Paying for Long-Term care, Part XXII (Is Medicaid Planning Legal?)

The Greatest Financial Risk for Seniors:

Paying for Long-Term care, Part XXII

(Is Medicaid Planning Legal?)

Kemp Scales, CELA*

For the great majority of people the only government program we have in this country that will pay for long-term nursing care is Medicaid. Thus, asset-protection planning in this area is largely “Medicaid planning.” In our office much of our work involves counseling and assisting clients in the use of legal options available under the Medicaid law to protect at least part of their life savings from the risk of being all spent down if they or their spouse needs to enter a nursing home. And often, especially with single clients, we are recommending that they make gifts – that is, transfer part of their assets out of their name and control in order to accelerate their eligibility for Medicaid.

But is it legal to make gifts to qualify for Medicaid? And even if it is legal, is it ethical? In this issue I’ll discuss the legality of Medicaid planning, while the next issue will discuss the issue of whether Medicaid planning, even if legal, is also ethically justifiable.

Is Medicaid Planning Legal? The simple answer is “Yes.” When properly done, it is entirely legal to make gifts for the purpose of qualifying for Medicaid to help pay for your long-term nursing care, just as legal as tax planning and other common estate-planning options. The only thing illegal about making gifts for Medicaid purposes is not disclosing them on the Medicaid application.

However, we still have clients coming in who are uncomfortable with the idea of making any gifts that create a “penalty” for Medicaid eligibility. Doesn’t the very word “penalty” mean they would be doing something wrong?^[1] Indeed, some believe this may even be a crime! Where did they get that idea?

Well, back in 1996 Congress did pass a law making such gifts a crime, complete with a fine of up to $10,000 and a possible one year of jail time. But when the press picked up on this, calling it the “Granny Goes to Jail Act,” apparently enough members of Congress were sufficiently embarrassed by what they had done that the very next year they slightly changed the law. Now it was not Granny who was the criminal, but the person who charged a fee to advise or assist her in making such a gift, who could be fined up to $25,000 and face up to five years of jail time. That law was immediately dubbed the “Granny’s Attorney Goes to Jail Act.” And that law is still on the books.

So, as the Medicaid law now reads, “Granny” and other seniors are free to make gifts to protect their assets from being spent down on long-term nursing care, just as they can make gifts to save on taxes or any other estate-planning purpose. But how are they going to get good help if their attorney risks jail time if he or she explains to them their rights or assists them in making such gifts?

To answer that question, we need to review what happened after the “Granny’s Attorney” law went into effect. In 1998 the New York State Bar Association sued the United States Attorney General in federal court, asking the judge to enjoin (that is, legally prohibit) the government from enforcing this law. Why? Because it was unconstitutional under the freedom-of-speech protection of the First Amendment. In response to this lawsuit, the then U.S. Attorney General Janet Reno took the unusual step of sending a letter to Congress stating that the United States government would not defend this lawsuit because the statute – which would prohibit “professional advisors such as attorneys . . . from providing truthful, non-misleading advice to their clients” about “an estate-planning strategy that itself is lawful” – was clearly unconstitutional under the First Amendment. The Federal Court for the Southern District of New York then entered a permanent injunction against the United States Government to prohibit it from enforcing this law. So while the law remains on the books, since 1998 there has been no known attempt to enforce this law anywhere in the country.

That is, not until 2013, when the Pennsylvania Medicaid Agency – in a case in the Federal Court for the Western District of Pennsylvania – included a claim under this law against Plaintiffs’ attorney (who happens to be the attorney writing this article). But the Judge was not persuaded:

“This Court will decline to enforce the statute in this case on the grounds that it clearly appears to be unconstitutional. Therefore, on the issue of criminal sanctions against Plaintiffs’ attorney for counseling or assisting Plaintiffs in the transfer of their assets to become eligible for medical assistance, summary judgment will be granted in favor of Plaintiffs. Because the statute is unenforceable on constitutional grounds there is no genuine issue of material fact.”

Zahner v. MacKereth, Civil No. 11-306 Erie (W.D. Pa. Jan. 16, 2014, not overruled or negatively treated on appeal).

So there is now a second federal district court finding this law to be unconstitutional and unenforceable, and – at least for attorneys in the Western District of Pennsylvania — that should be the final nail in the coffin for the “Granny’s Attorney Goes to Jail Law.”

And we now have the Third Circuit Court of Appeals (covering all of Pennsylvania, New Jersey, Delaware, and the Virgin Islands) recognizing Medicaid planning as a legal estate-planning option. On appeal in the Zahner case, it upheld Plaintiffs’ purchase of short-term annuities, notwithstanding their acknowledged Medicaid-planning motive in doing so, stating “we do not believe that the annuitant’s motive is determinative” and noting that “[f]inancial planning is inherent in the Medicaid scheme.” Zahner v. Secretary PA Dept. of Human Services, Nos. 14-1328, 14-1406, p. 21 (Third Circuit, 2015).

However, while such planning is legal as such, there are detailed rules regarding what particular planning options are available and what restrictions apply, and there is also a five-year look back period for gifts. This does not mean that it is too late to protect any part of your life savings once you are in a nursing home – to the contrary, it is generally possible to protect half or more of what is otherwise at risk, even in a crisis situation with no advance planning. But it does mean that getting expert legal advice and assistance with any gifting or other Medicaid planning is very important in order to protect part of your lifetime of savings and achieve your estate-planning goals.

The next article in this series will continue this broader look at the public-policy implications of this particular form of estate planning: Is Medicaid Planning Ethical?

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The content herein is for general informational purposes only and does not constitute legal advice. For specific questions you should consult a qualified elder law attorney

Note: Working with the long-term care system we have in this country, seniors and their families need to understand that despite the restrictions in the Medicaid law, it is almost never too late to protect part or your remaining assets, even when facing an immediate crisis and with no advance planning. Whether you are 75 years old and living in your own home, or have an 85-year-old spouse in a nursing home, there are steps you can be taking now to preserve part – and often a very significant part – of your life savings otherwise at risk of being spent on your nursing care. But “time works against you.” Every day of delay in a crisis can result in $250 or more of irretrievable loss, so it is important to contact a knowledgeable and experienced elder law attorney for advice sooner rather than later.

Kemp Scales is now retired, but elder-law attorney Schellart Los continues to serve clients throughout western Pennsylvania from offices in Erie and Titusville. She can be reached toll-free at (888) 827-2788 or by e-mail at schelly@losscaleselderlaw.com. The Law Offices of Schellart Joyce, LLC has an Internet presence at www.losscaleselderlaw.com.

1. An equally accurate but less pejorative way to describe the result of gifting is “period of ineligibility” for Medicaid. Or to state the rule more precisely, making non-exempt gifts within the look-back period will create a period of time that you will not be eligible for Medicaid to help pay for your nursing-home care. (In Pennsylvania in 2019, for every $10,420.14 you gave away, you will be ineligible for one month of Medicaid assistance.) ↑