s inception, the Patient Protection and Affordable Care Act (ACA) of 2010 made its own mark on Medicaid. ACA’s greatest impression on the Medicaid landscape came in the form of an eligibility expansion, increasing the income eligibility limit to 138 percent of the federal poverty level. However, although eligibility expansion was initially a requirement imposed on all states, a U.S. Supreme Court decision effectively rendered the expansion an option for states to implement at their discretion.
D. Crisis Medicaid Planning in the Current Legal Landscape
When the need for nursing home care unexpectedly arises, families of the institutionalized individual are best served by seeking financial advice from a team composed of an attorney, a financial planner, an accountant, and/or an insurance agent. These professionals are best equipped to assist in determining what assets exist in the institutionalized individual’s name, how those assets impact Medicaid eligibility, and what can be done to preserve those assets. Despite the additional rules and scrutiny placed on transfers as a result of Transmittal 64 and DRA, individuals engaged in crisis Medicaid planning still have options to prevent the fruits of their life’s work from being siphoned from their accounts and deposited into their nursing homes’ coffers.
Financial planners and insurance agents, with the assistance of attorneys, can use several financial planning products to preserve much of an asset’s value as part of a comprehensive crisis plan (e.g., promissory notes, personal service contracts, supplemental needs trusts, annuities). However, the availability of each of these instruments varies from state to state, as do the rules to which the planner must adhere to avoid creating a crisis plan that will result in a Medicaid application denial. To prevent a denial, which would eliminate the benefit of crisis planning, any instrument must meet certain narrow parameters to be deemed Medicaid compliant.
One widely available and particularly useful tool in crisis Medicaid planning is the Medicaid-compliant annuity (MCA). Generally, an MCA is a single premium immediate annuity (SPIA) that has no cash or surrender value and converts an asset into a future income stream for the owner. For an SPIA to be considered an MCA, it must be structured to comply with the strictures imposed by the state’s Medicaid program. Most important, an MCA can be funded with an IRA, allowing the owner to avoid the immediate consequences associated with IRA liquidation. So how can an annuity be funded with an IRA and remain Medicaid compliant?
III. Maintaining Medicaid Compliance When Annuitizing Tax-Deferred Funds
At this point, it should be clear that the financial requirements for Medicaid eligibility are far more complex than the nonfinancial requirements. The nonfinancial requirements are relatively straightforward. First, the applicant must be 65 or older, blind, or disabled. Second, the applicant must be a citizen of the United States or a qualified alien. Finally, the applicant must be a resident of a Medicaid-approved facility. Satisfaction of these nonfinancial requirements is what renders an applicant medically needy.
Broadly speaking, Medicaid’s financial eligibility requirements can be broken down into two categories: 1) the income test and 2) the asset test. Failing either one of these tests (i.e., because an applicant has too much income or too many assets) will render the applicant ineligible for Medicaid. Although income requirements have some variability from state to state, in order to qualify for Medicaid, the general rule is that an applicant’s monthly income must be less than the private pay rate for care (the rate an individual who is not on Medicaid must pay). Variability comes into play in how states determine income eligibility, information on which appears on the Social Security Administration (SSA) Program Operations Manual System website. However, in the case of a married couple in which one spouse is institutionalized (the institutionalized spouse) and the other spouse remains in the community (the community spouse), the income of the community spouse is generally not considered for the purpose of determining the institutionalized spouse’s income eligibility.
With respect to the asset test, in order to be deemed eligible, an individual applying for Medicaid typically can keep only $2,000 or less in total assets. This is commonly referred to as the individual resource allowance. As of January 1, 2019, if an institutionalized individual is single, $2,000 is all that the person may keep; however, if the institutionalized individual is married, the spouse can keep a separate amount referred to as the community spouse resource allowance, which is typically between $25,284 and $126,420. If an applicant’s countable assets exceed the individual resource allowance, those assets must be spent down. (Countability is discussed in the next section of this article.) It is during this spend-down process that the MCA comes into play by converting excess countable resources above the resource allowances into a future stream of income.
