Medicaid estate planning: still not resolved.

Congress wants to send lawyers to jail instead of "Granny", but loopholes remain

Whether one believes that public benefit programs have in fact been bonanzas for lawyers and their clients, Congress certainly sent that message in the summers of 1996 and 1997.

In 1996 it enacted criminal sanctions for the transfer of assets with the intent of qualifying for Medicaid to cover long-term care costs. Without any public discussion, open debate or prior notice, Congress enacted Section 217 as part of the Health Insurance Portability and Accountability Act of 1996 ("HIPA"). Effective January 1, 1997, it provided that "whoever knowingly and willfully disposes of assets (including the transfer in trust) in order for an individual to become eligible for medical assistance under a State plan under title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance..." will be guilty of a misdemeanor if convicted and subject to fines up to $10,000 or imprisonment of up to 1 year or both.(1)

In passing the Balanced Budget Act of 1997 this past August, Congress replaced Section 217 with Section 4734. Section 4734 provides that whoever "for a fee and knowingly and willfully counsels or assists an individual to dispose of assets (including any transfer in trust) in order for the individual to become eligible for medical assistance under a State plan under Title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance..." will be guilty of a misdemeanor, if convicted, and subject to fines of up to $10,000 or imprisonment of up to 1 year or both.

Until January 1, 1997, there had been no criminal sanctions for the inappropriate transfer of assets to qualify for Medicaid.

Attorneys and their clients have historically taken advantage of the transferability of assets rules in order to meet eligibility guidelines for Medicaid coverage. This process, known in the legal community as "Medicaid Planning," has been an accepted estate planning technique since the Medicaid transfer rules were first promulgated by Congress. These rules never absolutely prohibited the transfer of assets. Rather, if a transfer of assets occurred, the individual was merely deemed to be ineligible for Medicaid for a period of up to 30 months, depending on the uncompensated value(2) of the transfer.

This means that a Medicaid applicant or his/her spouse is prohibited from transferring for less than fair market value any resource that is potentially available to cover nursing home costs within 30 months of institutionalization or, if the individual is already institutionalized, within 30 months of applying for Medicaid.(3) To transfer resources for less than fair market value within the period of ineligibility gives rise to a rebuttable presumption that the transfer was with the intent to qualify for Medicaid.(4)

The applicant or spouse must then show by clear and convincing evidence that he/she intended to obtain fair market value for the transfer but did not, or that the purpose of the transfer was not to qualify for Medicaid.(5) If a presumption of an inappropriate transfer cannot be rebutted, the applicant is subject to a period of ineligibility for Medicaid benefits, not to exceed 30 months.(6)

Attorneys have circumvented the legislated prohibitions by carefully calculating their clients' assets and timing the period of ineligibility caused by transfers before they allow clients to file Medicaid applications. If the client revealed all of his/her assets and the attorney's calculations were correct, the client qualified for Medicaid because the assets were no longer in the client's estate and the 30-month period of ineligibility had passed. The only way to get "caught" was to miss an asset that was later found by the state's Department of Human Services or to incorrectly calculate the period of ineligibility, in which case the client would be subject to a further waiting period and reapplication before he/she qualified for Medicaid.

Some sources estimate that as much as $5 billion a year, or approximately 20% of Medicaid nursing home expenditures, could be saved if Medicaid planning could be stopped.(7) In 1994, 69% of nursing home residents were at least partly financed by Medicaid.(8)

Although proponents of Section 217 anticipated making more stringent penalties for such Medicaid planning techniques, in reality, Section 217 was too vague to be useful. There was no definition of what constituted a "willful" transfer of assets. Also, the individual would have to apply for Medicaid during a period of ineligibility to be "caught." The Department of Human Services would have no way of knowing that an individual transferred assets more than 30 months prior to his/ her application because the Department is legally restricted to a 30 month look-back period, thus making the likelihood of finding violations even more remote.

In addition, this past April the U.S. District Court for Oregon dismissed a case challenging the legality of Section 217, Peebler & Nay v. Reno, finding that where an individual had waited the ineligibility penalty period before filing a Medicaid application, even if the individual transferred assets during that period, Section 217 was not triggered."

