Transfer Penalties and the Community Spouse

Some couples might consider reducing the size of the marital estate by giving their resources away. Frequently this is the result when the plan is “home-made.” However, transfers for less than fair market value, including complete and partial gifts) trigger a period of ineligibility. 42 U.S.C. 1396p(c). It does not matter whether the applicant or Community Spouse makes the transfer for less than fair market value. The only issue is whether either spouse made a transfer for less than fair market value within the look-back period. If so, then the State must impose a Medicaid eligibility penalty. 42 U.S.C. § 1396p(c)(1) (emphasis added).

The transfer penalty is calculated by dividing the value of assets given away by the average monthly cost of nursing home care (the “divisor”). The divisor varies from State-to-State. In 2021, the Georgia divisor is $8,821 (beginning 4/1/2021). The Tennessee divisor is $5,472 (since 3/1/2015). Thus, if $100,000 was given away by either spouse , a Georgia applicant would be disqualified for 11.34 months and a Tennessee applicant would be disqualified for 18.27 months. In general, the penalty is (theoretically) for the approximate number of months the applicant could have private paid for nursing home care if the gift had not been made. Transfers to trusts may trigger a penalty. See discussion of Johnson v. Guhl, supra.

The actual cost of nursing home care in 2021 would exceed $100,000 regardless of whether the applicant is penalized 11.34 months or 18.27 months. The lesson here is that gifting requires careful planning. If gifting is not part of a plan, the cost of providing nursing home care during a penalty period may exceed the value of the gift.

Because the focus in this Chapter is on MCCA’s spousal impoverishment provisions, gifting is mentioned primarily to underscore inclusion of the Community Spouse’s gifts as part of the eligibility process. 42 U.S.C. § 1396p(h)(1)(A) makes it clear that action by the applicant or the applicant‘s spouse transferring income and resources of the applicant or spouse, or preventing receipt of income or resources either is entitled to receive, is subject tot he penalty rule.

Transfers to the Community Spouse and disposition of Resources After Eligibility is Determined

Since all marital resources are deemed available, there is no penalty when resources are transferred from one spouse to the other. In most States, including Georgia, the CSRA must be transferred to the Community Spouse before the next annual review because the Institutionalized Spouse must have less than $2,000 in countable resources when the annual review takes place. The transfer of all marital resources (countable and exempt) from the Institutionalized Spouse to the Community Spouse is a common Medicaid Planning technique. There are at least two reasons for these transfers: First, if the Community Spouse predeceases the Institutionalized Spouse, then at her death, the spousal impoverishment provisions no longer apply. Thus, if the Institutionalized Spouse still owns resources, he will be immediately over-resourced and lose eligibility. By transferring resources to the Community Spouse’s name, she can leave them in a testamentary special needs trust for the benefit of the Institutionalized Spouse without over-resourcing him and causing him to lose Medicaid eligibility. Second, resources removed from the Institutionalized Spouse’s estate are not subject to estate recovery (in most states).

Some commentators opine that, after eligibility is established, the Community Spouse may dispose of the CSRA and exempt assets without triggering a Medicaid Penalty. A letter, dated April 5, 2000, from Ronald Preston, Associate Regional Administrator to Brian E. Barreira which reads as follows:

This is in reply to your letter concerning transfer of assets by community spouses. You advised us that it is the position of the Division of Medical Assistance (DMA) that the post-eligibility transfer made by community spouses causes Medicaid disqualification. Thus, you requested that we notify DMA of its need to come into compliance with federal law.

Under the transfer of assets provisions in § 1917(c) of the Social Security Act (the Act), transfers between spouses are exempt from any transfer penalty. Under the spousal impoverishment provisions of § 1924 of the Act, once eligibility is determined, the resources of the community spouse are no longer considered available to the institutionalized spouse. Thus, after the month in which an institutionalized spouse is determined to be eligible for Medicaid, any resources belonging to the community spouse are solely the property of that spouse. That is, the community spouse can do whatever he or she wants with them.

Notwithstanding the Preston letter, at least one court has taken a different view. In Thompson v. State of Connecticut Department of Social Services, 1999 Conn. Super. LEXIS 3174 (CV 980063936 November 23, 1999), a Community Spouse transferred an exempt resource, first from the Institutionalized Spouse to himself, then to his daughter. The second transfer was challenged. In reviewing the transactions, the court found that while the transfer from the Institutionalized Spouse was an appropriate transfer, the second transfer from the Community Spouse to his daughter “was an obvious attempt to place the property beyond the reach of the State Department of Social Services.” Id., at *5. As a result, the spousal exemption was lost thereby losing [the Institutionalized Spouse’s] eligibility for [Medicaid Benefits].” Id., at *6. The Court found that “at the moment the community spouse moved out of the marital residence, the recipient’s eligibility for [Medicaid] would have been lost, since the value of the property would no longer be exempt.” Id., at *7.

