The Use of Personal Care Contracts in Light of Reed v. Dept. of Social Services1
Vincent G. Rapp2 |
Michael C. Weeks2 |
This article provides a detailed explanation regarding the use of personal care contracts for nursing home clients to transfer assets to family members without causing a Medicaid transfer penalty.
The Missouri Court of Appeals recently ruled that a nursing home resident may pay her daughter a lump sum in exchange for personal care without causing a Medicaid transfer penalty. This means that, despite recent tightening of the Medicaid rules, at least one asset transfer technique remains viable.
This article will review the asset transfer rules that apply for “Vendor Medicaid” or Medicaid for individuals residing in skilled nursing facilities or eligible to receive in home care through the home and community based service programs. Other Medicaid programs have different rules regarding asset transfers.
Transfers of Assets Impacting Medicaid Eligibility
Any time a benefit program has an asset limit, the first question clients will ask is, “What happens if I just give my money to my kids/friends, etc?” The federal and state governments are aware that most people, if faced with the choice of giving their life savings to their children prior to their death or spending $4,000-$6,000 per month on skilled care until the funds are exhausted, will choose the former. As a result, there are very strict rules regarding individuals transferring assets to other individuals, charities, political organizations, or any other source. The base rule is that any assets transferred for less than full consideration will cause a penalty period, during which individuals will not be eligible for Medicaid benefits even if they meet all of the other eligibility requirements.3 The formula for determining this penalty period is calculated by dividing the amount of the gift transfer by the penalty divisor.4 If an individual makes gifts more than 60 months in advance of applying for Medicaid vendor (nursing home) benefits, then the gift is made beyond the “look-back period,” which means that there will be no transfer of asset penalty applied.5 For example, if an individual transfers $28,520 on May 1, 2007, they will have a 10-month penalty period. However, if the individual doesn’t apply for vendor Medicaid benefits until June 1, 2012, no penalty will be assessed because it is outside of the 60-month look back period.
As mentioned in the footnotes, the largest changes to the Medicaid eligibility rules in the last 13 years occurred in February 2006. With the enactment of the Deficit Reduction Act, the ability for a potential Medicaid applicant to transfer even a small amount of assets has been drastically impacted. The two primary reasons for this change are the increase in the look back period from 36 months to 60 months for all transfers for less than full consideration and the delay in the running of any penalty period until the time of the transfer (which would only be the case if the individual was already in a Medicaid bed in the skilled nursing facility) or until such time as the individual would be eligible for benefits “but for the application of the penalty period.”6 This delay in the start of the penalty period will certainly become a large trap for the unwary, because it requires an individual who wants to make any type of gift – even a gift of modest value – to be able to ensure that they will have available funds to pay for care for up to the next 60 months, or that they can ensure the gift will be returned if asked. Obviously, either of these requirements is nearly impossible to predict with any certainty. Consider the 78-year-old grandmother who gives her grandchild a semester’s worth of college tuition (approximately $4,500 for a four-year public university). Three years later, grandmother has a major stroke, which was totally unexpected. If grandmother has sufficient assets to pay for only 18 months of skilled care (which could easily cost $90,000 or more), she would have exhausted her resources inside of the 60-month look back period. Grandmother would have a 1.53 month penalty ($4,500/2,943= 1.53),7 but this penalty would not begin to run until she was eligible “but for the penalty period.” Many practitioners have taken this to mean that the individual: 1) is in a skilled nursing facility; 2) is in a Medicaid-certified bed in the facility; 3) has less than $1,000 of countable assets; and 4) has applied for Medicaid benefits, even though they will be denied because of the penalty. If grandmother is down to less than $1,000 but will be denied benefits for 1.53 months at that point, who will pay the skilled nursing facility the more than $6,000 that it will cost to stay for that 1.53 months? It is unlikely that the grandson will be able to refund the money – and should he be required to do so? It should be noted that the Deficit Reduction Act does require that there be hardship waivers, but, as of this date, Missouri has not enacted any process. Furthermore, the law has for some time dictated that no penalty should be applied if it can be proven that the transfer was “exclusively for a purpose other than” achieving Medicaid eligibility.8 However, this should be looked at very suspiciously, because the author’s experience suggests that it is nearly impossible to have the state look at any transfer as meeting this standard. Perhaps with the new law change, the state will have to ease its stance on this position, because so many more distant transfers are going to cause a loss of benefits. Until that becomes reality, it is unwise to rely on any transfer not causing a period of ineligibility.
