Medi-Cal Planning for Long Term Care

One of the more frequent inquiries this office receives is in regards to Medi-Cal planning as it relates to the costs of long-term care. This article will provide some basic information about Medi-Cal to help you determine whether Medi-Cal planning would be beneficial for you or someone close to you.

What is Medi-Cal?

Medi-Cal is the California needs based health care program which is funded both by Federal Medicaid funds and California state funds. Medi-Cal will cover long-term care if ordered by a physician and deemed medically necessary. Medi-Cal will not cover most assisted-living facilities and will not pay for a private room. Medi-Cal is only available to those who do not earn enough or have enough countable resources to provide for their own health care. Countable resources do NOT include exempt assets: see Exempt Property below.

Medi-Cal Eligibility

In the case of a married couple, when both spouses are going to live in a long-term care facility, to be eligible for Medi-Cal, each spouse has to show s/he is medically needy. In other words, that s/he has a monthly income insufficient to pay for necessary medical care and has countable assets that fall below the two thousand dollar ($2,000.00) limit.

If one spouse will enter long term care and the other will remain in the community, between the married couple, they may keep a total of $137,400 (Community Spouse Resource Allowance “CSRA”) in non-exempt resources. There is no limit on the income of the community spouse, but the state sets a minimum monthly maintenance needs allowance (MMMNA) every year, which in 2022 is $3,435. The community spouse may supplement his or her monthly income to a set limit ($3,435), either by taking some of the institutionalized spouse’s income or by keeping additional income-producing resources. Therefore, if the community spouse’s income is less than $3,435 per month, the income of the institutionalized spouse can be transferred to the community spouse up to that amount, and subject to the institutionalized spouse’s right to $35 for his personal needs allowance. Note that this is an exception to the share of cost rules outlined below. For example:

Joe enters into a nursing home paid for by Medi-Cal and has monthly income of $3,000. Joe’s wife, Mary receives $900 per month from Social Security. Mary is short of the MMMNA by $2,535.  Joe can allocate $2,535 of his income to Mary to bring her up to the $3,435 MMMNA and deduct if from his share of cost, leaving him with only $465.  He is obliged to pay $430 for his own care (i.e. $3,000 minus $2,535 minus $35 personal needs allowance).

The community spouse can seek a CSRA that is larger than $137,400 if monthly income generated from the $137,400 is less than $3,435. The Department of Health Services must enlarge the CSRA if a shortfall is shown. However, the process to increase the CSRA is quite technical and requires a Petition before the Probate Court. It is not possible to simply work with county eligibility workers. Increasing the CSRA when income is insufficient accomplishes Congressional intent to protect the community spouse from impoverishment.

Of all of the Medi-Cal planning strategies out there, the spousal property transfers enabled by the CMS rules against spousal impoverishment are legitimate and something in which our office has considerable experience. If you know any married couple struggling to pay the expense of long-term care for one spouse or avoiding long-term care for one spouse because of the expense, please think about referring them to our office for a Medi-Cal planning consultation with one of our attorneys.

Income and Share of Cost

While you are in long term care, you can have income of up to $35 per month, that is called the “maintenance need standard” which the state sets. If your income is higher than that, you may qualify nonetheless if you agree to pay the medical costs each month until you reach the $35 threshold, then Medi-Cal will pay the remainder, provided the services are covered. This is known as the share of cost. For example:

If Joe enters a skilled nursing facility and his income is $1,200 per month from Social Security, Joe will have to pay $1,165 toward the cost of the facility, that will be his share of cost. Joe is entitled to only $35 of his $1200 per month Social Security check as his personal needs allowance.

What does Medi-Cal Cover in Terms of Long-Term Care?

Long term care will be covered if ordered by a physician, and “medically necessary.” You should know that Medi-Cal will not cover assisted-living facilities and will not pay for a private room. Further, because nursing homes can charge private-pay residents considerably more, at times they may have admissions policies that discriminate in favor of private-pay residents. Applicants often fear that s/he will receive inferior care as a Medi-Cal recipient based on the knowledge that the facility gets paid considerably more from private-pay residents than from Medi-Cal. Of course the law requires equal treatment, but economic incentives continue to encourage facilities to favor private-pay residents.

Exempt Property

Exempt property will not count when determining eligibility while non-exempt or countable assets will effect eligibility. The following items are exempt: the home (as long as there is an intent to return to it), home furnishings, clothes, home repairs, satisfaction of mortgages, or other debts, an exempt burial space, one vehicle, term life insurance, whole life insurance with a face value of $1,500, and, qualified Individual Retirement Accounts and certain annuities (which must be scheduled to exhaust the balance of the annuity at or before the annuitant’s life expectancy).

Planning for Medi-Cal Eligibility

If one decides that Medi-Cal is desired or necessary, many people accelerate eligibility by reducing their countable assets. The three most effective ways to reduce countable assets are to prove the assets are unavailable to pay for care, convert the assets into something that Medi-Care does not count (the equity in a primary residence by paying down a mortgage or improving the home), or give away the assets (giving away assets can result in a period of ineligibility though). Note that if countable assets are sold, the proceeds are counted.

