Reminder of Changes in Medicaid Made by the Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (“DRA”), signed into law on February 8, 2006, introduced some major changes to the Medicaid laws and procedures. Even though the law is now almost 6 years old, it is still helpful to remember the extensive changes which it introduced. The most significant part of DRA relates to gifting. Remember that all transactions prior to February 8, 2006, were grandfathered and processed under the prior laws.

Several highlights of DRA are:

The Look-Back period for gifts and transfers has been changed from 36 months to 60 months. The look-back period starts from the date of the Medicaid application.

The Divestment Penalty Start Date will begin to run at the point where the individual is otherwise eligible for Medicaid benefits. Under the old law, the divestment penalty period began to run in the month that the gift was made.

The Income First Rule requires that the community spouse must first consider the income earned by the institutionalized spouse, before requesting a fair hearing to increase the Community Spouse Resource Allowance (CSRA) amount.

The Homes Equity Limitation states that a New Jersey individual may not qualify for Medicaid benefits if his or her residence has a value greater than $750,000.00.

The Aggregate Gift Rule requires that the value of all gifts made during the look-back period must be added together for purposes of calculating the actual divestment penalty period.

The Promissory Note Rules state that a promissory note must be actuarially sound, irrevocable, non-assignable, and have no value on the secondary market. DRA also eliminated the use of Self-Canceling Installment Notes (“SCIN”).

The Life Estate Rule requires that if an individual purchases a life estate in a child’s home, the individual must actually live in the home for a minimum period of 1 year. If the individual fails to meet the required time element, the purchase of the life estate will be treated as an improper transfer, and subject to a divestment penalty period.

The Annuity Rules state that an annuity must be actuarially sound, irrevocable, non-assignable, and have no value on the secondary market. For a single person, the state must be named as the primary beneficiary, to the extent that Medicaid benefits were paid to the individual. Additionally, should any funds remain in the annuity, they will go to the individual’s heirs. For a married couple, the spouse, minor, or disabled child can be named as the primary beneficiary. Additionally, the state must be named as the contingent beneficiary.

The changes in the Medicaid laws resulting from the DRA make it more important than ever to seek help from estate planning professionals.