To be considered Medicaid compliant, an SPIA must a) be irrevocable; b) be nonassignable; c) provide for equal payments (i.e., no deferred or balloon payments); d) name the state as a beneficiary; and e) be actuarially sound. If the annuity does not meet these criteria, it will be considered a transfer for less than fair market value and trigger a penalty period. The penalty period for an institutionalized individual is calculated as follows:
(I) the total, cumulative uncompensated value of all assets transferred by the individual (or individual’s spouse) on or after the look-back date specified in subparagraph (B)(i), divided by
(II) the average monthly cost to a private patient of nursing facility services in the State (or, at the option of the State, in the community in which the individual is institutionalized) at the time of application.
During the penalty period, an institutionalized individual is not eligible for Medicaid and is responsible for paying for nursing home care. For this reason, any crisis Medicaid planning must be performed with precision, with up-to-date account balances and valuations accurate to the penny. An inaccurate accounting of available resources, income streams, and expenses can result in an unexpected penalty period and/or ineligibility for Medicaid.
IV. Countability of IRAs in Crisis Medicaid Planning
The asset test includes an important characterization as to whether a particular asset is countable or noncountable (exempt) for Medicaid eligibility purposes. Exempt assets are not considered when determining a Medicaid applicant’s eligibility, whereas countable assets are. Except for the few federally required resource exclusions, each state determines those assets that are countable and those that are not. Common examples of countable assets include checking and savings accounts, CDs, stocks, mutual funds, bonds, and other liquid assets that can be readily converted into cash. Compare these assets with those that are required by federal law to be deemed noncountable/exempt, such as a primary residence, one vehicle, personal effects, and household items.
States are split as to whether IRAs are considered countable, or exempt, for determining Medicaid eligibility. See Table 1 on following pages.
There is further distinction among the states as to the countability of an IRA in an institutionalized spouse’s name versus an IRA in the name of the community spouse. See Table 2 on following pages. Generally, if an IRA is countable, the value assigned is the value of the IRA less the withdrawal penalty assessed.
If an individual with funds in an IRA needs crisis Medicaid planning, the IRA needs to be looked at carefully because its value is often the fruits of the individual’s life’s work and therefore must be treated with care. When properly evaluated, that IRA can provide an invaluable sense of security when it is converted into a steady stream of income through annuitization. When evaluated carelessly, annuitization of an IRA can have costly tax and Medicaid eligibility consequences.
The Medicaid rules governing asset countability are mutable, and the states’ varying approaches to IRAs complicate matters. These issues, among others, exemplify the need for sound financial and legal advice when deciding whether to annuitize an IRA.
A. Planning Options When IRAs Are Countable
If a state does not consider an IRA a countable resource according to its Medicaid rules (i.e., IRAs are exempt), there is no need to annuitize the IRA. Because the value of the IRA is not counted toward the individual resource allowance or the community spouse resource allowance, there is no concern that the IRA’s value will render the applicant ineligible for Medicaid. Furthermore, because there are tax consequences when an IRA is annuitized or converted into another financial instrument (though these tax consequences are relatively minor in comparison with the tax consequences of liquidation), it is best not to incorporate the IRA into the crisis plan and thus accelerate those tax consequences unless there is another compelling reason.
Because crisis plans in jurisdictions where IRAs are not considered countable do not require workarounds to preserve their value, our focus moving forward is on circumstances under which an IRA is considered a countable resource. We will operate under the assumption that an IRA is a countable asset regardless of whether the individual has begun taking the required minimum distributions (RMDs). Under these circumstances, the premise is simple: Convert the tax-deferred funds in the IRA into a future income stream without incurring a large taxable event. The goal is to provide the maximum economic benefit to the client.
1. Methods for Transferring Tax-Deferred IRA Funds
When a crisis plan calls for use of IRA funds, and the decision has been made to annuitize rather than liquidate the IRA, three options exist to transfer the funds from the IRA to an MCA. The first option is called a 60-day rollover. In a 60-day rollover, the IRA owner (or his or her representative) contacts the company holding the IRA funds and instructs it to liquidate the account without withholding any funds for taxes. The liquidation check usually arrives within 5 to 7 business days, and as long as the funds are reinvested within 60 days of the liquidation — in this case by annuitizing the funds into an MCA — there will be no immediate tax consequences.
