Quietly, with no fanfare and no discussion, U.S. lawmakers passed a measure late last year that could criminalize a certain type of estate planning. The measure, which went into effect Jan. 1, was part of a much larger health reform bill and was aimed at stemming bogus claims for Medicaid--a government health insurance program for the poor.
But because of the way the measure was drafted, it is possible that individuals could run afoul of the rules inadvertently at the worst possible time--when they’re sick and unable to care for themselves.
“Granny could go to jail,’ was the dramatic assessment of the Institute of Certified Financial Planners.
The brouhaha concerns a few paragraphs in the Health Insurance Portability and Accountability Act, which was passed in August 1996. These paragraphs alter federal Medicare laws by imposing criminal penalties for those who transfer assets and later apply for federal health insurance assistance for the poor, commonly known as Medicaid (Medi-Cal in California).
Theoretically, the law does not change what’s permissible. However, it stipulates that those who violate Medicare rules can be criminally prosecuted and face up to one year in jail and a $10,000 fine.
Attorneys say jail sentences are unlikely for practical reasons--jails are crowded enough without adding the ailing and aging individuals who might run afoul of this law--but they note that the law has had a “chilling effect” on a whole segment of the estate planning industry.
“At this point in time, there is no way to tell anything,” says Ira S. Wiesner, a Sarasota, Fla.-based lawyer and president of the National Academy of Elder Law Attorneys. The practice of so-called Medicaid planning has come to a virtual standstill, he adds, because “you would never know whether what you are doing constitutes an illegal act.”
Already, there is an effort afoot to repeal the law. But in the meantime, attorneys and financial planners are scrambling to warn their clients about how seemingly innocuous estate planning procedures--including giving tax-free gifts to your children and grandchildren--could turn them into criminals.
Two events could trigger the penalties: a transfer of assets and application for Medicaid benefits. Could you be subject to the criminal sanctions if you transferred assets in years past, but applied for Medicaid in 1997 or later? Possibly.
“That’s the question,” says Sally Hurme, attorney with the American Assn. of Retired Persons’ legal advocacy group. “Because the law is written so vaguely, it’s hard to tell.”
Why is the law so vague? Partly because it appears to have been slipped into the health-care reform bill at the last minute without any disclosure or discussion, says Bob Coplan, national director of family law planning at Ernst & Young in Washington.
“It’s a big mystery as to who drafted and sponsored this [law]. It just snuck into the bill at the last minute,” Coplan adds.
Because the bulk of the industry was taken by surprise, there was no discussion about what the law aimed to accomplish or any attempt to clarify the rules before the law was passed, he added.
Attorneys maintain that Medicare laws are so complicated--and have been for years--that you can easily run afoul of them accidentally. But, in the past, the only penalty for error was a financial one: You would be denied Medicaid insurance benefits for a set period of time; now you could go to jail.
However, to fully understand the issues involved, a bit of background is necessary.
Several years ago, a new subspecialty of law emerged to handle what was seen as a growing problem among the elderly: health-care impoverishment. As the elderly population began to burgeon--those age 85 and over are the fastest-growing segment of the population, according to Census figures--so did the population in nursing homes. But with the cost of nursing home care ranging from $35,000 annually to more than $70,000 annually, an increasing number of seniors found themselves running through their life savings in record time.
That was particularly problematic for married couples, where one spouse needed nursing care while the other was reasonably healthy and living at home. According to federal Medicaid laws, the spouse in the nursing home could only receive federal health insurance through the Medicaid program after the couple had spent all but a token amount of their own money. Ultimately, that meant that the surviving spouse was left in poverty.
So-called elder law attorneys came to the rescue with estate planning techniques that artificially impoverished elderly individuals, leaving them with access to their money but officially eligible for federal health-care aid for the poor. These techniques were always controversial, labeled as “cheating” by the government. But so many seniors considered them necessary that past studies indicated that as many as half of the nation’s nursing home residents had used them prior to entering a nursing home.
In 1993, the government decided to address the problem head-on. In a major reform, Medicaid rules were changed, allowing surviving spouses and disabled children to keep more assets. Meanwhile, civil penalties were imposed on those who gave away their valuables prior to applying for Medicaid. Specifically, the rules said that if you gave cash, stock or valuable property to a non-qualifying individual--anyone other than a spouse or disabled child--prior to entering a nursing home, you would be ruled ineligible for Medicaid coverage for a period of time corresponding to the number of months that the gift could have paid for your care.
In other words, if you gave your child a $10,000 tax-free gift--as is allowed under U.S. estate tax rules--but then went into a nursing home in a state where the average cost of nursing care was $3,500 a month, you would ineligible to receive Medicaid benefits for a period of three months. That’s because that’s how long you could have paid for your own care had you not given away the money. The rules can get complex when it comes to giving away personal property, such as jewelry or the family car--which is sometimes acceptable and sometimes not--and when considering past gifts.
The law still says that Medicaid authorities can look back three years to determine whether your past activities would trigger Medicaid penalties. So, in theory, your tax accountant may have advised you to pay for your grandchild’s education back in 1995--when you were healthy and flush with cash. But in 1997, you have a medical emergency, enormous expenditures and are suddenly in need of long-term custodial care in a nursing home. If Medicaid authorities determine the gift to your grandchild was an impermissible asset transfer, you’ve become a lawbreaker.
“The problem is that Medicaid law is extremely complicated and technical,” says Gregory S. French, executive director of Pro Seniors in Cincinnati. “Often, you do not know with certainty whether a transfer will be considered OK or not. Now, if you make a misstep, you can not only lose your Medicaid eligibility, you could face criminal prosecution. Good intentions are not significant.”
Kathy M. Kristof welcomes your comments and suggestions. Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail email@example.com