Medicaid Planning: Proceed with Caution

September 2006—After Congress passed—and President Bush signed—the Deficit Reduction Act of 2005, many observers wondered what would happen to Medicaid planning and to the sale of “Medicaid friendly” insurance products. If you took a hard line on this issue—either viewing DRA as a death knell or as no big deal—it’s time to take another look.

That’s because two issues are clouding the matter. The first is whether or not DRA is a valid law. Due to a Senate clerk’s error, the president signed legislation passed by the Senate, but not by the House. Result: a prominent elder law attorney, Public Citizen (a consumer advocacy group), and several other parties have filed suit asking that DRA be declared unconstitutional.

The second reason: No state has adopted the new rules, says Jim McHale, a Medicaid expert with the The Ohlson Group in Indianapolis, Indiana. Typically, states have until the first day of the first calendar quarter after the end of the legislature’s next session to adopt Federal legislation. At this point, it’s unclear exactly how they’ll implement DRA’s Medicaid provisions and whether they’ll make their rules retroactive to February 8, 2006 or to some later date.

Given these uncertainties, some Medicaid planners believe there’s a window of opportunity to develop plans under the old rules. Others, like McHale, urge caution. “There are too many factors involved,” he says. “I’d rather be safe than sorry.”

At the very least, advisors must understand how the new rules differ from the old and inform clients of the risks of proceeding under either framework.

According to Dale M. Krause, J.D., LL.M, of Krause Financial Services in De Pere, Wisconsin, the “new” Medicaid has five restrictions that advisors must consider:

• The old “look back” period for asset transfers is now five years instead of three.

• If Medicaid discovers an asset transfer within five years, the monthly penalty period it imposes (determined by the size of the transfer, divided by average monthly cost for nursing home care in the client’s state) will now start at the time the person applies for Medicaid, not the time he or she made the transfer.

• Clients who purchase a Medicaid Qualified Annuity can no longer name any beneficiary they wish. Under DRA, the state Medicaid agency has to be named as the primary beneficiary.

• Community spouses must consider the institutionalized spouse’s income before applying to increase their “Monthly Maintenance Needs Allowance”. In effect, DRA mandates an “income first”, rather than an “asset first” test.

• Medicaid will no longer allow Medicaid applicants to exclude the entire value of their home. In the future, they will only get to keep either $500,000 or $750,000 (depending on which limit the state chooses). In states with high real estate values, applicants could be barred from Medicaid. They’d have to spend the difference, which could be huge, on nursing home care before qualifying for Medicaid.

Given Medicaid’s complexity—and the current uncertainties—advisors should proceed with caution. In addition to being upfront with clients about the risks involved, you should also be upfront with yourself about the limits of your knowledge. A strategy that works regardless of where Medicaid lands? Make friends with a good elder law attorney.

What “Red Flags” are affecting your business? The National Ethics Bureau welcomes your input. Send your comments to: hlew@ethicscheck.com