LTC Bullet:

Tuesday September 14, 1999

Seattle--

The Center for Long-Term Care Financing often presents the case that easy availability of Medicaid long-term care benefits reduces the demand for private long-term care insurance. Why buy apples on one side of the street when someone's giving them away on the other?

We have proved many times that Medicaid nursing home eligibility is easy for most seniors to achieve without spending down significantly. (See especially the Center's two white papers, "LTC Choice" and "The Myth of Unaffordability.")

Occasionally, we have provided concrete evidence that even wealthy people can and do qualify quickly and easily for Medicaid benefits with the assistance of Medicaid estate planning attorneys. (See the Center's audiotape of excerpts from actual elder law [NAELA] training sessions, "Medicaid Estate Planning: The Smoking Gun.")

From time to time, planning abuses come to our attention that are so egregious that they merit spotlighting with an LTC Bullet. This is one of those cases. It includes an actual example of a Medicaid shelter worth almost three-quarters of a million dollars. In principle, however, the same technique could protect wealth of any amount. Here's hard proof--in a Medicaid planner's own words--that virtually anyone can qualify for Medicaid benefits regardless of assets.

At the 1999 National Academy of Elder Law Attorneys (NAELA) Symposium "Elder Law Litigation: The Next Frontier" in San Diego, CA, Medicaid planner Rebecca Shandrick of Denver, CO delivered a presentation entitled "Using the Family Business as an Exempt Resource."

The following verbatim transcript of excerpts from this presentation speaks for itself. Suffice it to say: we wonder how the long-term care insurance industry can be expected to sell its critical product to an aging public that desperately needs it when Medicaid planners throughout the United States are promoting Medicaid planning techniques like this one. Pity the prosperous business owners who end up dying in nursing homes on welfare instead of purchasing quality care at the appropriate level in the private market place with the proceeds of their lives' work. How can the government let this happen? Where's the outrage?
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Transcript of Medicaid planner's presentation:

"I'd like to talk about using the family business as an exempt resource for Medicaid eligibility. Now we have some new regulations…which really helped to exempt the family business from being a countable asset for Medicaid eligibility. Currently, you can exempt the entire family business plus other related assets and these assets will not be counted to Medicaid eligibility…

"The new [Social Security] amendments took effect May 1, 1990 and they totally discontinued the limitation on the value of property used in a trade or business for a countable resource. So now there is an unlimited exemption for property used in a trade or business…. We don't have any limit so it really doesn't matter about the value of the property. It's exempt. We find the instructions for how to define this property in what we call the POMS or the Program Operations Manual System, which is put out by the Social Security Administration…

"The POMS lists categories of property that are excluded from countable resources in accordance with the regulations. Income producing property used in a trade or business is excluded regardless of its value or its rate of return. There is no limit on this…

"For a family farm or family ranch, things that can be excluded: well, obviously the property; obviously, the land; also, buildings, if you have farm buildings, you have barns, you have storage facilities, sheds, those can be excluded; if you have vehicles, trucks, things like that as long as they're used in the business, doesn't have to be exclusively used in the business, you can exclude those. All inventory can be excluded. If you have an inventory of crops, the value of those crops can be excluded. If you have livestock such as cattle, sheep, whatever, the entire value of the cattle and sheep, livestock is excluded. If you have a retail business, obviously the structure and the land
is going to be exempt. Also your inventory and your equipment used in that retail business. If you have a warehouse or an additional facility, that can be excluded also. The only criterion is that all this property be in current use. If it's not in current use at the time, there must be a reasonable explanation and assurances that the use will resume…

"There is an unlimited exemption for liquid resources used in a business. It can be very, very significant, especially if you have a seasonal business…a farm or ranch where your crops are harvested only certain times of the year or you only sell livestock for a certain time in the year. So you have to--as of necessity-- have a lot of cash on hand, because you are not in a retail business where you are selling stuff every day…

"Now as I told you, there is no monetary limit on the liquid resources. There is no amount of money that above that you cannot exempt…

"[The business] is supposed to be intended for a profit, but it does not have to show a profit…

"Property that is used by an individual as an employee is exempt… Now anything you use as an employee can be exempt. You have a computer. You have any type of equipment. It may not be required by your employer, but if you use it for your business, it's exempt. So it's a lot less restrictive and you can exclude a lot more property that way. Again, we do have the current use criterion that the property does have to be in current use. If not in current use, you can have a twelve month grace period in which to put the property back in current use and this can be extended for another twelve months if the problem is that the person is under a disability and that is why the property is not in current use…

