(In Zahner v. Mackereth (U.S. Dist. Ct., W.D. PA, Jan. 16, 2014), a federal district court ruled that long-term annuities, that is, annuities with payment terms of 5-years or more, purchased by Medicaid applicants were not transfers for less than fair market value and, therefore, were not subject to a penalty period, but that shorter-term annuities purchased by Medicaid applicants, i.e., annuities with payment terms of 18-, 14-, and 12- months, were subject to a penalty period. (I blogged about the Zahner v. Mackereth case here.) Plaintiffs appealed the court’s ruling about short-term annuities. The appeal is now pending before the United States Court of Appeals for the Third Judicial Circuit. The National Academy of Elder Law Attorneys, along with its Pennsylvania and New Jersey chapters, submitted an amicus curiae, or “friend of the court,” brief in support of the plaintiffs’ appeal. The amicus curiae brief contains an excellent explanation of the background of and need for Medicaid planning which is reproduced in full below, although footnotes have been omitted. )

Medicaid Planning is a widely accepted legal practice and a useful tool to help preserve assets for family


Nursing home care is costly, one year’s care far exceeding the life savings of all but the most affluent elderly. For the states of the Third Circuit, the average cost of nursing home care, according to one reputable study, now ranges from $99,196 per year for a semi-private room in Pennsylvania to $109,500 per year in New Jersey, while the cost in Delaware is $107,310. Not surprisingly, the price to insure against such costs is correspondingly substantial, so that long term care insurance has never penetrated much of the potential market. Even the well-off are discouraged from buying it, a Forbes website cautioning against it for a variety of familiar consumer-protection reasons.

Few people have the income or assets to cover these costs, or even to afford the insurance. In 2011, median net worth for all households aged 65 and over, not including home equity, was only $27,322 (and even with home equity was only about $170,500). Even when the more affluent married couples are separated out, they are not much better off—$92,000 in equity, $285,000 with the home thrown in.

That is, of all elderly married couples, half have less than $92,000 in savings and investments and other equity besides their homes. Income is correspondingly modest. From 2010 data, the Census Bureau reports that median household income for those 65 and older was $45,763; broken down by gender, it was $25,705 for unmarried men and $15,072 for unmarried women. Long term care insurance premiums would constitute a significant percentage of their income

There is nothing untoward about retaining the services of an attorney or financial adviser and engaging in a plan to expedite eligibility for Medicaid benefits. Much of such Medicaid advice or planning involves disabusing clients of some of the vast amount of misinformation they have picked up from friends or others. People who have heard about spousal benefits think the spouses must divide their assets early on, and the “community spouse” wrongly thinks he or she gets to keep his or her half. They have heard of the five year look-back, and think there is an absolute bar to eligibility for any transfer made, no matter to whom or what the reason. They wrongly think they cannot qualify until they have been a state resident for six months, or that they can be required to pay privately for some period of time, or that they cannot transfer assets to a spouse, or that they will lose their house, or that “the nursing home” or Medicaid will “take their Social Security.”

Aside from the many misconceptions, there are rights and protections—affirmative Congressional policy choices—that people would not learn of or use but for such planning. The situation of the elderly surviving spouse, usually the widow, living with and caring for the mentally ill adult child (often not all that young, either), is not uncommon. When the parent needs nursing home care, the family must plan to utilize the rules that allow the parent to convey her home and other assets into a special needs trust for the welfare of the disabled child, under 42 U.S.C. §1396p(c)(2)(B)(iii). Similarly, the grandmother plans to use Medicaid as Congress intended when she sets aside funds for a disabled grandchild under 42 U.S.C. §1396p(c)(2)(B)(iv).

In a similar vein, where Congress decided that the spouses of Medicaid beneficiaries should be allowed to retain their own homes and cars, it did not mandated that the home be in poor shape, in need of repair, and under a heavy mortgage, or that the automobile be an 18-year old sub-compact. The community spouse who has $150,000 in assets can, with proper planning, “spend down” so that she will enter the world of Medicaid benefits with savings of $75,000, a home that is in reasonably good shape, and a car that might last her remaining lifetime without major repairs. Given that she may be limited to her own retirement income for the rest of her life, that is no more than prudent planning.

Even the transfer rules as established by Congress are for the most part a benign element of this system. The exclusions from the anti-transfer rules draw hard lines, disability being the major one.