With the tightening of the transfer of asset penalties, it will become more important than ever to be able to start any type of asset protection planning earlier, and also to be very familiar with techniques that will allow for assets to be transferred without the imposition of a penalty. One such technique is the personal services contract, where the potential Medicaid applicant employs the adult child and/or friend to provide necessary personal services which they have no legal obligation to provide to the applicant in exchange for fair market compensation.
In a typical situation, son or daughter has been providing substantial care to a parent, but it becomes apparent that, either now or in the near future, skilled level care will be necessary. Often, the son or daughter has been providing this care at no cost to the caregiver. The parent and/or child are usually surprised that, even though the care provided kept the parent out of the skilled nursing facility for months or years, saving thousands of dollars for the state, they are not allowed to be compensated for any past care in the least, but the state will require the parent to spend down all but $1,000 of the parent’s assets prior to allowing the parent to qualify for Medicaid.9 However, absent clear intent that this care was intended to be a paying relationship, it will be presumed that any transfer of assets, particularly between related individuals, is a transfer for less than fair market value.10
Essential Components of an Effective Personal Care Contract
1. The contract identifies the parties. The authors suggest identifying the parties in the first paragraph as “care provider” and “care recipient.”
2. Identify the duties of the care provider. These duties can be broad and generalized, but should be specific whenever possible to conform to the individual needs of the care recipient.
3. Define the duration of the contract. The contract may be for a period of months or years or it can be for the lifetime of the care recipient. If the contract is to be for the lifetime of the care recipient, the parties should stipulate to care recipient’s present age and life expectancy based upon published actuarial tables. The authors suggest using the United States Life Tables, 2003 published by the National Center for Health Statistics.11 The attorney must take into consideration the circumstances of the parties when discussing the advantages of a monthly contract versus a lifetime contract. In some situations it would be more advantageous to use a monthly contract until the care recipient needs to enter a nursing home, and then use a lifetime contract to provide care for the client for the rest of his or her life while in the nursing home, to more accurately reflect the new level of care required.
4. Define the compensation to be paid. Wages can be calculated on an hourly rate or any other method that can be shown to be reasonable under the circumstances. Wages paid to the care provider should be comparable to wages paid in the community for like services. Expenses that can be shown to be reasonable, such as mileage, may also be included.
5. Signature of parties and date. The personal care contract should be drafted with the understanding that it may be challenged by the Missouri Department of Social Services (the “department”). The most likely challenge will be that the transfer of assets used to pay for the personal care contract was made without adequate consideration. The department defines “fair and valuable consideration” in § 1040.015.10 in the Income Maintenance Manual.12
1040.015.10 Fair and Valuable Consideration
‘Fair and valuable consideration’ means money, real or personal property, or services received from the person(s) to whom the property was transferred is equal to approximate market value at the time of transfer.13
Although the department defines the phrase “fair and valuable consideration,” its definition “has no legal controlling force.”14 Whether or not consideration exists is a matter of law. The Missouri Court of Appeals for the Western District had an occasion to address the issue of consideration in Citibank v. Wilson.15 The court stated:
Consideration exists where there is a detriment to the promisee or a benefit to the promisor. McRentals, Inc. v. Barber, 62 S.W. 3d 684, 706 (Mo. App. 2002). “This con-sideration may consist of some right, interest, profit, or benefit accruing to one party, or some forbearance, loss, or responsibility given, suffered, or undertaken by the other party.” Carter v. St. John’s Regional Med. Ctr., 88 S.W.3d 1, 10 (Mo. App. [S.D.] 2002).
If the department believes the transfer was made without adequate consideration, it will impose a penalty as discussed above. When the applicant (the care recipient) is notified by the department that it intends to impose a penalty, the applicant is also notified of the right to an administrative hearing to appeal the department’s decision. The applicant exercises the right to appeal by simply sending a certified letter to the case worker handling the application for benefits.
The administrative hearing is conducted on the record by a department attorney acting as the hearing officer. This is the only opportunity the applicant and the department will have to introduce evidence into the record. The applicant must be prepared to offer evidence to show that the personal care contract is valid and that the assets transferred were given in exchange for valuable consideration. In some cases it may be adequate to provide only the testimony of the care provider. The care provider can testify to the following elements:
1. Authentication of contract.
2. Signature of the parties to the contract.
3. The assistance needed by the care recipient covered by the personal care contract.
4. The services provided by the care provider, for the benefit of the care recipient, as required by the personal care contract.
5. The transfer of assets in exchange for the personal care contract.
There may be circumstances where the applicant may want to present medical evidence of the care recipient’s condition as proof of the care recipient’s need for the services covered by the personal care contract.
