New Jersey Medicaid Planning Guide
- Levels of Long-Term Care, Cost and Eligibility
- Citizenship and Residency
- Clinical Eligibility
- Transfer of Assets
- Ten Common Mistakes in Medicaid Planning
- 1. Waiting.
- 2. Failing to Transfer the Home.
- 3. Failing to Disclose all Assets or all Transfers to Medicaid.
- 4. Failing to Change the Will of the Community Spouse.
- 5. Failing to Transfer Aggressively.
- 6. Failing to Administer Trusts Properly.
- 7. Timing of the Snapshot.
- 8. Failing to Take Advantage of Exempt Transfers.
- 9. $15,000 Transfers.
- 10. Failing to Take Assets out of an Income Only Trust.
- Ten Top Planning Strategies
- Estate Recovery
Levels of Long-Term Care, Cost and Eligibility
There are four frequently used levels of care in New Jersey. The cost of adult day care averages $70 to $120 per day, home care averages $28 per hour from an agency, assisted living averages $6,000 to $10,000 per month, and nursing homes cost $10,000 to $14,000 per month. Medicaid will pay for all four of these levels of care.
Citizenship and Residency
To be eligible, the applicant must be a resident of the United States who is either a citizen or an alien who can be classified as an eligible alien. The applicant must also be a resident of the State of New Jersey.
There is also a clinical eligibility test. Essentially, to be eligible for Medicaid an applicant must be unable to perform three of the six activities of daily living, which are transferring, bathing, dressing, feeding, toileting, and continence, or suffer from severe mental impairment.
There is an income test for Medicaid for all four levels. The income cap for Medicaid eligibility is $2,349 per month for 2020. All income that a Medicaid applicant receives is counted. This includes earned and unearned income. Income from the sale of a resource is excluded. The proceeds continue to be treated as a resource. Monies received as a settlement from a casualty insurance claim so long as the repair or replacement is made within 9 months is excluded. Third-party payments for medical care or services, including room and board, are excluded. Income received by the spouse of a Medicaid applicant is not counted. New Jersey follows the “name on the check” rule. This means that income belongs to the person whose name is on the check. If a check is payable to a particular individual, that individual is considered to be the owner of the income. If income exceeds the income cap, a Qualified Income Trust (“QIT”), also known as a Miller Trust, can be established to obtain eligibility.
For Medicaid eligibility purposes, income and assets are considered resources. The asset limit for Medicaid for all four levels of care is $2,000. If the applicant is an adult residing in the same household as his or her spouse, the resources of the ineligible spouse, also known as the community spouse, are deemed to the applicant in determining resource eligibility. A resource assessment is made at the beginning of the first continuous period of institutionalization or the date of the Medicaid application, whichever first occurs. For a married couple the Community Spouse may retain half of the couple’s countable assets with a minimum of $25,728 and a maximum of $128,640 in 2020. Certain resources are excludable. All resources are included, except a house occupied by an individual as his or her principal residence. One automobile is excluded, if it is used for transportation for the individual or a member of the individual’s household. Personal effects with a value not exceeding $2,000 are excluded. The cash surrender value of life insurance policies, if the total face value of the policies does not exceed $1,500 are excluded. The value of resources that are not accessible to an individual through no fault of his or her own, such as irrevocable trust funds, property in probate, real property that cannot be sold because of refusal of a co-owner to liquidate are not counted. Burial spaces intended for use for the individual, his or her spouse, or any other member of his or her immediate family are excluded.
Transfer of Assets
There is a Medicaid transfer of asset penalty for any transfers for less than fair market value made within five years prior to applying for Medicaid or receiving an institutional level of care, whichever comes first. An institutional level of care is a nursing home, an assisted living facility, or home care where the recipient meets the clinical eligibility test. The penalty for a transfer within the five-year lookback period is calculated by dividing the amount transferred by the average monthly nursing home cost, regardless of the level of care actually being received, which for 2020 is $10,730.10 per month or $357.67 per day.
Assets include all assets of the individual and the individual’s spouse. They also include assets to which the individual and the individual’s spouse are entitled, but do not receive because of inaction. Examples would include waiving a right of inheritance or not accepting or accessing a personal injury settlement. The transfer of a home would be considered an asset, even if the individual is residing in the home as a primary residence. Fair market value is an estimate of value based on generally available market information. Transfer of asset provisions apply to transfers made by the Medicaid applicant or the spouse of the Medicaid applicant. There are exceptions to the Medicaid transfer of asset penalty for transfers of assets to certain individuals. The home may be transferred without penalty to:
- The spouse of the Medicaid applicant;
- A child under age 21 or a child of any age who is blind or totally and permanently disabled;
- The brother or sister of an institutionalized individual who already has an equity interest in a home prior to the transfer, and who is residing in the home for a period of at least one year immediately before the individual becomes an institutionalized individual;
- The child of an institutionalized individual who is residing in the individual’s home for at least two years before the date the institutionalized individual became institutionalized, and who provided a level of care to such individual which permitted the individual to reside at home rather than in an institution or facility; or
- A trust established for the sole benefit of an individual under age 65 who is disabled.
