North Carolina Basic Medicaid Rules Explained

There can be no doubt but that the statutes and provisions in question, involving the financing of Medicare and Medicaid, are among the most completely impenetrable texts within human experience. Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.

Rehabilitation Ass’n of Virginia v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994) (Ervin, Chief Judge)

THE FOLLOWING SUMMARY IS MEANT TO BE FOR GENERAL INFORMATION. DO NOT RELY UPON THE FOLLOWING FOR DEFINITIVE LEGAL ADVICE.

INTRODUCTION

For all practical purposes, in the United States the only "insurance" plan for long-term institutional care is Medicaid. Medicare only pays for approximately 7 percent of skilled nursing care in the United States. Private insurance pays for even less. The result is that most people pay out of their own pockets for long term care until they become eligible for Medicaid. While Medicare is an entitlement program, Medicaid is a form of welfare - or at least that's how it began. So to be eligible, you must become "impoverished" under the program's guidelines.

Despite the costs, there are advantages to paying privately for nursing home care. The foremost is that by paying privately an individual is more likely to gain entrance to a better quality facility. The obvious disadvantage is the expense; in North Carolina, nursing home fees average $5,500 or so a month. Without proper planning nursing home residents can lose the bulk of their savings.

For most individuals, the object of long-term care planning is to protect savings (by avoiding paying them to a nursing home) while simultaneously qualifying for nursing home Medicaid benefits. This can be done within the following rules of Medicaid eligibility.

In North Carolina, Medicaid is administered by the Division of Medical Assistance of the Department of Health and Human Services (the "DMA"). Across the state, the county Departments of Social Services ("DSS") assist the DMA in Raleigh with local program management. However, in order to qualify for federal reimbursement, the state program must comply with applicable federal statutes and regulations. So the following explanation includes both North Carolina and federal law as applicable.

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THE ASSET RULES

The basic rule of nursing home Medicaid eligibility is that an applicant, whether single or married, may have no more than $2,000 in "countable" assets in his or her name. If the applicant is married, the spouse is called the Community Spouse, and there are rules concerning how many countable assets the Community Spouse may keep. Those rules will be discussed further below. "Countable" assets generally include all belongings except for (1) personal possessions, such as clothing, furniture, and jewelry, (2) one motor vehicle, (3) the applicant's principal residence, and (4) assets that are considered inaccessible for one reason or another. The asset rules are quite complex.

Keep in mind, the rules discussed in this part relate to qualifying for Medicaid and have nothing to do with transferring those assets or whether those assets might be subject to estate recovery upon the death of the applicant. Those rules will be discussed in detail below.

Real Property: The Home

A home with equity of less than $500,000 (until November 1, 2007, there was no limit) will not be considered a countable asset and, therefore, will not be counted against the asset limits for Medicaid eligibility purposes as long as the nursing home resident intends to return home or his or her spouse or other dependent relatives live there. It does not matter if it does not appear likely that the nursing home resident will ever be able to return home; the intent to return home by itself preserves the property's character as the person's principal place of residence and thus as a noncountable resource.

Further, the $500,000 equity limit does not apply if the home is occupied by a spouse or other dependent relative of the applicant.

The "Home" also includes an unlimited amount of real property (subject to the $500,000 equity rule, if applicable). As a result, for all practical purposes nursing home residents do not have to sell their homes in order to qualify for Medicaid.

Do keep in mind, that while the Home does not count for Medicaid qualification purposes, it may likely be subject to estate recovery later after the death of the Medicaid applicant and his or her spouse. Estate Recovery will be discussed further below.

Real Property: Tenancies-in-Common

A tenancy-in-common is a method of holding title to real property jointly with others. The percentages need not be equal. Each "tenant in common" has an equal right to use the real property. Upon sale of the real property, the proceeds are divided according to the percentage ownership interests. Each tenancy-in-common interest can be separately sold, transferred as a gift, and passed on under a Will.

Tenancy-in-common property is NOT countable property for purposes of Medicaid qualification. However, it is available for estate recovery and may raise transfer issues if later transferred.