Demonstrating unavailability for purposes of Medi-Cal means that an asset cannot be liquidated or sold. That means that you made a good faith effort to sell for a reasonable amount of time, and the asset failed to sell. On the other hand, assets are generally considered available if the applicant has the legal right, power, and authority to liquidate them. Most assets will fit into the latter category and will not qualify as unavailable.

An applicant can “spend down” by paying for nursing home care until s/he is within the $2,000 asset range or s/he can purchase exempt assets and services such as a home, home furnishings, clothes, home repairs, satisfaction of mortgages, or other debts, an exempt burial space, one vehicle, term life insurance, whole life insurance with a face value of $1500, and certain annuities (which must be scheduled to exhaust the balance of the annuity at or before the annuitant’s life expectancy or that of his spouse). Spending down on nursing care and then establishing eligibility is often a good idea because some facilities do not take individuals who immediately eligible for Medi-Cal on admission. However, if the goal is to avoid extinguishing the estate on healthcare, other strategies must be considered.

If a person decides to give all their assets away and does not engage in proper planning, this will result in ineligibility, this will have significant psychological effects, not to mention potential tax consequences. The average age of someone going into a skilled nursing facility is about 62 years old, with a stroke. At age 80, for example, you have beaten the odds by 18 years, and statistics indicate that death will occur during sleep or after a brief illness. At that age, the odds of having a long-term care need are remote. That doesn’t mean that it is not going to happen to you, but the statistics indicate that it would not. Obviously, your individual health at the current time would dictate whether or not you personally have the likelihood for that to happen to you. The point is, is that it is our policy that this type of planning is not appropriate unless the need for Medi-Cal is well-founded.

Annuities

When you invest in an annuity, you enter into a contract with an insurance company under which, in return for your investment, the insurer promises you (and/or your heirs) a stream of payments starting immediately or in the future. An annuity can be appropriate as part of an overall financial plan, even for an older adult. There are two basic types of annuities: immediate annuities in which the pay-out begins shortly after the contract is entered into, and deferred annuities in which the pay out is delayed. Both immediate annuities and deferred annuities can be purchased as fixed or variable. Fixed annuities lock in an earnings rate, while variable annuities do not lock in an earning rate and depend on how investments in the stock market perform.

The Medi-Cal program regulates the treatment of annuities in great detail. Deferred annuities are counted as available resources by the Medi-Cal program. An immediate annuity is considered “unavailable” because the purchase of the annuity is irrevocable and there will be periodic payments of principal and interest. But, an immediate annuity must be likely to make all of its payments within the applicant’s lifetime (or based on the spouse’s lifetime) otherwise Medi-Cal will consider the annuity a partially disqualifed transfer to the annuity’s remainder beneficiary. Payments from an immediate annuity will be considered “income” and will have to be used towards share of cost if eligibility is established. Also, DHS seeks recovery against the residual of annuities after the death of the Medi-Cal beneficiary.

Transferring and Gifting

The Medi-Cal program has developed a complete set of rules to discourage people from giving away their assets in order to become eligible. Applicants must report transfers of assets that occurred within the 30 months of application for benefits, known as the “look back rule.” Namely, if you transfer non-exempt assets, Medi-Cal will disqualify you for up to 30 months, the disqualification period to be derived by a formula which can be illustrated by the following example:

Joe gifts $42,500 to his son on January 28, 2022, retaining $2,000. He entered a nursing home in April 2022 and applied for Medi-Cal. Since he gifted $42,500, he will be subject to ineligibility because it is within the thirty (30) month look back rule. The period of ineligibility will be the amount of the gift ($42,500) divided by the Average Private Pay Rate (APPR) used for the year of application, $10,184 in 2021. Joe would therefore be disqualified for nursing care for 4.17 months which is rounded down to four (4) months. Disqualification begins the month of the transfer, January 2022, so Joe will be eligible in May of 2022.

There are certain exceptions to the transfer rules if either the asset is exempt. Exempt assets can be transferred if the purpose is other than to qualify for benefits and a purpose other than to qualify will be presumed. In addition, assets can be transferred without penalty to the community spouse, a disabled child of the institutionalized spouse and under other limited circumstances.

