Medicaid madness:"Look-back" period creates financial hardship for many Americans

When Dan Callahan, a public relations professional from Missouri, learned in 2003 that the Medicaid qualifications were going to get tougher, he and his two siblings took their 83-year-old mother to an accountant who specialized in elder and estate law to find out how they could comply.

Callahan thought he knew the drill: His father had needed nursing home care while suffering from Alzheimer's years earlier, at which point his mother had transferred the family duplex, car and other assets into her name so that her husband could qualify for nursing home care under Medicaid when his disease progressed to the point that he could no longer be cared for at home. But the move ended up backfiring.

"It was a sobering meeting," Callahan told WalletPop. "The accountant was pretty pessimistic about the way the law was going." Callahan was told his mother had too many assets to qualify for Medicaid; however, she also wouldn't be likely to remain healthy long enough to transfer her assets to her children without incurring serious penalties. Callahan's mother passed away a mere two months after hearing the news that her lifetime habit of saving still wouldn't be enough to pay for her care and leave an inheritance for her children.

Watching the health of an elderly parent decline is difficult enough, but for many Americans, that ordeal is exacerbated by the intimidating, sometimes frightening prospect of dealing with Medicaid - often the only option for seniors who need long-term nursing home care. As Callahan and many others have learned, the Deficit Reduction Act of 2005 (DRA) drastically changed the qualifications for nursing home care via Medicaid, making them much stricter. If advance preparations aren't made for a loved one's care, most, if not all, of an estate - the entire fruits of a hardworking American's lifetime of labor - can vanish.

The Nursing Home Dilemma

Given the constraints of the laws governing Medicaid and Medicare, many senior citizens find themselves in a bind when they reach the point of requiring nursing home care, a pricey option that can cost up to $400 a day in some parts of the country. The problem is that Medicare won't cover nursing home care, nor will the majority of private health insurance plans. And many seniors are considered too "rich" to receive Medicaid. Although should they go into a nursing home they'll soon see most of their assets disappear.

The Deficit Reduction Act made two big changes to the qualifications for Medicaid. Previously, if a senior wanted to give away assets to his or her children in order to appear less wealthy and thereby qualify for Medicaid, they were subject to a three-year "look-back period." That meant the assets would need to be given away more than three years before they need Medicaid assistance.

The DRA changed the look-back period to five years, increasing the risk that a senior would need nursing home care during that gap. In addition, the look-back period used to start when an elderly person gave away his or her assets; the DRA changed the rule so the clock only starts once that person applies for Medicaid.

Steps Seniors Can Take

It's enormously complicated, says Cormac McEnery, a New York City-based attorney specializing in eldercare law, one of a trio of lawyers WalletPop interviewed.

The lawyers' we spoke with were unanimous with their first piece of advice: Find an attorney who specializes in elder and estate planning who's based in the state in which the nursing home you're considering for your parent is located. (The National Academy of Elder Law Attorneys is a good place to search for such a lawyer.)

Trying to cut corners to save costs can have catastrophic results, warns McEnery. One family had an $800,000-plus lien slapped onto a family home, the consequence of an improperly executed attempt at protecting the house by a lawyer unfamiliar with Medicaid-related estate planning, he says.

Next, draw up a power of attorney for the senior, says Ronald Runkle, a Grayslake, Illinois-based eldercare attorney. This lets a responsible child or other party carry out the senior's wishes and handle their financial affairs if he or she develops dementia or suffers a stroke or other catastrophic health crisis.

If the senior is still living in his or her home, many eldercare lawyers suggest what's called an "irrevocable income-only trust." This lets the homeowner continue to stay in the house while protecting the home as an asset by putting it in the trust, which is controlled by the trustee, who is generally a responsible adult child of the senior citizen. Other types of assets, such as stock portfolios, can also be placed into income-only trusts.

Seniors can give cash, real estate or other assets to family members, but then they need to wait five years before applying for Medicaid benefits. Before applying for Medicaid, it's important to first meet with an eldercare lawyer, advises Runkle. Applying for Medicaid too early, or before provisions have been made to protect the parent's assets, could result in major mistakes that the next of kin could pay for dearly..

If a family suspects that a parent with significant assets may need nursing home care within five years and no preparations have been made, the options are more limited. The parent could deed the house to an adult child who lives with that parent as a full-time caregiver, but only if it's documented by the senior's doctor that without such intervention, the person would need a nursing home. If you move into an elderly parent's home to help them with tasks such as bathing, dressing and cooking, visit their doctor as soon as possible after your move to document this need, advises Martha Brown, a partner at law firm Oelbaum, Brown & Alsop in St. Louis. After two years of this arrangement, the senior's home can be transferred without penalty and the elder can go into a nursing home.

If you have the space to take in an elderly parent and if they can remain with you for more than a year, you can enter into a transaction with them called a "life estate," Runkle says. In simple terms, it's as if they were paying you a lump sum of rent that lets them live in your house. The assets used to buy this life estate will go to the home-owning child and be protected from being claimed by Medicaid. (If an elderly parent just gives an adult child money informally, even if the parent is living with them, Medicaid will view that as a gift and deem the parent ineligible until a penalty period has passed.)

Even the best-laid plans...

Sometimes, even planning ahead isn't enough to save a family from the Medicaid morass. When Anne Marie Colletti, a corporate librarian in New Jersey, lost her father suddenly in 2005, she initially took comfort in the fact that he had made provisions for the care of her mother, who suffered from Alzheimer's. Colletti was shocked to find out that the newly-implemented DRA contained no provisions for "grandfathering in" the wills of people who died just as the new law was taking effect. Within a month of her father's unexpected death, she says she was receiving threatening letters from Medicaid, demanding one-third of her late father's home, car and investments.

"The letters started coming within a month or two," Colletti says. At first, she replied that she was still sorting through the estate paperwork. They said, 'We need this response back within a week, or we will deny your mother's services,'" she recalls. "I felt all alone in this." When the agency unearthed two long-forgotten life insurance policies held by Colletti's father, they demanded that she sign over the benefits. "All they wanted was the money, and they didn't care that they were bleeding a family dry," she says.

When Colletti hired a lawyer to try and protect her inheritance, the ensuing legal wrangling stretched to spring of this year - nearly five years after her father's death. Eventually, Medicaid wound up with one-third of her father's modest estate - at no small expense on both sides, Colletti notes, saying her legal expenses climbed to $30,000. "Was it really worth the taxpayers' time for that?" she asks.
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