Vermont Bar Association

Seminar Materials

2012 BASIC SKILLS IN VERMONT

PRACTICE & PROCEDURE

Elder Law

August 23 & 24, 2012

Windjammer Conference Center

South Burlington, VT

Faculty:

Glenn A. Jarrett, Esq.

Diane Rosen Pallmerine, Esq.

Elder Care: Legal and Financial Planning Basics

August 24, 2012

Vermont Bar Association Basic Skills Course

I. Introduction to Elder Law-- D. Pallmerine & G. Jarrett A. Scope of Elder Law B. Ethical Issues—Do Vermont’s Professional Conduct Rules really work?

Who’s the Client, Informed Consent Issues C. Guardianship

II. Introduction to Long-Term Care—D. Pallmerine A. Options B. Costs C. Benefit Programs

III. Medicare Benefits for Skilled Nursing Facilities and Home Health Care--G. Jarrett

IV. Current Issues in Medicaid Qualification for Nursing Home Care and In-Home Services—D. Pallmerine & G. Jarrett (including materials by M. Caccavo)

A. The Basic Eligibility Requirements for Individuals B. Spousal Qualification C. Transfer of Assets Rules after DRA Implementation D. Real Estate, Promissory Notes, Mortgages, Annuities and other

Special Assets E. Estate Recovery

V. Using Special Needs Trusts to Protect Assets and Provide Access to Care—G. Jarrett

A. When to use SNTs

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II. Introduction to Long-Term Care

Dianne Rosen Pallmerine, Esq.

A. Care Options

1. Remaining at Home

2. Continuing Care Retirement Communities

3. Independent Senior Housing

4. Adult Day Care

5. Program of All-inclusive Care for the Elderly (P.A.C.E.)

6. Residential Care and Assisted Living

7. Nursing Homes

B. Costs of Care

1. Remaining at Home

2. Continuing Care Retirement Communities

3. Independent Senior Housing

4. Adult Day Care

5. Program of All-inclusive Care for the Elderly (P.A.C.E.)

6. Residential Care and Assisted Living

7. Nursing Homes

C. Paying for Long-Term Care

1. Long-term Care Insurance

2. Medicare Coverage for Long-term Care is Limited

3. Veterans Benefits

4. Long-term Care Medicaid: Choices for Care

5. Reverse Mortgages

D. The Care Manager's Role

I. Introduction to Long-Term Care

Dianne Rosen Pallmerine, Esq.

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Three factors contribute to the high and increasing cost of long-term care:

1. People are living longer

2. People are dying slower

3. Care costs more

The overall life expectancy in the U. S. has increased by thirty years since the last

century, from 49.2 years in 1900 to 77.8 years in 2008. The improvements in life expectancy in

the first half of the twentieth century came from public health measures affecting particularly

infants and children. Since the 1950s, the increase has been mainly due to prevention and

treatment of chronic diseases of adults.1

Not only are people living longer, they are dying more slowly. They can live longer with

diseases that once would have quickly killed them, supported by ongoing care and treatment.

When a health crisis occurs, there may be new interventions to try to postpone death. In 1900, as

many as 80% of people in this country died at home. By 1950, about 50% of people still died at

home, while the other half died in hospitals. By 2004, 68% of people died in an institutional

setting, 46% in hospitals and 22% in a long-term care facility.2

A. Care Options

For the United States overall and for the State of Vermont, the Baby Boomers are

moving into retirement age. That means that the number of people over age 65 and the

proportion of the population that is over age 65 in both the nation and in Vermont will continue

to increase.3 The older someone is, the more likely the person is to need assistance with some

daily tasks. Long-term care is an elastic term, covering the medical or personal assistance that a

person needs due to a chronic problem or disability. "Activities of daily living" (ADLs) are

basic abilities, such as bathing, dressing, toileting, or eating without assistance. Another class of

activities, called "instrumental activities of daily living" (IADLs) involve more complex abilities,

like cooking a meal, doing housework or balancing a checkbook. A person's difficulties with

ADLs or IADLs can impair the person's ability to live independently.

1 Corr, C.A. et al., Death and Dying, Life and Living (2008).

2 Kiernan, Stephen P., Last Rights (2006).

3 Wasserman, J., Shaping the Future of Long Term Care and Independent Living. Vermont Dep't of Disabilities,

Aging and Independent Living (June, 2008).

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How likely is it that someone turning 65 will need long-term care at some point in his

remaining lifetime? What level of care is likely to be needed? How long is care going to be

needed for? These are the kinds of questions that people ask as they try to plan for future care.

There are some average answers to these questions that appear regularly in articles and fact

sheets on long-term care, often without any source given for the information. The common

source appears to be a 2005 study ("2005 Study) that used computer simulations and existing

data on care needs and use to make predictions to guide policy and personal long-term care

decisions.4

The 2005 Study predicted that people turning 65 in 2011 will need an average of three

years of long-term care, about two years for men and just under four years for women. For

purposes of the study, long-term care would be needed by people with at least a moderate level

of disability, which was defined as needing help with at least one ADL or at least four IADLs.

Needing help with multiple IADLs signals the presence of significant cognitive impairment, such

at would be seen in the middle stages of Alzheimer's Disease. Of the three years of long-term

care, two years are predicted to be received at home and the remaining year would be received in

a care facility, either in an assisted living or a nursing home setting. Looking at average needs

does not reflect the large variation in care needs between individuals. About one third of the 65

year olds in the study will never need long-term care. At the other end of the care spectrum,

about 1/5 of the group will need more than five years of care. The 2005 Study will be referred to

again, as specific care options are considered.

1. Remaining at Home

Most people hope to remain in their own home as they age.

Having built a life in a place, people want to continue have their familiar base, even as they adapt

growing older. Giving up the home can become a symbol of the other losses imposed by time.

For the one third of people aged 65 that will not ever need long-term care, remaining at home is a

good option. Many people who need some degree of long-term care also manage to remain in

their homes, mainly with the assistance of family and friends. The 2005 Study predicts that, of

those needing long-term care, two thirds will receive that care at home. Three quarters of the

4 Kemper, P., Kosimar, H. and Alecxih, L., "Long-term Care Over an Uncertain Future: What Can Current Retirees

Expect?", Inquiry 42:335-350 (Winter 2005/2006). [Citing as Kemper et al., 2005.]

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care will come from informal supports and only one quarter of the care will be from paid

caregivers.5 The value of the unpaid care received is estimated to be more than $375 billion each

year. In 2007 the total amount spent by Medicaid for long-term care services was $97 billion.

The long-term care system in this country could not function without the huge contribution of

unpaid care.6

Sometimes a shared living arrangement can allow an elder can remain in the community,

rather than in an institutional setting. Often the caregiver is a child who moves into the parent's

home or has the parent move into the child's home. HomeShare Vermont is a non-profit

organization that matches people who have housing with people who are looking for low-cost

housing in exchange for providing some services.7 For an elder who needs companionship or

some housekeeping chores done, this may be the answer. A student or working person may live

in the elder's home rent-free in exchange for doing a set of chores or may pay a reduced rent just

for being a presence in the home at night. HomeShare also matches homeowners with people

who can provide full or part-time non-medical, personal care. A full-time caregiver will live in

the home and also receive a salary.

2. Continuing Care Retirement Communities

The idea of "aging in place" has a lot of appeal. Some people select a

place to move to after retirement that promises to allow them to stay within a community

regardless of the path their health takes. Continuing Care Retirement Communities (CCRCs)

charge a high entry price when independent seniors take up residence and charge a monthly fee

as well. The hope is that the residents will remain active and independent. But if a resident or

one member of a resident couple needs a higher level of care, there are assisted units and nursing

home level care available within the community. Even if the spouses must live separately, they

will be close enough so that the healthier spouse and friends from the community can visit

without having to drive or arrange for other transportation.

3. Independent Senior Housing

5 Kemper et al., 2005 at 342-343.

6 AARP, Across the States, Profiles of Long-term Care and Independent Living, 8th edition, 2009.

7 Their offices are at 412 Farrell Street, So. Burlington, VT 05403, tel. (802) 863-5625, website:

http://www.homesharevermont.org

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Even a senior in good health might decide that continuing to manage the

family homestead is too costly or takes too much time and effort. There are senior communities

where the senior can purchase a smaller home, that will be more economical to run and that has a

property management company handle the outside chores. There are senior apartment

complexes that have some additional common amenities and provide transportation to shopping.

Having other people nearby can provide a social life for a senior who had become isolated. The

apartment life can be reassuring, since there are people to call on in an emergency or who will

check on one another.

4. Adult Day Care

While adult day care is not a type of living situation, it can be a resource

that allows a senior to remain in the community. The senior goes the center location and can

spend the day there, in a safe and supervised environment. Meals and snacks are provided.

There is medical supervision from nurses. Social work services are available. Various activities

keep the participants engaged and active. The availability of adult day care can allow a caregiver

spouse time to take care of her own needs, so that she does not become ill herself. Or, the

regular hours can allow a caregiver child to continue working without worrying that a frail or

cognitively impaired parent is in trouble at home.

5. Program of All-inclusive Care for the Elderly (P.A.C.E.)

Like an adult day care program, PACE has a central location where

participants spend the day and receive medical care, meals and a variety of other services.8

Transportation to the PACE site is provided as part of the program. PACE is available to people

over age 55 needing a nursing home level of care, but still living in the community. The first

PACE site opened in Colchester in 2007 and serves residents in Chittenden and southern Grand

Isle Counties. The second PACE site opened in Rutland in 2008 and serves Rutland and

northern Bennington Counties. Unlike adult day care, PACE operates like a managed care

provider for its participants. It pools the participants' insurance benefits or private payments, and

then provides all their acute, primary and long-term care needs. The payments that support

PACE come from Medicare, Medicaid, private insurance and direct payments from participants.

6. Residential Care and Assisted Living

8 www.pacevt.org

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Across the United States "assisted living" is a broad term that covers the

housing plus care options that are between independent living and nursing home care. The term

can describe very different living situations, depending on the state. In Vermont, a distinction is

made between "residential care" and "assisted living".

By statute, a residential care home provides room, board and personal care. A residential

care home can be a private home, with just a few residents. There are two levels of care a

residential care home can provide. Level IV is the lower level of care, including help with basic

personal needs such as meals, grooming and mobility. There is medication management, but not

other nursing care. Level III homes include the same care and medication management, but add

some nursing supervision of care.9

In assisted living, the resident has at least a bedroom and a private bathroom, and a

locking door. The assisted living unit must have a kitchen area or there may be access to a

communal cooking area.10 Assisted living facilities usually have a congregate dining room and

residents have the option of having all of their meals prepared for them. All assisted living

facilities must provide Level III care. There are always staff members on site and a nurse comes

in regularly for medical supervision. Daily activities and classes are provided.

7. Nursing Homes

Nursing homes are also called "skilled nursing facilities" ("SNFs") or

Level I/Level II facilities. They provide skilled nursing care, rehabilitation services, health care

and other services.11 There is round-the-clock nursing coverage. Nursing homes are the most

institutional settings in which someone can receive long-term care. Residents often share a room

and the doors are not locked. There is little personalization, either in the décor or the daily

routines.

9 33 V.S.A. § 7102(10); Residential Care Home Licensing Regulations, Agency of Human Services, eff. 10/3/2000.

10 33 V.S.A. § 7102(1); Assisted Living Residence Regulations, Agency of Human Services, eff. 3/15/2003.

11 33 V.S.A. §7102(7)

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B. Costs of Care

1. Remaining at Home

Allowing for variation in the type of support needed, care at home can be

the least expensive and most customized way to receive long-term care. As discussed above,

must of the assistance seniors receive at home is provided at no cost by family and friends.

An occupational therapist from a local home health agency or hospital can come to the

home and assess how well the home meets the senior's needs. The occupational therapist can

suggest modifications to make the home safer and more manageable. It may just take hiring a

carpenter to construct a ramp, to make it possible for someone using a walker or wheelchair to

get into the house. More major alterations can cost many thousands of dollars, such as adding a

ground floor bathroom to a house that lacks one.

Even a very frail, impaired senior can remain at home if there are sufficient financial

resources to pay for the level of care needed. Home health agencies will charge at an hourly rate,

starting with a minimum of three hours. In the Burlington area, a client would expect to pay in

the range of $20-$25/hour, through an agency that handles the intricacies of payroll, including

unemployment insurance and worker's compensation. Agencies generally charge a lower hourly

rate for longer blocks of time. A caregiver who spends the night, with a patient who generally

sleeps through the night, might cost around $250 for the twenty-four hour shift. Rates may be

higher for more difficult care situations.

For those who do not wish to use an agency, the Rewarding Work website,

http://www.rewardingwork.org, has lists of available personal care providers and lists of people

needing care. Jobseekers can list their information for free. Potential employers can purchase a

subscription, starting with $10 for one month of access. The Vermont Association of Area

Agencies on Aging has put together a booklet called Employing a Caregiver in Your Home that

details the federal and state payroll responsibilities a direct employer of a caregiver takes on.12

By way of comparison, a person with advance dementia who is agitated and wanders at

night, might need the services of two full-time caregivers, so that someone is always awake with

12 To obtain a copy online go to www.nevaaa.org, navigate to the Family Caregiver Support page and look for the

booklet name. You can also call the Senior HelpLine at 1-800-642-5119.

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the person. At a conservative $1000/week/caregiver, with two caregivers, a month of care will

cost in the neighborhood of $8,000. This is comparable to the cost of a nursing home.