The second option for transferring tax-deferred funds held in an IRA is called a trustee-to-trustee transfer, in which the IRA owner (again, or his or her representative) completes an authorization permitting the plan administrator of the IRA to transfer the money directly to the insurance company issuing the MCA. In this case, the individual does not have to take any steps to ensure that the funds are rolled over because the plan administrators deal directly with each other to transfer the funds from the IRA to the MCA.
The third option for transferring funds is called a direct rollover. In a direct rollover, the IRA owner requests that the current custodian of the IRA funds make a payment directly to the insurance company issuing the MCA. This option is distinguishable from the trustee-to-trustee transfer because there is no transfer paperwork. It is important to note, however, that often the IRA custodian will not issue a check payable to another custodian without the transfer paperwork required in a trustee-to-trustee transfer.
2. Medicaid-Compliant Annuity in the Name of the Community Spouse
One of the more straightforward crisis Medicaid planning strategies involving the use of tax-deferred monies is the purchase of an MCA in the name of the community spouse. The community spouse transfers the IRA funds into an MCA in order to eliminate the IRA’s value as a countable asset. There is flexibility in choosing the term of the MCA. When considering life expectancy, one must go beyond a simple review of the SSA or state-specific life expectancy tables by conducting a thorough analysis of the spouses’ current health, family health histories, and prognosis of any medical conditions. The goal is to choose a term the community spouse is likely to outlive to reduce the risk of recovery by the state as primary beneficiary.
Because the community spouse’s income is not considered at the time of the institutionalized spouse’s Medicaid application, the income produced by the MCA does not jeopardize the Medicaid eligibility of the institutionalized spouse. However, to reap the economic benefits of this strategy, the term of the MCA should be long enough to minimize its monthly payout. The higher the payout of the MCA, the more tax consequences the community spouse will incur over the course of the annuity.
3. Medicaid-Compliant Annuity in the Name of the Institutionalized Spouse
Another common situation when dealing with IRAs in Medicaid eligibility occurs when the IRA is owned by the institutionalized spouse rather than the community spouse. Since ownership of the account cannot be changed, the institutionalized spouse may be able to annuitize the IRA in his or her own name. This strategy is useful if significant tax consequences for liquidating the IRA would result, the couple has a low monthly income, and/or the community spouse is expected to outlive the institutionalized spouse. The goal of this plan is to maximize the MCA term to minimize the monthly income produced by the annuity, with the intent of shifting the income to the community spouse under the monthly maintenance needs allowance (MMNA) regulations.
4. The Name on the Check Rule
One of the most creative crisis Medicaid planning strategies is use of the Name on the Check rule. Though not available in all states, this rule is so named because its focus is on the spouse to whom income is attributed, or the spouse whose name is on the check. This rule has its origins in 42 U.S.C. § 1396r-5(b)(2)(A)(i), which states, “[I]f payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse.”
The Name on the Check rule comes into play when an IRA exists in the institutionalized spouse’s name and the couple wants to prevent the annuity income from going to the nursing home. In a Name on the Check case, the IRA in the institutionalized spouse’s name is used to purchase an annuity that names the institutionalized spouse as the owner and annuitant. However, this annuity will name the community spouse as the sole payee, which means that the community spouse’s name is on the check.
This strategy works because when a stream of income is payable to the institutionalized spouse either individually or jointly with the community spouse, the income (or half the income in the case of joint income) is attributed to the institutionalized spouse for Medicaid eligibility purposes. If the income is attributed to the community spouse only, even as payee of an IRA-funded annuity in the institutionalized spouse’s name, the income from the annuity will be attributable to the community spouse. Put simply, because the community spouse’s name is on the check as payee of the annuity, the income will be attributed to that spouse rather than the institutionalized spouse pursuant to the Medicaid guidelines in jurisdictions where the Name on the Check rule is available. The institutionalized spouse is then able to avoid increasing his or her income, and the annuity payouts do not become part of the Medicaid copay.
It is important to keep in mind that even though using the Name on the Check rule is a valuable crisis planning strategy for use with MCAs, the rule does not appear in the Internal Revenue Service (IRS) Treasury Regulations. For IRS purposes, the income and tax liability of the IRA belongs to the account owner, which is the institutionalized spouse in a Name on the Check case. It is only for Medicaid planning purposes that the income from an annuitized IRA is attributed to the community spouse when using the Name on the Check rule.
