LTC Bullet: They're Baaack, Part III: "Buy Cattle, Get Medicaid"

Tuesday July 17, 2001

Seattle—

Principals of the Center for Long-Term Care Financing frequently attend, monitor and report on conferences of the National Academy of Elder Law Attorneys (NAELA). We focus on their extensive training programs for a wide range of gambits and techniques to qualify their prosperous clients for Medicaid without spending down. We are usually amazed at the complexity of Medicaid nursing home eligibility rules and at the ingenuity of these lawyers in circumventing the laws.

We report the facts, but we are often frustrated by our readership's incredulity. Even opponents of Medicaid estate planning--who understand the damage it does to elderly victims in particular and to the long-term care system in general--can't believe just how insane and destructive the whole business is. That's why we always encourage LTC Bullets readers to attend these conferences, see for yourself, or at least, buy and listen to the audio tapes. (You can order the tapes for any of the sessions we discuss in this series of LTC Bullets by faxing your request for the NAELA 2001 Symposium order form to ADC Services at 985-892-9975. That's how we got our copies.)

Short of that, however, the next best thing is to bring you verbatim transcripts of actual NAELA sessions presented by ostensibly responsible professionals. That's what our "They're Baaack" series is all about. What follows, word for word, is part of a presentation titled "Planning for the Small Business or Family Farm," presented at the 2001 Symposium on Elder Law in Vancouver, British Columbia on April 20, 2001. According to the conference agenda, "This session will outline strategies, which preserve the family business or family farm when either the owner or the owner's spouse requires long term care."

You are about to learn . . .

* How to qualify for Medicaid nursing home benefits by purchasing cattle.

* How to get around Medicaid eligibility rules by taking a salary in a family business.

* Why anyone with $300,000 or any amount of exempt assets never needs long-term care insurance.

* Why Medicaid is for anyone and everyone who is "not wealthy" and why "wealthy" includes no one with a million dollars or less.

What you will not find is . . .

* Any mention that Oklahoma's Medicaid nursing home reimbursement rate is among the lowest in the country.

* Any warning that going on Medicaid means losing your independence and control of your wealth.

* Any glimmer that Medicaid often means dying in a nursing home on welfare without the ability to purchase quality home care or assisted living services.

* Any clue of the disastrous condition of the nursing home industry caused by excessive Medicaid dependency and inadequate Medicaid financing.

This is how the speaker was introduced: "Lee Holmes is a Certified Elder Law Attorney [CELA], one of the founders of NAELA, served on the Board of Directors from 1989 to 1992. He's a NAELA Fellow, practices elder law in Oklahoma City. He was chairman of the Estate Planning Probate and Trust Section of the Oklahoma Bar Association for the '98 to '99 term and a founder and for three years President of the Exchange Club Child Abuse Prevention Center in Oklahoma City."

Caveat: Lee Holmes is a nice fellow, very sincere and dedicated. He is one of the few NAELA members who still greet and converse with your humble correspondents. Maybe he should know better than to say what follows . . . but he doesn't. We all need to be patient, but persistent and adamant, to insist that egregious Medicaid planning of this kind destroys public assistance for the poor, impedes responsible long-term care planning, drags down access and quality for everyone . . . and, it must stop! The Center for Long-Term Care Financing's "LTC Choice" public policy framework (http://www.centerltc.com/pubs/CLTCF%20Report) is a far more humane and workable answer to the challenge of providing quality long-term care for all Americans, rich and poor alike.

So, take your blood pressure medicine, read on, and let us know what you think. The excerpt can be a bit hard to follow in places, so we’ve capitalized key points and themes for emphasis.

"What you and I are seeing on a regular basis is a family coming in and one of the persons has either had a stroke, they've had an accident, they've had Alzheimer's, dementia, other problems, and frequently, as we all know, the caregivers at home have been taking care of someone for two or three or four or five or six years by themselves suffering and stressing, etc. and now it has finally reached the point that they can no longer stay at home. The crisis has finally happened. And they can no longer be the caregiver at home because they are debilitated now. The last few people I've had, that's been the situation. Now, how are we going to handle the situation, because they didn't do any planning back two or three or four or five years ago for this. But what they now have is they may still have a farm. The husband may still be farming the operation; he may still have a little farm; he may still have a business. The wife may be farming also if she had to take over the farming operation because the husband got sick.