2. Continuing Care Retirement Communities

The first CCRC in Vermont was Wake Robin in Shelburne. All residents start out living

independently. There is a steep entrance fee and a monthly charge that will depend on the type

of housing selected. Once the resident makes his selection, that will determine the monthly rate

he pays as long as he remains at Wake Robin, regardless of the intensity of care that he requires.

The least expensive option, a 557 square foot one bedroom apartment, requires an entrance fee of

$160,000 and a monthly fee of $2,608 for a single person. The costs represent housing plus the

equivalent of long-term care insurance.

3. Independent Senior Housing

For seniors with limited income and resources, there are subsidized

housing developments that were built with financial assistance from the federal government,

under the Department of Housing and Urban Development (HUD). There are various age and

income limits for residence at different developments. But all the subsidized housing

developments charge less than the fair market value for a similar apartment in the same area. In

some situations the rent will be limited to 30% of the elder's income, after a deduction for

medical expenses. Handicap accessible apartments or apartments with universal design features

may be part of such developments.

4. Adult Day Care

Genworth, a financial services fund with a long history in long-term care

insurance, prepares an annual survey of the costs of long-term in each of the states. The

Genworth 2011 survey gave the daily rate for adult day care in Vermont as $120-$160.

5. Program of All-inclusive Care for the Elderly (P.A.C.E.)

Many PACE enrollees have Medicare and Medicaid benefits. These

people have no out-of-pocket costs to participate in PACE services. The cost for someone who

is not on Medicaid runs about $5,000/month.

6. Assisted Living

Since assisted living facilities vary so much in the type of living

arrangement and the scope of services, it is hardly surprising that the monthly cost found in the

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2011 Genworth survey ranges from about $2,000/month to over $6,000/month. Often there will

be a stepped series of rates within an individual facility. There will be a base rate for someone

who is functioning independently. Services are then added on as needed, with associated

increases in the monthly rate.

7. Nursing Homes

The cost of nursing home care can quickly run through a senior's savings.

In 2011, the Arbors, which specializes in memory issues, was charging $315/day for a private

room and $280/day for a double room. The rate at Burlington Health and Rehab, which is a non-

specialized facility in Burlington, Vermont, is about $270/day and Starr Farm, a new facility in

Burlington, is about $279/day. That works out to about $8,200 per month, or close to $100,000 a

year. To pay for that care out of investments earning 5% a year, without invading principal, and

with no other source of income, you would need to have about $2 million to invest. It is the cost

of care that makes long-term care Medicaid a middle class issue.

C. Paying for Long-Term Care

1. Long-term Care Insurance

Long-term care insurance may be part of the solution, but it cannot be the entire solution

to the long-term care problem. Take as an example a good quality policy, with 4 years of

coverage at $100/day, that has an inflation rider, and assume that the buyer will need care at age

85. If he buys the policy at age 65, the median age for the purchase of LTC insurance, the 20

years of premiums, at $2,560 /year will cost a total of $51,200. If he waited to buy the policy

until age 75, the premiums and the total cost would be higher: 10 years of premiums at

$8,146/year = $81,460. If the buyer needed the full four years of benefits, the insurance

company would pay out $146,000.

But remember the insurance is covering less than half the cost of nursing home care!

Using the $279/day cost of Starr Farm, the buyer would need to spend: $101,000 - 36,500 =

$64,500 of his own income and resources each year over what the insurance covered.

Some general considerations in buying long-term care insurance are:

a. It is expensive, so it only makes sense for those with enough

income to afford it and enough assets to protect.

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b. Flexibility: does the policy allow care in various settings, such as

home care, assisted living, and nursing home. Will the policy pay caregivers if they are family

members?

c. Consider an inflation/cost rider - what seems like a large monthly

payment may not be so big when it comes time to use the policy.

2. Medicare Coverage for Long-term Care is Limited.

In 2009 survey conducted by the MetLife insurance company, 2/3 of their

respondents believed that long-term care costs would be covered by Medicare, health insurance

or disability insurance. So, while the belief that the familiar Medicare coverage extends to long-

term care is not uncommon, the reality is that Medicare provides only limited coverage for

limited periods of time.

Coverage for care in a skilled nursing facility (SNF), like a nursing home, is only

is available if the need for skilled care arises within thirty days after a three day hospital stay.

42 U.S.C, §1395x(i). This requirement is not as straightforward as it seems, since not all three

day hospital stays count. If the patient is only in the hospital for "observation", that time does

not count toward the three days. The patient must need skilled care on a daily basis for the same

condition he was hospitalized for. Skilled care is distinguished from custodial care. The type of

care that a nursing home provides to a patient with a chronic condition that precludes

independent living, such as advanced Alzheimer's Disease, is custodial, and not covered by

Medicare.

If the patient qualifies, the first twenty days of care are fully paid for by Medicare. The

maximum Medicare will cover is 100 days. For days 21 through 100, the patient has a co-pay of

$144.50 (for calendar year 2012).

3. Veterans Benefits

The Veterans Administration has a number of benefits that help seniors.

VA benefits fall into two main classes, income assistance and direct care. In particular, the Aid

and Attendance Program helps some low income veterans by giving them additional financial

support to offset medical and care costs.

4. Long-term Care Medicaid: Choices for Care

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Long-term Care Medicaid pays for care when someone has run out of

money and needs the level of care provided by a nursing home. The care can be given in a

nursing home or in the community. Medicaid will cover the cost of adult day care and of PACE,

which can allow people remain out of institutions even as their care needs rise. Part IV of these

materials covers Long-term Care Medicaid.

5. Reverse Mortgage

Reverse mortgages are useful only for allowing a senior who owns a home

to use the equity in the home to remain at home. Once the mortgage is approved, the senior can

elect monthly payments or take money out as needed. Interest is charged on the money

borrowed. The mortgage does not come due until the home is sold, or the senior moves out of

the home, or dies.

There is mandatory counseling from a government approved counselor - who is

not employed by the lender. The counselor's job is to make sure the senior understands the cost

of borrowing against the home. If the senior intends to leave the home to his children, he must

understand that the home will still be subject to the mortgage after he dies. At that point the

children would have to pay off the loan, either from their own resources or by refinancing the

property.

Reverse mortgages have a privileged position with respect to long-term care

Medicaid. As long as the money is spent in the month it is withdrawn, it will change the

Medicaid status of the individual. It is neither countable income or nor a countable resource for

Medicaid. This means that the senior can receive Medicaid assistance at home, and also have

access to the cash from the reverse mortgage. While long-term Medicaid only pays for a limited

amount of home care, the reverse mortgage can be used to pay for whatever additional care that

the senior needs to remain at home.

D. The Care Manager's Role

When a client comes to an attorney for help with long-term care issues, the

kind of help the client needs will be tightly tied up with the care needs of the client. However,

attorneys rarely have the knowledge and experience to guide clients and families through the

intricacies of care decisions. Some of the complicating factors have been dealt with in these

materials, such as the variety of deciding where care should be given, financing care and

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assessing care quality. Then there are clinical considerations, such as diagnosis and likely

prognosis. There are psychological issues; often unresolved problems in the family resurface

under the stress of a parent's illness. This is where a care manager can save the senior, the family

and the legal advisor from drowning in a sea of complexities.

A geriatric care manager will have a degree in social work, psychology, nursing,

gerontology or another human services field. By training and experience the care manager

should be able to evaluate the senior's needs, determine what the senior wants, and use all

available local resources to help the senior live safely in his preferred setting. Even if a private

care manager is hired by the family, the care manager's first loyalty should be to the senior, as a

resource and an advocate.13 The first thing that the care manager does is find out what the

senior's abilities and limitations are. Can the senior walk unassisted or does the senior have poor

balance, weakness and a high risk of falling? What is the senior's mental status? Can the senior

direct his own care givers or does someone else need to take charge of interviewing, hiring,

training and supervising the care? Are there family members nearby who are willing and able to

be part of a care team or do the children live many hours away? In some situations, the care

manager becomes the absent child's avatar, doing what the child would do, if the child were

living closer. The care manager may provide or arrange for companion services or medication

management. The range of tasks can be from the short term and relatively impersonal, such as

advice on different assisted living options for a competent senior, to intimate and long-term,

helping a fragile senior remain at home and then serving the family as a bereavement counselor

after the parent's death.

Some care managers appear on the scene as part of a facility or agency that is involved in

care. For example, if the senior is being discharged from a hospital, there will a hospital

discharge planner coordinating the discharge. These discharge planners are usually social

workers and in other ways fit the definition of care manager. The catch is that the discharge

planner's first loyalty is going to be to the hospital, not to the senior or the senior's family. For a

patient covered by Medicare, hospitals are under their own financial pressures to discharge the

13 National Association of Professional Geriatric Care Managers (NAPGCM), Standards of Practice, as revised

through December, 2011 (Standard 1: "The primary client is the person whose care needs have initiated the

referral to the geriatric care manager." Standard 2: "Geriatric care managers should promote self-determination

of the primary client as appropriate within the context of their situation.").

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patient quickly. The hospital is paid for a fixed number of days, determined by the patient's

diagnosis. If the individual patient outstays that limit, the hospital must absorb the costs of the

extra time. If the patient is being discharged to rehabilitation in a nursing home, the hospital has

every incentive to place the patient in the first appropriate nursing home bed that is available. If

the hospital is allowed to discharge the patient to all the facilities within a fifty mile radius

around the hospital, a patient from a county south of the hospital could end up in a nursing home

north of the hospital, and a hundred miles away from family and friends. There are different

incentives for a care manager working for a care agency. The agency care manager is most

likely to recommend services that her agency provides, not only from financial self-interest but

also because she will be most familiar with her own agency's resources and personnel.

The private care manager usually is paid directly by the senior or the senior's family.

Some long-term care insurance policies include this benefit. Private care managers can charge

by the hour or may charge a flat fee for some services.

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III. MEDICARE BENEFITS FOR SKILLED NURSING FACILITIES AND HOME HEALTH CARE

Glenn A. Jarrett, Esq.

I. Medicare and Skilled Nursing Facilities

While many clients may believe that Medicare will pay for their nursing

home stay, that belief is not grounded in reality. Medicare is our country’s health

insurance program for people age 65 or older. Certain people younger than age

65 can qualify for Medicare, such as those people who are receiving Social

Security Disability Insurance (after a two year waiting period) and those who

have permanent kidney failure or amyotrophic lateral sclerosis (Lou Gehrig’s

disease) (with no waiting period). The program helps with the cost of health care,

but it does not cover all medical expenses or the cost of most long-term care.

Medicare is financed by a portion of the payroll taxes paid by workers and their

employers. It also is financed in part by monthly premiums deducted from Social

Security checks for those retirees or disability recipients who are receiving

Medicare.

Medicare only pays for a limited amount of nursing home care. The first

requirement is that the individual have been hospitalized for three consecutive

days, not counting the day of discharge. 42 C.F.R. § 409.30(a). The three days

must be as an admitted patient, not one on “observation status.”

Neither the Medicare statute nor the Medicare regulations define

observation services. The only definition appears in various CMS

manuals, where observation services are defined as:

a well-defined set of specific, clinically appropriate services, which include

ongoing short term treatment, assessment, and reassessment, that are

furnished while a decision is being made regarding whether patients will

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require further treatment as hospital inpatients or if they are able to be

discharged from the hospital. Medicare Benefit Policy Manual, CMS Pub.

100-02, Chapter 6, §20.6; same language in Medicare Claims Processing

Manual, CMS Pub. 100-04, Chapter 4, §290.1.

In most cases, the Manuals provide, a beneficiary may not remain in

observation status for more than 24 or 48 hours. Id.

Even if a physician orders that a beneficiary be admitted to a hospital as

an inpatient, since 2004 CMS has authorized hospital utilization review

(UR) committees to change patients' status from inpatient to outpatient.

Such a retroactive change may be made, however, only if (1) the change

is made while the patient is in the hospital; (2) the hospital has not

submitted a claim to Medicare for the inpatient admission; (3) a physician

concurs with the UR committee's decision; and (4) the physician's

concurrence is documented in the patient's medical record. Medicare

Claims Processing Manual, CMS Pub. No. 100-04, Chapter 1, §50.3,

originally issued as CMS, “Use of Condition Code 44, ‘Inpatient Admission

Changed to Outpatient,’” Transmittal 299, Change Request 3444 (Sep. 10,

2004).

CMS explains that retroactive reclassifications should occur infrequently,

"such as a late-night weekend admission when no case manager is on

duty to offer guidance." CMS, “Clarification of Medicare Payment Policy

When Inpatient Admission Is Determined Not To Be Medically Necessary,

Including the Use of Condition Code 44: ‘Inpatient Admission Changed to

Outpatient,’” MedLearn Matters (Sep. 10, 2004). Use of Condition Code

44 is not intended to serve as a substitute for adequate staffing of

utilization management personnel or for continued education of physicians

and hospital staff about each hospital’s existing policies and admission

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protocols. Center for Medicare Advocacy, Inc.

http://www.medicareadvocacy.org/medicare-info/observation-status/

If this three day requirement is met, Medicare will pay 100% of the costs for up to

20 days of nursing home costs if skilled care is needed and the patient enters the

nursing home within 30 days of the hospital stay. Medicare will pay 100% of the costs

for days 21-100 after a deductible of $144.50 per day is met if skilled care is needed.