Tax Consequences of Gifting Assets

Asset transfer strategies that involve assets other than cash have the downside of depriving the recipient of a step up in basis to the date of death value. When property is transferred by gift, the recipient receives a carryover basis, in other words, the basis that the transferor had. If assets are transferred on death, the recipient receives a date of death basis in the property which helps eliminate capital gains on significantly appreciated assets. Often the residence has appreciated significantly and it is important to consider tax implications of transferring the residence by gift. Tax issues always must be weighed against the Medi-Cal estate claim which will be described below. An example follows:

Joe purchased a home forty (40) years ago for $15,000. The home is now worth $300,000. If Joe transfers the home to his son now, his son has a carry over basis of $15,000. When his son sells the home, he has to pay tax on the $285,000 capital gains. If Joe’s son receives the home upon Joe’s death, Joe’s son receives a stepped up basis of $300,000 and can sell the home and pay no capital gains taxes. The downside is that if Joe keeps the home and receives Medi-Cal benefits, then Medi-Cal will make an estate claim against the house to recover the benefits received by Joe on the death of Joe unless it is a Revocable Living Trust (see the section entitled Estate Claim below). This example assumes that Joe was fifty-five (55) or older when he received Medi-Cal benefits and that neither a spouse, minor child, or blind or disabled child resides in the home upon his death.

Medi-Cal and the Home

Although the home is only one asset that may be subject to an estate claim, it is the most common asset remaining in a Medi-Cal beneficiary’s estate, and the easiest to collect on. Our main objective is to plan so that you can enjoy your residence while you are alive and avoid or decrease the estate claim after your death.

Note that placing property in joint tenancy no longer provides any protection from the estate claim because the Department of Health Services (“DHS”) takes the position that it may recover against the decedent’s interest in joint tenancy.

The home can be transferred to the community spouse or another individual without causing disqualification. That is because the asset is exempt and there is no policy against transfer of exempt assets because you are not transferring the home for purposes of eligibility. There is no thirty (30) month look back period of ineligibility because the home is not a countable asset.

Life Estate

A second option is to transfer the home and retain a life estate. This option gives you a great deal of protection by guaranteeing you the right to remain in the home and providing that the house cannot be sold or encumbered without your consent. A life estate includes the right to exclusive possession and the right to rents, issues, and profits. If you retain a life estate, the property will be included in your gross estate for federal estate tax purposes and therefore the recipient of the property enjoys a stepped-up basis.

Irrevocable Trust

Another option is to do an Irrevocable Grantor Trust. The Trust gives the transferor no rights to the residence in the Trust other than a right of occupancy, but it allows the Trustee the right to sell the property. Because the Trust is an Irrevocable Trust providing only for a right of occupancy, the sale proceeds will not be counted against the transferor’s Medi-Cal eligibility. Finally, if properly drafted, the Trust Estate will escape Medi-Cal Estate recovery claims. Should an Irrevocable Trust become part of your Medi-Cal plan, great care must be taken to insure the Irrevocable Trust includes the proper tax planning provisions.

Estate Claim

By law, the California Department of Health Care Services must be notified whenever a person dies in California, regardless of whether that person received Medi-Cal benefits during their lifetime. If a person received Medi-Cal benefits during their lifetime, the California Department of Health Care Services will seek repayment from the beneficiary’s estate after the Medi-Cal beneficiary dies. This is known as Medi-Cal recovery. These claims often run from tens of thousands to hundreds of thousands of dollars.

A recent change in California law represents a seismic shift in the Medi-Cal recovery law. The new law, which applies to Medi-Cal recipients who die on or after January 1, 2017, greatly expands the assets exempt from Medi-Cal recovery and reduces the medical services provided by Medi-Cal for which the California Department of Health Care Services may seek recovery.

Under the new law, there are two main groups whose estates are subject to Medi-Cal recovery: 1) beneficiaries who were 55 or older when they received Medi-Cal benefits for nursing facility services, and some home related services, along with related drugs; and 2) beneficiaries of any age permanently institutionalized in a medical facility.

Under the new law, the assets exempt from recovery are greatly expanded. After January 1, 2017, exempt assets will include: retirement accounts and life insurance policies (unless the estate is the named beneficiary), a home with a  fair market value of less than 50% of the average price of homes in that county, and property not subject to probate. The last exemption is the most important.

Our clients who have a revocable living trust already know that a properly funded trust removes assets from their probate estate. Under the new Medi-Cal recovery rules, assets placed under the umbrella of a revocable living trust are not subject to probate and are now also exempt from recovery for Medi-Cal. For our clients who have placed assets in their revocable living trust, those assets are now also not subject to Medi-Cal recovery. This is a significant added advantage to having a revocable living trust. Now, not only does your revocable living trust protect your estate from probate and ensure your assets are distributed according to your wishes, but your assets will also be protected from Medi-Cal recovery, should you ever be entitled to and receive said benefits.

Conclusion

If you or your loved ones are considering the possibility of receiving Medi-Cal benefits at some point in the future and do not already have a revocable living trust, we urge you to schedule an appointment with our office.

If you already have a living trust and are considering the possibility of receiving Medi-Cal benefits in the future, now is a good time to review your trust to ensure it is properly funded.

Remember, the new law only concerns Medi-Cal recovery; qualifying for Medi-Cal is a separate issue and the look-back period still exists. Drobny Law Offices, Inc. has experience with Medi-Cal planning and will be honored to assist you.

This testimonial or endorsement does not constitute a guarantee, warranty or prediction regarding the outcome of your legal matter.