"And now the issue is, well, what can we do from a Medicaid perspective, long-term care perspective, when one of them has to go into a nursing home? WELL THERE IS SOME GOOD NEWS FROM AN EXEMPTION PERSPECTIVE AND THAT IS THAT WE CAN NOW EXEMPT, WE CAN ALWAYS EXEMPT, A FAMILY BUSINESS OR A FAMILY FARM. AND THERE IS NO LIMIT ON THE VALUE OF THAT ALTHOUGH THE VALUE IS USUALLY NOT A BIG ISSUE. Usually these people are not in the multi-million dollar issue; they're in a few hundreds of thousands of dollars. But they have the property that they really enjoyed, that they want to keep. They don't want to lose it. So what can you do to help them maintain this property and keep that within the family, keep it for the spouse, and pass it on to the kids? (emphasis added)

"The good thing is that if it can be qualified as business property, it'll stay exempt. Now you want to be sure to qualify it, to look at your state Medicaid manual and your regulations to see what your state requires. I've given you the Oklahoma manual language here [in a handout], but you want to look at your own Medicaid manual to see what it specifically says as required to exempt your assets. And most of them, because of the federal law, will exempt a family farm, it will exempt a family business, provided that one of the spouses, or the individual has a working interest or income from that business. Now this is when you look at the income tax return to see if the person is reporting as income, especially earned income, the income from that family farm, maybe even a loss. Got one right now that has had losses the last couple of years. BUT THAT FARM IS GOING TO BE EXEMPT FOR THE HUSBAND WHO OPERATES THE FARM EVEN THOUGH HE OPERATES IT AT A LOSS. THE CATTLE ARE EXEMPT. ALL THE FARM EQUIPMENT IS EXEMPT. THE LAND IS EXEMPT. WE DON'T EVEN HAVE TO COUNT IT. WE GET TO KEEP THAT AS EXEMPT RESOURCES. And that is a good thing. We don't need to be taking that out. (emphasis added)

"Now what we always do is look at the income tax return to see if that has shown up on a Schedule C or E or F. C is the business income schedule for an individual proprietorship. Schedule E is rental income and Schedule F is farm income. If it is on Schedule E, then it's classified as rental income and then you are subject to that $6,000 total exemption perhaps. If it is on Schedule E, then can you switch that over? Is there some mistake that has been made and you can switch that back to a Schedule C or Schedule F? And it may be that you will have to now have them arrange to get a Schedule C or a Schedule F before you go into the Medicaid office to get qualified and they'll have to start treating it as earned income to exempt it.

"One of my clients had some property right at the edge of town and fortunately, they had been operating, they had two pieces of property, one, they had a family farm that the wife had inherited and she's operating this family farm and she has cattle there and she was filing a Schedule F because she had the cattle out there. THE HUSBAND HAD HIS OWN BUSINESS AND WAS DRAWING A SALARY. THE WIFE WAS WORKING IN THE BUSINESS, ALSO DRAWING A SALARY. AND BOTH THE FAMILY FARM WAS EXEMPT AS FARM AND THE FAMILY BUSINESS WAS EXEMPT BECAUSE THE WIFE WAS DRAWING A SALARY OUT OF IT. In fact, the husband still drew a salary out of it even though he had become incapacitated because they had continued paying him a consulting fee without any Medicaid aspects involved. They were just doing that. And he still had mental ability but he didn’t have physical ability to work. But they were still paying him and still consulting with him so he still drew a salary and that exempted the farm, that exempted the business property, the land on which the business property was operated, although it was owned individually and the business was operated in a corporation, and all of those assets were exempt. (emphasis added)

"So you need to look carefully at what comes in your office to see if you can qualify as exemptions. If you can't, then you need to see if some planning can be done to exempt assets by getting them into the business. WE HAD A CLIENT A COUPLE YEARS AGO THAT THE HUSBAND WAS OPERATING THE FARM AND HE ALSO HAD A SMALL BUSINESS WITH A PARTNER AND WE GOT TO LOOKING AT IT AND WE WERE ABLE TO EXEMPT HIS SMALL BUSINESS THAT HE HAD WITH A PARTNER BECAUSE HE HAD INCOME FROM THAT. WE EXEMPTED THE BANK ACCOUNTS THAT THE PARTNERSHIP HAD. WE EXEMPTED THE FARM BECAUSE HE WAS FARMING. WE EXEMPTED ALL OF THE EQUIPMENT. HIS WIFE WENT INTO THE NURSING HOME AND WAS QUALIFIED FOR MEDICAID. (emphasis added)

"Now if it had been a reverse situation, if he had been the one who had gotten sick and needed to exempt assets for him because he was in a nursing home, we would have had a tougher situation. IF THEY HAD BEEN TO ME FIVE OR SIX YEARS BEFORE AND SAYING, YOU KNOW, 'WHAT SHOULD WE DO HERE?,' I PROBABLY WOULD HAVE SAID YOU MIGHT OUGHT TO GET LONG-TERM CARE INSURANCE ON THE HUSBAND BECAUSE IF HE GETS DEMENTIA, HE CAN'T WORK AND SO FORTH, YOU'RE GOING TO LOSE THE BUSINESS, YOU'RE GOING TO POTENTIALLY LOSE THE EXEMPTIONS, BUT IF THE HUSBAND STAYS HEALTHY AND THE WIFE BECOMES DEBILITATED, WHICH HAS HAPPENED IN THIS PARTICULAR CASE, YOU DON’T NEED TO PLAN FOR LONG TERM CARE FROM THE STANDPOINT OF BUYING INSURANCE ON THE WIFE BECAUSE ALL OF YOUR ASSETS ARE EXEMPT. So those are aspects that you need to take into consideration in considering the plan. (emphasis added)