If the department does not change its position after the administrative hearing, the applicant may appeal the department’s decision to the circuit court pursuant to § 208.100, RSMo 2000.
Reed v. Missouri Department of Social Services
On July 25, 2003, Eileen Reed entered the Blanchette Place Care Center (nursing home) in St. Charles. On September 3, 2003, Reed entered into a personal care contract with her daughter, Sandra Teson. Reed was identified as the care recipient, and Teson was identified as the care provider. The contract set out the duties of the care provider in detail (see Exhibit 1). On October 14, 2003, Reed paid Teson $11,000 by check, fulfilling her obligations under the contract.16 On October 16, 2003, Reed submitted her application for Medicaid benefits, a/k/a medical assistance vendor coverage, in order to have Medicaid pay for her nursing home expenses. The Department of Social Services accepted Reed’s application but imposed a four-month penalty because it had determined that the transfer of the $11,000 was made without adequate consideration. The nursing home agreed to allow Reed to defer payment for the four-month penalty period pending the outcome of the appeal process. Reed, through her attorney, wrote to the caseworker and requested a formal hearing on the record, which was held on February 2, 2004. At the hearing the state offered the testimony of the caseworker to provide a foundation for the admission of evidence, both verbal and documentary, to establish the procedural history and the status of the case. The applicant, Eileen Reed, offered the testimony of the care provider, Sandra Teson, to establish the fact that her mother, Eileen Reed, had medical problems which caused her to have problems with communication, nutrition and hydration. Teson explained how she had been able to provide personal services pursuant to the personal care contract to assist Reed in ways that addressed her medical problems. Teson provided meals when the nursing home staff was too busy to feed Reed. Teson provided a communication link from Reed to the nursing home staff when Reed was unable to verbalize her medical problems. Teson reported adverse medication side effects to the nursing home staff that she discovered before anyone else did. Teson discovered a serious medication administration error and, after reporting her observations, was able to get the problem corrected. When Teson finished her testimony, the record was full of uncontradicted evidence regarding the important services Teson provided pursuant to the personal care contract – services which significantly improved the quality of life for Reed.
On July 13, 2004, the department, through its hearing officer, affirmed its decision to impose a four-month penalty upon Reed based on its determination that the $11,000 transfer from Reed to Teson was made without consideration. On August 3, 2004, Reed filed her notice of appeal with the St. Charles County Circuit Court. On November 5, 2005, the circuit court entered a judgment overturning the decision of the department, finding that the department’s decision was “arbitrary, capricious, and unreasonable.” The circuit court found that there was substantial evidence in the record to show there was fair and valuable consideration for the payment of the $11,000.
On December 12, 2005, the department filed its notice of appeal to the Missouri Court of Appeals for the Eastern District of Missouri. By decision dated June 20, 2006, the appeals court upheld the circuit court’s ruling overturning the department’s decision to impose a four-month penalty on Reed.
Income Tax Considerations
An attorney should advise his or her client that amounts paid under a personal care contract are taxable income to the care provider. If the amount paid to a care provider is more than $600, the care recipient must issue an IRS form 1099 and provide a copy to the care provider. The care provider must pay income tax (and self-employment tax) on the income. The authors suggest attorneys advise their clients to discuss the tax implications of the transaction with their accountant to ensure they claim the appropriate deductions.
Summary
Since the enactment of the Deficit Reduction Act of 2005, it has become significantly more difficult to protect a client’s assets from long-term care costs. However, some planning opportunities still exist. Counselors need to be aware of the drastic changes in law, and how the changes will affect clients. Use of a personal care contract becomes an even more important tool for the experienced elder law attorney. When used appropriately, these contracts can produce beneficial results for the client. The client secures the benefits of personal care from a trusted loved one while being able to transfer significant sums of money without the imposition of a penalty period.
Exhibit 1
Personal Care Contract 17
This agreement is entered into by and between Eileen Reed (CARE RECIPIENT) and Sandra Teson (CARE PROVIDER). It sets forth the terms under which CARE PROVIDER will provide personal assistance to CARE RECIPIENT.