Non-home assets may be transferred to:
- The spouse of the Medicaid applicant;
- A child who is blind or totally and permanently disabled;
- A trust established for the sole benefit of an individual under age 65 or to a child of any age who is disabled.
Hardship provisions exist but are extremely difficult to prove.
Ten Common Mistakes in Medicaid Planning
The single biggest mistake is waiting to plan. As a general rule, the sooner Medicaid planning begins the better the result. If significant assets are transferred, there is a five-year lookback, and the five-year lookback does not begin until the assets are actually transferred. Start now.
2. Failing to Transfer the Home.
If the Medicaid applicant is married and the community spouse is residing in the home, their home is not considered to be a countable asset for Medicaid eligibility purposes. However, if the house is still titled in both spouses’ names when the institutionalized spouse dies, Medicaid will place a lien on the home. When the community spouse sells the house or dies, Medicaid will insist on repayment. Transferring title prevents this.
3. Failing to Disclose all Assets or all Transfers to Medicaid.
Failure to disclose assets or transfers to Medicaid constitutes Medicaid fraud, which is a criminal offense. It can also cause a loss of eligibility and Medicaid may demand repayment for past medical assistance.
4. Failing to Change the Will of the Community Spouse.
Spouses usually have wills leaving their estates to the other. However, if a community spouse has a will leaving assets to the institutionalized spouse, the institutionalized spouse will be disqualified from Medicaid until all of the inheritance is spent down. In New Jersey there is an elective share statute, so the community spouse should leave the institutionalized spouse the minimum amount to satisfy the elective share but the remainder should be left to children or other family members or friends.
5. Failing to Transfer Aggressively.
Occasionally individuals transfer assets to children but retain too much in their own names. If this happens, there will be excess resources at the time the individual would otherwise be eligible to apply for Medicaid, and those excess resources will have to be spent down, further delaying Medicaid eligibility. It is always better to over-transfer to reliable children, family or friends, because those individuals can retransfer to the extent necessary to pay for care.
6. Failing to Administer Trusts Properly.
Frequently individuals place assets in irrevocable trusts and then take them back out in whole or in part, or they use trust funds to directly pay long-term care expenses. Medicaid correctly considers these trusts to be a sham.
7. Timing of the Snapshot.
In New Jersey the community spouse is allowed to keep one-half of the countable assets with a maximum of $128,640 in 2020. If assets are spent down below $257,280 prior to the snapshot, which is the date of the Medicaid application or the date of institutionalization, whichever first occurs, then half will be less than $128,640.
8. Failing to Take Advantage of Exempt Transfers.
Exempt transfers are discussed above.
9. $15,000 Transfers.
Individuals think they can transfer $15,000 per year to each child without a transfer of asset penalty. They are confusing what used to be the annual exclusion for gifts under the Federal Gift Tax law with Medicaid transfer of asset rules. New Jersey does not have a de minimis exemption for transfers from the transfer of assets penalty, so technically even modest birthday and holiday gifts are subject to the penalty. Most caseworkers will overlook those modest gifts, but some will not.
10. Failing to Take Assets out of an Income Only Trust.
An individual can transfer assets to an irrevocable trust reserving income to himself. The transfer of asset penalty begins when the assets are transferred to the trust. However, New Jersey has a broad definition of estate recovery, so assets in the Income Only Trust would be included for estate recovery purposes. The solution is to transfer the assets out of the Income Only Trust prior to applying for Medicaid. This will result in a transfer of asset penalty calculated by applying the average income over the past five years by the life expectancy of the Medicaid applicant. It is better to pay the penalty than to lose the assets to estate recovery.