Despite the fact that Section 217 of HIPA was frought with enforceability problems, public pressure continued to demand its repeal. In passing the Balanced Budget Act of 1997, Congress replaced Section 217 with Section 4734, penalizing the advisors rather than "Grandma and Grandpa." Although it might appear to the nursing home industry that Congress has moved closer to holding the "offending party" accountable in transfer of asset cases, Section 4734 is no panacea. Its scope is open to interpretation. It is possible that a paid counselor will run afoul of Section 4734 only when he/she counsels the client to not only transfer assets, but to apply for Medicaid during the resulting period of ineligibility. This narrow interpretation of Section 4734 would be consistent with the dicta set forth in Peebler & Nay v. Reno.(10)

A broader interpretation of Section 4734 would be that criminal sanctions attach as soon as a paid counselor advises a client to transfer assets to become eligible for Medicaid, regardless of whether the client waits the period of ineligibility before filing a Medicaid application. It is unlikely, though, that Section 4734 will be given such a broad interpretation, due to the pressure being exerted on behalf of seniors by special interest groups, various attorney organizations and the National Academy of Elder Law Attorneys. In addition, the attorney under this broad interpretation might be subject to criminal sanctions based upon actions over which he/she had no control, should the client ignore the attorney's instruction or fail to disclose all of his/her assets, thus causing the attorney to incorrectly calculate the period of ineligibility.

Moreover, Section 4734 has been attacked as an unconstitutional infringement on First Amendment freedom of speech guarantees. This First Amendment challenge lies in the fact that it is unconstitutional to prevent an attorney from providing counsel to a client about legal activities. Transferring assets is legal, provided the individual does not apply for Medicaid during the period of ineligibility triggered by the transfer.

It is clear that if Congress wishes to eliminate Medicaid planning as an estate planning technique, Congress will need to go back to its initial rules on the transfer of assets. Specifically, Congress will need to significantly expand the "look back" period, making it financially unfeasible or impossible to transfer assets for Medicaid eligibility - perhaps even making the look-back period unlimited.

Proposals have already been made to revise Section 4734. One such proposal, from the Congressional Research Service, suggests that Section 4734 be revised to make it illegal for a paid counselor to advise or assist an individual in not disclosing the disposition of assets to qualify for Medicaid. This would resolve the First Amendment challenge. It still would not resolve the transfer of assets issue.

There appears to be no easy legislated resolution to Medicaid planning on the horizon. Many attorneys are following the dicta set forth in Peebler & Nay v. Reno and continue to advise clients on how to transfer assets and wait the period of ineligibility before applying for Medicaid.

Where does this leave nursing home administrators who seek timely Medicaid reimbursement but oppose estate planning to cover it? One "self-help" method available to them that has not been altered by the transfer of assets debate is the estate recovery action. These are available in states where the estate of the institutionalized resident or the community spouse has assets that are deemed to be available to pay for long-term care costs.(11) In addition, nursing home administrators and their trade associations can advocate for a reform of the transfer rules.

1. Pub. L. No. 104-191 Section 217 (August 21, 1996) [amending Section 1128B(a)(42U.S.C. 1320a-7b(a)].

2. Uncompensated value equals the fair market value of the asset transferred minus the value of what was received for the asset.

3. 42 U.S.C. Section 1396p(c)(1)(A) and (B); See also Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, Section 6411 (e) [amending 42 U.S.C. Section 1396p(c)].

4. 42 U.S.C. Section 1396p(c)(2)(C).

5. 42 U.S.C. Section 1396p(c)(2)(I) and (c)(2)(C)(ii).

6. The period of ineligibility is calculated as follows: (1) Until the asset is returned; (2) the uncompensated value of the asset divided by the average monthly private pay rate for nursing home care; or (3) 30 months, whichever is less. 42 U.S.C. Section 1396p(c)(1)(A)(B)(i). Note that there is an undue hardship exception to this provision. 42 U.S.C. Section 1396r-5(c)(3)(C).

7. Cantwell, J.R., Solutions to the Medicaid Funding Problem. Dallas, Tx: National Center for Policy Analysis, 1995.

8. American Health Care Association, Facts and Trends: The Nursing Facility Sourcebook. Washington, D.C., 1995.

9. The action was filed on February 14, 1997, by Margaret Peebler and Tim Nay, the first President of the National Academy of Elder Law Attorneys, against Janet Reno, Attorney General of the United States. The action sought a declaration that Section 217 was void for vagueness and did not create a crime where the Medicaid application was filed after the period of ineligibility due to the transfer of assets had elapsed.

10. This case will be viewed by most courts as dicta because there was no decision on its merits.

11. Remember that a community spouse cannot generally disinherit an institutionalized spouse because a legal living spouse is entitled to a 1/3 interest in the deceased spouse's estate. An election against the will can be forced via the institutional spouse or his/her guardian for recovery of these assets which can be used to pay long-term care expenses.

Terry A. Donner, Esq., is a Cleveland, Ohio-based nurse-attorney who practices healthcare law for a national managed vision care company and provides healthcare law and risk management consulting services to long-term care and healthcare organizations. She teaches health law, health policy and risk management at Ursuline and Notre Dame Colleges in Cleveland.