1. DUTIES OF CARE PROVIDER. CARE RECIPIENT contracts to receive and CARE PROVIDER agrees to provide the following services for the lifetime of the CARE RECIPIENT on an “as needed” basis:
a. Attend to needs of CARE RECIPIENT, including preparation of nutritious, appropriate meals and snacks; house cleaning; laundry;
b. Assist CARE RECIPIENT with grooming, bathing, dressing, laundry, and personal shopping, as needed;
c. Purchase, with funds made available by CARE RECIPIENT, or assist CARE RECIPIENT in purchasing clothing, toiletries, and other personal items for CARE RECIPIENT as needed, taking into account CARE RECIPIENT’s ability to pay for such items;
d. Purchase, with funds made available by CARE RECIPIENT, or assist CARE RECIPIENT in purchasing hobby, entertainment or other goods for CARE RECIPIENT’s use and enjoyment, as needed, taking into account CARE RECIPIENT’s ability to pay for such items;
e. Monitor CARE RECIPIENT’s physical and mental condition and nutritional needs on a regular basis in cooperation with health care providers;
f. Arrange for transportation to health care providers and to the physician of CARE RECIPIENT’s choice. CARE PROVIDER will also arrange for assessment, services and treatment by appropriate health care providers, including but not limited to, physicians, nurses, nursing home services, physical therapists, and mental health specialists as needed for CARE RECIPIENT;
g. Assist CARE RECIPIENT in carrying out the instructions and directives of CARE RECIPIENT’s health care providers;
h. Arrange for social services by social service personnel as needed by CARE RECIPIENT;
i. Even if additional services are not needed, visit at least weekly with CARE RECIPIENT and encourage social interaction;
j. Arrange for outings and walks in keeping with CARE RECIPIENT’s lifestyle, if reasonable and feasible for CARE RECIPIENT;
k. Interact with and/or assist any agent of CARE RECIPIENT in interacting with health professionals, long-term care facility administrators, social service personnel, insurance companies, and government workers in order to safeguard CARE RECIPIENT’s rights, benefits, or other resources as needed.
l. The privacy of CARE RECIPIENT shall be preserved and respected as to visitors, telephone conversations and personal mail. Family members shall be permitted to visit CARE RECIPIENT.
2. DURATION. The services indicated above shall be provided to CARE RECIPIENT by CARE PROVIDER for the lifetime of CARE RECIPIENT.
3. COMPENSATION. The parties stipulate that as of the execution of this Agreement, CARE RECIPIENT is 76 years of age. CARE RECIPIENT agrees to pay, and CARE PROVIDER agrees to accept, in payment for the aforesaid services to be rendered by CARE PROVIDER, the compensation set forth below, which compensation the parties stipulate and agree to be fair and reasonable and commensurate with the quality and extent of the services and their fair market value.
Professional geriatric care managers typically receive $20.00 per hour for performance of the services noted above. The parties stipulate and agree that the CARE PROVIDER shall receive $12.00 per hour.
The parties agree and stipulate that CARE PROVIDER shall furnish the services set forth over the lifetime of CARE RECIPIENT on an “as needed” basis. Therefore, the parties understand that the hours expended in performance of said services will fluctuate over
said lifetime according to CARE RECIPIENT’s needs. There may be periods where more than 20 hours per week may be required. Conversely, there may be intervals when the services require less time. The parties agree that over the lifetime of CARE RECIPIENT, CARE PROVIDER will expend, on average, 4 hours per week or more.
The parties agree and stipulate that CARE RECIPIENT is 76 years of age. Based on the actuarial tables published by the National Center for Health Statistics, the life expectancy of CARE RECIPIENT is 11.3 years. This Agreement is for the duration of CARE RECIPIENT’s life, regardless of its length. Although CARE RECIPIENT may live beyond said life expectancy or survive for a shorter duration, the parties agree and stipulate that compensation to the CARE PROVIDER be based upon said life expectancy of 11.3 years.
The parties, therefore, agree and stipulate that compensation to the CARE PROVIDER shall be computed as follows: $12.00 per hour, multiplied by 4 hours, multiplied by 11.3 years, multiplied by 52 weeks equals $28,204.80.
Thus, the maximum reasonable fair market value compensation is $28,204.80.
The parties recognize that CARE RECIPIENT does not possess sufficient assets to pay the maximum compensation. Therefore, the parties agree that as full compensation for the services contemplated hereunder, CARE RECIPIENT shall pay to CARE PROVIDER in cash and/or other assets of equivalent value the amount of $11,000.
The parties agree that the agreed upon compensation of $11,000.00 is less than the reasonable and fair market value of the services contemplated hereunder; nonetheless, CARE PROVIDER agrees to accept such amount as full compensation.
4. NON-ASSIGNABILITY. This Agreement is for services unique to CARE RECIPIENT. CARE PROVIDER agrees to personally perform the above services. CARE PROVIDER shall have no obligation to render services or otherwise be liable to any other person or entity.