Real Property: Life Estates

These are often referred to as "life time rights" or "life rights". In this type of ownership, one owner is referred to as the Life Tenant, the other as the Remainder Interest. The Life Tenant has a current ownership interest that brings with it the exclusive right to occupy and use the premises for the rest of her life. Life Tenants are legally obligated to maintain the premises, pay the taxes and keep it insured. The Remainder Interest holder has a current ownership interest, too, in as much as he may transfer that interest at anytime. The Remainder Interest holder does not have the right to use or occupy the premises, however, until the Life Tenant has died. Once the life tenant has died, the property passes automatically to the Remainder Interests and free of liens the Life Tenant may have added to the property after the life tenancy was created.

Life Estates are not countable. They also have the added feature of not being available for estate recovery upon the death of the Life Tenant. For this reason, life estates have been a popular, sometimes abused, method of holding title to real property.

The Deficit Reduction Act and new DMA rules complicate transferring and buying life estates. Those rules will be discussed in a later installment pertaining to Transfers of Assets.

Real Property: Joint Tenancies

Join tenancies in real property are somewhat similar to tenancies-in-common. As long as the joint tenancy exists, if a joint tenant dies, the surviving joint tenant or tenants take the deceased tenant's interests automatically (in this way, a joint tenancy is similar to a life estate). Because of that feature, joint tenancy property will escape estate recovery.

There is currently much confusion with respect to North Carolina law as to whether the joint tenancy interests must be equal. The "safe" assumption is that they must be equal, the "correct" (at least in our opinion) assumption is that they need not be equal (you might be in for a fight to prove we are correct). There may be an effort to address the confusion legislatively.

Personal Property: Household and Personal Effects

Household furnishings, clothing, jewelry and other personal effects used by an applicant and spouse as such are non-countable. For example, clothing and furniture regularly used by an applicant or spouse will not count; clothing and furniture in a storage area (perhaps from a discontinued business) will count.

Personal Property: Automobiles

One automobile used to transport the applicant or a spouse is noncountable. The DMA manual instructs the caseworker to assume that is the case unless there is evidence to the contrary. If the applicant and a spouse own more than one automobile, then the most valuable auto does not count, but other autos will be countable.

Personal Property: Insurance

For purposes of Medicaid, two types of insurance are relevant: One type has no cash value or buildup (commonly called term insurance), the other type does have some sort of cash value or buildup (and comes under a variety of headings such as "whole" or "universal" or "variable" . . . the cash value is what is important for Medicaid purposes). Examine all life insurance policies. Do not count term insurance. If the total face value of any sort of "cash buildup" insurance exceeds $10,000, the cash value of those policies are countable.

Example: Maude owns two whole life policies, and a term life insurance policy. One whole life policy has a face value of $7,000 and a cash value of $500; the other has a face value of $4,000 and a cash value of $2,500. The whole life policies exceed $10,000, so the total cash value of $3,000 is countable. The term insurance does not count.

Instead say Maude owns a $7,000 face value policy with a cash value of $6,000 and a $2,500 policy with a cash value of $2,000. Because the face values total less than $10,000, the $8,000 total cash values will not count.

Personal Property: Retirement Plans/IRAs

Retirement plans and IRAs that are at all accessible are countable. The fact that accessing them may cause unpleasant tax consequences or surrender charges is irrelevant. On the other hand, an IRA that is paying a fixed, irrevocable annuity stream may not count as an asset.

Personal Property: Burial Contracts

Irrevocable burial contracts are not countable. Revocable contracts are countable. Note carefully, if an applicant does not have an irrevocable burial contract, $1,500 in otherwise countable resources may be earmarked for burial purposes and thus avoid classification as available resources.

Personal Property: Annuities

DRA made a number of very important changes in this area. If an annuity purchased on or after November 1, 2007, is either revocable or assignable it is a countable resource.

If the annuity is not a countable resource (because it is irrevocable and nonassignable), then the annuity must be analyzed to determine whether a transfer penalty will apply.

