MassHealth Update on Elder Law

From the Winter 2010 Rudolph Friedmann Newsletter
By Bryan S. MacCormack

Long term care refers to the services and support needed when the ability to care for oneself has been reduced by disability, chronic illness, or aging. An estimated 44% of people reaching age 65 are expected to enter a nursing home at least once in their lifetime. And 53% of them will stay for one year or more. In Massachusetts the average cost of a nursing home is about $10,000 a month.

Most people pay out of their own pockets until they become eligible for Medicaid. Each state operates its own Medicaid (MassHealth in Massachusetts) system which must conform to the federal guidelines. This article will summarize the Medicaid laws and will discuss opportunities that exist to preserve and protect your assets against the costs of long term care. The Medicaid rules are different for single and married people.

The basic rule of Medicaid eligibility is that you can own no more than $2,000 in "countable assets". For married couples the healthy spouse can keep $109,560. The Deficit Reduction Act of 2005 changed the laws regarding the treatment of asset transfers. The old law utilized a 36 month look-back period (or up to 60 months for transfers to certain trusts). For transfers made on or after February 8, 2006, the look-back period for all transfers is 60 months. The transfer rules are used to determine whether certain transfers will cause an ineligibility period for Medicaid. Certain transfers are exempt from this penalty, including transfers between spouses, transfers to children with disabilities, transfers to caretaker children, transfers to a trust for the benefit of a disabled person under the age of 65, and transfers to a sibling who has an equity interest in the house, or who has lived there for at least one year before you moved to a nursing home. One way to protect your savings is to spend them on "non-countable" assets. These expenditures include paying off a mortgage, making repairs to a home, paying off credit card balances, prepaying funeral expenses, or even updating home furnishings.

The simplest way to protect your home is to sign a deed conveying the remainder interest to another while retaining a life estate. The main advantages of retaining a life estate is that your home will not be part of your probate estate, the beneficiaries would obtain the property with a "step up" in cost basis; and Massachusetts cannot recover against life estates for Medicaid expenses that may have incurred. A disadvantage of reserving a life estate is that the life tenant is not entitled to apply his capital gain tax exclusion to the full proceeds of the sale. This may result in significant capital gain taxes if the property is sold prior to the death of the holder of the life estate.

Medicaid does consider the assets of revocable or "living" trusts to be countable in determining Medicaid eligibility. Irrevocable trusts (or "Medicaid Trusts") have proven to be a powerful way to protect your assets. These trusts can be drafted so that the income would be payable to you for your lifetime, but the principal cannot be paid to you or your spouse. Medicaid Trusts are typically funded with your primary residence and also investment accounts.

The Medicaid Trust would be drafted as a "Grantor Trust", which means that you would be considered the owner for income tax purposes. The real estate taxes and income from investment accounts would be reported on your personal income tax returns. The Grantor Trust status will enable you to utilize the capital gain tax exclusion if you sell the property. There would be a 5 year look back period for transfers to a Medicaid trust. If you are relatively healthy and are not expected to go into a nursing home within the next 5 years you should consider using a Medicaid Trust as part of your planning strategy.

Planning in advance is always the best approach. For those who have not planned in advance, there are many Medicaid planning techniques that still exist to protect your assets from the costs of long term care and general creditors.