Medicaid Myths Part Two: Divestment and Millionaires
This article will delve into the second major area of misunderstanding in Medicaid: Divestment. Divestment is the term for the broad concept that if a person gives away money or other assets for the purpose of becoming eligible, a penalty will be imposed that prevents that person from receiving Medicaid benefits for a period of time. Federal law regarding divestment is at 42 USC 1396p(c); Wisconsin State law is at Wis. Stat.§ 49.453.
Divestment Myth #1 – Annual Gift Tax Exclusion and Medicaid: The most common misinformation refrain here is, “I heard you could give away $14,000 a year and still get Medicaid.” I wish I had $14,000 every time a client brings this one up. This is based on a misapplication of IRS tax rules. When I am asked this question, it is time for a frequently-echoed refrain. It goes like this: “It’s true that Medicaid and tax law are both federal laws. And one would think that since they are both federal laws, Congress might be consistent in the way they work. However, that is not the case. So while it is true you can give away up to $14,000 per recipient per year for tax purposes, it does not work the same way for Medicaid. They have different rules.”
There is no fixed amount that is “safe” in Medicaid. There are a few general rules. Because these rules can change and are somewhat subjective, I recommend consulting with an experienced elder law attorney before trying them. For example, a pattern of gifting in the past, which is continued during the look-back period and is less than 15% of the applicant’s annual income, may be allowable. A payment to a relative for care services, which is less than a specified limited amount established by the Medicaid agency, may be allowable. (Anything greater than the specified amount would require a written agreement that meets certain standards.) If you violate the divestment rules and give away $14,000 a year for three years, then need to apply for Medicaid the next year, and your penalty period would be 172 days (using 2014 numbers).
Divestment Myth #2 – Monthly Gifts: “If I just give away a little bit of money every month, there will not be a penalty.” This misconception is based on what used to be the law. This is frequently brought up by someone who says, “my uncle gave away $3000 per month for two years and got on Medicaid right away.” That is simply not the way it works anymore. Now, everything you give away five years before you apply gets added together to create a penalty. The penalty starts when you are in the nursing home, at the correct asset level to qualify, and you apply for Medicaid. The penalty then goes forward from there. So the days of giving away a little bit every month are gone.
Divestment Myth #3 – Millionaires Getting on Medicaid: “If we expand the divestment laws, we will make it harder for millionaires to get Medicaid.” This refrain is what we hear from Wisconsin legislators when they pass restrictive laws that affect Wisconsin’s seniors. The most recent set of restrictions prevents community spouses from giving away any resources for the first five years after their spouse in the nursing home qualifies for Medicaid. There were other restrictions that I have written about in past articles, that were then rescinded. The refrain in passing the restrictions was some concern that millionaires are abusing the Medicaid system. (In order to buy into the argument that the new divestment restrictions were intended to target millionaires you would have to ignore the plain fact that the community spouse divestment restrictions target couples whose assets are well under $150,000 because you generally need less than that to qualify in the first place.) The concept that Wisconsin’s efforts will prevent millionaires from getting Medicaid is ludicrous for two reasons:
#1) most millionaires are not looking to get Medicaid if they need long-term care. Millionaires are staying in their homes with private-duty nurses. Millionaires who are not at home are spending their money in high-end private pay facilities that do not take Medicaid. The only “millionaires” who often need to apply for Medicaid are those people who own a highly appreciated piece of real estate that has been in the family for 50 or more years. Like a farm.
#2) If a real millionaire wanted to apply for Medicaid, Wisconsin’s newly restrictive laws don’t make it any harder. Under federal law, the millionaire simply needs to divest assets and wait for five years. And being a millionaire, he or she can do that.
