Friday, November 16, 2007

Medicaid Estate Recovery Program May Doom Medicaid Planning

The federally mandated Estate Recovery Program may just put the final nail in the coffin of Medicaid Planning for the Middle Class. The law requires the each state to collect the amount expended for long term care from the Medicaid recipients' estates once they are gone. It’s not a new law, but the states – thanks to federal pressure as well as the economic realities that the program will eventually bankrupt the states - are beginning to take this process seriously. Florida’s version of that law is Sec. 409.9101, FS.

A little history... In the mid-1990s Medicaid was revamped to allow Middle-Class Americans over age 65 to benefit from this program to pay for long term medical care (then called "catastrophic illness"). Medicaid is part of Social Security. And like Social Security it was originally intended to be a safety net for our lower income citizens.

Social Security was originally intended to make sure that the poor had at least some income for their retirement years. In the same vein, Medicaid was created to make sure these people would also have a place to stay and professional services when they became too ill or infirm to handle their own affairs. They were expected to spend what theyhad for that care and then they could get government assistance.

Then the entitlements grew and grew. For a time, far too many people considered Social Security to be their "retirement". This was never intended to be. The same goes for Medicaid, and Medicaid Planning became a cottage industry for many estate planners. Perhaps it was the recognition of the Baby Boomers reaching retirment age that changed direction of these programs.

Today, Medicaid for the aged is reverting to its original intent of being a safety net. In 2006 new rules were passed to limit the Middle Class access to Medicaid. For example:
1. The "look back period" - that time that Medicaid looks into the past at an applicant's finances to see if "transfers for less than value" have been made - has been increased incrementally over the years from 20 months to 60 months.
2. The penalty time for which an applicant would be ineligible for benefits for violating the "transfer for less than value rule" can no longer be avoided by waiting out that period of time before applying for Medicaid. This is a huge impediment to Medicaid Planning!
3. Immediate annuities -- that favorite Medicaid planning tool that converts an "asset", subject to spend down, into "income", now must pay any remainder, upon the death of the annuity beneficiary, to the state, rather than to members of the family. So much for passing your estate to your heirs

These are but a few examples of what is happening to Medicaid for the Middle Class. And now, after many years on the books, the Estate Recovery Program is being taken seriously by the states.

The Estate Recovery Program is a mandate by the feds that the states collect all costs that were spent for a Medicaid patient upon his death after his or her spouse and the dependant children are also gone. Subject to certain limitations (e.g., Homestead property in Florida), most assets can be taken for this purpose.

Up until now the states have not been quick to follow the federal law, but, with their financial backs to the wall, many states have passed their own laws requiring collection from the estates. All states will be passing such laws in the near future.

What does this mean to the middle class? Primarily, it means that Medicaid patients will be severely limited in passing on even the Medicaid defined "excluded" and "non-countable" assets in their estates - the assets not subject to "spend down", as they have been able to do in the past. There will be virtually no avenues of escape. In the near future, you can assume that, if you are to be a Medicaid patient, you will not be able to pass much - if any - of your estate to your loved ones.

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