Transfer penalties will be discussed in much greater detail in a later issue. For purposes of this brief discussion, however, an annuity purchased (or a preexisting annuity that has any changes made) on or after November 1, 2007, will not be subject to a transfer of assets sanction if the State is named as remainder beneficiary to the extent of Medicaid benefits paid (the State may take second place behind a spouse and a minor child) and the annuity is expected to pay out in level payments over the actuarial life expectancy of the annuitant.

Personal Property: Trusts

The Medicaid trust rules are extremely complex. Please do not rely upon this simple explanation for a definitive answer.

Was the trust was funded by the applicant or the applicant's spouse?

General Rule: If an applicant is the beneficiary of a trust funded with his assets or the assets his spouse, the trust will be countable to the applicant. Of course, a number of significant exceptions apply.

Exception 1: Was the trust funded by a spouse's will? If so, and if the trust was properly designed as a discretionary trust (meaning the trustee is not legally obligated to distribute anything at all to the beneficiary), the assets in the trust will not be countable.

Exception 2: If not funded by will, does the trust allow the trustee to distribute anything from any part of the trust under any conceivable circumstance? If the answer is "no" the trust is not countable. If the answer is "yes" with respect to any part of the trust, that part of the trust is countable.

A trust may have different parts. Part A or Part B. Perhaps parts for different beneficiaries. Importantly, most trusts have "income" and "principal". A trust may prohibit distributions of principal under any circumstances but allow or require distributions of income. The "principal" would not be "countable" and the income, of course, would be.

Really Important Note: If an applicant or her spouse sets up an "Exception 2" trust that prohibits any distributions to the applicant or the spouse, it may not be a countable asset, but the trust certainly will raise transfer of assets concerns when it is established, especially if the trust was set up within the last five years.

Exception 3: If the trust was funded with the applicant's own assets and the applicant is under age 65 at the time the trust is set up, then the trust might qualify as a "self-settled special needs trust". See a further explanation of special needs trusts on the Mason Law website by clicking HERE.

Was The Trust Funded By Someone Else?

If a trust set up by someone other than the applicant or her spouse, will the assets be counted? Answer: It depends.

General Rule: If a trust set up by someone other than the applicant or her spouse requires the trustee to distribute assets under certain circumstances, the assets that are required to be distributed will be countable if those circumstances occur.

Common Example: Mom sets up a trust for daughter that requires assets to be distributed for the "health, education and maintenance" of the daughter. The trusts assets will be countable if daughter needs to go into a nursing home.

Common Example: If the trust says my trustee may not distribute to daughter in any manner that would disqualify her for nursing home benefits under Medicaid, but may distribute for other reasons, the trust assets will not be counted. These types of trusts are commonly referred to as "third party special needs trust". See a further explanation of special needs trusts on the Mason Law website by clicking HERE.

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TREATMENT OF ASSETS FOR A MARRIED COUPLE

Medicaid law provides special protections for the spouse of a nursing home resident, known in the law as the "community" spouse. Under the general rule, the spouse of a married applicant is permitted to keep one-half of the couple's combined countable assets up to $104,400 (2008). In addition, there is a minimum resource allowance for the community spouse of $20,880 (also 2008). The protected amount is referred to as a "Community Spouse Resource Allowance" or "CSRA".

The CSRA is calculated with respect to assets held by a married couple as of the beginning of the first continuous 30 consecutive day period that the applicant spouse has been confined to a hospital or nursing home or some combination of the two. For the sake of administrative convenience, DMA will actually measure the assets as of the close of the last business day of the preceding month. This is sometimes referred to as a "snapshot date". It does not matter when the Snapshot Date occurred. It is not at all uncommon to have a Snapshot Date that was triggered several years before the date of a Medicaid application.

So, for example, if a couple owns $90,000 in countable assets on the date the applicant enters the hospital and stays in it or a nursing home for 30 days or more, he or she will be eligible for Medicaid once their assets have been reduced to a combined figure of $47,000 - $2,000 for the applicant and $45,000 (one-half of $90,000) for the at-home spouse. If the couple owned $220,000 in assets, the spouse in need of care would not become eligible until their savings were reduced to $106,400 ($2,000 for the nursing home spouse and the maximum $104,400 for the community spouse).