It is also important to be aware that when an annuity with a short payout period is created using the Name on the Check rule, the annuity will come under increased scrutiny from the local Medicaid office. The Medicaid office may erroneously attribute income to the institutionalized spouse, assess a penalty, or even claim that because the annuity is being paid out over such a short term, the annuity is providing a lump sum. Under such circumstances, an attorney’s relationship with his or her local Medicaid office becomes an asset to the crisis planning team in weighing the pros and cons of using the Name on the Check rule.
Although using the Name on the Check rule is a viable planning strategy in many states, it has not been universally accepted. In some jurisdictions, the rule has been accepted, in others it has been rejected, and in others it has been used with mixed results. For example, the Name on the Check rule has been used with success in Illinois, Maryland, Massachusetts, Pennsylvania, West Virginia, and Wisconsin, among others. The rule has been rejected in Iowa, Kansas, Minnesota, Nebraska, and New Jersey. At the time of this writing, the viability of Name on the Check rule is still pending in Colorado, Kentucky, Missouri, and Mississippi.
V. Additional Considerations
In any crisis plan, there is more to consider than the institutionalized individual’s financial health, although the goal is ultimately to maintain that aspect of personal well-being. Any careful and prudent professional who participates in crisis planning, whether a financial planner, attorney, insurance agent, or accountant, must also consider the client’s physical and mental health, underlying goals, and longevity. Furthermore, it is important to consider the community spouse’s health if the institutionalized individual is married in order to determine whether some form of long-term care planning is called for to prevent a future crisis scenario for the community spouse.
A. Medicaid Life Expectancy
Medicaid life expectancy (MLE) is determined either by looking at the SSA life expectancy table (for years up to 2015), the SSA life expectancy calculator (for years beyond 2015), or the table used by a particular state. The method for making the MLE determination varies from state-to-state. The MLE is important not just for ensuring that an annuity purchased as part of a crisis Medicaid plan meets the actuarially sound test but also for weighing risks when it comes to identifying the annuity’s payee and considering beneficiaries. In a crisis Medicaid plan involving both a community spouse and an institutionalized spouse, the planner should obtain each spouse’s MLE using the jurisdiction-specific mode for making that determination. This MLE should be compared with each spouses’ longevity and health outlook, and the plan should be adjusted accordingly.
An example of poor planning is a situation in which, based on the applicable table or calculator, the community spouse’s life expectancy is longer than that of the institutionalized spouse (e.g., 10 years and 3 years, respectively), but the community spouse is in ill health and the institutionalized spouse, while needing 24-hour care, has dementia but still possesses his or her physical faculties. Although the plan for this situation would likely involve the institutional spouse being named the payee with the community spouse as the primary beneficiary and the state as the contingent beneficiary, what is likely to happen is that the community spouse will predecease the institutionalized spouse, resulting in significant consequences. Specifically, if the community spouse dies before the institutionalized spouse in this scenario, not only would any income-shift to the community spouse be eliminated in favor of an increased Medicaid copay but also the remaining value of the annuity would go to the state (up to the value of Medicaid services provided) upon the institutionalized spouse’s death.
B. Use of Paper Checks
In our modern society, in which daily life comprises clicks, page views, and preferences tailored to meet the demands of instant gratification and ease of access, financial institutions have worked to stay current by providing paperless billing and payment options. However, if any sort of complexity arises in financial planning, a paper trail is essential to filling in gaps when aspects of a plan come into question. In crisis Medicaid planning, in which complexities are less an aberration and more the norm, foregoing the paperless option is important for maintaining the file and ensuring completeness. Furthermore, in the event the local Medicaid office denies an application and the matter is reviewed at a fair hearing (e.g., in a Name on the Check case), a physical check can serve as powerful evidence.