(Medicare supplemental policy coverage may pay the $144.50/day). After day 100,

Medicare pays nothing. A skilled nursing facility (“SNF”) is defined as an institution that

is primarily engaged in providing skilled nursing care and related services to residents

who require either medical and nursing care or rehabilitation services. 42 U.S.C. §

1395i-3(a). It is not necessary that the beneficiary enter the SNF immediately after his or

her discharge from the hospital to qualify, but the beneficiary must be admitted to the

SNF within 30 days of discharge from the hospital. For certain injuries recuperation at

home may be required before rehabilitation can begin and the 30 day period may be

extended. Medicare will not pay for custodial care in a SNF.

Many people believe that within the 100 day maximum that Medicare will

pay for, there is a rule that Medicare will no longer pay for the patient’s stay at

the SNF if the patient “plateaus,” “is not improving,” or “is not progressing.” The

“Improvement Standard” is a rule of thumb that Medicare uses to deny or

terminate coverage to beneficiaries whose conditions are not improving. Neither

the Medicare statute nor its implementing regulations mentions or suggests an

improvement standard in the context of diagnosis or treatment of illness or injury.

The improvement standard, therefore, derives instead from references in some

Medicare manual provisions, which have been refined, simplified, and

emphasized in contractors’ internal guidelines over time.

Those guidelines, rather than federal statutes or regulations, are the basis for the

rules that employees of SNFs apply. The improvement standard has become

ingrained in Medicare culture so that employees will state unequivocally that the

improvement standard requires that coverage be terminated. Indeed,

4

many advocates are unaware that the policy has little basis in the law and fail to

challenge terminations of Medicare coverage based on it.

The Medicare statute does not require an improvement standard as a

prerequisite to Medicare coverage. The general statutory standard for Medicare

coverage is one of medical necessity; the standard is whether a given service is

“reasonable and necessary.” See 42 U.S.C. § 1395y(a)(1)(A). The same

subsection of the law does use the word “improve,” but only in the specific and

limited context of authorizing Medicare coverage “to improve the functioning of a

malformed body member.” This use of “improve” is the only reference to

improvement in the statute. So, it appears that there is no clear improvement

standard in the Medicare statute. If the skilled services are “reasonable and

necessary for the diagnosis or treatment of illness or injury,” they should be

covered by Medicare.

The Medicare regulations flesh out the general medical necessity standard. In

the SNF context, the regulations make it absolutely clear that improvement

cannot be the quid pro quo for coverage:

The restoration potential of a patient is not the deciding factor in determining

whether skilled services are needed. Even if full recovery or medical

improvement is not possible, a patient may need skilled services to prevent

further deterioration or preserve current capabilities. 42 C.F.R. § 409.32(c).

There is a significant test case about the Improvement Standard pending in the

United States District Court for the District of Vermont. In January, 2011, Vermont Legal

Aid and the Center for Medicare Advocacy filed a class action suit, Jimmo v. Sebelius, in

our federal district court on behalf of a nationwide class of Medicare beneficiaries. The

suit challenges the use of an Improvement Standard. In October, 2011, Chief Judge

Reiss denied a Motion to Dismiss filed by the government and rejected the assertion that

there was no proof that the government was applying such a policy:

"The court cannot conclude as a matter of law that Plaintiffs' Improvement

Standard theory is factually implausible when it is supported by at

5

least some evidence in each of the Individual Plaintiffs' cases and where

other plaintiffs have successfully demonstrated the use of illegal

presumptions and rules of thumb much like Plaintiffs allege here."

(Jimmo v. Sebelius, Civil No. 5:11-CV-17 (D. VT. 10/25/20011).

The Center for Medicare Advocacy contends: “For decades, Medicare

beneficiaries – particularly those with long-term or debilitating conditions

and those who need rehabilitation services – have been denied necessary

care based on the Improvement Standard. This illegal practice means

that Medicare coverage for vital care is denied to thousands of individuals

on the grounds that their condition is stable, chronic, not improving, or that

the necessary services are for "maintenance only." The use of this illegal

standard has a particularly devastating effect on patients with chronic

conditions such as Multiple Sclerosis, Alzheimer's disease, ALS,

Parkinson's disease and paralysis.” Center for Medicare Advocacy, Inc.

website--Federal Judge Refuses to Dismiss Medicare Beneficiaries’

Challenge to the Medicare “Improvement Standard--

http://www.medicareadvocacy.org/2011/10/27/federal-judge-refuses-to-

dismiss-medicare-beneficiaries-challenge-to-the-medicare-improvement-

standard-2/

II. Medicare and Home Care

Who’s eligible? If the patient has Medicare, the patient can use his or her home health benefits if

the patient meets all the following conditions:

1. The patient must be under the care of a doctor, and must be getting services

under a plan of care established and reviewed regularly by a doctor.

6

2. The patient must need, and a doctor must certify that the patient needs, one or

more of the following:

■ Intermittent skilled nursing care

■ Physical therapy

■ Speech-language pathology services

■ Continued occupational therapy

■Medical Social Services

■Certain durable medical equipment

3. The home health agency caring for you must be approved by Medicare

(Medicare-certified).

4. The patient must be homebound, and a doctor must certify that the patient is

homebound. To be homebound means the following:

■ Leaving the home isn’t recommended because of the patient’s condition.

■ The condition keeps the patient from leaving home without help (such as

using a wheelchair or walker, needing special transportation, or getting

help from another person).

■ Leaving home takes a considerable and taxing effort.

A person may leave home for medical treatment or short, infrequent absences for

non-medical reasons, such as attending religious services. The patient can still

get home health care if he or she attends adult day care, but the home care

services would be provided in the home.

Medicare does not pay for:

24-hour per day care in the home.

Prescription drugs (with a few exceptions — consult the physician).

Meals delivered to the home.

Homemaker services like cleaning, laundry and shopping.

What is a Plan of Care?

7

A plan of care directs what type of services and treatment the patient receives.

The doctor will work with a home health care nurse and then will decide:

what kind of services the patient needs

what type of health care professional should provide the services

how often the patient will need the services

the kind of home medical equipment the patient will need

the kind of food the patient may need and

the results the doctor expects from the therapy.

The home health agency staff provide care according to your authorized plan of

care. The doctor and home health agency personnel must review the plan of

care at least every 62 days or more often if the severity of the condition requires.

Home health agency professional staff are required to notify the doctor promptly

of any changes that suggest a need to modify the plan of care.

How Long Will Services Continue?

Medicare pays for covered home health services for as long as they are

considered medically reasonable and necessary. However, skilled nursing care

and home health aide services are covered on a part time or intermittent basis.

Basically, this means there are limits on the number of hours and days of care a

patient can receive in any week for certain types of services.

For purposes of qualifying for home health benefits, Medicare defines

"intermittent" as:

Skilled nursing care that is needed or provided on fewer than seven days

each week or less than eight hours each day over a period of 21days (or

less).

8

Extensions can be made in exceptional circumstances when the need for

additional care is finite and predictable.

For purposes of coverage, Medicare defines part-time/intermittent care as:

Skilled nursing or home health aides services that are provided

(combined) for any number of days per week so long as they are furnished

less than 8 hours per day and 28 or fewer hours each week.

The weekly maximum number of hours of care can be increased from 28

to 35 if Medicare determines that the condition requires additional care.

The home health benefit under Medicare is a valuable benefit for patients who

are homebound, but benefit from continued care, such as stroke victims. If the

patient’s doctor continues to certify the plan of care, there is no limit to how long

the home health benefits can last.

1

IV. Long-term Care Medicaid Qualification

Dianne Rosen Pallmerine, Esq.

A. Long-term Care Medicaid for Individuals

1. Medical Eligibility

Choices for Care is the name for the Medicaid long-term care

program which covers a nursing home level of care, whether it is provided in a

nursing home or in a community setting. It is the most recent stage in an

evolution that began with Medicaid only covering long-term care provided in a

skilled nursing facility. One obvious disadvantage to such a purely institutional

program was that people were forced to go into nursing homes once their care

costs overwhelmed their assets. Even if there was only a small shortfall, where

only a few hours of services were needed, there was no mechanism for the state

to help maintain someone at home. The state ended up paying for the most

costly care while the recipient would have been far happier receiving less costly

care in the comfort of his own home.

The mechanism for states to experiment with alternatives to this inefficient

system is through the use of "waivers". Since Medicaid is both a state and

federal program, the state must ask the federal government to "waive" particular

program requirements, if the state wishes to try something new. Waivers have

allowed states to extend Medicaid coverage to a wider range of beneficiaries.

Some waivers increased the financial limits for receiving assistance. For

example, under Dr. Dynasaur, Vermont recognized that even working parents

might not be able to afford health insurance for their children. Vermont's Home

and Community-based Waiver allowed a set number of qualified individuals in

each county to receive long-term care outside the nursing home setting.

However, there was still a bias in favor of institutional care, since all qualified

2

nursing home patients received Medicaid benefits, but only a set number of

patients in the community could be helped. The intent of the Choices for Care

waiver program was to remove the bias toward institutional care.

Once a person is eligible for Choices for Care, the recipient can receive

care in one of four settings: (1) nursing home, (2) home-based, (3) enhanced

residential care (ERC) in an assisted living facility or residential care home, and

(4) through the Program for All-Inclusive Care for the Elderly (PACE).

Medicaid pays a nursing home for care it provides at a set daily rate,

specific to that nursing home. When care is received at home, a care plan is

developed that includes a certain number of service hours each week, including

respite hours for a family caregiver. A plan might include a total of 30 or 40

hours of services each week. The home-based program is usually not enough

for someone who does not have additional assistance, such as a family member

who can provide care on evenings and weekends. The home care program is

also not a good choice when the recipient needs round-the-clock supervision,

such as a person with Alzheimer's Disease who gets up and wanders at night.

The ERC program was developed to allow someone in an assisted living

setting to remain there, rather than having to go into the less pleasant nursing

home environment, as the person's care needs increase. The ERC benefit only

covers the medical portion of the assisted living fee. The ERC recipient must

continue to pay privately for the room and board portion of the assisted living fee.

PACE is a new option for Vermont's frail elderly population - people over

age 55 who need a nursing home level of care. The first PACE site opened in

Colchester in 2007 and serves residents in Chittenden and southern Grand Isle

Counties. The second PACE site opened in Rutland in 2008 and serves Rutland

and northern Bennington Counties. PACE operates like a managed care

provider for its participants. It pools the participants' Medicaid and Medicare

3

benefits and provides all their acute, primary and long-term care needs.

Transportation to the PACE site is provided as part of the program. Participants

spend the day there and receive medical services, meals and other support at

the site. (See www.pacevt.org for more information.)

Whether care is received in the community or in a nursing home, the

requirements under Choices for Care are the same. An applicant must satisfy

both medical and financial requirements. The same form is used to start both

sides of the process. The form is called "Application for Choices for Care Long-

Term Care Medicaid", ESD/DAIL form 202LTC (R 3/11). There is a tension

between the two sides of eligibility. Why should a family assemble and divulge

detailed financial information to the state, if the applicant may not be medically

eligible? On the other side, the nurses who make the medical eligibility

determinations do not want to waste time evaluating someone who is unlikely to

meet the financial requirements. Case managers from the Agencies on Aging,

the Visiting Nurses Association or other home health providers can give an

educated guess about medical eligibility, based on past experience. However,

with the current financial constraints on the state, there may be pressure for the

Medicaid evaluators to apply the eligibility rules more stringently, so that fewer

people are found medically eligible. So, past experience may not be as reliable a

guide as it used to be as to what medical eligibility looks like. Under some

circumstances, it may make sense to fill out an application with very little financial

information, just to get the medical eligibility determination made.

The application form and supporting documentation are sent to the Central

Application and Document Processing Center in Waterbury to be scanned into a

central system. This was a new system and then Tropical Storm Irene hit while

the system was still in transition. Applications should still be sent to the

Waterbury address - but then the applications are transported to the temporary

4

offices in Williston for scanning. The eligibility determination still occurs in the

local district office of the Economic Services Division of the Vermont Department

for Children and Families (ESD/DCF), working from the scanned image. A

Benefit Programs Specialist in the district office reviews the financial information.

The Benefits Programs Specialist also prints out part of the application and

sends it a Long-term Care Clinical Coordinator (LTCCC) for the district. The

LTCCC's job is to determine the whether the applicant meets the medical

eligibility requirements. The LTCCC is registered nurse employed by the state,

under the Department of Aging and Independent Living (DAIL), who visits the

applicant at home or in the care facility to assess the applicant's care needs.

There are three medical eligibility categories under Choices for Care:

Highest Need, High Need and Moderate Need. If the applicant is found to be

Highest Need, the LTCCC has determined that the applicant needs the level of

skilled nursing care that a nursing home would provide. All Highest Need

applicants who meet the financial and other requirements for Long-term Care

Medicaid receive benefits, as an entitlement. However, an applicant with serious

health problems might be found to be only High Need. It is more a difference of

the amount of care than of the type of care or the diagnosis. Where a High Need

person might require extensive, daily help with one activity of daily living (ADL),

such as bathing, dressing eating, walking or toileting, the Highest Need person

would need assistance in more than one of these areas. A person who needs

skilled nursing every day, such as for wound care, could qualify as Highest Need

but a person who needs skilled nursing visits only twice a week would be High

Need. A High Need person might not be able to live alone, independently, but

could function well in assisted living or home with part-time care givers. While

these options are less costly than nursing home care, they can still cost several

thousand dollars each month. Even so, a Medicaid applicant judged to be High

5

Needs will only be helped if the Choices for Care program has the funds

available. Those with still fewer care needs, in the Moderate Needs category,

also receive assistance only when funds are available, and after the High Needs

group has received assistance. The hope was that Medicaid would see overall

expenses for long-term care decrease as fewer Highest Need people opted to

receive the most expense category of care, i.e. nursing home care. Those

savings would then be used to extend the program to people with less intense,

but still costly, care needs.