Often, it is advantageous for the couple to try to have as much money as possible in their names on the Snapshot Date up to $208,800 so that the amount the community spouse is allowed to keep will be as high as possible. Sadly, many couples believe they understand the rules and spend half of their assets before a Snapshot Date only to later discover they must reduce their assets by half again!

After a determination has been made as to the nature and extent of an applicant's (and spouse's) assets, and whether any of those assets will be protected, the next major inquiry involves whether any assets have been transferred before the application.

This concludes the discussion of the classification of assets for Medicaid eligibility purposes. We now turn our attention to the much misunderstood (but very harsh) Medicaid transfer penalties.

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THE TRANSFER PENALTY

The other major rule of Medicaid eligibility is the penalty for transferring assets. Medicaid has always imposed some sort of restriction on transferring assets before entering a Medicaid application - were it not for such restrictions, anyone could qualify for Medicaid simply by giving assets away at the time nursing home entry became necessary.

Early in 2006 Congress passed, and on February 8, 2006, President Bush signed, the Deficit Reduction Act ("DRA"). DRA mandates tough new restrictions on the transfer of assets made on or after the effective date of February 8, 2006.

DMA announced on August 17, 2007, that implementation of new rules mandated by DRA would begin November 1, 2007 (the "Implementation Date"). There will continue to be many details to hammer out as DMA, county Departments of Social Service and advocates sort through the new Medicaid manual changes. Expect confusion and differing rules interpretations through 2008, perhaps into 2009. The remainder of this memo will refer to the November 1 implementation date of the new DRA Rules as the “Implementation Date”.

What had been uncertain is whether the new rules would apply (i) to Medicaid applications filed on or after the Implementation Date and with respect to assets transferred on or after the Implementation Date, or (ii) to Medicaid applications filed on or after the Implementation Date but with respect to assets transferred on or after February 8, 2006. The question was whether new DRA rules would apply to any asset transferred after February 8 when someone files an application after the Implementation Date, or whether the old rules would continue to apply to assets transferred before the Implementation Date, even when someone is filing an application after the Implementation Date.

The excellent news is that the new DRA rules apply the transfer rules with respect only to transfers on or after the Implementation Date. The pre-November 1 (or "old") rules will continue to apply to transfers made through the day before the Implementation Date (November 1, 2007).

Because the pre-November 1 rules will continue to be relevant for at least three more years, this memorandum will discuss the old transfer rules (“Old Rules”) and the new rules that were implemented in North Carolina on November 1, 2007 (“DRA Rules”).

Old Rules

If an applicant (or his or her spouse) transferred assets before the Implementation Date, he or she will be ineligible for Medicaid for a period of time beginning on the date of the transfer (often referred to as a “Transfer Sanction”). The actual number of months of ineligibility is determined by dividing the amount transferred by $5,000 (and under the Old Rules rounding down to a whole number). For instance, if an applicant made gifts totaling $100,000, he or she would be ineligible for Medicaid for 20 months ($100,000 ÷ $5,000 = 20). Another way to look at this is that for every $5,000 transferred, an applicant will be ineligible for nursing home Medicaid benefits for one month.

There is no cap on the period of ineligibility. So, for instance, the period of ineligibility for the transfer of property worth $400,000 is 80 months ($400,000 ÷ $5,000 = 80). However, DMA may only consider transfers made during the 36-month period (60 months in the case of trusts) preceding an application for Medicaid, the "look-back" period. Effectively, then, there is a 36-month cap (60 for trusts) on periods of ineligibility resulting from transfers. People who make large transfers have to be careful not to apply for Medicaid before the 36-month (60 months for trusts) look-back period passes.