For parents with a child with difficulties short of disability, with marital or financial difficulties, grandchildren with the same or educational needs, the transfer penalties are the price willingly paid so they can provide for their families as best they can. The amounts actually transmitted to children and others incurring penalties have never been that great.

Against this backdrop, Medicaid planning has become a standard practice not only among elder law attorneys, but among estate planners and others. State estate planning guides and programs typically include discussions of the many ways in which attorneys can assist clients in maximizing their benefits under Medicaid. Medicaid rights and planning are also woven into other legal authority. The Uniform Guardianship and Protective Proceedings Act (1997) expanded the authority of guardianship courts to authorize gifts and transfers beyond estate tax reduction to include “eligibility for government assistance,” authorizing transfers “to qualify the protected person for governmental programs … .” 8A U.L.A., Supp. 2000, pp. 14-144, 156-157, and §411(c)(1) and (3). More recently, the Uniform Commissioners adopted a marital agreements uniform law proposal that rejected a provision prohibiting agreements enabling one spouse to qualify for public benefits, retaining only a provision subjecting them to judicial review, and then only at the request of the nominally “disadvantaged” spouse. In a variety of circumstances, courts have followed suit. Those following the substituted judgment approach in guardianships have held that a guardian should be allowed to make gifts of his or her ward’s property to qualify for Medicaid if that is what the ward would have done if able. Rainey v. Guardianship of Mackey, 773 So.2d 118, 122 (Fla.Dist.Ct.App. 2000).

[A] competent, reasonable individual … would prefer that his property pass to his child rather than serve as a source of payment for Medicaid [sic] and nursing home care bills.

In re Daniels, 162 Misc.2d 840, 618 N.Y.S.2d 499, 504 (Sup.Ct. 1994). In Matter of Labis, the court allowed a guardian to transfer the marital home to herself, the community spouse, as part of a Medicaid estate plan. 314 N.J.Super. 140, 142, 714 A.2d. 335 (1998). It applied rules drawn from estate tax reduction gifting cases—the donees were the natural objects of the subject’s bounty, did not detract or interrupt the quality or duration of medical care, and the person was unlikely to regain consciousness.

That approach, involving an exempt transfer that did not advance eligibility, but only avoided potential estate recovery, was extended in In re Keri, 181 N.J. 50, 853 A.2d 909 (2004), to gifts made to adult sons who had been providing care, but not enough to come within the exclusions, while reserving funds to pay for care for the penalty period that would result. The court rejected the idea that doing what the law specifically permitted was not consistent with public policy:

… Congress has carefully defined and circumscribed Medicaid planning …. By its actions, Congress has set the public policy for this program and although some might choose a different course, the law has not. Few would suggest that it is improper for taxpayers to maximize their deductions under our tax laws to preserve income for themselves and their familiar … . So long as the law allows competent persons to engage in Medicaid planning, incompetent persons, through their guardians, should have the same right …

181 N.J. at 69, 853 A.2d at 920.

Indeed, Medicaid is so pervasive throughout our health care system today that an attorney who fails to take into account potential Medicaid benefits may be committing malpractice, and a trustee who spends trust assets without considering the availability of public benefits may have breached its duties of diligence, loyalty, prudence, or due care.

There is simply nothing “smelly” about Medicaid planning. To criticize those who engage in it blames the victims for attempting to make the best of a system filled with fine lines and capricious choices. Like Appellants, they are typically the ones who have paid their taxes conscientiously throughout their lives, and their health insurance premiums, and who late in life have the misfortune to suffer (or be married to someone who suffers) from a medical condition that does not trigger eligibility for conventional medical insurance. Most apposite is the comment of the New York court in Matter of Shah, 694 N.Y.S.2d 88, 257 A.D.2d 256 (N.Y.App.Div.,2d Dept. 1999), aff’d, 95 N.Y.2d 148, 733 N.E.2d 1093, 711 N.Y.S.2d 824 (2000):

No agency of the government has any right to complain about the fact that middle-class people confronted with desperate circumstances choose voluntarily to inflict poverty upon themselves when it is the government itself which has established the rule that poverty is a prerequisite to the receipt of government assistance in defraying the costs of ruinously expensive, but absolutely essential medical treatment.

For additional information concerning Medicaid and public benefits planning, visit: