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New Transfer of Asset Restrictions on Long-Term Care
Imposed by the Deficit Reduction Act of 2005

By Gregory Wilcox, Esq.

President Bush signed the Deficit Reduction Act of 2005 (DRA) into law on February 8, 2005.1 DRA is a wide-ranging statute that cuts back on a number of social programs in the name of "deficit reduction." However, DRA is widely seen as merely a means of providing political "cover" while Congress plans to extend tax cuts for high-income earners. The net result is not likely to be a reduction in the federal deficit but merely a reduction in the growth of the deficit.

Only a small part of DRA addresses Medicaid eligibility for long-term care, primarily §§6011-6016, entitled "Reform of Asset Transfer Rules".2 Actually, these sections venture outside of Medicaid’s transfer of asset rules and make eligibility for long-term care more difficult to achieve in a number of other ways. This article will limit itself to the changes in the transfer rules per se. Other articles in this issue will address other cutbacks, e.g., in the areas of annuities, home equity, and spousal impoverishment.

DRA makes obsolete many common transfer-planning techniques long used to shelter assets and accelerate Medicaid eligibility. Indeed, DRA reads like a list of Medicaid planning approaches, using language with the sole purpose of preventing their use.3 Fortunately, California’s Medi-Cal version of Medicaid has some rules that are not common in the rest of the country, and Congress seems to have overlooked some of the planning techniques that are based on them.

This article will describe the changes DRA requires, and then comment on each change, identifying the planning approaches that will no longer be available and also the approaches that may still be used.

Effective and Implementation Dates

Before getting into the substance of the new transfer rules, there are two critical procedural questions to answer: what are the "effective dates" in the federal statute and when and how will California actually implement the new rules? It turns out that the answers to both of these questions are murky.

The "Effective" Date

There is uncertainty about the effective date of DRA’s transfer provisions. There are two DRA sections that directly address transfers, §§6011 and 6016. The former section states that it is effective with regard to transfers made on or after the date of enactment. However, §6016 provides a different and elaborate transition rule for its four special transfer restrictions. Some commentators have assumed that the §6016 transition rule applies to all the new Medicaid long-term care restrictions, but actually §6016 limits its scope to only the changes made in that specific section.

The "Implementation" Date

Distinct from such ambiguities in the federal statute are the more important questions of state implementation: when will California issue instructions to county workers to implement the new federal statutory rules and what events will be subject to them? No matter what DRA says about when its rules start, the state will need some amount of time to formulate and produce regulations and instructions to implement them simply as a matter of administrative necessity. Further, in the past, California has taken a fairly relaxed approach to implementing new federal Medicaid statutes on transfers of assets. Most notoriously, it still has not implemented Congress’s 1993 changes,(4) and the federal government (perhaps surprisingly) has not forced compliance.

Finally, in the past when California implemented new federal transfer rules, the rules have only been effective prospectively, that is, to events occurring after the date the state gives instructions to the counties. The prospect of trying to enforce new regulations on events that occurred earlier will certainly appear unappetizing to the state. The state is now apparently trying to determine whether it can ignore the statute’s "effective dates" for its own administrative convenience. All things considered, there is substantial reason to believe that transactions related to Medi-Cal transfer planning will be subject to the pre-DRA rules for at least some time to come.

Lengthening the Look-Back Period

As most readers know, if a Medi-Cal applicant has made a gift of his or her assets, he or she will suffer a period of ineligibility for Medi-Cal support of long-term care. However, the period of time that the Medi-Cal program looks back for such gifts has always been limited. Under current federal law, the Medicaid program is required to look back 36 months for such gifts. However, California’s Medi-Cal program never implemented the federal law, and it retains a 30-month "look-back" period that it adopted back in 1990.

DRA has now extended the "look-back period" to 60 months for all gift transfers, made by means of a trust or otherwise (§6011(a) and (b)).(5) This is one of the two or three most significant changes made by DRA.

The extended "look-back" date only applies to gift transfers that occurred on or after the date of DRA’s enactment (§6011(c)). In other words, before enactment of DRA on February 8, 2006, a prospective Medi-Cal applicant could give away $1 million, wait 30 months, and then apply.6 After DRA is put into effect, the same prospective Medi-Cal applicant will have to wait 61 months before applying in order to avoid reporting the gift. At that time, he or she will not have made any disqualifying gifts within the last 60 months and will no longer be subject to any ineligibility on account of the transfer.

What does this mean? Most obviously, those with substantial assets who are willing to give them all away in order to qualify for Medi-Cal support for long-term care are going to have to wait an additional two and half years before they can apply. However, even with a 30-month look back period, few clients have been attracted to the idea of giving away valuable assets that account for most of their net worth, and then waiting out the look-back period.

On the other hand, in many other areas of the country (where the OBRA 1993 changes have long been in effect), clients have been willing to make such transfers to an "income-only" trust and then wait out the resulting 36-month look-back period. This way they still have the income from their property during the waiting period, but the assets themselves will not be held to be "available" (and disqualifying) when they eventually apply. However, when they apply for benefits the trust income will still be treated as available to satisfy their Share of Cost obligations. Bottom line: we may very well see a new wave of interest in such arrangements in California (and in the technical issue of what constitutes obligatory trust "income" that the Medi-Cal program will insist on counting).

One commentator argues that the 60-month look-back rule may result in many more applications being denied for lack of documentation because applicants will have to produce five years instead of three years of records to prove they have not made any disqualifying transfers.7 The new rule will certainly favor those who keep good records, probably precisely those who intentionally give away assets in order to be able to apply for benefits five years later. Such five-years-in-advance gifts might occur where a person is diagnosed with a degenerative condition such as Alzheimer’s disease fairly early, and will probably not need institutional care until five years have passed.

Change in Beginning Date for Period of Ineligibility

DRA changes the date on which a period of disqualification begins. This is the most significant change in DRA for long-term care benefits. Under existing law, if a person makes a gift transfer, the period of ineligibility begins with the month when the gift was made. This beginning month could have been many months ago, so that the period of ineligibility could easily have already expired by the time the donor wants to make an application for benefits.

DRA provides that the period of ineligibility arising from a gift transfer starts "the first day of the month on or after which assets have been transferred for less than fair market value [the current rule], or the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional care described in subparagraph (C) [i.e., long-term care] based on an approved application for such care but for the application of the penalty period, whichever is later."8

In other words, the penalty period starts when the applicant makes an otherwise acceptable application for long-term care benefits. As a result, there will no longer be any way for a person to give away assets and then wait for the period of ineligibility to expire before applying for benefits (other than waiting out the full 60-month "look-back" period). Under existing law, if a person gave away $20,000 ten months ago, the penalty period would have already expired ($20,000 divided by the $4,812 Average Private Pay Rate = 4 months). Under DRA, the 4 months will start to run as soon as the applicant applies and is determined to be "otherwise eligible."

There are several nuances to note:

  • First, DRA is written to prevent a prospective applicant from applying a number of months earlier just to start the penalty period running. DRA says that the penalty begins only when the applicant is eligible for medical assistance "but for the application of the penalty period."
  • Second, DRA only applies to transfers of assets after the date of its enactment. Earlier transfers are treated under the existing rules.
  • Third, this change, like the others, only applies to long-term care benefits. Gift transfers continue not to affect Medi-Cal received in the "community."

This change will have a substantial impact on Medi-Cal planning practice for long-term care. Clients will no longer be able to make gifts of excess assets and simply wait out the disqualification period. In addition, clients will no longer be able to make periodic gifts in view of the Average Private Pay Rate in order to divest and make themselves eligible. Staged gifts each month, decreasing stacked gifts, even half-a-loaf gifts all seem to have been made obsolete by DRA.

Many advocates have pointed out that Congress, in its zeal to stop Medi-Cal planning, has also set traps for the innocent. A healthy 74 year old grandmother may give her grandson $40,000 for college, and then have a stroke a year later and require nursing home care. Under the existing law, the penalty period arising from the gift would have expired in 8 months, and the grandmother would now be eligible. Under DRA the grandmother will find that, even if she has only $1,000 in countable assets left, she will be ineligible for Medi-Cal for 8 months when she applies for support. The problem is this: how is the 8 months of care going to be paid for? The $40,000 is gone, spent on the college, and the grandmother has only $1,000. What nursing home would admit her under these circumstances? The only hope is a claim of "hardship," as described below.

A slight variation in these facts produces an even more startling result. Let’s say that the grandmother in the example above had quite a bit more than $1,000 when she had her stroke and applied for placement in a nursing home. Assume she had $50,000 when she was admitted but will run out of money in about 10 months. She will apply for Medi-Cal and find that she is ineligible for the next 8 months because of the gift to her grandson 22 months earlier.

There is conflicting authority on what the nursing home is allowed to do in such a case. Some commentators assert that under law the nursing home cannot evict the grandmother unless there is a safe place to which to transfer her. But no other facility will take her when she has no ability to pay for her care. How her continuing care is to be paid for during the 8 disqualification months is a mystery. One commentator suggests that DRA will become known as the Nursing Home Bankruptcy Law of 2005.9

Other commentators argue that nursing homes can evict residents who end up in this quandary — under the regulation allowing nursing homes to evict if "the resident has failed, after reasonable and appropriate notice, to pay for (or to have paid under Medicare or Medicaid) a stay at the facility" (42 CFR §483.12(a)(2)(v)). On the other hand, these regulations also require the facility to provide sufficient preparation and orientation to residents to insure a safe and orderly transfer (42 CFR §483.12(a)(7)), and to give a written notice, including the location to which the resident will be transferred (42 CFR §483.12(a)(6)). So, presumably it will be possible to go to a hearing and force the facility to retain a resident for whom no payment is being made if it fails to meet these requirements. However, as a practical matter, because of the intense economic pressure on the nursing homes, this outcome seems extremely unlikely in most cases.

Although most gift strategies will be obsolete under DRA, there is one that might still work, "Return of Half-a-Loaf." This is best explained by example:

Grandmother Moses with $50,120 gives away $48,120 to her son and keeps $2,000 (her allowable "property reserve"). The gift of $48,120 results in a 10-month disqualification period precisely ($48,120/$4,812). Ms. Moses applies for Medi-Cal and finds that she qualifies but for the gift and the 10-month disqualification period. Ms. Moses’ son then returns $24,060 to his mother. This return of gifted funds might then serve to reduce the disqualification period to 5 months.(10) The $24,060 returned amount should be just enough to pay for the disqualified months, assuming that the private pay rate is the same as the official $4,812 Average Private Pay Rate (for 2005). Net sheltered amount: the $24,060 in the hands of Ms. Moses’ son.

A variation of this approach might be even more attractive:

Grandmother Moses with $50,120 gives away $24,060. This results in a 5-month disqualification period ($24,060/$4,812). Mrs. Moses expects if she then applies for Medi-Cal she will find that she does not qualify because she has retained $24,060. But if she spends that down on her care and applies, she will then be stuck with the 5-month disqualification. So, concurrently with her gift of $24,060 she also purchases an annuity with the retained $24,060. This is a transfer for value that is not disqualifying. Because her assets will then be spent down, she will "otherwise qualify" for benefits and her 5-month disqualification arising from the gift can start. She structures the annuity so that it pays her a monthly amount for five months, probably a large part of the amount that she will need each month to pay for her private care during 5-month disqualification period. If her combined annuity payments and income are not sufficient, the donee of her gift will have funds to help her close the gap.

There’s good news and bad news about this approach. The good news is that it does not depend on uncertain Medi-Cal rules that determine whether the disqualification period will be reduced as a result of partially returned gifts. The bad news is that there is probably no insurance company that currently sells annuities like the one described (or any annuity covering a period of less than two years).

Aside from these approaches, almost the entire area of gift planning may have to be replaced by planning based on transfers for full value. If a prospective Medi-Cal applicant makes a "transfer" but receives adequate compensation in some form, the transfer will not trigger the "transfer of assets" rules at all. For example, there may be new interest in "life care contracts" as a form of transfer for full value. On the other hand, some observers suggest that such "life care contracts" may end up being regulated as an "annuity" because DRA allows the Secretary of the Department of Health Services to define an annuity almost any way he or she likes.11

Availability of Hardship Waivers

Perhaps sensing that its new transfer of assets disqualification rules might cause hardship in individual cases, Congress has apparently adopted new rules for waiver of the rules upon proof of "hardship" (§6011(d) and (e)).

Note: The change may only be "apparent" because the odd language of DRA does not actually make any amendment to the existing federal statute. It cites the existing hardship provisions in 42 U.S.C. §1396p(c)(2)(D) but nowhere states that they are actually amended!

Under existing law, an applicant will not be ineligible on account of gift transfers if "the State determines, under procedures established by the State (in accordance with standards specified by the Secretary [of the Department of Health and Human Services]), that denial of eligibility would work an undue hardship as determined on the basis of criteria established by the Secretary."12

DRA now requires the states to provide for a hardship waiver process:

  1. Under which an undue hardship exists when application of the transfer of assets provision would deprive the individual -

    (A) of medical care such that the individual’s health or life would be endangered;
    (B) of food, clothing, shelter, or other necessities of life; and
  2. Which provides for
    (A) Notice to recipients that an undue hardship exception exists;

    (B) A timely process for determining whether an undue hardship waiver will be granted; and

    (C) A process under which an adverse determination can be appealed.

There’s a puzzle here. When Congress last amended the Medicaid transfer rules in OBRA 1993, it required the states to follow hardship standards established by the Secretary of HHS. Accordingly, the federal Centers for Medicare and Medicaid (CMS) issued a revision to the federal State Medicaid Manual (Transmittal No. 64, revising §3258.10, C., 5., November, 1994). The CMS guidelines (apparently the Secretary’s "standards") said that the states must find undue hardship where application of the transfer of assets rules would cause deprivation of medical care that would endanger an individual’s health or life, or would deprive him or her of food, clothing, shelter, or other necessities of life. The guidelines also said there is no hardship when the transfer rules only cause "inconvenience" or a restriction of "lifestyle but would not put him or her at serious risk of deprivation." Finally, the CMS guidelines require the states to provide notice to applicants of the undue hardship exception, a timely determination of a claim, and an appeals procedure.

In other words, the DRA language is almost identical to the existing CMS language. It changes almost nothing. One might be tempted to argue that federal statute now requires the states to provide undue hardship waivers, whereas before it was only pursuant to CMS guidance. But of course, as pointed out above, the new DRA language does not explicitly amend the governing federal statute anyway. Perhaps this is just a case of Congress wanting to look as if it is doing something when it is not really doing anything at all.

A more fundamental issue is that it is difficult to imagine when the deprivation of long-term nursing home care would be anything but a danger to health or life. Accordingly, one might think that deprivation of nursing home care would be a hardship in many if not virtually all cases.

As a result, hardship waivers may present planning opportunities. Theoretically, advocates need only show that their clients will die without support from Medi-Cal for nursing home care. In most cases, this really should not be overly difficult. The problem is that there are no state rules to rely on. Furthermore, CMS unhelpfully suggests that the states have "considerable flexibility in deciding the circumstances under which you [the states] will not impose penalties under the transfer of assets provisions because of undue hardship," e.g., by providing criteria for when life and health are at risk.13 The states are also invited to require that the applicant show efforts to recover previously transferred assets. California has done none of this, so we are left with only the federal statute and CMS guidance.

DRA does explicitly amend the federal transfer of assets statute to protect nursing homes. It says that the state’s hardship procedures must permit a nursing facility where the "institutionalized individual is residing to file an undue hardship waiver application on behalf of the individual with the consent of the individual or the legal guardian of the individual" (§6011(e)). Furthermore, while such an application is pending, if the application meets CMS criteria yet to be written, the state may provide payments for nursing facility services in order to hold the bed for the individual at the facility." The nursing home industry lobbyists were obviously paying attention when this bill was drafted.14 However, the so-called "bed hold" is limited to payment for 30 days.

The "bed hold" language here is a little strange. "Bed hold" usually refers to payment for a bed from which the resident is absent. However, it seems in this case the intention is simply to pay for a bed that the resident is actually using while the hardship claim is pending.

As mentioned above, DRA provides an effective date for the foregoing three changes, i.e., lengthening the look-back, change in the beginning date of the ineligibility period, and availability of hardship waivers.15 All three rules apply to transfers made on or after the date of enactment of DRA, February 8, 2006.

Calculation Reforms

DRA hunts down and plugs additional perceived leaks in the Medicaid transfer of assets rules, no matter how minor. In a section entitled, "Additional Reforms of Medicaid Transfer of Assets Rules," DRA prevents the states from using calculation methods that might lose the program a few dollars here and there (§6016).

Rounding Losses

Some states, like California, round down fractions to the nearest whole number of months when computing the period of disqualification that arises from a gift transfer of assets. DRA puts a stop to this loss of funds (§6016(a)).16 It amends the transfer statute to provide that "a state shall not round down, or otherwise disregard any fractional period of ineligibility."

As a result, the penalty will amount to a per diem penalty. For example, if a transfer is made that generates a transfer penalty period of 4.5 months, the applicant will be ineligible for 4 months and 15 days.

Multiple Transfers

DRA widens the authority of states to maximize the disqualification period arising from multiple transfers of assets (§6016(b)).17 However, the import of the new language is obscure. In a subsection entitled, "Authority for States to Accumulate Multiple Transfers into One Penalty Period," DRA says:

Notwithstanding the preceding provisions of this paragraph, in the case of an individual (or individual’s spouse) who makes multiple fractional transfers of assets in more than 1 month for less than fair market value on or after the applicable look-back date specified in Subparagraph (B), a State may determine the period of ineligibility applicable to such individual under this paragraph by

(i) treating the total, cumulative uncompensated value of all assets transferred by the individual (or individual’s spouse) during all months on or after the look-back date specified in subparagraph (B) as one transfer for purposes of clause (i) or (ii) (as the case may be) of subparagraph (E); and

(ii) beginning such period on the earliest date which would apply under subparagraph (D) to any of such transfers.

First, there are problems of interpretation. What are "multiple fractional transfers of assets"? DRA makes no attempt to define them. For example, does the provision only apply to multiple transfers where a "single asset" is divided into fractions, e.g., to transfers of fractional interests in a parcel of real property, but not to transfers of $10,000 per day from each of five different bank accounts over five days?

Second, it is hard to see what abuse Congress is trying to stop with this language. Transfers during one month can already be accumulated by the states.(18) DRA’s focus on multiple transfers "in more than one month" seems instead targeted on staged gifts, e.g., gifts below the Average Private Pay Rate each month (all of which, when rounded down, avoid triggering any disqualification). Other parts of DRA appear to prevent this treatment for gifts after DRA’s effective date, e.g., by forcing counting of fractional periods of ineligibility. Accordingly, the only use for this provision would be for pre-DRA gifts, but it is not clear that DRA applies at all to such transfers.

Best guess: this is Congress’s attempt to prevent the multiple gift planning techniques described in the report of the U.S. General Accountability Office (GAO), entitled, "MEDICAID, Transfers of Assets by Elderly Individuals to Obtain Long-Term Care Coverage," September 2005. It describes how eligibility can be accelerated through the use of "multiple small transfers."(19)

Purchase of Notes and Loans as Transfers

With certain exceptions, DRA expressly defines "assets" that are subject to the transfer rules to include funds used to purchase a promissory note, loan, or mortgage as a disqualifying transfer (§6016(c)).20 To avoid such treatment, the note, loan, or mortgage has to meet all of three criteria:

It has a repayment term that is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration);

It provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and

It prohibits the cancellation of the balance upon the death of the lender.

Further, if the promissory note, loan, or mortgage does not satisfy such requirements, its value is defined as the outstanding balance due as of the date of the individual’s Medi-Cal application.

Here Congress’s purposes are clearer. It perceives that many "purchases" of promissory notes, loans, and mortgages have in the past been a sham. A large purchase price for such an asset in a transaction alleged to be "for value" can deplete the applicant’s resources and make him eligible for Medicaid. However, because of deep discounts the supposed asset turns out to have little or no real value that can either be used for the person’s own medical care or counted as having an "available" significant value by the Medicaid programs. DRA prevents this by requiring that such purchases be commercially reasonable. Otherwise, the full balance due will be counted, no matter how much it would be discounted in the market on account of its lack of security or poor debtor credit.

Although the purchase of such discounted notes and loans has been somewhat used in California for Medi-Cal planning, it has not been widespread (probably because California’s asset transfer rules have been so much easier to use). Currently, California allows notes to be valued as either their outstanding balance, or by an appraiser. DRA will now bar the latter.

Transfers to Purchase Life Estates

Rounding out its four "additional reforms" of the Medicaid transfer rules, DRA provides that money used to purchase a life estate interest in the home of another individual will be regarded as assets that have been transferred — unless the purchaser actually resides in the home for a period of at least one year after the date of the purchase (§6016(d)).(21)

Again Congress targets a technique that Medicaid applicants have used to artificially reduce their assets by purchasing exempt "residential" assets that were never actually used as a residence. Furthermore, in the past if the purchaser died after receiving Medicaid, there was the attractive prospect of avoiding estate recovery claims because of the disappearance of the life interest.

None of this seems particularly relevant in California because the technique DRA targets is seldom if ever used in this state. The reason is that California has allowed transfer of an applicant or beneficiary’s home to any person without transfer disqualification. Accordingly, in California the more likely planning technique has been for the nursing home resident to purchase a fractional tenants-in-common interest in a child’s home (carefully obtaining an appraisal and paying full market value for the fractional interest). After waiting a reasonable time the nursing home parent could then simply transfer his or her fractional interest back to the child, and suffer no transfer penalty. This new DRA rule may not have much impact on California planning practice. If planners stay away from "life estates" they will be outside its scope.

DRA (thankfully) does not directly address California’s liberal rule on transfer of residences (that is, a residence can be transferred to anyone without causing disqualification for the transferor if the transferee gives back a sworn statement of "right to return home"). However, the new DRA rule disqualifying applicants who have more than a certain amount of home equity may well limit the use of California’s home transfer rule. If an applicant has equity that exceeds $500,000, say for example $600,000, then the transfer will no longer be a transfer of an entirely exempt asset. It will be a transfer of an exempt home up to $500,000 and also a transfer of an additional countable $100,000 in equity. Accordingly, the transferor will then be deprived of the customary argument that he or she transferred only an exempt asset — and so should not suffer any transfer disqualification. Clearly, the transfer of the $100,000 in equity was "for a purpose to qualify for medical assistance" and would constitute a disqualifying transfer.22

There may be a great escape from the DRA’s equity rule in California. In this state the "market value of real property" is "the assessed value determined under the most recent property tax assessment, if the property is located in California" (emphasis added) (22 Cal. Code of Regulations §50412(a)(2)). Further, "the net market value of real or personal property is the owner’s equity in that property"; and "the net market value shall be determined by subtracting the encumbrances of record from the market value" (Cal Code of Regulations §50415). This rule, if retained, will vastly reduce the number of homes that have "equity" in excess of the DRA limits.

Effective Dates

DRA provides an elaborate set of transition rules for all the calculation reforms described above (§6016(e)). It would seem that these rules should be applicable to all the Medicaid changes. However, by its own terms, the transition rules are limited to only the calculation reforms in §6016.(23)

With certain exceptions, all the amendments made by this section (that is, the calculation reforms in §6016) apply to Medicaid payments for calendar quarters beginning on or after the date of enactment, without regard to whether or not final regulations to carry out such amendments have been promulgated by such date (§6016(e)(1)). DRA here appears to be referring to federal regulations, not state regulations.

DRA expressly excepts the following from the new rules in §6016 (§6016(e)(2)):

(A) medical assistance provided for services furnished before the date of enactment;

(B) assets disposed of on or before the date of enactment of this Act; and

(C) trusts established on or before the date of enactment of this Act.

DRA allows a sort of grace period, but only if HHS determines that a state needs legislation in order for the state’s Medicaid Plan to comply with the new DRA rules (§6016(e)(3)). If that is the case, the "effective date" is extended to allow for state law amendment. Mandatory enforcement of the new rules will be put off until the first day of the first calendar quarter beginning after the close of the next regular session of the state legislature. However, even if the "effective date" is postponed so that it only applies to new applications after that date, it is not clear if the new rules will still apply to transfers that occur on or after enactment of DRA.

All this language is very familiar. It is identical to the language used in OBRA 1993. California ignored it at that time. It is hard to know if it will ignore it again in DRA.

Conclusion: What is Left of Medi-Cal Planning?

Some gift planning may still be available, for example, gifts with a returned half, or half-a-loaf gifts combined with purchase of an annuity.

Planners are going to have to turn more attention to sheltering assets through transfers for value. Personal care contracts might work, assuming that they can be kept out of the category of "annuity." Applicants can still purchase exempt assets such as a car or home without adverse consequences. They can also then make non-disqualifying gifts of the same assets (with attention paid to the new home equity limits).

Medi-Cal applicants can purchase single premium life insurance. Such purchases do not appear to come under DRA’s annuity rules; they constitute a transfer for value, and they will accelerate eligibility. The proceeds at death will then be immune from estate recovery (at least so far).