Example: Bill Gates transferred $1,000,000 to the kids on March 1, 2005, and applied for Medicaid on February 25, 2008, 35 months and 25 days after his large gift to the kids (within 36 months). (Either Bill received bad advice or no advice because, presumably, he could he could no longer afford good advice!). Because he had a transfer within 36 months of the application, Bill will be assessed a 200 month Transfer Sanction beginning on March 1, 2005. Had Bill waited another few days (until on or after March 1, 2008) to file his application there would be no sanction because the gift transfer had been made more than 36 months before the application.

Important Reminder: The Old Rules apply only to transfers made before November 1, 2007.

DRA Rules

The most significant DRA change is that Transfer Sanctions will not begin to run until both of the following conditions have been met: (i) the applicant is in a nursing facility with a physician’s formal approval and (ii) the applicant is otherwise financially qualified for Medicaid (other than the fact that there will be a Transfer Sanction). Also, rounding down no longer applies and fractional Transfer Sanctions will be in force.

Example: Had Bill made a $100,000 transfer made on October 15, 2006, a 20 month Transfer Sanction would have applied under the old rules and would begin to run on October 1, 2006. Under the DRA Rules, the Transfer Sanction will not begin to run until later. For example, say Bill transferred $100,000 on November 15, 2007, and later filed for Medicaid in December, 2007 when he has $10,000 cash in the bank. To be eligible, he must have no more than $2,000 in countable assets. On January 14, 2008 he has spent money and has $1,500 left. A 20 month Transfer Sanction would then begin to run.

Exceptions to the Transfer Penalty

Under DRA a Transfer Sanction will not apply if an applicant can prove “by the greater weight of the evidence” that the earlier transfer was made exclusively for reasons than to qualify for Medicaid. Note that the burden will be on the applicant, who may or may not be in any position to go through a hearing process and may well need to engage an attorney for assistance.

Very important planning exceptions are available. Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

(1) A spouse (or anyone else for the spouse's benefit);

(2) A blind or disabled child;

(3) A trust for the benefit of a blind or disabled child; or

(4) A trust for the benefit of a disabled individual under age 65 (even for the benefit of the applicant under certain circumstances).

Special rules apply with respect to the transfer of a home. In addition to being able to make the transfers without penalty to one's spouse or blind or disabled child, or into trust for other disabled beneficiaries, the applicant may freely transfer his or her home to:

(1) A child under age 21;

(2) A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home; or

(3) A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided such care that the applicant did not need to move to a nursing home.

As mentioned above, a transfer can be cured by the return of the transferred asset in its entirety.

Hardship Exception to Transfer Sanction

Implementation of the DRA Rules in North Carolina had been delayed pending the adoption of formal hardship exception rules. “Formal” in this case means the rules had to be vetted through the involved administrative (and public) process for the adoption of rules. Advocacy groups (including the Elder Law section of the North Carolina Bar and others) were very much involved. Ultimately the General Assembly became involved and hardship rules were hammered out at that level and legislatively adopted.

The adopted Hardship Rule allows a Community Spouse to retain the previously protected income (see “TREATMENT OF INCOME” below), slightly more than $60,000 of Countable Assets, and a homeplace with equity of less than $500,000 . . . and still qualify for a finding of Hardship if other hardship conditions are met.

Mason Law and other involved advocates are consistently maintaining that the Hardship Exception to the imposition of Transfer Sanctions should not be viewed as a pre-application planning opportunity. In other words, do not plan on transferring assets in excess of the Hardship levels outlined in the preceding paragraph and plan to argue “hardship”. While that tactic may work for a limited time, we believe it flaunts the spirit of the hardship rules (that they be reserved for unintentional cases of hardship) and would incur the wrath of legislators who had made a good faith effort to break an impasse. Abusing the hardship rules, we believe, would invite a legislative response.

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LIENS AND ESTATE RECOVERY

The state has the right to recover whatever benefits it paid for the care of the Medicaid recipient from his or her probate estate. Given the rules for Medicaid eligibility, the only property of substantial value that a Medicaid recipient is likely to own at death is his or her home. Under current law, the state may make a claim against the decedent's home only if it is in his or her probate estate. Property that is jointly owned with rights of survivorship, in a life estate, or in a trust, is not included in the probate estate and thus escapes estate recovery. Congress has given the states the right to seek estate recovery against such nonprobate property; so far, North Carolina has not definitely acted on this new provision.

