Last week’s article explained how a Medicaid-compliant annuity can be used to help a family to manage and minimize nursing home expenses. We also reported that a recent federal court ruling in Zahner v Secretary of Pennsylvania Department of Human Services (DHS) has not only clarified the general use of Medicaid compliant annuities, but also determined that there is no minimum required term for such an annuity. This has significant implications to help middle- class families.
One benefit of the Zahner ruling is that it enables an asset preservation strategy to cap a family’s liability for a single parent’s nursing home expenses. A second benefit of Zahner is that it offers a solution for the proactive adult child(ren) to cure an uncompensated asset transfer which could otherwise result in liability arising from Pennsylvania’s filial responsibility laws for the adult child(ren) for the cost of their parent’s nursing care. In the first case, Zahner is a proactive strategy to maximize a planned preservation of family assets. In the second case, Zahner allows an emergency rescue to prevent a financial liability for an adult child.
Adult children of Pennsylvanians who receive nursing care should be concerned with Pennsylvania’s uniquely harsh filial responsibility laws, which make adult children responsible for the cost of the care of their indigent parents. This liability surfaces as a crisis when an indigent parent cannot get Medicaid from Pennsylvania Department of Human Services (DHS) to pay for nursing care because of the parent’s spending during the sixty calendar months preceding an application for Medicaid in a nursing home. Let’s examine how the adult child’s liability occurs and how the Zahner ruling validates a strategy to cure such a liability problem.
DHS regulations penalize the parent’s uncompensated transfer of assets, totaling more than $500 in any one month, during the sixty calendar months preceding an application for Medicaid to pay for care in a nursing home. Unless a family seeks proactive advice from an Elder Law attorney immediately upon a parent’s admission to a nursing home, since it is not possible to apply for Medicaid to pay for nursing home care until funds are depleted, the problematic issue of the uncompensated transfer of assets otherwise will not surface until it is too late. When an applicant applies for Medicaid, and DHS determines from their systematic review of five years of bank statements and tax returns that such an unauthorized transfer or gift of assets has been made, a penalty period results of about one month for every $9,000 that DHS determines to have been wrongly transferred.
Unfortunately, often a nursing home will not begin the time-consuming process of applying for Medicaid until a widow or widower has only $20,000 of assets remains in their bank account. At that time, the adult child who is the nursing home’s primary family contact is called on to gather the financial records which DHS requires with the Medicaid application. When during the process of gathering that information the adult child discovers that their parent secretly gave money to a sibling because of illness, unemployment or coercion, an eligibility problem is discovered.
The Pennsylvania Supreme Court, notably in the HCRA v Pittas case, validated filial responsibility laws to enable a nursing home to sue an adult child for collection of funds due for the care of their indigent parent who is denied Medicaid eligibility. Over the four to five months that the Medicaid application and approval process takes, the amount due by the parent to the nursing home can grow to exceed $50,000. A nursing home can’t demand payment while a Medicaid application is pending. But if immediate eligibility is denied and a penalty period is assessed, the filial liability law becomes the nursing home’s means of collection.
The Pittas case enables the nursing home to sue any child. The only statutory defense is ten years of consecutive abandonment of the child by the parent when the child was a minor. The nursing home is neither obligated to demonstrate that the defendant benefitted from the wrongful transfer, nor obligated to identify the wrongdoing child and join that child in the suit. Ultimately, the nursing home may place a lien on any adult child’s real estate to ensure payment of their parent’s account.
Here’s how the Zahner annuity can fix that. Say the responsible child discovers a previous uncompensated transfer of around $100,000 to a sibling, while the parent still has at least a nearly equal amount of cash remaining. Then the responsible child may use a Zahner annuity to exhaust the parent’s remaining resources in order to seek an immediate eligibility determination. Even when an expected penalty period is established, which in this case would be about one year, the annuity income can be used to pay the nursing home privately during the penalty period. The use of this technique could reduce a nursing home’s collection issues, as well as prevent or reduce a child’s liability for the cost of the parent’s care.
Medicaid compliant annuities may also be used proactively for asset preservation. A parent who has $290,000 of assets and $2,000 of monthly income could choose to gift $160,000 to a family trust, which would result in a DHS-imposed penalty period of eighteen months without Medicaid benefits. The family could simultaneously use the remaining $130,000 of assets to purchase a Medicaid-compliant annuity, be eligible to apply for Medicaid immediately, and utilize the annuity income to pay for the cost of the nursing care during the penalty period.
One life insurance company deals exclusively in “Medicaid annuities” and is represented by a Midwest originator. That tandem is respected nationally by Elder Law attorneys who understand and use these asset preservation provisions. Even general practice attorneys and licensed insurance agents should seek experienced guidance in this area since the stakes are high.
David D. Nesbit, Attorney, Keystone Elder Law P.C.