Although the Thompson decision appears to be a case of bad facts making bad law, caution should be used when making transfers beyond the marriage. While the language in both 1396r-5 and 1396p support a conclusion more consistent with the Preston letter, some courts have held that it only applies to the CSRA, not exempt resources. Nonetheless, it is clear that Section 1396r-5 terminates deeming at the time of eligibility. 42 U.S.C. § 1396r-5(c)(4). Thereafter, any resources owned by the Community Spouse can be used (or given away) as she chooses, see § 1396r-5(c)(5); the only resources deemed available to the Institutionalized Spouse are those exceeding the CSRA. 1396r-5(c)(2)(B).

Another reason for transferring resources to the Community Spouse is avoidance of estate recovery claims. Section 1396p does not create an estate recovery claim against resources held by the Community Spouse. Instead, it preserves a claim against “the property of an individual on account of medical assistance rendered to him.” See § 1396p(a). Since 1396p(c)(2) authorizes inter-spousal transfers without penalty, good planning usually means the Institutional Spouse will not own assets subject to a lien at death.

In Nevada Department of Human Resources v. Ullmer, 87 P.3d 1045 (Nev. April 1, 2004), the court took a position at odds with the notion that exempt resources may be transferred for less than market value after eligibility is determined. There, Nevada placed a lien on the deceased Institutionalized Spouse’s interest in a homeplace prior to the Community Spouse’s death. The Community Spouse argued that the lien was an impermissible recovery and that it should be dissolved. The court found affirmed the use of pre-death liens as long as the lien is limited to the Medicaid applicant’s interest in the property, that the liens are released if the Community Spouse transfers the property for fair market value and the lien includes notice that surviving spouses are free to use or dispose of property through bona-fide transactions as a method of avoiding impoverishment. “Although the government is prohibited from executing its interest until the surviving spouse’s death, the government’s interest survives and continues with the property. Any individual who takes property upon the death of a Medicaid recipient, through inheritance, assignment, joint tenancy, etc., takes it subject to the government’s interest. … [A]ny person who acquires an interest in the property through gift or fraudulent transfer, takes the property subject to the State’s interest granted by the estate recovery statutes.” Id. The court held that this approach balances two important interests: avoiding spousal impoverishment and estate recovery. The effect, however, is although the Community Spouse may spend the equity in her homeplace, she cannot give it away if the Institutionalized Spouse owned an interest at the time of his death.

Interspousal Transfers that Exceed the CSRA

As a general rule, there is no Medicaid penalty for asset (income or resources) transfers between spouses. 42 U.S.C. § 1396p(c)(2)(B). However, that does not mean States always approve interspousal transfers that exceed the CSRA. In McNamara v. Ohio Department of Human Services, 744 N.E.2d 1216 (Ohio App. 2000), the court negated a transfer of resources beyond the CSRA by looking through a spousal trust to find the corpus available to pay the Institutionalized Spouse’s health care bills. There, Mr. McNamara transferred more than $200,000 into an actuarially sound spousal trust for his benefit. His argument was that Section 1396p(c)(2)(B) permits unlimited transfers to or for the benefit of a spouse. The court rejected Mr. McNamara’s argument finding that permitting unlimited interspousal transfers would render the CSRA limits in Section 1396r-5 meaningless. Specifically, the court held that “the amount of funds that one person may transfer to his or her spouse under Section 1396p(c)(2)(b) is limited to the maximum accounts the community spouse may retain under CSRA provisions in Section 1396r-5(f).” Id., at 1220. The reasoning is similar to a circumstance where an individual attempts to shield assets from his own creditors by making himself the beneficiary of a self-funded spendthrift trust; trusts of that sort are generally pierced for the benefit of creditors. Although the concepts are not identical, the result reached in McNamara is similar.

This begs the question: would the result have been different if Mr. McNamara owned the resources in his own name prior to Mrs. McNamara’s institutionalization? The answer, under A.K. v. Division of Medical Assistance and Health Services would be “no.” This is because (1) all resources are counted when the snapshot is taken, regardless of whose name they are titled in, and (2) other than the CSRA, all resources are deemed available to pay for the Institutionalized Spouse’s nursing home care.

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