The Deficit Reduction Act of 2005 (“DRA”) was signed into law on February 8, 2006. It is important to note that all transactions prior to February 8, 2006, will be grandfathered and processed under the old laws. It is my opinion that the most significant part of DRA relates to gifting. In light of DRA, and the limitations imposed by it, it is now more important than ever that individuals consider purchasing Long-Term Care (“LTC”) Insurance as a means to protect all of their assets for their heirs.
The 10 highlights of DRA are as follows:
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 rule, 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 CSRA amount.
The Homes Equity Limitation states that an individual may not qualify for Medicaid benefits if his or her residence has a value greater than $500,000.00. In some jurisdictions, the limitation has been raised to $750,000.00.
The Rounding Down concept for gifts has been eliminated. Under the old rule, if an individual gave away a gift which created a 1.999 month divestment penalty period, the actual penalty would be limited to 1 month. Under the new rule, the actual divestment penalty period will be totally imposed.
The Aggregate Gift Rule requires that 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 Hardship Waivers that were previously granted under the old rule will be more difficult to obtain under DRA.
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 sate must be named as the contingent beneficiary.