Ten Top Planning Strategies
Planning strategies basically fall into two categories: spend down and transfer of assets. The ten top strategies include the following:
There are several options with respect to the home. The home could be transferred to the community spouse without a transfer of asset penalty. However, if the community spouse suffers from a diagnosis or is aging, then this might not be the best option. The home could be transferred to children subject to the transfer of asset penalty, but there are risk factors such as lawsuits by children’s creditors, divorce, death of a child, etc. The child will also be saddled with carryover basis on the value of the home. Often, transferring the home to an irrevocable trust and retaining a right to use and occupy for the individual makes the most sense. The individual would pay all of the expenses of maintaining the home including taxes, insurance, utilities, etc. The individual would remain entitled to the homestead tax rebate, senior citizen’s deduction, Veteran’s deduction, Veteran’s exemption, and real estate tax freeze. The transfer would be subject to the Medicaid transfer of asset penalty. However, the primary residence exclusion on the sale of a home could be retained as well as the step-up in basis, if the home is not sold during the individual’s lifetime. The home could be transferred without a Medicaid transfer of asset penalty to: a child under age 21, a child who is blind or disabled, a sibling who has lived in the home for at least one year prior to the date of institutionalization and has an equitable interest in the home, or to a caregiver child discussed above. The Medicaid applicant could sell a remainder interest in the home. The purchase price for the remainder interest would be the Medicaid value of the home minus the value of the life estate. At age 75, a life estate is worth approximately 52%. Therefore, a remainder interest in a $400,000 house could be sold to a child for approximately $192,000. The problem is if the home is sold during the parent’s lifetime, the parent would be entitled to that portion of the proceeds of sale represented by the value of the life estate.
2. Debt Repayment.
The Medicaid applicant could repay all debts including outstanding mortgages on real estate, home equity loans, car loans, credit card bills, and student loans.
3. Making Home Improvements.
Prior to the application for Medicaid, the community spouse may want to spend money on home improvements that will have to be made anyway over the next few years.
4. Buying a New Car.
The community spouse may want to purchase a new car.
5. Prepaid Funeral Contracts.
A prepaid funeral should be purchased for the Medicaid applicant and the community spouse, and burial plots could be considered for other family members.
The community spouse may wish to purchase a Medicaid-compliant annuity. This would convert countable assets used to purchase the annuity to a non-countable income stream for the community spouse.
7. Transferring Assets to a Blind or Disabled Child.
There is no Medicaid transfer of asset penalty for gifts to a blind or disabled child, but care must be taken not to disqualify that child from public benefits they may be receiving and a determination must be made as to whether the child has liens against him. The child must be responsible. When necessary, assets should be transferred to a blind or disabled child using a special type of trust designed to protect the child’s own benefits.
8. Care Agreements.
If a child is caring for a parent, a written care agreement can be drafted and the parent can hire the child to provide care. The agreement should be very detailed outlining the scope of care, the hours of care being provided, and should provide for reasonable compensation. Fifteen dollars an hour is probably about the limit that would escape a Medicaid challenge. The Care Agreement must be fully executed and in place prior to any money changing hands in payment of caregiving services.
9. Large Transfer of Assets.
A large transfer of assets could be made, including the transfer of the home to a trust with the expectation that the Medicaid applicant or the transferee would pay for whatever care is necessary for five years.
10. Transfer Assets and Pay a Penalty.
If assets are transferred during the five-year period, there will be a Medicaid transfer of asset penalty. The penalty is calculated by dividing the amount transferred by the divisor, which currently is $10,730.10. So if $107,301 were transferred, the Medicaid applicant would be ineligible for Medicaid for ten months. If the applicant were receiving care at home at a cost of $3,000 per month, half of the funds transferred to the transferee would have to pay for the care. If the care costs $3,000 per month, the transferee would essentially be giving back $30,000, but would retain the remaining $77,301. In order for this strategy to work, the Medicaid applicant must be clinically and financially eligible, so all assets must be transferred and a Medicaid application must be filed.
New Jersey recovers from the estates of deceased Medicaid recipients. New Jersey has a broad definition of estate for this purpose. No recovery is made until after the death of the Medicaid recipient’s surviving spouse, and then only if there are no surviving children under the age of 21 or that are blind or permanently disabled. Federal law requires estate recovery only from a probate estate, but New Jersey has expanded that definition to include all assets, real and personal, including assets conveyed to a survivor through joint tenancy, tenancy in common, survivorship, or a living trust. A third party trust established for the benefit of the deceased Medicaid recipient is not subject to estate recovery. However, under the concept of tracing, if a trust is established by a third party with assets owned by the Medicaid applicant within five years prior to the beneficiary’s death, then those assets are subject to estate recovery. Again, there are hardship provisions, but hardship is extremely difficult to prove. While the statute excludes a life estate, an Income Only Trust would be included in estate recovery. Estate recovery applies only to Medicaid payments made for services received after the individual attains age 55. No recovery is made if the estate is under $500.
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