The Deficit Reduction Act of 2005:

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• The Deficit Reduction Act of 2005
• Hope or Illusion for Increased LTCi Production?

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SummaryThe Deficit Reduction Act of 2005

• The look-back period for gifts increased to 5
  years
• Many state are phasing it in over 5 year period.
  All states will be in compliance in February of
  2011
• Gifts made during the look-back period create an
  ineligibility period based on their size the
  larger the amount, the longer the period
• If an individual or spouse uses an annuity to
  qualify for benefits, the state must be named
  first beneficiary

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• Deposits in a Continuing Care Retirement
  Community
• Have to be used prior to eligibility or
• The state notifies the facility that it has a
  lien on the deposit for repayment of services
• Waxman Amendment repealed state can easily
  gain Partnership status

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• 5 year look-back period

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• All states look for disqualifying transfers
  (gifts). Referred to as the look-back period, it
  begins on the date of application for Medicaid
  benefits
• Gifts made during this time create a period of
  ineligibility, based on their amount.
• The formula is
• The amount divided by your states average monthly
  cost of a private pay nursing home room

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Example

• John enters a nursing home on December 25, 2008.
  He applies for Medicaid on this date.
• He tells Medicaid that he gifted 100,000 to his
  children on December 25, 2007
• His state sets the average monthly cost of care
  at 5,000
• The penalty (ineligibility for Medicaid
  benefits) is 20 months (100,000 / 5,000)

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When does the penalty begin?

• For all gifts made after February 8, 2006 (the
  date president Bush signed the bill) the penalty
  begins on the date John applies for Medicaid, not
  the date he made the gift
• Going back to the example

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• John enters a nursing home on December 25, 2008.
  He applies for Medicaid on this date. He tells
  Medicaid that he gifted 100,000 to his children
  on December 25, 2007
• His state sets the average monthly cost of care
  at 5,000. The penalty (ineligibility for
  Medicaid benefits) is 20 months (100,000 /
  5,000)
• The penalty begins December 25, 2008. He must
  therefore, wait 20 months before Medicaid will
  start to pay for care

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Will this encourage people to buy LTCi?

• No, for at least two reasons
• The majority of people who look to Medicaid
  already have a pre-existing condition they
  wouldnt qualify for the policy to begin with
• Telling a prospect, You know, youll have to wait
  5 years after giving your money away to qualify
  for benefits, is also a waste of time. He likely
  will go back to the attorney who will tell him he
  can find a way around it

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• Medicaid now mandates the
• state be added as beneficiary

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How it works

• Individuals Client has 200,000 in cash. Instead
  of spending it on his care in a nursing home, he
  purchases an immediate annuity, thereby turning
  his cash into income
• He qualifies for Medicaid, but the state must be
  named beneficiary
• Bottom-line the state gets their money either way

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• Couples The couple has 409,560. The husband
  needs skilled nursing home care
• She keeps no more than 109,560
• The balance, 300,000 must be spent on his care
• She is instructed to purchase an immediate
  annuity for 300,000
• Issues with annuitizing
• The state must be named beneficiary
• What if the funds are qualified or low cost based
  assets?

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Will this encourage people to buy LTCi?

• No. Annuitizing almost always is used as a last
  resort.
• If you try and explain that annuitizing wont
  work, its likely the prospect will tell you
• Thats not what my attorney told me.
• The meeting then becomes confrontational.

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• Liens and
• Continuing Care Retirement Communities

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The rule

• States are given the right to either
• Refuse eligibility if the applicant has a deposit
  at a CCRC or
• Qualify the individual, but send a notice to the
  CCRC that the state has liened the deposit

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Will this encourage people to buy LTCi?

• Perhaps if the prospect / client is healthy. Once
  he understands that the deposit would end up
  going to Medicaid, not his family, there may be
  motivation to protect it.
• Keep in mind that percentage wise, very few
  people end up in CCRCs

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• Partnership

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• States are free to create partnerships and the
  majority have rushed to do so
• The only formula will be dollar for dollar
• Keep in mind that this is an asset, not income,
  protection program

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Will this encourage people to buy LTCi?

• It hasnt in the past. Until recently, surveys
  conducted by AHIP and LTCi carriers, show that
  sales have barely moved.
• Partnership has some issues
• It does not protect income
• Many states mandate compound inflation into 70s
• No state guarantees payment for home care, adult
  day care, or assisted living

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• Suggestions on how to
• use the Deficit Reduction Act
• to your advantage

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• Dont use it at all
• The DRA only confuses the client. Remember
  Medicaid, not the DRA helps you sell LTCi
• It pays almost exclusively for SNF care. Clients
  want to stay at home
• Medicaid is not free. Think about taxes if assets
  are gifted
• Once on Medicaid, the spouse in the community
  loses most, if not all, of her husbands income

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The wrong way to use DRA

• Objection from prospect
• I heard that Medicaid will pay for my care in a
  good nursing home
• Your response
• Recent changes in the law make it difficult if
  not impossible to protect assets
• Prospects response
• Thats not what the lawyer said

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The right way to use DRA

• Objection from prospect
• I heard that Medicaid will pay for my care in a
  good nursing home
• Your response
• The attorneys correct. But in my experience not
  one of my clients ever told me they wanted to go
  to a nursing home. The damage to your family is
  done when they decide to keep you home
• Did your attorney tell you that Medicaid will
  pay for home care, adult day care or assisted
  living?
• Prospects response
• No, he didnt

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• He did tell you that you would have to gift your
  assets and wait 5 years. Right?
• He did
• I am looking at your portfolio. It has over
  400,000 in qualified funds and low cost based
  assets. Are you aware that there will be a
  substantial tax if they are gifted?
• He never told me that
• Once on Medicaid, your wife will likely lose
  most, if not all, of your monthly income
• He never told me that either

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• So what do you want to do?
• This approach educates not scares the client. It
  also marginalizes the Medicaid planner.