A report in December of 2006, after Choices for Care had been in

operation for just over one year, showed a decrease in the number of

Vermonters receiving care in nursing homes, and care being provided to people

in all three medically eligible categories. The waiting list for care under High

Needs limits stayed at zero from January 2007 through February, 2008. With

mounting economic pressures on the state, coverage for those in the High Needs

category had been cut back, with 76 applicants in this category waiting for

assistance as of July, 2009. In 2010, despite the continuing low state revenues,

some savings through the Choices for Care program allowed High Needs people

to be enrolled on a month-to-month basis. In the Moderate Needs Group, over

300 applicants were on the waiting list for Homemaker services in July, 2009, up

from around 60 in July, 2006. In 2010, the waiting list remained at around 350

applicants, after enrollment was frozen in November, 2009.

Dr. Susan Wehry was named as Commissioner of DAIL on January 5,

2011. Dr. Wehry is trained as a geriatric psychiatrist. She has been an advocate

for elder autonomy, including choices of where to live and receive care. As of

January 28, 2011, DAIL began moving High Needs people off the waiting list and

enrolling them for Choices for Care services. The Moderate Needs enrollment

6

was re-opened effective February 21, 2011, after the High Needs waiting list was

reduced to zero.

7

(See: Choices for Care Program Manual, Vermont Department of

Disabilities, Aging and Independent Living, Final, October 2005; Choices for

Care, 1115 Long-term Care Medicaid Waiver Regulations, Vermont Department

of Disabilities, Aging and Independent Living, October, 2005. These manuals

can be found online through the Department of Disabilities, Aging and

Independent Living/Division of Aging and Disabilities website at

www.ddas.vermont.gov/ddas-policies. Data on the number of participants in

Choices for Care come from the Quarterly Data Reports, at

www.ddas.vermont.gov/ddas-publications. Recent developments are

documented in the DAIL Budget Testimony, February 2012 (accessed through

http://dail.vermont.gov/dail-publications, then scroll down to DAIL Budget

Testimony) and Division of Disability and Aging Services announcements at

http://www.ddas.vermont.gov/.)

2. Long-term Care Medicaid: Financial Eligibility - Resources

Unlike other states, Vermont Medicaid uses identical financial

eligibility criteria for its nursing home and community long-term care programs.

This was true even before the programs were brought together under the

umbrella of Choices for Care. There are separate rules governing resources and

income. If a potential applicant has more resources than the program permits

him to have, he can pay privately for care until his resources are low enough to

qualify for Medicaid assistance. This is called "spending down." There are other

options which allow a Medicaid applicant to preserve some assets with or for his

spouse, children or other trusted people. These options are discussed in other

parts of this Manual.

While the medical side of eligibility determination is under the Department

of Disabilities, Aging and Independent Living (DAIL), the financial eligibility

determination is made by the Economic Services Division of the Department for

8

Children and Families (ESD/DCF). In 2008, the Agency of Human Services,

which includes both DAIL and ESD/DCF, began a major reorganization of its rule

numbering systems, along with plans to move to a computer-based document

management system. DCF Bulletin Number 08-20F, dated September 21, 2008

describes the changes and contains a list cross-referencing the new numbering

system with the old one. Older materials will cite to the regulations in the old

format, where the Medicaid rules all had an "M" prefix. The "M" indicated that the

rule was part of the Medicaid Policy Manual. There is also a Medicaid

Procedures Manual, which includes instructions, flowcharts, forms, income and

resource standards and some sample calculations. The Procedures Manual has

not yet been revised and Procedure entries still have a "P-" prefix. For example,

the current standard values for Medicaid programs are found in P-2420. Hard

copies of the Rules are available for purchase from DCF for $150. The hard

copies will be re-issued yearly. The updates to the rules during the year will only

be available online. You can sign up to receive notification of rule updates via e-

mail through http://dcf.vermont.gov/esd/rules. This is the web address for

Proposed, Adopted and Expedited Rules. On this page, under Adopted Rules, if

you click B10-18, you will access Bulletin No. 10-18, which contains the value the

state uses for the average cost of nursing home care in Vermont, at P-2420

D.13., effective 10/1/10. Further down on the page, you can access Archived

Rules by year, such as the useful 2008 Bulletin No. 08-20F, mentioned above.

Look at pages 39-44 in Bulletin 08-20F for the rules that used to be found at

M200, pages 49-51 for the M400 rules, and pages 62-63 for some useful M100

rules. If you get tired of keyboarding, you can also telephone DCF in Waterbury

at (802) 241-2100 for more information.

a. Resources: Countable and Non-Countable

9

The basic rule is that the Medicaid applicant can only have

$2,000.00 in countable resources. P-2420 (C)(1). There is an additional

resource allowance for a single person receiving long-term care in the primary

residence owned by the recipient. Such an individual can keep an additional

$3,000.00, for a total of $5,000.00. Rule 4249.9. This accommodation was

made to allow the Medicaid recipient to have some savings for larger expenses,

such as property tax payments, that go along with home ownership. If the

applicant is married or has a civil union partner, the applicant is still limited to

$2000.00 in resources, but the spouse can keep up to $113,640.00 in countable

resources without jeopardizing the applicant's eligibility. Rule 4265; P2420 C3.

This amount usually changes, increasing yearly. However, if both spouses need

long-term care Medicaid, then the couple can only keep a total of $3,000.00 in

countable resources.

The Medicaid regulations provide that anything that is not explicitly

excluded (non-countable) is a countable resource that contributes to the resource

total. Rule 4250. The two most common non-countable resources are a primary

residence and automobiles. Rule 4241.1; Rule 4248.2.

Prior to the enactment of the Deficit Reduction Act of 2005 (DRA), a home

and contiguous property of any value was excluded. The DRA required states to

limit the equity value excluded to either $500,000.00 or $750,000.00. Vermont

chose the lower amount. Rules 4241.1 and 4252.6. The amount is supposed to

increase in increments of $1,000.00 following the consumer price index. So,

effective January 1, 2012 the excluded equity value is $525,000.00. P2420 C4.

The vehicle exclusion is not limited to one car or a car of a certain value.

Generally, boats or recreational vehicles are not covered by this exclusion.

However, if the applicant lives on an island and the only way to get to medical

10

care is to travel by boat, then the boat would be excluded. Household items,

such as furniture and appliances are not countable either. Rule 4248.1.

There are other exclusions that apply to income-generating assets, such

rental properties or annuities. Rule 4241.7; Rule 4244. The Medicaid applicant

can set up an account for burial containing up to $10,000.00. Rule 4243. Each

exclusion rule has its own specific requirements that must be followed exactly or

the exclusion may not apply, resulting in a denial of Medicaid eligibility. In the

Policy Manual, the exclusions are found under Rule 4240; Rules 4241 through

4249.9. Rule 4251 lists resources that are countable, but this section should be

read along with Rule 4240, since the same classes of assets may appear in both

sections. For example, jointly held real property is only excluded under certain

circumstances. Reading the pertinent parts of both the section on excluded

assets and the section on countable assets clarifies where the line between

excluded and countable falls for this resource.

b. Resource History and Current Eligibility for LTC Medicaid

Not only must the applicant be currently eligible for Medicaid

at the time of application, but the applicant, or couple, must not have done

anything prior to submitting the application that would delay eligibility. The period

before an application is filled that Medicaid can scrutinize is called the "look-

back" period. Medicaid can penalize any uncompensated asset transfers made

during the "look-back" period by delaying the start of Medicaid benefits. Up until

February 8, 2006, when the Deficit Reduction Act of 2005 (DRA) went into effect,

the look-back period was three years. The DRA extended the look-back period

to five years, with the new law being phased in. The three year look-back

remained in effect through February, 2009. Thereafter, the look-back period is

increased by one month for each month that passed, until the full five year look-

back was reached in 2011. Transfers made in the three years before February 8,

11

2006 were controlled by the old penalty rules and transfers made after February

8, 2006 are controlled by new, more punitive rules. (See below). Any

uncompensated transfer made before the look-back period is essentially invisible

to Medicaid, and will not create any penalty period of Medicaid ineligibility.

3. Long-term Care Medicaid: Financial Eligibility - Income

There are long-term care Medicaid income standards. They are

somewhat convoluted. Generally, someone who requires long-term care would

not be prevented from receiving long-term care Medicaid assistance due to

income. If a person has more income, Medicaid will just require him to pay a

greater share of his medical costs.

To oversimplify for a moment, first consider a person who has enough

income to pay the nursing home he is receiving care in, at the nursing home's

private pay rate. That person does not need Medicaid assistance, so there is no

long-term care income issue. Next, consider a second situation, where the

person has monthly income below the amount that Medicaid would pay that

specific nursing home for a month of care. That person turns over all of his

income, less allowed deductions, to the nursing home. The amount the patient

pays to the nursing home is called the "patient share." The nursing home then

bills Medicaid for the difference between what the person has paid and the

Medicaid rate. Again, there is no problem. It is the person in the middle range of

income that Medicaid has a trouble handling. What I thought Medicaid was doing

with these middle range people was taking the full amount of income, minus

deductions, and letting the nursing home apply that amount to the nursing

home's private pay rate. At some point during the month, the money from the

patient would be used up. Then, for the remaining days of the month, Medicaid

would just pay the Medicaid rate to the nursing home. All of the accounting

would be between Medicaid and the nursing home.

12

Now, let's return to the actual determination. The income regulations, as

written, refer to two standards, the "institutional income standard" (IIS) and the

"protected income standard" (PIL). Rule 4281.5. The current institutional income

standard is $2,094.00 per month for an individual and twice that for a couple.

P2420 B 5. The current PIL is $958.00 per month for an individual or couple

outside of Chittenden County, and $1,033 for an individual or couple within

Chittenden County. P2420 B 1. Are you beginning to see the convolution

potential? The institutional income standard is looked at first. If the applicant's

income is below this standard, then the individual qualifies for long-term care

Medicaid. However, if the person has more than the institutional standard, he

must spend-down his income on approved health care costs, until he reaches the

PIL.

Problems arise from uncertainty about what amount Medicaid is using to

calculate the care costs and when Medicaid is applying those costs. This creates

monthly billing uncertainty for certain Medicaid recipients. Some people who do

not have sufficient income to pay for nursing home care at the private pay rate

are receiving denial notices from Medicaid, and then having to negotiate

payments with the nursing home and Medicaid every month. What makes this

worse is that the patients impacted by this are often being pushed over the

income limit because they are being reimbursed for a portion of their care costs

from long-term care insurance. From a policy and state budget point of view,

and under federal mandate, the state is supposed to encourage people to obtain

long-term insurance coverage. The application of the income standards results

in people being penalized for having had the forethought to purchase long-term

care insurance.

The "patient share" is the amount that Medicaid determines a Medicaid

recipient must pay toward his care costs. The calculation starts from the

13

recipient's gross income. A person in a nursing home is allowed to keep $47.66

of his monthly income as a "personal needs allowance". Rule 4462.1; P-2420 B

6. For a person at home or receiving Enhance Residential Care, there is a

community maintenance allowance of $1,033.00 per month. P-2420 D 10

(1/1/11). The difference between the amount set for the personal needs

allowance and the community maintenance allowance is that the recipient's room

and board are already taken care of in a nursing home.

All health insurance premiums are allowed to be deducted from income.

This makes sense because it saves the state money. If a Medicaid recipient

needs physician services and has Medicare Part B, federal dollars pay the

doctor. If the person has private insurance, private dollars are used. The

doctors tend to prefer Medicare and private insurance since the reimbursement

rates to providers are higher than what Medicaid pays them. So, there are

specialists that the Medicaid recipient can only work with if he has some

additional insurance. From the patient's point of view, continuing to pay

Medicare or private insurance premiums is a cost-free way to get access to a

wider choice of providers. If the Medicaid recipient stops paying Medicare or

private insurance premiums, he does not end up with more available income.

His patient share just gets increased to make up the difference.

For example, consider a single person with $1,000.00 per month of gross

income. He has Medicare Part B, which has a standard premium of $99.90 for

2012. He has a supplemental Medigap insurance policy for which he pays

quarterly premiums of $450.00. He is receiving his care in a nursing home. His

patient share would be calculated as follows:

Gross income $1,000.00

Medicare Part B premium - 99.90

Medigap Policy ($450/3 months) - 150.00

14

Personal Needs Allowance - 47.66

Patient Share 702.44

B. Qualifying a Spouse for Long-term Care Medicaid

1. Resource Allowance for the Medicaid Recipient's

Spouse

If the applicant is married, or has a civil union partner, then

the couple can keep additional resources. In 1988, Congress tried to extend

Medicare coverage to long-term care in the Medicare Catastrophic Coverage Act

(MCCA). Although most of the provisions of MCCA were repealed, among the

provisions that survived are the ones intended to prevent the impoverishment of

the spouse remaining at home, when the other partner needed Medicaid benefits

to pay for nursing home care. See 42 U.S.C. §1396r-5.

a. How Vermont Handles Spousal Resources

As of January 1, 2012, a couple can have a total of

$115,640.00 in countable resources at the time of application, and have one

spouse qualify for long-term care Medicaid benefits. The spouse who is applying

for Medicaid benefits is referred to as the "institutional spouse" (IS), a term that

was created when all long-term care Medicaid recipients received care in a

nursing home or other institution. The spouse who does not require Medicaid

help is called the "community spouse" (CS). The $115,640.00 resource total is

really the sum of the $2,000.00 that the Medicaid recipient can keep and the

$113,640.00 amount that the spouse can keep. The spouse's amount is called

the Community Spouse Resource Allowance (CSRA, see below). The

Community Spouse Resource Allowance is adjusted upward by the federal

government each January. For simplicity, the IS will be referred to in these

materials as "he" and the CS will be "she".