In North Carolina, the 2005 Budget Bill, enacted in August 2005, authorized liens on certain nonprobate real property interests beginning July 1, 2006. The provision was so poorly written, and it generated so much controversy, that the 2006 Budget Bill postponed the effective date until July 1, 2007, to enable DMA and other interested parties (including the Elder Law section of the North Carolina Bar Association) to revisit the issue. Finally, the General Assembly repealed the provision late in the 2007 session. Nobody seems to want this provision at the present time (We believe it may eventually resurface at some future time).

Accordingly, contrary to popular belief, there is no such a thing as a Medicaid or “nursing home” lien in North Carolina. Upon the death of a Medicaid recipient, and providing no exception ton to estate recovery applies (see below), DMA is a fifth class creditor against the probate estate of the deceased recipient – DMA “gets in line” with other creditors of equal rank.

The law also provides exceptions to estate recovery when hardship can be proven. In other cases DMA will completely forego estate recovery if the deceased is survived by a spouse or a minor or disabled child. You should always seek assistance from qualified counsel if facing estate recovery.

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TREATMENT OF INCOME

The income eligibility rules are convoluted, but in summary, if the applicant’s income is in excess of the facility’s private pay rate, the applicant will not be eligible for Medicaid. When a nursing home resident becomes eligible for Medicaid, all of his or her income, less certain deductions, must be paid to the nursing home. The deductions include a $30-a-month personal needs allowance, a deduction for any uncovered medical costs (including medical insurance and Medicare supplemental plan premiums), and, in the case of a married applicant, an allowance he or she must pay to the spouse that continues to live at home.

As will be discussed a bit more below, Medicaid considers only the income of the applicant and not that of the community spouse (the spouse not being institutionalized). Medicaid uses a “name on the check” rule in determining income.

Spousal Income

In all circumstances, the income of the community spouse will continue undisturbed; he or she will not have to use his or her income to support the nursing home spouse receiving Medicaid benefits. In some cases, the community spouse is also entitled to share in all or a portion of the monthly income of the nursing home spouse. DMA determines an income floor for the community spouse, known as the minimum monthly maintenance needs allowance, or MMMNA, which, under a complicated formula, is calculated for each community spouse based on his or her housing costs. (Where the community spouse can show hardship, DMA may award a larger MMMNA, but only after an appeal to fair hearing.) The MMMNA may range from a low of $1,711.25 to a high of $2,610 a month. If the community spouse's own income falls below his or her MMMNA, the shortfall can be made up from the nursing home spouse's income.

Also, an additional allowance can be made for every dollar that certain housing costs such as taxes, mortgages and insurance exceed $514 (up to a maximum of $895 in shelter costs over $514).

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THE MEDICAID APPLICATION

Applying for Medicaid is cumbersome and tedious. Every fact asserted in the application must be verified by documentation. The application process can drag on for several months as the local DSS demands more and more verifications regarding such issues as the amount of assets and dates of transfers. If the applicant does not comply with these requests and deadlines on a timely basis, DSS will deny the application. In addition, after Medicaid eligibility is achieved, it must be redetermined every year.

Further, under the new DRA transfer sanction rules it may be necessary to file two Medicaid applications if a sanctionable transfer has been made under the new DRA Rules. The first application will be needed to establish that the applicant is both in a nursing home and is otherwise financially qualified. Without such an application it would be impossible to begin the running of a Medicaid transfer sanction. Finally, a second application will be needed to establish that a sanction has run and that all other necessary requirements for an approved application continue to apply to the applicant.

SUMMARY

As you can see, the Medicaid rules are exceedingly complex and are becoming harsher. Nevertheless, many worthwhile planning opportunities exist that this rather “bare boned” summary cannot explore. We can help.

Robert A. Mason, Certified Elder Law Attorney by the National Elder Law Foundation, ABA recognized entity for certification of Elder Law specialists.

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