"I don’t know about the rest of you, but we keep having problems with people coming into my office about long-term care insurance. And I don’t know why it’s happening, but I guess maybe it is because I do elder law work. But I've had some bad situations come in where people have been told they needed long-term care insurance and they didn’t need it. One client came in and she had $700,000 of cash assets and over $3,000 a month of retirement income and she was told by two different insurance agents that she needed long-term care insurance. AND SHE FIRST TOLD ME SHE HAD $300,000 OF ASSETS AND I SAID, 'YOU DON’T NEED LONG-TERM CARE INSURANCE. $3,000 A MONTH MORE THAN PAYS FOR YOUR NURSING HOME CARE IN OKLAHOMA.' I don’t understand this. And she said, 'would it make a difference if I had $500,000?' And I said well that's even more reason you don’t need long-term care insurance. You buy insurance to shift the risk. You don’t need to shift any risk. And so she said 'would it make any difference if I had $700,000?' I said you have $700,000? She said 'yeah.' And she said why do these two insurance agents say I need insurance? And I said, aha!, commissions. OK? (emphasis added)

"But literally, bad situations, I don't know if you're seeing these types of situations or not, but I am. So, you know, it’s not good, but on the other hand there are people out there of my clients that we counsel with to buy insurance when it’s necessary and when it’s advisable, when they can and when it works and when they have the income to pay for it. But we have to counsel with our clients extensively as an objective person as opposed to a salesman that's getting a commission off of it. The same thing in planning for your family business, your family farm. You've gotta be careful as to whether or not they need it and they can afford it and whether or not it’s going to work.

"NOW IN DOING YOUR PLANNING . . . WITH YOUR PLANNING ASPECTS, YOU WANT TO BE SURE THAT IF YOU'RE GOING TO NEED TO EXEMPT ASSETS, REMEMBER THEY COULD BUY CATTLE, THEY CAN CONSUME ASSETS, EXEMPT ASSETS, BY BUYING CATTLE AS AN EXAMPLE, IF THEY ALREADY HAVE A FARM OPERATION. But you have to be careful. You don’t want to throw money away. You don’t want to just go throw money into the deal in order to make it exempt if you are going to lose more than you save in the long run. So in doing your planning you have to analyze the whole picture. Also, you have to look in Oklahoma and I don’t know about other places, but there's a lot of federal programs that'll pay you to not plant crops. And those farms, now it’s rental property, and won't be exempt. So you have to look and see what the situation is with your farm and whether or not you can exempt all the property or just part of it. (emphasis added)

"THE OTHER PLANNING OPPORTUNITIES THAT YOU HAVE TO LOOK AT ARE WHETHER OR NOT YOU CAN HAVE A FAMILY MEMBER IN THE BUSINESS, OR WHETHER OR NOT YOU CAN HAVE A HUSBAND AND WIFE IN THE BUSINESS TO EXEMPT IT IF YOU HAVE A HUSBAND AND WIFE, BY HAVING THEM START DRAWING A SALARY. ONE PLANNING OPPORTUNITY MIGHT BE, AS AN EXAMPLE THAT I GAVE HERE IN THE OUTLINE, IS YOU HAVE A HUSBAND AND WIFE SITUATION AND THEY'VE GOT TOO MUCH ASSETS TO QUALIFY FOR MEDICAID. THE SON HAS A BUSINESS AND THE MOM HAS BEEN WORKING IN THE BUSINESS. THE SON'S BORROWED MONEY FROM THE BUSINESS. MOM HAS THIS CASH MONEY THAT BASICALLY IS GOING TO BE SPENT AT THE RATE OF 3 OR 4 OR 5 THOUSAND DOLLARS A MONTH, BUT MOM COULD INVEST THAT MONEY IN THE SON'S BUSINESS, CONTINUE TO DRAW HER SALARY AND THAT INVESTMENT WOULD BE EXEMPT. (emphasis added)

"Now that is good planning. These people have worked all their lives, making a dollar, two dollars, five dollars an hour to accumulate a little bit of money. She's still not wealthy. But we need to protect what we can so she can have a fair standard of living. One of the things that you and I are seeing all the time are people coming in and the husband has had problems, the wife has had problems, and the well spouse is 70 years old or 65, 70, 80 years old, still extremely active, still going to have a life expectancy of 10, 20, 30 years and we need to protect their dignity by protecting assets for them. And that's the way we do it by helping them to conserve assets because someone who has $100,000 or $200,000 is not wealthy or $300,000 or $400,000. Steve [Stern, his co-presenter] was telling me about a judge in New York that said, hey, having a million dollars, you're not wealthy, takes that much to retire on. WE THINK ABOUT A MILLION DOLLARS, THAT THAT PRODUCES $50,000 OR $60,000 A YEAR AND THEY MAY HAVE $800 OR $900 OF SOCIAL SECURITY, THEY'RE NOT WEALTHY. It costs that much for our families to live now. And we don’t want to have people in poverty. So in planning with your people, you want to be sure that you take all these things into consideration and try to help that family to preserve some assets." (emphasis added)