15

At the time of the application, Medicaid (i.e. ESD/DCF ) looks at the total

resources of the couple without concern for which spouse owns the resource.

However, each year, the recipient's eligibility is reviewed. Any assets owned by

the Medicaid recipient and someone else are presumed to belong solely to the

Medicaid recipient. Rule 4251. Many couples have all of their assets in joint

ownership. In that case, by the first annual review, each of the assets must be

re-titled, removing the Medicaid recipient's name so that he does not exceed the

$2,000.00 limit. Usually at the end of the re-titling the Medicaid recipient has one

bank account, jointly held with a spouse or trusted child, that receives his direct

deposits of Social Security benefits and other income.

b. How Other States Handle Spousal Resources

Compared to many other states, Vermont has elected

a kinder and simpler method for determining the assets that the community

spouse is allowed to keep. Whatever the federal government sets as the highest

amount permitted for long-term care Medicaid, Vermont simply uses that amount.

For 2012, the figure is $113,640. Any countable assets that the Community

Spouse has that total less than the limit, she can keep. Other states follow the

federal statute, and use a complicated formula that involves a "snapshot" of the

countable assets held by the couple on the first day of the institutional spouse's

continuous period of institutionalization, a period that is expected to last at least

thirty days. 42 USC §1396r-5(c)(1)(B). The community spouse can only keep

half of the countable assets held by the couple on the snapshot date. For people

in other states, this creates a double bind - they must keep their assets high for

the "snapshot" and then quickly spend-down the assets to be under the limit for

Medicaid eligibility purposes. In other states, Medicaid applicants must go to an

administrative hearing to get the resource allocation raised, even just up to the

federal maximum. In Vermont, the administrative hearings are called Fair

16

Hearings and are held before the Human Services Board. A search of Vermont

Fair Hearings decisions, going back more than ten years, revealed only two

cases concerned with community spouse resource allocations, both from 1994.

2. Spousal Income Allocations

When Congress created the provisions to prevent spousal

impoverishment under Medicare Catastrophic Coverage Act (MCCA) in 1988, it

was concerned with the income, as well as the resources, of the community

spouse. Then, as now, most of the community spouses were women and many

of them did not have significant work histories outside the home. They relied on

their husband's Social Security and pensions, since they might have little income

from these sources themselves. Congress set up specific provisions to allow the

community spouse to receive some or all of the institutional spouse's income. 42

USC §1396r-5(d).

If the community spouse or civil union partner has little income of her own,

or has unusually high shelter expenses, she will be allowed to keep a portion of

the Medicaid recipient's income each month. This is called a spousal allocation.

The spousal allocation is also subtracted from the Medicaid recipient's gross

income in determining his patient share. For example, if a person with same

income and deductions as the person in the patient share example, above, also

had a spouse, and the spouse's income allocation was calculated to be $800.00,

there would be a patient share of zero, since $705.94 minus $800.00 is less than

nothing.

If the community spouse has income over the Maximum Income Allocation

value (P-2420 D 8a and line 23 (B) in the sample form), after allowing for shelter

expenses, she will not receive any of her spouse's income. On January 1, 2012,

the cut-off amount was raised to $2,841.00/month. The catch to receiving an

income allocation is that the community spouse must continue to keep her

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resources below the Community Spouse Resource Allowance for as long as she

wishes to keep receiving the income allocation. For example, a community

spouse who did not receive an income allocation could sell her primary residence

and move into an apartment, keeping all of the proceeds. A community spouse

who wanted to keep an income allocation might not have that option because the

proceeds from the sale could put her over the resource limit and make her

spouse ineligible for Medicaid.

Income from the community spouse's retirement accounts must be

included in determining the community spouse's gross income. The retirement

accounts of the community spouse are excluded resources when Medicaid

eligibility is determined, as long as the community spouse is either still working or

is taking distributions consistent with her life expectancy, measured according to

tables published by the Office of the Chief Actuary of the Social Security

Administration. Rule 4248.5. So, the community spouse may have substantial

income from retirement funds, since she is allowed to keep the funds, and must

draw them down at a rate faster than what the I.R.S. requires under its minimum

distribution rules.

The following materials were prepared by Michael D. Caccavo, Esq.

C. TRANSFER OF ASSET RULES

The Medicaid transfer of asset rules changed significantly with the

enactment of the Deficit Reduction Act of 2005. The law became effective Feb. 8,

2006. All transfers of assets after that date are evaluated based on the new

rules. Transfers made before that date are not subject to penalty.

Rule 4471 defines what constitutes a transfer, subsequent rules

delineate what transfers are subject to a Medicaid penalty and what are or might

be exempt or subject to a reduced penalty. The three basic questions in

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evaluating a transfer are: 1. Is it a transfer? 2. Is it exempt from penalty? 3. If not

exempt, what is the penalty?

Is it a transfer? Rule 4471 defines a transfer as any disposition of

resources (property) or income of the ‘financial responsibility group’ by a member

of the group or someone with lawful access to such resources. Clearly a gift or a

payment by the applicant or applicant’s spouse is a transfer. But the definition is

broader, so a withdrawal by a child who is a joint owner on a bank account would

also be a transfer. A disposition of property by a guardian or by court order would

also be a transfer under the definition in the rule. Charitable donations are also

transfers.

Is the transfer exempt from penalty? There are a number of reasons a

transfer might be exempt from penalty. Some are:

Transfer for fair market value (4472) exempts all transfers where fair

value was received by the member in exchange for the transfer. So, regular

payments of bills are exempt. Also, a transfer of assets in exchange for verified

services rendered to the member for care, food, shelter, transportation, medical

assistance, etc. could render the transfer exempt from penalty or reduce the

penalty. The rule contains a list of services which may qualify, but be aware that

it is the department that makes the determination as to whether fair value has

been received.

Transfer for less than fair market value (4473 and subsections)

contains a substantial list of circumstances in which a transfer for less than fair

value might be exempt from penalty. In broad terms these are: a transfer

occurring more than 60 months prior to application; a transfer to a spouse; a

transfer to a child under 21; a transfer to or for the benefit of (allowing a transfer

to a trust or SNT) a disabled child of any age; a transfer NOT made for purposes

of qualifying for Medicaid, i.e. the transferor had no reason to believe Medicaid

19

might be necessary in the immediate future, or it was part of a regular pattern of

giving; it was a transfer of an excluded resource; it was to purchase a Medicaid

qualifying annuity; and for a home, the transfer to a ‘care taker child’ who has

lived in the home for at least 2 years and provided services to keep the applicant

out of the nursing home or to a sibling who has resided in the home for at least a

year and has an ownership interest in the home (legal or equitable). NOTE: This

is not an exhaustive list, refer to the rules for a complete listing.

What is the penalty? If the transfer is subject to penalty you first need to

determine how much is subject to penalty. The value of the transferred property

may have been reduced by applying some of the exceptions noted above. Once

you have the actual amount subject to penalty you divide that amount by the

Vermont penalty divisor, $256.66 per day for 2012. The resulting number is the

number of days the applicant will be disqualified from receiving Medicaid

benefits, once they are ‘otherwise eligible’.

For example: If a person ‘gifted’ (receiving no value for the transfer)

$100,000.00 dollars within the last 5 years, the penalty calculation is :

$100,000.00 divided by 256.66 per day = 389.6 or 390 days of being

disqualified from Medicaid benefits.

The important thing to note is when the penalty begins. Under the rules

prior to the DRA, the penalty started when the transfer was made. No more.

Now, so long as the transfer was made within 60 months of applying for Medicaid

the penalty begins to run when the person applies for Medicaid and is

determined to be eligible for Medicaid benefits, but for the penalty. The new rules

have eliminated the old ‘half a loaf’ gifting plan, previously used for Medicaid

planning.

Now for asset protection planning we have to use a ‘gift and

purchase/loan’ plan. Using such a plan you have to calculate the gift and

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resulting penalty, and use the remaining funds either as a Medicaid qualifying

loan or to purchase a Medicaid qualifying annuity so that at the time of

application the person is ‘otherwise’ eligible while at the same time has a

resource to provide payments to cover the nursing home cost during the penalty.

The big caveat with this planning in Vermont is that the income source, together

with other income of the applicant, must not result in more monthly income than

the Medicaid reimbursement rate for the particular nursing home. If the applicant

has more available income than Medicaid would pay the nursing home, the

applicant is NOT ‘otherwise eligible’ because, even though they cannot pay the

private pay rate, Medicaid would not provide them coverage.

D. Real Estate, Promissory Notes, Annuities, and other Special Assets.

1. REAL ESTATE

Real estate presents a variety of issues for Medicaid planning, because

clients possess a variety of types of real estate. Many have a home. Some might

have a camp or vacation home. Some might have a rental or business property.

Some might own property with other people. All present different planning

challenges. The home stands alone, with separate treatment, all other types of

property will be countable unless it falls into one of the catagories below.

The Home. Under the DRA and current Vermont Medicaid rules, the

primary residence, up to $525,000.00 in equity value, is and exempt asset, and

remains an exempt asset so long as the applicant would return home if they

could. There is no ‘reasonability’ or ‘medically likely’ test in Vermont. If the person

says it is their home and they would return there to live if it was ever possible, it

is exempt. The trick is, to be sure that the house does not pass through probate

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on the person’s death. If the house goes through probate, it will be subject to a

Medicaid reimbursement claim. Estate recovery is the rule in Vermont and the

Medicaid Estate Recovery folks are diligent in submitting claims in probate. So

the key to preserving the house is to avoid probate when the Medicaid recipient,

the surviving spouse – yes, the Medicaid lien will extend to the estate of the

surviving spouse, dies.

1. Life Estate Deed with Reserved Power of Sale: The Life Estate

Deed with Reserved Power of Sale, a/k/a “Enhanced Life Estate Deed” (ELED),

or the “LadyBird Deed” or “Medicaid Deed” as it is known nationally and the

“Italian Deed” or “Granai Deed” as it is known in Central Vermont (named after

the late C.O.Granai, Esq. of Barre, who used the form in numerous deeds and

had the ‘honor’ of having the Vermont Supreme Court uphold the language in

Aiken v. Clark, 117 Vt. 391, 1952) and also occasionally referred to as a LERP

(Life Estate with Reserved Powers) can be a powerful and important tool in the

Elder Planning arsenal. The benefits are as follows:

A. Exempt for Medicaid. For the homeplace, at least, the property

remains an exempt asset for Medicaid purposes, up to a maximum equity value

of $500,000 (note this new limitation under the DRA 2005). Current Medicaid

regulations promulgated by DCF particularly regulation 4241.6 have made clear

that with a transfer, only the life estate with reserved power of sale is entitled to

the full exemption. The exemption actually rests on the status of the property as

the homeplace, and the Life Estate with power of sale retains sufficient control to

avoid being a gift.

B. Retain Control. Because the Grantors reserve for themselves the full

power to mortgage, sell, lease or convey the property during their lifetimes, they

retain full control over the property. There is no loss of control or even veto power

given to the remaindermen. This is a major concern for many elders, especially if

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they are doing more long term estate and Medicaid planning rather than

immediate or emergency Medicaid planning. For these clients it is comforting to

know that while they are ensuring the property will pass to their children, they

could still sell it and buy a condo or that motor home to travel the country if they

wanted, without the consent of the children.

C. Avoids Probate. Many clients have a goal of Probate avoidance after

their death. This deed accomplishes that goal. Avoiding probate is the second

part of protecting the property from Medicaid. By having the property pass

outside the probate estate, any possible Medicaid reimbursement claim will be

avoided. If the property goes into the probate estate, it may have to be sold to

generate cash to pay the Medicaid reimbursement claim. Currently, Vermont

only employs estate recovery to obtain reimbursement of Medicaid expenses.

NOTE: This may change. In 2010, the department was seeking

rulemaking authority from the legislature and was looking at various methods to

enable recovery against the primary residence. Many other states are employing

‘expanded’ estate recovery and asserting claims against remainder interests or

treating the conveyance of a remainder interest as a transfer. It is still good

planning, but clients should be warned that the rules may change in the future

and the deed won’t have the Medicaid planning benefits it currently does.

D. Not Subject to Creditor Claims. The Life Estate Deed does not

subject the property to the claims of creditors of the remaindermen. It also

protects against the claims of divorcing remaindermen and their spouses. And for

the remaindermen, it does not qualify as an asset for scholarship applications or

other such income or asset based programs. This is a major advantage over the

simple joint tenancies often created in the past with the idea of avoiding probate.

E. Tax Rebate Preserved. The Life Estate Deed can preserve the Home

Owner’s property tax prebate/rebate for the Grantors. Suggestions: I

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recommend including specific language stating grantors are responsible for all

taxes during their lifetime to avoid any issues with the tax department. Currently

you should have the clients execute a Homestead Termination and a new

Homestead Declaration when you file the deed. It is also good practice to list the

Grantor as the first Grantee on the Transfer Tax Return. Also, you should be

aware that when the grantor moves to the nursing home, the Homestead status

for property tax purposes will be lost. Once the owner is no longer residing in the

house, it does not qualify as Homestead property.