5. LIABILITY. Medical care is to be provided at the expense of CARE RECIPIENT. CARE PROVIDER shall not be liable for the cost of CARE RECIPIENT’s care. CARE RECIPIENT agrees to reimburse CARE PROVIDER for any reasonable out-of-pocket expenses incurred on CARE RECIPIENT’s behalf.
6. EFFECTIVE DATE. This Agreement shall take effect and be binding on the parties hereto upon payment of the agreed upon compensation set forth above for CARE PROVIDER.
7. ARBITRATION CLAUSE. The parties agree that any dispute between them regarding the services under this Agreement or any other aspect of this Agreement, will be determined by submitting it to arbitration under the laws of the State of Missouri, rather than by a lawsuit through the court process.
8. This Agreement contains the entire Agreement and understanding between the parties, surpassing all prior communications, either written or oral, concerning the subject matter of this Agreement. This agreement may be changed only by a written instrument executed by both parties hereto.
9. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri.
THIS IS A LEGALLY BINDING AGREEMENT. EACH PARTY HAS READ THE ABOVE AGREEMENT BEFORE SIGNING IT. EACH PARTY UNDERSTANDS THE AGREEMENT HE OR SHE IS MAKING, HAVING HAD THE OPPORTUNITY TO ASK TO HAVE EACH TERM THAT THE PARTY DOES NOT UNDERSTAND FULLY EXPLAINED.
Footnotes
1 Reed v. Missouri Dep’t of Soc. Servs., Family Support Div., 193 S.W.3d 839 (Mo. App. E.D. 2006). Although this appears to be a case of first impression for Missouri, a similar case was decided in Florida in 1998. See Thomas v. Fla. Dep’t of Children and Families, 707 So.2d 954 (Fla. Dist. Ct. App. 1998).
2 Vincent G. Rapp is a solo practitioner in St. Charles, a member of the National Association of Elder Law Attorneys (NAELA), and a 1995 graduate of St. Louis University School of Law. Michael C. Weeks is an attorney with the law firm of Rudy D. Beck & Associates, PC, an elder law and estate planning firm in St. Charles. Mr. Weeks is a member of the National Academy of Elder Law Attorneys and is a 2002 graduate of the University of Missouri-Columbia.
3 When discussing penalties, it is important to recognize that this article refers only to vendor type Medicaid benefits, which deal with payments to individuals in primarily skilled nursing facilities. There are other benefit programs, such as medical assistance benefits (which cover doctor’s visits, hospital stays, etc.) which have no transfer of assets penalty. For simplicity, this article is written disregarding the more relaxed eligibility requirements for those other programs.
4 See 42 USC § 1396p(c)(1)(E). Currently, the penalty divisor in Missouri is $2,852.
5 On February 8, 2006, President Bush signed the Deficit Reduction Act of 2005, which greatly altered the penalty periods and the look-back period. See Pub. L. No. 109-171, 120 Stat. 61-68, § 6011.
6 See Pub. L. No. 109-171, 120 Stat. 61-68, § 6011 amending 42 U.S.C. § 1396p(c)(1)(D).
7 Pub. L. No. 109-171, 120 Stat.61-68. In addition to the other changes discussed, § 6016(a) also required each state to impose a partial month penalty. Previously, the practice in Missouri had been to round the gift off to the nearest whole month.
8 See 42 U.S.C. § 1396p(c)(2)(C).
9 An applicant for Medicaid benefits must have less than $1,000 of countable assets in order to be approved for Medicaid benefits. See § 208.010.2(4), RSMo 2002.
10 See HCFA Transmittal 64 § 3258.1 available at http://www.elderlawanswers.com/resources/documents/Transmittal64Sec3258.pdf.
11 Elizabeth Arias, United States Life Tables, 2003, 54 Nat’l Vital Statistics Reports (April 19, 2006) available at www.cdc.gov/nchs/data/nvsr/nvsr54/nvsr54_14.pdf.
12 Family Support Division, Income maintenance manual, December 1973 Eligibility Requirements, available at www.dss.mo.gov/fsd/iman/index.html.
13 Id.
14 Couch v. Dir., Mo. State Div. of Family Servs., 795 S.W.2d 91, 93 (Mo. App. W.D. 1990), Danner v. Div. of Family Servs., 772 S.W.2d 868, 871 (Mo. App. W.D. 1989).
15 160 S.W.3d 810, 813 (Mo. App. W.D. 2005).
16Reed v. Mo. Dep’t of Soc. Servs. Family Support, 193 S.W.3d 839, 841 (Mo. App. E.D. 2006).The payment of the $11,000 was approved by the probate court on October 6, 2003, since Teson was Reed’s court appointed guardian.
17 Personal care contract on file with author.