C. Inherited IRAs
Inherited IRAs pose their own unique issues. When a spouse inherits an IRA from his or her deceased spouse, it is essential that the inheriting spouse contact a tax professional because the wrong decision could result in forfeiture of a large percentage of the deceased spouse’s funds. Regardless of the inheritor’s relationship to the decedent IRA owner, he or she must take at least the annual RMD to avoid forfeiting to the IRS 50 percent of the amount that should have been withdrawn. Depending on the type of IRA, the inheriting spouse may have to pay income tax on the RMD. Such is the case for a traditional IRA. For an inherited Roth IRA, the account is federally tax free as long as the funds have been in the IRA for 5 years or longer.
An inheriting spouse has two options: 1) roll over the IRA and use his or her own age and life expectancy for calculating the RMD or 2) transfer the funds to another IRA in which the beginning of distributions depends on whether the deceased spouse had yet attained the age of 701/2. An inheriting spouse who uses the first option will experience a 10 percent penalty for early withdrawal if he or she begins taking funds before the age of 591/2. An inheriting spouse who uses option 2 will have immediate access to the funds without the 10 percent penalty. Regardless of the option elected, the IRA funds can still be annuitized should the need arise in a crisis.
D. Annuitization Versus Liquidation
Although MCAs are great tools that should be in any crisis Medicaid planner’s toolbox (jurisdiction permitting), it is important to understand that they are not appropriate in all cases, even if the MCA is available in the jurisdiction as an asset protection vehicle. It also must be understood that when an IRA holds little value, it is limited in how much benefit annuitization it can provide.
Consider an IRA worth $10,000. A short annuity (e.g., 4-month) will only yield the annuitant just a little more than $2,500 per month in interest without any attorney or processing fees. The annuity also will be taxed as it is paid out because the IRA funds were tax-deferred, leaving the annuitant with even less of a benefit. Assuming the same IRA value, the monthly payout decreases as the term increases; therefore, annuitizing a $10,000 IRA over a longer period of time will provide the annuitant little security as an income stream. The lower the IRA’s value, the lower the value it has as an income stream. Considering this same $10,000 IRA in a crisis plan, the institutionalized individual would likely benefit more from leaving the IRA as is or liquidating it. Of course, liquidating an IRA creates a taxable event on the entire value of the account, which the crisis Medicaid planner should carefully consider.
It is also important to note that in some instances in which an institutionalized individual has particularly high medical expenses, liquidation may be appropriate because those expenses may offset the tax consequences of liquidation. This again illustrates how important it is to have a clear grasp not only of the client’s finances but also his or her outlook from a longevity and health perspective.
The long-term care system in the United States was originally intended to provide for the medically needy. It was born out of the reality that the number of aging Americans was increasing as was the cost of their care. With many citizens unable to afford long-term care insurance or otherwise pay for their care, a public program from which Medicaid evolved was created.
Though the spirit of Title XIX could be found in subsequent measures enacted to expand benefits and extend services to more medically needy individuals, progress was ultimately stymied by legislation signed in the name of reducing the federal deficit. The result is a framework wherein individuals and families of minimal or moderate means must make a decision: (a) spend their entire life savings for a few months of care without regard for their family’s future, or (b) use the legal avenues available to preserve their assets so that their loved ones are cared for. The decision is simple — though as evidenced throughout this article — the path to preserving assets for loved ones often is not.
States Where IRAs are Exempt for Both the Institutional and Community Spouse
States are split as to whether IRAs are considered countable, or exempt, for determining Medicaid eligibility. For example, based on the information available when this article was written, IRAs are exempt for both the institutionalized and community spouse in the District of Columbia, Florida, Georgia, Idaho, Kentucky, Mississippi, New York, North Dakota, Rhode Island, South Carolina, Texas, and Vermont. IRAs are considered countable for both the institutionalized and community spouse in Alabama, Arizona, Arkansas, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Virginia, and Washington.
States Where an Institutionalized Spouse’s IRA Is Countable but Exclude the IRA of the Community Spouse
There is further distinction among the states as to the countability of an IRA in an institutionalized spouse’s name versus an IRA in the name of the community spouse. The following states consider an institutionalized spouse’s IRA countable but exclude the IRA of the community spouse: Alaska, Delaware, Indiana, Kansas, Pennsylvania, West Virginia, Wisconsin, and Wyoming. Generally, if an IRA is countable, the value assigned is the value of the IRA less the withdrawal penalty assessed.