Appellate Division Makes Do It Yourself Medicaid Gift Planning Even Riskier

Posted on: September 1st, 2015 by Lawrence A. Friedman

The Appellate Division of the Superior Court of New Jersey laid to rest two vexing Medicaid planning issues in C.W. v. Div. of Medical Assistance and Health Servs. (Aug. 31, 2015 #22-2-7790) Since nursing homes average over $10,000 per month in New Jersey and Medicaid is the only government program that funds long term care, these rulings should be of more than passing interest to anyone with a loved one in failing health.

C.W. v. Div. of Medical Assistance and Health Servs. dealt a death blow to two areas of contention. First is whether the Medicaid disqualification penalty period due to gifts is recalculated as the average cost of nursing home care changes from year to year. The second question is whether a penalty period is reduced when some (but not all) gifts within the lookback period are returned.

To understand these issues, we first must consider how one qualifies for Medicaid. Medicaid eligibility is discussed in detail under the elder law drop down menu, but we’ll summarize two key bones of contention in C.W. v. Div. of Medical Assistance and Health Servs.

An individual must satisfy both financial and care requirements to obtain Medicaid to fund long term care. Thus, resources and income of a Medicaid applicant (and spouse in most cases) must fall within Medicaid caps. However, where the applicant asks Medicaid to fund long term care, gifts by either spouse during a lookback period are taken into account. The lookback period is roughly the 60 months prior to application in addition to the application date forward.

Non-exempt gifts during the lookback period disqualify the applicant for roughly a month of Medicaid funded long term care for each $10,000 gifted by either spouse. The $10,000 divisor represents average nursing home costs in New Jersey so it varies from year to year.

The divisor can increase quite a lot if the gift is early in the lookback period and nursing home costs rise substantially during the lookback period. For instance, if gifts total $120,000 and the gift divisor is $10,000 per month, the long term care Medicaid disqualification penalty period would be 12 months. However, $120,000 in gifts would trigger only a 10 month penalty period if average monthly nursing home costs rose to $12,000.

As the examples show, the higher the divisor, the shorter the penalty period. Since average nursing home costs tend to increase over time (often much more than general inflation), applicants generally could qualify for Medicaid sooner if gift penalties were based on current divisors rather than staying static from the start of the penalty period.

Rather than start when gifts are made, the Medicaid gift penalty period is deferred until the individual both has applied for Medicaid and would receive Medicaid to fund long term care but for the gifts that trigger the penalty period. Thus, the penalty period wouldn’t start until June 2016 if the applicant’s spouse gifted $250,000 in August 2015 but excess resources weren’t spent down and a Medicaid application filed until the end of May 2016. Since the penalty period would cover multiple years this raises the question whether the penalty period is based on the average nursing home cost in 2016 or is recalculated each year with the new annual divisor.

In C.W. v. Div. of Medical Assistance and Health Servs., the Appellate Division held that once the penalty period starts, it continues to run and isn’t shortened even if the gift penalty divisor rises in the interim. Even a new Medicaid application doesn’t allow for the penalty period to be recalculated.

The Appellate Division’s second holding may prove even more vexing. The court ruled that a penalty period need not be reduced when some but not all gifts within a lookback period are returned. Thus C.W. argued that the Medicaid penalty period should be reduced pro rata when gifts are returned. For instance, if mom gave her son $180,000 in May 2015 and the son either returned $80,000 to mom in December 2015 or spent $80,000 on mom, C.W. would say the penalty period should be based on $100,000 rather than $180,000.

The Appellate Division rejected partial penalty abatement and held that the penalty period is unchanged where only some gifts within the lookback period are returned. In addition, the court held that a gift penalty still applies where a gift recipient deposits the gift in the recipient’s name but spends it on the donor.

So, what should we learn from C.W. v. Div. of Medical Assistance and Health Servs.? The most important lesson is a principle we have stressed throughout our website– do it yourself long term care or Medicaid planning is incredibly risky. Errors that might seem inconsequential to a lay person can prove catastrophic. Spouses should seek Medicaid counsel before making significant gifts whenever there is reason to fear that either spouse may need long term care in the next 60 months or so.

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