Presumably applicants can still purchase a fractional interest in a home belonging to a child, and then transfer the interest back to the child as a gift. There are matters to consider in such plans: property and transfer taxes, and due-on-transfer provisions in deeds of trust, to name a few.

Planners are going to have to figure out ways to shelter the "excess" equity in an applicant’s home so the home can be transferred and sheltered from estate recovery. The state’s use of tax assessed value for "market value" may solve many of these problems.

If all else fails, attorneys will have to become much more expert at two arguments that disqualification resulting from a transfer of assets should be excused: that the transfer was for a purpose other than to qualify for Medi-Cal or that the applicant should nevertheless be approved for benefits on account of hardship.

Challenges lie ahead.

Gregory Wilcox, Esq., is an attorney in private practice in Berkeley, CA.


1. 120 Stat. 4, Public Law 109-171, formerly Senate Bill 1932. The entire statute is available at: Go Back

2. Title VI, Chapter 2 -- Long-term Care Under Medicaid, Subchapter A — Reform of Asset Transfer Rules, and Subchapter B — Expanded Access to Certain Benefits (relating to expansion of state long-term care partnership programs). Go Back

3. Indeed, Congress had before it a nice laundry list of Medicaid planning tools provided by the U.S. Government Accountability Office (GAO), "MEDICAID Transfers of Assets by Elderly Individuals to Obtain Long-Term Care Coverage," September 2005, GAO-05-968, available at:
Go Back

4. Omnibus Budget Reconciliation Act of 1993 (aka OBRA 1993). Go Back

5. Amending 42 U.S.C. 1396p(c)(1)(B)(i)). Go Back

6. 30 months in California because the state has never implemented the 36-month look-back rule required by OBRA 1993. Go Back

7. "Congress Imposes Punitive Medicaid Transfer Rules, Other Restrictions," by Harry Margolis, The ElderLaw Report, January 2006, Vol. XVII, No. 6. In addition there is the problem of documenting that something didn’t happen. Go Back

8. As 42 U.S.C. §1396p(c)(1)(D), new subdivisions (i) and (ii). Go Back

9. "Congress Imposes Punitive Medicaid Transfer Rules, Other Restrictions," by Harry Margolis, The ElderLaw Report, January 2006, Vol. XVII, No. 6. Go Back

10. There is some uncertainty about the pro-rating of a period of disqualification based on a partial return of a gifted asset. The federal statute speaks only of abatement of the disqualification if "all of the assets transferred for less than fair market value have been returned to the individual" (42 U.S.C. §1396p(c)(2)(C)(iii)). The CMS State Medicaid Manual restates the same language (§3258.10, C., 3.). However, the California Department of Health Services has allowed partial abatement in the past. Go Back

11. 42 U.S.C.§1396p, new (e)(1). Go Back

12. 42 U.S.C. §1396p(c)(2)(D)). Go Back

13. State Medicaid Manual §3258.10, C., 4. and 5. Go Back

14. On the other hand, one commentator points out that the hardship waiver is only for hardship of the resident, not for the financially pressed facility; so if the facility is forced to provide care at its own cost during a disqualification period, there may be no "hardship" for the resident. "Congress Imposes Punitive Medicaid Transfer Rules, Other Restrictions," by Harry Margolis, The ElderLaw Report, January 2006, Vol. XVII, No. 6. Go Back

15. §6011(c) expressly applies to the entire 6011 "section." Go Back

16. 42 U.S.C. §1396p(c)(1)(E)), new clause (iv). Go Back

17. 42 U.S.C. §1396p(c)(1), new subparagraph (H). Go Back

18. State Medicaid Manual, §3258.5, G. Go Back

19. Page 27, GAO-05-968, available at Go Back

20. 42 U.S.C. §1396p(c)(1), new subparagraph (I). Go Back

21. 42 U.S.C. §1396p(c)(1), new subparagraph (J). Go Back

22. 42 U.S.C. §1396p(c)(2)(C)(ii). Go Back

23. DRA limits the application of the following transition rules to "the amendments made by this section" [6016(e)(1)] and to the "amendments made by a provision of this section" [6016(e)(3)](emphasis added). Nevertheless, most commentators assume that the following transition rules apply to all of the new Medicaid transfer of assets rules, §§6011-6016. Planners will have to wait to see what HHS makes of this. Go Back