F. No Medicaid Look-back. The Life Estate Deed does not constitute a

penalized transfer for Medicaid. Because the grantors retain full control during

their lifetime, there is no present transfer. Therefore, there is no look-back or

penalty period to be considered when using this conveyance.

G. Step-up in Basis. When the property does transfer to the

remaindermen, upon the death of the Grantors, there is a step-up in basis of the

property to the date of death value (26 USC §2036). This can be a significant

benefit to the remaindermen, saving hundreds of dollars in capital gains taxes if

they then sell the property.

H. No Gift Tax Return Required. There is no Gift Tax return required at

the time of signing the deed because there is no present gift. There are contrary

views on this issue.

With all of these benefits it would seem that the Enhanced Life

Estate Deed is almost a perfect planning technique. It is, almost. As with most

things there are some disadvantages. The major disadvantage is in the Medicaid

context. If only one spouse survives and receives Medicaid Long Term Care

benefits, all their income must be spent for their care first. This leaves no funds

available to pay for the ongoing expenses of the property. While the elder may

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not be living in the house there are still expenses for taxes, insurance and other

maintenance. These cannot be paid for from the elder’s income. If the situation is

not planned for, then the remaindermen will have to pay these costs to preserve

the asset. It is a situation that can be planned for by gifting and having the

remaindermen make an arrangement to pay these expenses from the gifted

funds. Sometimes a Trust is established by the remaindermen for this purpose,

or a memorandum of agreement may be used. Such formalized arrangements

present a risk that the gifted assets may be included as available funds by

Medicaid unless very careful drafting is done on the documents. I personally do

not recommend such formal arrangements, preferring that my clients not risk the

Medicaid plan with them.

One way of avoiding this problem is to rent the house. When the elder is in

the nursing home, the house can be rented without jeopardizing the homestead

exclusion. The house should be rented for fair market rental and the lease must

provide that the elder may return to the house at any time. The costs of the

house such as taxes and insurance may be paid from the proceeds. Any excess

in the rental income over the home expenses must be used to pay for nursing

home care, thereby reducing Medicaid’s contribution. But this allows the

expenses to be paid without having the remaindermen dipping into their funds to

pay them. The major drawback to this is that many children or POA agents will

not want to take on the additional headaches of the rental. (Query: does the

rental, at some point, impact the capital gains exclusion? I suspect so, but it

bears more research). Note: There has been some discussion that the

department might change the rules and not allow the payment of expenses from

the rent first, but rather count it all as income for the patient share. This would

certainly defeat the purpose of renting.

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It should also be noted that if the home is a duplex or multifamily dwelling

that is partly rented and partly occupied by the elder, the same rules apply. It still

qualifies as a homestead and the Enhanced Life Estate Deed works. Any income

can first pay for expenses, with any profit going to nursing home costs. Such a

property is not subject to the 6% income test used for the commercial property

exemption.

Currently, transfers using an Enhanced Life Estate Deed are subject to the

Transfer Tax. Normally this is not a problem because the Grantees are usually

the children. Since there is no consideration paid and it is a transfer between

parent and child, it is exempt from the Transfer Tax. An issue does arise, though,

when the transfer is not a between a parent and child or grandchild. A sibling or

more remote relation or friend is not exempt. The Tax Department has taken the

position that the full tax has to be paid on transfer, even though no actual change

in ownership is taking place. The Department also requires that the non-

residential tax rate be used because the property will not be the Grantee’s

primary residence. You can, however, reduce the tax by using the mortality

tables to calculate the value of the remainder interest and pay the tax only on

that amount

There is no officially prescribed language that must be used to

create a retained life estate with the necessary powers. The DCF office is pretty

flexible, although in the past the deed had to include powers to “sell, lease,

mortgage and otherwise convey” and a clear statement of the right to all

proceeds. This does not seem to be the case now, as I have seen some very

basic language pass review. The Vermont Supreme Court interjected itself into

this issue in the case of Weed vs. Weed, 2008Vt 121, August 29, 2008. The

Court was construing the reserved powers and decided that a reservation of “the

right to sell the subject property in fee simple absolute or in any lesser fee”

26

required an actual sale, with real consideration, and did not allow transferring by

gift. I now recommend that you include in your language “sell, lease, mortgage

and otherwise convey, with or without consideration.”

The bigger problem is having language that is concise enough to not

make the deed unwieldy while at the same time having it comprehensive enough

to allow Title attorneys to feel comfortable allowing the Reserved power holder

alone to sign conveyancing documents without the remaindermen joining in.

Usually this is not a problem but be aware it does crop up from time to time. All

the major Title Insurers in Vermont do recognize these types of deeds and don’t

require the remaindermen to sign. If you run into a reluctant Title attorney, call

their Title insurer. If you encounter resistance be certain the insurer knows the

exact language in the deed and be certain that you are dealing with an attorney

at the title company who is familiar with Vermont practice. I once had the

situation of meeting resistance with the title company attorney, until I discovered

it was a regional attorney who was not from Vermont, covering for the Vermont

attorney.

For convenience I have included as an attachment the form that I use, a

part of which was developed by Al Overton and the attorneys in his office, and

which has been modified to include language which I think meets the Weed vs.

Weed standard.

Reserved Life Estate without Power of Sale: The Reserved Life Estate

without Power of Sale is an excluded resource, 4241.1. The “Look Back” period

will apply and a penalty will be assessed on the value of the remainder interest in

the land which was conveyed.

At the present time the main benefit of using a Deed with a

Retained Life Estate without Power of Sale is Probate avoidance. This can be an

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added benefit by avoiding not only the expense and delay of probate but also the

possibility of a Medicaid reimbursement claim against the Probate Estate.

Another use of the Life Estate is to obtain a discount on the value of a gift.

This type of transfer does not allow retention of control, because

the remaindermen do have an interest and therefore would have to sign any

documents affecting the property. There is also less creditor protection, as the

interest of the remaindermen may be subject to attachment and divestment,

subject to the life estate, of course.

This type of ownership does not provide all of the tax benefits of the

Power of Sale Life Estate. For capital gains tax, if the property is sold during the

life tenant’s lifetime the remaindermen will share in any sale proceeds and will

have to pay capital gains tax on their share (with carry over basis), thus losing

some of the capital gains tax exclusion. The capital gains step-up on death,

however, is preserved by the retention of the life estate.

Caveat: The above assumes that the home is located in Vermont. If the

home is not in Vermont, it does not qualify for the exemption. To qualify for

Vermont Medicaid, you must be a Vermont resident, if you claim your primary

residence is in another state, you can’t be a Vermont resident. This can present a

real Catch 22 for some clients. Cross- border planning presents real challenges.

Another issue that often arises with the house, is what is included in the

definition of the ‘homeplace’. Generally the house and all surrounding,

contiguous acreage is included in the exemption. Contiguous includes any

property divided by a road or stream, if the parcels would touch but for the road

or stream. The parcels do not have to have been deeded to the owner in one

deed, they can have been accumulated over time from different grantors.

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Sometimes the ‘homeplace’ includes other structures or residences.

Generally these have been exempt as part of the homestead. If they were

producing income at all, the income would be included in the applicant’s income

calculations. Recently the department may have changed its interpretation. There

is one anecdotal case where the department asserted that a rental unit on the

homestead property should be valued seperately to determine if it met the

‘income producing’ test, or the value of the building would be countable.

2. Income producing property.

Income producing property is exempt if it meets the definition of ‘income

producing’. This is a difficult standard, because currently it must net 6% of its fair

market value annually to be considered ‘income producing’. While such property

is exempt, the income, of course, will be included in the patient share and/or the

spousal allowance calculation.

3. Property listed for sale.

Property that is not otherwise excluded, is not counted as long as it is

listed for sale. This does not mean that there must be a contract with a realtor. It

can be ‘for sale by owner’, but there must be objective evidence that is it is for

sale, such as a sign on the property, advertizing online or in the newspaper, etc.

Property listed for sale must be listed for ‘fair market value’ not some impossibly

inflated value to avoid a sale. Also, and clients should be aware of this, if an offer

in excess of 2/3’s the listed price is received, they must take it. Once the property

is sold, the assets become countable. One way to preserve the property in part,

is to give a ‘First Option’ on the property, allowing a preferred buyer, like a family

member the right to purchase if a 2/3’s or better offer is received. It won’t

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preserve the whole value, but it can pass property at a discount, and keep camps

and other property with sentimental value in the family.

4. Property owned with others.

Often, clients will own property with other people. The form of ownership is

important. Tenants in common property will have the proportionate value as a

countable resource. Joint tenancy property, on the other hand, has 2 different

rules. If the joint tenancy was created less than 3 years before application, the

proportional value of the property is counted. If it was created more than 3 years

before application, the value is not countable. However, if the applicant owned

the property outright and created the joint tenancy within 5 years of the

application date, the transfer of asset penalty will apply to the value of the

interests transferred.

5. Life Estate.

When a client owns just a ‘bare’ Life Estate, the value of that property

interest is not a countable resource. I previously discussed the transfer of

property and retention of a bare life estate. But a client may also have purchased

a life estate. In such a situation, the purchase price must have been reasonable,

or for fair market value.

2. SPIAS AND PRIVATE MORTGAGES

A. Single Premium Immediate Annuities

With the drastic changes in the Medicaid look-back and the application of

the penalties, this type of annuity has become a very useful planning tool for

‘emergency’ planning situations. With such a policy a couple can take a large

amount of countable assets (cash, investments, other annuities) and convert the

30

asset into an income stream for the Community Spouse. For example a client

can take a disqualifying $125,000.00 regular annuity and use it to purchase an

immediate annuity for the community spouse. The purchase is a ‘purchase for

value’ so not penalized, the annuity meets the Medicaid criteria and the CS

receives payments/income for whatever time period is contracted for so long as it

is not longer than the CS actuarial life. The asset no longer counts; the income to

the CS has no effect on qualification. Once the IS is qualified, gifts by the CS will

not affect qualification so gifting is still viable (although it will affect the CS if later

institutionalization is required). There are immediate annuities available that meet

the Medicaid criteria that will pay for as short a period as 1 year.

When using SPIAs for an individual, you will have to be careful to do some

computation as to whether the payback requirement will actually preserve any

assets for family members. This is also important when choosing a payback

term. Remember, the term cannot be longer than the annuitant’s life expectancy,

but it may be shorter.

Existing annuities can be converted to SPIA’s without tax consequences

by doing a Sec. 1035 exchange. This avoids the immediate recognition of taxable

income or gain as would be the case with a regular liquidation.

SPIA’s can be used in situations such as the one described above to

immediately qualify someone with a disqualifying annuity or other cash or

investments. They can also be used as part of a more complicated gifting

strategy to assist in a ‘reverse half a loaf’ plan.

In pre-DRA days we used what was called a “half a loaf” gifting plan to

transfer assets and qualify a person for Medicaid. Basically it was a gift of some

funds where the retained funds would cover the gifting penalty. With the DRA this

planning is no longer possible because the penalty doesn’t start to run until the

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applicant is “otherwise qualified for Medicaid”, meaning they can’t have any

funds.

B. Reverse Half a Loaf Gifting

Under the new penalty rules imposed by the DRA, in order to start the gift

penalty clock running, the applicant must be otherwise eligible for Medicaid,

meaning he has no more than $2000 in countable resources. Thus all funds must

be transferred before applying. The simplest method is to transfer all applicant’s

money, then apply. When they are approved and the penalty is imposed, the

transferee of the funds can pay the monthly expenses. Then each monthly

payment covers one month of the penalty AND constitutes a partial return of the

gift, reducing the total penalty as well. This method will require the applicant to

recalculate the penalty in light of the partial return, and to reapply when it

appears the proper penalty has been ‘served’.

A SPIA can be used in the same scenario. The transfer calculation is

made, a portion of the funds are gifted (approximately one half) and the balance

of the funds are used to purchase a SPIA. Then application is made. The

purchase of the SPIA is not penalized nor is it a countable resource. The monthly

proceeds will pay for the nursing home during the penalty period. When the

payments are done the penalty should be over and the applicant immediately

qualified for Medicaid. While using the SPIA in this manner does entail a modest

fee, it has the advantage of being easier to calculate, and avoiding the

requirement of re-applying. It also avoids the risks of having the funds to pay

through the penalty period in one individual’s name (death, creditors, etc.).

Private mortgages, which will be discussed in more detail later, could also

be used as a funding source to pay during a ‘reverse half a loaf’ penalty.

Two things to be careful of when using SPIAs :

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1. Be sure that the payment computation uses the SSA life expectancy

tables and NOT the IRS tables, and

2. Be sure the beneficiary designations meet the Medicaid criteria for

Medicaid payback.

I have worked with only a very few local financial advisors who really

understood SPIA’s and could find the right product. There is an attorney, Dale

Krause, at dalekrause@Medicaidannuity.com (www.Medicaidannuity.com) who

is licensed to sell these products in Vermont and is extremely knowledgeable

about the products and planning techniques and very helpful in making

calculations and obtaining the product.

C. Private Mortgages

Private mortgages are essentially treated the same as annuities. They

have to meet all the requirements regarding payback no longer than life

expectancy, regular equal payments at least annually with no balloon provisions,

Medicaid payback language in the event of the death of the note holder,

reasonable interest, etc. The only real difference between a private mortgage

and a private unsecured note and a private SPIA would be whether there is a

mortgage or security for the instrument. Note: With private notes and mortgages

you should be sure to NOT include language allowing for prepayment without

penalty. While this is provided for in the Vermont statutes, DCF has raised

questions and claimed such a provision made the note a countable resource. I

think they are clearly wrong, but it is easier to avoid the problem than to have to

fight it.

