Asset Protection Planning – Perils of Doing it on Your Own

Dealing with long term care planning, and especially asset protection planning, is a daunting process. Very complicated state and federal Medicaid laws and regulations present many pitfalls for those who try to engage in the asset protection process on their own without working with a competent elder law attorney.  A 2015 Medicaid case from New Jersey is an example of a family that tried to go through the process on their own and now have some pretty nasty consequences.  The case is C.W. v. New Jersey Division of Medical Assistance and Health Services, NO. A-02352-13T2 (NJ Sup. Ct. App. Aug. 31, 2015).

“C.W.” was a 90 year old New Jersey resident who moved into a skilled nursing facility in 2007.  The following year, 2008, she transferred her home and $540,000 in assets to her children, which together were worth approximately $864,000.  In 2009, C.W. applied for Medicaid benefits.  Not surprisingly, the state Medicaid authorities imposed a penalty of 10 years and 4 months before they were willing to begin paying her nursing home costs.  At that point, her children tried to fix the problem.  They returned $235,000 to C.W. who then paid that amount to her nursing home.  Then, her children returned the home to her, which was then sold.  Strangely, the sale proceeds were then deposited into an account in the children’s names, not in C.W.’s name, with the children executing a written agreement to transfer the amount of C.W.’s care cost to her each month.  C.W. then reapplied for Medicaid and was again denied as before.

Let’s consider each of the many mistakes made by C.W.’s family and also consider how the results may have been different. Under the Medicaid rules, when a Medicaid penalty period is assessed, it takes the form of a time period before which benefits will be paid. The simple mathematical formula takes the total gifted amount and divides it by the average monthly cost of private-paid skilled nursing home in that state.  Currently in Washington, that divisor amount is now $297.  Dividing $864,000 by $297 would result in a penalty period of roughly 2,909 days, or 97 months.

What were some of C.W.’s mistakes?

The first mistake was in not understanding the rules of Medicaid’s 60 month look back period.  When you apply for Medicaid, the administrative authorities are allowed to do a complete financial audit of the Medicaid applicant’s financial activities over the previous 60 months.  Whatever was done earlier than 60 months before the application is never considered and has no effect whatsoever on Medicaid eligibility.

There are situations where someone is fairly healthy when they engage in asset protection planning but then suffers unanticipated health issues that force a move to a nursing home much sooner than they ever thought they might need it.  That was not the case for C.W. as she was already in a nursing home when she started gifting away her assets.  Had C.W. made the gifts in 2003 applying for Medicaid in 2008, would have been just fine and there would have been no Medicaid penalty.  Alternatively, the family could have considered delaying the Medicaid application for a few years and privately payed the nursing home from the gifted funds until the 60 month look back period elapsed.

The second mistake was in transferring C.W.’s home out of her name.  When a single individual applies for Medicaid, the home may be considered an exempt asset if they have a reasonable expectation of returning to the home within a reasonable period of time.  As soon as C.W. transferred the home, it ceased to be an exempt asset for purposes of her eligibility.  Then, after her children conveyed the house back to her, it was sold.  Once the equity in the home is converted to cash, whether by a sale or mortgage, the cash received is not exempt.  There is also a question as to why the sales proceeds were put into the children’s’ bank account, rather than staying in C.W.’s account.  When this occurred she ultimately re-gifted that amount back to the kids.  That meant another gift within the 60 month period that could extend the period of disqualification.

Also, it is important to note that for income tax purposes, once C.W. transferred the house to her children, the opportunity to claim an exemption from capital gains tax on the sale of the home was probably lost.  If the house had been sold by the children instead of being transferred back to C.W. first, and assuming that the house sold for $324,000, and further assuming for our purposes that C.W. had paid approximately $150,000 for the house, then capital gain of $174,000 would have to be recognized by the children upon the sale of the home.  At a probable 15% capital gains tax rate, there would be $26,100 in capital gains tax due to the IRS because of the sale.

Clearly, good advice from a qualified elder law attorney could have made a big difference in the costs ultimately borne by C.W. and her family for her long-term care needs.  For more asset protection information click here.

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