"I'd like to go to a hypothetical case study…and basically this is based on an actual case that I did in Colorado… H is institutionalized in a nursing facility and W is living at home in the community. The home is located in the city and is not part of the farm or ranch property. But H and W do jointly own a cattle ranch with 800 acres with a value of $450,000. Buildings are on the ranch plus fencing, equipment, water pumps and wells with a value of $10,000. Livestock on the ranch is valued at $50,000…. Liquid assets of $200,000 are in joint tenancy between H and W…. H's income is $600 of Social Security, $83 income from leased land. W's income is $200 Social Security and $83
from leased land. What I've done is list all the exempt assets which is a good way to sort of begin for your clients, you know, to put down everything that is exempt. The home obviously is exempt under a different exemption. The ranch land, all improvements and all equipment, valued at $480,000…. Lease land, argue that it is part of the business and thusly it should be under the unlimited exemption. Liquid resources $27,000…add that to the CSRA [community spouse resource allowance] and you get $149,960. Now I have calculated the CSRA. You want to argue that the entire $200,000 in liquid resources should be used as an aggregate. In Colorado, we can give the community spouse the maximum. We don't have to split the resources in half and we do allow the maximum of $81,960. Then you need to add on to that the $27,000 for operating expenses. This would be a total of $108,960 in exempt liquid assets. I've calculated that a monthly income allowance for the community spouse, using the $1,357 minimum, it calculated a shelter allowance of $359.90 or $360, you need to add that to the minimum and you get a total of $1,770, minus their income, you get $750 that W needs additionally to get her MIA of $1,770. So what I've done is increase the CSRA to give W her allowable MIA and what I've done is use $41,000 of liquid assets at an interest rate of 6% a year and added that on to give the total liquid asset exemption as $149,960. And I totaled up the total exempt assets and in this example it's $737,960 [presenter giggled at this point] of exempt assets. So this can really help you out if you have a client who has especially a ranch or farm with a lot of land that is worth quite a bit of money but not a lot of income. People who are resource rich, income poor. It helps a lot. What you want to do after you've successfully completed the Medicaid application, gotten the institutionalized spouse on Medicaid is to work with this property so that it is always exempt. Now there is no current prohibition on the transfer of exempt resources… So you want to think about that. You want to think about transferring this business because it is exempt and there is no prohibition against doing that. You also want to think about capital gains taxes. If you do an outright gift with highly appreciated property such as real estate, you may have some problems. You may not want to do that. What I've suggested is a joint tenancy which would help somewhat with capital gains or a life estate…. You might also look into a trust, transferring property that way. But, as long as you don't do an outright gift, I think you will not run contrary to the intent of the exemption and you'll be all right…

"In conclusion, I'd like to say that this is a very little-known exemption. You may not use it very much. You may only use it once or twice, but if you can use it it's going to really help your clients tremendously…

Q and A:

"The question was: can you just buy a business, an ongoing business or a ranch, keep it for a year and then have it excluded under these rules and I think the answer is yes as long as you've operated that business, your family's operated that business for a year. That is the only requirement…

"The question was: can the property be in a living trust and still be exempt. What the regulation says is property of the individual so if the trust owns it, yeah, I think we have to wait until we get this exemption for the institutionalized spouse and then go ahead and put it into a trust afterwards for the wife…

"The question was: did I have a case where the husband and wife were not supported by the income producing property, but the children were. I have had cases where all three of them were supported by it. I think just as long as somebody's getting some kind of income from it, I would think that for the intent of the exemption to work, husband and wife should have some kind of a little bit of income from it, just because of the intent. But I've only had cases where the entire family was receiving income and it didn't matter how much it was. If the son was getting a lot more, they didn't care…

"The question was: the mother gave the children money to open up a pet grooming store, is that exempt? It depends on if the mother retained any kind of an interest in that business, if they can add her on, and if she is getting as a result of her ownership interest, income. Then, you're OK."

There you have it. The easy way to get Medicaid without selling or even encumbering your lucrative business. As Jane Bryant Quinn once said: "Do only the suckers pay?" for long-term care.
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