D. Annuities:

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The recent changes to the Medicaid Rules, both in 2005 and more

recently as a result of the DRA 2005 have drastically changed the effective use

of Annuities in Medicaid planning. Under the current rules an annuity is treated in

one of three ways, depending on the status and terms of the annuity.

First, under 4242.1 an annuity is countable as a resource if it is in its

accumulation phase and can be liquidated or sold. Previously, all that needed to

be done in such a situation was to annuitize the investment, but that no longer

works. Any annuity in payment status is evaluated under one of the other two

rules.

Second, under 4244 an annuity is not counted as an available asset if

meets the following criteria:

(i)Has only the applicant and spouse as beneficiaries, and;

(ii) provides payment to the applicant and or spouse in equal intervals and

equal amounts, and;

(iii) the payments are based on their life expectancies, according to the

DCF tables, and;

(iv) does not contain a death benefit or any payment to anyone else if

applicant and spouse die before full payment period, and;

(v) the contract is calculated to return at least the amount used to

establish it plus earnings.

For annuities purchased after Feb. 8, 2006, or annuities purchased

prior to that date that do not meet the above requirement (iv), if the annuity

designates Vermont Medicaid as the first remainder beneficiary up to the amount

of long-term care assistance and community service Medicaid payments made

by the state for the institutionalized individual, except that a community spouse,

minor or disabled child may be named ahead of the State, provided the State is

named as secondary beneficiary, then it may also be considered as a non-

34

countable asset. (Note that there are different rules for applications filed before

10/7/05, but since we aren’t likely to be dealing with any of those now, I won’t

bother covering them.)

It should be borne in mind that any payments by the annuity, if payable to

the institutional spouse, will be included in calculating the patient share under

Medicaid. Thus, while the annuity may provide assistance for the community

spouse if other income is below the spousal support figure, any excess will be

used for the cost of nursing home care. On the other hand, if the annuity is

owned by or paying to the community spouse, the income is not countable, but

the spousal share may be reduced.

The third rule is found in 4473.4. Section A states that ALL annuities

purchased after 2/8/06 MUST name Vt. Medicaid as the first remainder

beneficiary (excepting surviving spouse, minor child or disabled child) to the

amount of Medicaid provided long term care or community service coverage. If

an annuity does not provide this, then it is a countable resource if it can be

liquidated or penalized transfer if it cannot.

4473.4 further states that if the annuity meets the requirements of 4244 or

4242.1 discussed above) then it is not a penalized transfer. If it does not qualify

under either of those two sections, then there are three more options for it to be a

non-penalized asset. These options are:

1. The annuity was purchased by the Institutional Spouse (IS) and is :

irrevocable and non-assignable; provides for equal payments in equal amounts;

is actuarially sound in that the payment term does not exceed the life expectancy

of the institutional spouse or community spouse, per the Medicaid life tables, and

it returns the purchase price plus interest.

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2. Is purchased by the IS and is either an Individual Retirement Annuity

under section 408(b) of the IRC, or; is deemed to be an IRA under a qualified

employer plan per section 408(q) of the IRC.

3. Was purchased by the IS with proceeds from: a §408(a) IRA; certain

accounts or trusts treated as an IRA under §408 (c); a Simplified Retirement

Account per §408 (p); a Simplified Employee Pension (SEP) under §408(k), or; a

Roth IRA under §408A.

NOTE that 4472.1 requires the use of the SSA actuarial tables in

determining life expectancy, not the IRS tables. It also provides that DCF may

develop its own alternate tables which will be adopted by rule. This rule applies

to all situations involving the deferred receipt of full fair market value (FMV), such

as promissory notes, annuities and other such arrangements.

Thus under the new regulations the use of annuities has changed

substantially and new annuity products are developing for the changing Medicaid

planning landscape. The most useful type of annuity these days is the Single

Premium Immediate Annuity, see later discussion of SPIA’s.

NOTES: a. Many Annuity salespeople are not aware of the new

regulations and are still selling standard annuities claiming that they are an

effective means of protecting assets for long term care. Also, nationally there

have been numerous abusive sales schemes involving annuities and the elderly.

Be sure to warn your clients.

b. Annuities have a built in trap if the client is using them as an

investment and wealth accumulation vehicle, especially later in life. Annuities

grow on a tax deferred basis. However, at death, there is income tax due on the

earnings as “income in respect of a decedent”. This can complicate the estate

plan and the duties of an executor and substantially reduce, unexpectedly, the

property passing to the named beneficiaries.

36

c. Many regular annuities (not SPIAs) have large penalties for

early cancellation or payment. Be sure to consider these carefully in the context

of your client’s age and health. Also advise your clients to be aware of these

issues. I have heard of some instances where an inappropriate annuity was sold,

and it was possible to get the transaction reversed, but it is always better, and

less expensive, to avoid the problem rather than having to correct it.

E. Life Insurance:

Life Insurance comes in two basic varieties, Term Insurance and

Cash Value (or Whole Life) life insurance.

1. Term Insurance: Term insurance is pure insurance, offering a death

benefit, but accruing no lifetime value with the premiums. Term insurance, no

matter what its face value is excluded as a resource under 4242. This exclusion

does present a planning opportunity, if the client’s goal is to ensure assets pass

to beneficiaries but are not needed for current support. By purchasing a term

policy, provided the premiums can be paid or if a single premium policy is

available, the client can insure his beneficiaries receive a death benefit, free of

any Medicaid claim. The purchase of the policy is not a prohibited transfer

because it is purchase for value. The policy itself is not a countable resource

because it has no present value.

2. Cash Value Insurance: Cash value life insurance includes the

traditional Whole Life policies, as well as the numerous Variable life and

Universal life type policies. Under 4242 if the combined FACE VALUE of all

policies owned by any one member of the financial responsibility group does not

exceed $1500.00, the total CASH VALUE is excluded as a resource. If the FACE

VALUE of all policies owned by any one member of the financial responsibility

group exceeds $1500.00, then $1500.00 of the CASH VALUE is excluded and all

37

amounts in excess of $1500.00, including any dividends, is considered a

countable resource. NOTE: Be sure to note the distinctions here, the test is not

the current Cash Value, but the Face Value. Under the rule, it seems that a policy

with a Face Value of $1500.00 but a Cash Value in excess of that amount would

NOT be countable.

Often you will encounter clients with one or more small whole life policies.

Frequently they are paid up insurance and the cash value is very close to the

death benefit. You may cash these policies out and then deal with them as any

other cash asset, or you can allocate the policy to be a part of the “Burial

Account” in your planning.

F. Retirement Accounts.

4248.5 has been changed to provide that when pension funds are held in

a retirement account as defined in the rule or in a work related pension plan and

owned by the institutional spouse no change in ownership is required for those

funds to be considered as an excluded resource for the benefit of the community

spouse when applying for Long Term Medicaid.

Retirement accounts include IRA’s, pensions, Keogh plans, SEPs and

401K plans. The definition may also include certain forms of life insurance,

annuities, and other forms of investments. The test for a Retirement Account is

not, initially, what form it takes, but whether the individual has set the account

aside to provide for support when they stop working.

DCF excludes from consideration funds owned by a member of the

financial responsibility group which:

(i) require the individual to terminate employment to access the funds; or

(ii) for which the individual is not eligible for a lump sum distribution; or

(iii) the individual is not eligible for periodic payments; or

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(iv) if the member of the financial responsibility group with the funds has

reached retirement age, they must be drawing on the funds at a rate consistent

with the Medicaid life expectancy tables (not the IRS RMD rate).

If the spouse (or other person in the “financial responsibility group”) is the

owner of the funds, they won’t be counted as an asset, but the person must be

drawing them down and the payments will be considered in calculating the

spousal support allowance.

G. Estate Recovery

In Vermont, Medicaid is limited to Estate recovery. The state has not

implemented any form of Enhanced Estate Recovery as other states have. This

means that assets passing through a decedent’s probate estate are subject to a

Medicaid claim if the decedent or the decedent’s spouse had received Medicaid

nursing home or home and community based services when over the age or 55.

Therefore, it is important, when doing estate planning for older people to give

serious consideration to avoiding probate if there is likely to be a Medicaid claim.

As stated above, this is one of the reasons that an Enhanced Life Estate Deed

(ELED) can be useful.

The rules regarding Estate Recovery are found at 7108.3. It specifies that

a claim will be filed in the probate estate for a decedent who received services as

stated above. If there is a surviving spouse, the claim will only be filed in the

surviving spouse’s estate. No claim will be filed if there are surviving children

under age 21 or children who are blind or totally and permanently disabled as

defined by Social Security.

While Medicaid may submit a claim, it is not always paid, or paid in full.

The claim is subordinate to administrative expenses and priority claims. Also, the

39

claim may be defeated or reduced under various circumstances. The exemptions

are set out in the following rules:

Rule 7108.3.1 deals with Income producing assets necessary for the

survivors to remain off public assistance.

Rule 7108.3.2 deals with several exemptions for the homestead

(hopefully you have done planning for this so it is not an issue for your clients).

Rule 7108.3.3 deals with the court adjusting claims against homesteads

on a pro-rata basis between other claims.

Rule 7103.4 provides for a retroactive homestead exemption.

And, interestingly, Rule 7103.3.5 provides for a reduction in the Medicaid

claim based on the existence of a qualified LTC partnership insurance plan. This

is interesting, because the legislature has so far failed to enact the requisite

legislation to permit LTC partnership plans in Vermont.

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Michael D. Caccavo’s Reserved Life Estate Language:

( INSERT AFTER PROPERTY DESCRIPTION PARAGRAPHS)

“RESERVING UNTO THE GRANTOR(S), _________________ , A LIFE

ESTATE IN THE ABOVE-DESCRIBED PROPERTY WITH FULL POWER TO

MORTGAGE, LEASE, SELL OR OTHERWISE CONVEY SAID PROPERTY,

WITH OR WITHOUT CONSIDERATION, WITHOUT JOINDER OF THE

GRANTEES IN SUCH CONVEYANCE, AND THE RIGHT TO ALL INCOME

AND PROCEEDS FROM SUCH TRANSFER, FREE OF THE INTEREST OF

GRANTEES , DURING HIS/HER/THEIR LIFETIME. GRANTOR(S) SHALL BE

SOLELY RESPONSIBLE FOR THE PAYMENT OF TAXES ON SAID

PROPERTY.

THE REMAINDER INTEREST HEREIN GRANTED SHALL PASS TO

GRANTEES SUBJECT TO ANY LEASE OR MORTGAGE CREATED BY THE

LIFE TENANT(S); AND SHALL BE EXTINGUISHED BY ANY SALE OR OTHER

CONVEYANCE BY LIFE TENANT OR BY A FORECLOSURE SALE BY A

MORTGAGEE, WITHOUT THE NECESSITY OF JOINING THE

REMAINDERMEN IN SUCH FORECLOSURE.”

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V. Supplemental Needs Trusts

Glenn A. Jarrett, Esq.

I. First Party and Third Party Trusts

A. Introduction

Because two of the most common benefit programs available to persons with

disabilities, SSI and Medicaid, are means-tested programs, it is important to

consider the financial impact on a beneficiary of assets owned, acquired or

inherited by such a beneficiary. Before 1985, some individuals attempted to set

up discretionary trusts using their own funds without losing their eligibility for

public benefit programs. These attempts rarely met with success. Courts held

that assets held in self-settled discretionary trusts were available to the settlors

and their creditors, including the state that provided the benefits these people

were trying to protect. See, e.g., Vanderbilt Credit Corp. v. Chase Manhattan

Bank, 473 N.Y.S. 2d 242 (A.D. 1984). In 1985, federal legislation declared such

self-settled discretionary trusts to be against public policy. The Consolidated

Omnibus Budget Reconciliation Act of 1985 (“COBRA”) provided no creditor

protection to these trusts and the principal and income were deemed to be

available to the settlors of such trusts. However, after COBRA, practitioners

developed self-settled non- discretionary trusts that did protect the trust assets

from being deemed available to the settlors. Only the distributions that were

mandated by the trust could be considered by the state agencies.

The result of this development was that a settlor could establish an

irrevocable trust and receive income from the trust. As long as the income from

the trust was less than the income limits on public benefits, the principal of the

trust and its undistributed income were not considered available to the settlor and

2

therefore, to the state. Settlors could thus protect the principal of the trust for

their ultimate beneficiaries and provide an inheritance for their families.

Following the 1985 Act, Congress perceived that such self-settled trusts were

abusing the Medicaid program. To correct that perception, Congress included in

the 1993 Omnibus Budget Reconciliation Act of 1993 (“OBRA-93”) a new

definition of trusts that disqualified their beneficiaries from public benefits.

However, the redefinition contained in OBRA-93 also included criteria for

creating trusts that do not disqualify disabled beneficiaries from receiving public

benefits.

Such trusts have to be lawful under the laws of the state in which they are

created and also have to comply with state Medicaid regulations and federal

agency interpretations of federal law found in the State Medicaid Manual. These

OBRA-93 trusts are frequently called Special Needs Trusts or Supplemental

Needs Trusts. They will be referred to interchangeably in this section as SNTs.

There are two primary types of self-settled SNTs. They are often referred to as

(d)(4)(A) and (d)(4)(C) trusts for the statutory sections that authorize them (42

U.S.C. § 1396p). A (d)(4)(A) trust must contain a provision to repay Medicaid at

the death of the beneficiary for the cost of services it paid for the beneficiary’s

benefit during his or her lifetime. A (d)(4)(C) trust is often referred to as a pooled

trust. Further discussions of these two types of trusts are in sections E and F,

below. Self-settled trusts are very different than third party trusts, which will be

discussed in section H. The primary distinction is that third party trusts do not

contain assets of the beneficiary.

B. SSI and Medicaid Requirements

An individual may qualify for Medicaid directly or as a result of qualifying

for Supplemental Security Income (“SSI”) through the Social Security

Administration (“SSA”). The Supplemental Security Income program was signed

3

into law in 1972 by President Nixon to address gaps in federal benefit coverage

for the aged, blind and disabled who had not been able to work a sufficient

amount of time to qualify for benefits under the Social Security Act and who were

poor. Before the SSI program was enacted, only state welfare programs

provided cash income to such beneficiaries. In order to be eligible for SSI, an

individual may have up to $2,000 in available resources and a couple may have

up to $3,000. In addition, a person or couple is allowed to have a homestead,

without any limitation on value, household goods, a car, and each individual can

have a burial fund with not more than $1,500 in it.

The trust provisions of OBRA-93 also pertain to eligibility for SSI. The

Foster Care Independence Act of 1999 (“FCIA”) (P.L. 106-169) changed the SSI

rules for trusts, effective January 1, 2000. 42 U.S.C. 1382b. Section 205 of this

law provides, generally, that trusts established with the assets of an individual (or

spouse) will be considered a resource for SSI eligibility purposes. It addresses

when earnings or additions to trusts will be considered income. The legislation

also provides exceptions to the general rule of counting trusts as resources and

income. The FCIA specifically exempts OBRA-93 special needs trusts and

pooled trusts from being considered an available resource and provides that

transfers to fund such trusts by an individual under age 65 will not incur a transfer

penalty. In many ways, the SSI rules for SNTs are more restrictive than the

Medicaid rules. The SSA will review SNTs for beneficiaries who are receiving

both SSI and Medicaid, but only after the SNT is created. The Social Security

Administration’s Program Operations Manual System (“POMS”) is an exhaustive

set of regulations dealing with many issues, among them, SNTs. See, e.g.,

POMS SI 01120.200, SI 01120.201 and SI 01120.203 (January 2009). The

POMS may be found online at http://policy.ssa.gov/poms.nsf/aboutpoms.

There are critical elements required to establish a SNT under 42 U.S.C. §

1396p (d)(4)(A) that are contained in the following paragraph from the statute:

4

A trust containing the assets of an individual under age 65 who is disabled

(as defined in section 1614(a)(3) [of the Social Security Act]) and which is

established for the benefit of such individual by a parent, grandparent,

legal guardian of the individual, or a court if the State will receive all

amounts remaining in the trust upon the death of such individual up to an

amount equal to the total medical assistance paid on behalf of the

individual under a State plan under this title.

The Social Security Administration has included additional criteria for approval in

the POMS that are not apparent from the statutory language:

Disability—There is no requirement that the disabled individual

have been determined to be disabled before the trust was created.

That determination can be made when the trust is funded and

submitted to SSA for approval. POMS SI 01150.121.

Sole benefit requirements—Until a few years ago, there were some

SSA Regional Counsel who took the position that payment of taxes,

trustee fees or other administrative expenses violated the

requirement to repay Medicaid first. Since the Medicaid repayment

is only accomplished after the death of the beneficiary, it would be

impossible to administer the trust. The POMS were amended to

clarify that the “sole benefit” requirement is not violated if certain

administrative expenses are paid during the life of the beneficiary

and certain others after death, but before repayment to Medicaid.

The prohibited and allowable expenses are found in POMS SI

01120.203.B.3.

Doctrine of Worthier Title—Some of the SSA Regional Offices

(including the Boston Region, which includes Vermont) have

published regional instructions to guide staff in evaluating trusts.

These instructions describe what is necessary to have an

irrevocable trust under state law. A recent change to the Boston

5

Region POMS indicates that a Vermont trust may provide that

assets will go to “the heirs of John Smith” or the “Estate of John

Smith.” See POMS (SI BOS01120.200.D.3). This is a change from

the prior practice of the SSA, which would disqualify a Vermont

trust if the beneficiary's heirs were contingent beneficiaries. Note

that the State as a creditor does not constitute a beneficiary.

Funding by Competent Adult Beneficiary—Until the issuance of the

new trust POMS by SSA in January, 2009, it was unclear whether

an adult beneficiary of a Supplemental Needs Trust who had

capacity could fund his or her own trust. The new POMS make it

clear that it is permissible for the person "whose actions created the

trust" to seed it with a token amount, like $10.00, and have the

adult beneficiary transfer his or her own assets to the trust. SI

01120.203 B 1 f. This clarification will make it easier to fund a trust

and will eliminate the necessity of establishing a guardianship for

an adult beneficiary with capacity.

The Vermont Department for Children and Families may be helpful in reviewing

SNTs before they are signed. Contact Robin Chapman, Attorney/Policy Analyst,

at 802-241-2990 or at robin.chapman@ahs.state.vt.us. A new procedure

adopted by DCF calls for all SNTs to be sent for scanning to DCF/ESD, ADPC,

103 South Main Street, Waterbury VT. 05671.

C. The (d)(4)(A) Trust

One important thing to keep in mind is that a (d)(4)(A) Trust cannot be

established for a person aged 65 or older. This means the trust must be in place

and funded before the beneficiary reaches his or her 65th birthday. While the

trust can continue after the individual turns 65, additions to the trust cannot be

made after that birthday without counting as income to the beneficiary. In the

case of a structured settlement annuity in place before the beneficiary reaches

6

age 65, payments can continue to be made after the beneficiary turns 65. The

other salient characteristic of a (d)(4)(A) Trust is that there is a mandatory

payback to the State at the death of the beneficiary. The amount to be paid back

from trust assets is an amount equal to the total amount of medical assistance

paid on behalf of the beneficiary under the State plan.

D. The (d)(4)(C) Trust

In a (d)(4)(C) Trust, the trust is established and maintained by a non-profit

association. A separate account is maintained for each beneficiary of the trust,

but the trust pools these accounts to invest and manage the assets. Accounts in

the trust are established by a parent, grandparent, or legal guardian of such an

individual, by the individual himself or herself, or by a court and must be solely for

the benefit of the disabled individual. If there are amounts left in the beneficiary’s

account at his or her death, they may be retained by the non-profit sponsor. If

they are not retained, the trust pays the State back, much as in a (d)(4)(A) Trust

situation. The (d)(4)(C) Trust is very similar to the (d)(4)(A) Trust.

While there is no requirement that the beneficiary be under the age of 65

in the federal law, the Center for Medicare and Medicaid Services and many

states now consider amounts put in a (d)(4)(C) Trust for someone over 64 to be a

non-exempt transfer of resources. The Vermont regulation, M 4473.1, formerly

M 440.31, is unclear on this point, but DCF is interpreting the regulation to

prohibit people over 64 from establishing (d)(4)(C) trusts. Unlike (d)(4)(A) Trusts,

the individual whose assets are being transferred to the pooled trust may

establish the trust himself or herself. One pooled trust that is available to

Vermont residents and has been approved (informally) by DCF is Enhanced Life

Options, located in Bedford, NH. See www.elonh.org . Nina Hamberger is the

Executive Director and is very helpful. She can be reached at (603) 524-4189.

7

E. The (c)(2)(B) Trust

In 1988, the Medicare Catastrophic Coverage Act added provisions that

allowed an individual to transfer assets to certain individuals without penalty.

These included transfers to the individual’s spouse or to another for the sole

benefit of the individual’s spouse, to a blind or disabled child or to a trust for the

benefit of such a child. 42 U.S.C. § 1396p (c)(2)(B). In 1993, OBRA-93 added

subsection (iv) to (c)(2)(B). Subsection (iv) allowed a transfer to a trust

established solely for the benefit of an individual under the age of 65 who is

disabled (as defined in section 1382c(a)(3) of the Social Security Act). The

amendment included a (d)(4)(A) trust in subsection iv.

The effect of this provision is to allow a third person to transfer assets to a

trust for a disabled person without being penalized for the transfer. Creating the

trust will not disqualify the donor from receiving Medicaid benefits if he or she is

otherwise eligible for them. This can be very helpful for a person applying for

long-term Medicaid benefits who has a family member or friend with disabilities.

The trust must either be a (d)(4)(A) trust and provide for a payback to

Medicaid after the death of the beneficiary or must be for the sole benefit of the

disabled individual and must provide for spending the funds on an actuarially

sound basis determined by the life expectancy of the beneficiary. Health Care

Financing Administration (HCFA) Transmittal Letter 64, § 3257.6.

One question that arises is whether naming a remainder beneficiary

violates the law. This possibility would arise where the trust is not a (d)(4)(A)

trust, but a (c)(2)(B) trust that is actuarially sound. An examination of the State

Medicaid Manual, Transmittal Letter 64, §3257.6, leads to the conclusion that the

trust must contain a payback provision to Medicaid following the beneficiary’s

death or provide for distributions that are actuarially sound based on the sole

beneficiary’s life expectancy in order for a remainder beneficiary to be named

without disqualifying the trust. A recent exchange with the attorney for policy

decisions at DCF confirmed the option for (c)(2)(b) trusts.

8

A (c)(2)(B) trust could be a Qualified Disability Trust, which would provide

favorable tax treatment by allowing the trust the equivalent of the personal

income tax exemption each year.

F. Third Party Trusts

A third party SNT is a special needs trust established by one person for

the benefit of another and funded with assets that do not belong to the

beneficiary. The purpose of a third party SNT is to preserve public benefits for

the beneficiary while using the trust funds to enhance the beneficiary’s lifestyle.

A key issue in creating a third party SNT is whether or not the funds in the trust

are “available” to the beneficiary. If the income from the trust is considered

available to the beneficiary, he or she may be driven over the income limit for the

applicable program.

Relatives of disabled children have several options in considering estate

planning for the child with disabilities. They can disinherit the child, distribute

assets directly to the disabled child, distribute assets to siblings or others with the

understanding that the beneficiaries will use the inheritance for the benefit of the

disabled child or distribute assets to a special needs trust.

Disinheriting the child may be an option if the estate is small and there is

not enough money to make a meaningful difference in the child’s life. Leaving

the disabled child an inheritance may result in the reduction or elimination of

government benefits that are means-tested. Medicaid, SSI or federally assisted

housing may become unavailable. Medicaid is especially important because it

provides health coverage for the child. If the child is a patient in a public

institution and inherits money, the State may not only charge the child for his or

her care, but seek to be repaid for past care.

Leaving money or assets to a sibling or other relative with the

understanding that it will be used for the benefit of the disabled child can be risky.

9

The assets are subject to misappropriation by the relative or loss to creditors or

in a divorce..

The fourth option is to leave the inheritance to a special needs trust. A

properly drafted special needs trust allows individuals on means-tested programs

to retain their benefits. It also provides management of assets by a qualified

trustee, instead of risking loss because of the disabled child’s lack of ability to

manage money. A special needs trust is designed so that the assets are not

“available” to the disabled child. The child cannot compel distribution and it is set

up as a discretionary spendthrift trust.

A special needs trust can be set up as an inter vivos trust. An advantage

of an inter vivos trust is to provide a vehicle for grandparents or other relatives to

leave money for the person with disabilities. If the parents are divorced, it

provides an opportunity for each of them to leave money for their child without an

inordinate amount of concern that the other parent will misappropriate the

money, since if that parent is acting as trustee, he or she will have fiduciary

obligations.

A third party trust can be revocable or irrevocable from its inception, but

will become irrevocable at the death of the grantor. Having the trust be

revocable will avoid the necessity of filing fiduciary income tax returns as long as

the grantor is alive. A trust can provided that the trust will become irrevocable

after it has received a certain amount of assets. Making the trust irrevocable

from the beginning is favored by many lawyers who focus on preparing SNTs.

The lawyer creating a third party SNT should take income, gift and estate

tax issues into consideration. Some income tax rules pertaining to third party

SNTs are, first, that all transactions should be reported under the taxpayer ID for

the trust, not the grantor’s or beneficiary’s social security number; second, if the

trust is a grantor trust, it reports net income distributed to a beneficiary via a

Schedule K-1; and, third, the beneficiary’s income tax returns will reflect income

at lower individual tax rates. Filing an income tax return for the beneficiary will

10

not, in and of itself, impair benefit eligibility, but the SSA reviews IRS income tax

data by Social Security Number, which can generate a notice to the beneficiary

to explain the income reported; and the trustee must be able to show that income

amounts were distributions made for extra and supplemental items.

Federal Medicaid law only allows assets of a spouse to be put into an SNT

for the other spouse’s benefit through a will, rather than an inter vivos trust. If the

couple has planned with revocable living trusts, provisions can be inserted to

allow the trustee to pay assets over to the Personal Representative of the

deceased spouse’s estate to allow the funding of a testamentary special needs

trust. A testamentary special needs trust may be subject to the surviving

spouse’s rights to an elective share. There is no law in Vermont stating that a

testamentary special needs trust satisfies the state’s elective share law.

Therefore, if the surviving spouse is receiving Medicaid benefits, the State may

require an election against the testamentary SNT.