[IMPORTANT UPDATE TO THIS ARTICLE – PLEASE TAKE A LOOK AT THE POST HERE TO READ ABOUT SOME NEW DEVELOPMENTS THAT MAY AFFECT ISSUES I WROTE ABOUT IN THE ARTICLE BELOW!]
This is the third in a series of articles looking at the changes made to Medicaid for nursing homes and the Family Care program in Wisconsin. These changes are in the latest Biennial Budget passed on June 30, 2013.
This article focuses on a change to divestment law in Wisconsin. This change is at Wisconsin Statutes Section 49.453(2). This change says that a person can be subject to a divestment penalty for transferring assets that are excluded under 42 USC 1396p, the federal divestment law.
Here’s a little background. The concept of “divestment” in Medicaid involves gifting of assets, or selling assets at less than fair market value, in order to become eligible for Medicaid. If a person does this, and applies for Medicaid anytime in the next five years, the person will be found ineligible for Medicaid for a period of time. That period of time is calculated based on the amount of money that was gifted. For example, at this time in Wisconsin, if I gift away $10,000 and then apply for Medicaid within five years after the gift, I will not be able to receive Medicaid for around 41 days. That is the penalty period using today’s figures.
People are often confused and think that they can gift away up to the annual IRS gift tax exclusion amount in a year (currently $14,000), with no Medicaid penalty. That’s wrong. Medicaid and tax laws have nothing to do with each other.
If a person is in a position to gift assets and wait five years before applying for Medicaid, there will not be a penalty. If the person needs Medicaid within that five years, there will be a penalty.
There are some exceptions to this rule:
- Spouses can gift anything to each other.
- Parents can make gifts to a child of any age who is blind, or disabled.
- Individuals can transfer funds to a trust for a disabled individual who is under 65.
- The home can be transferred to:
- a caretaker child who meets certain requirements
- A child who is under 21, or blind, or disabled,
- a sibling with an ownership interest in the home and who has lived there for at least a year.
Also, a person can avoid the divestment penalty by showing that the transfer was not made for purposes of becoming eligible for Medicaid, or by showing there would be an undue hardship created if the penalty is enforced.
Getting to the important part for this article, there is another exception in federal law (42 USC 1396p(h)(5)) stating that assets that are excluded in the Medicaid eligibility determination are not included in the divestment penalty laws. In other words, if an asset is on the list of things that are not counted when a person’s eligibility is being determined, the individual can give it away without a penalty. The home is not part of this exception even though it is excluded for eligibility. Some of the assets that would fall into this exception under federal law are: a car, burial plots, a small life insurance policy, household furnishings, and business assets.
In federal law, possibly the most significant assets that are excluded in determining eligibility, besides the home, are assets used in a trade or business, and assets that generate income. This exclusion has allowed individuals who own farms or businesses, to receive Medicaid without having to lose the family farm or business. And after qualifying for Medicaid, they were able to transfer the business property without incurring a penalty for divestment. This allowed families to pass along the family farm or business without losing Medicaid.
The new Wisconsin law changes that. Under the new law, if a farmer or business owner needs Medicaid, they can qualify while still owning the business, but if they want to transfer it to the children who have worked their entire lives in the business or on the farm, those kids must pay full market value. Also, any loan between parents and children is presumed to be a divestment under another change in the law, so the parents cannot sell the property on a loan either.
The reality of family farming is that continuation of the farm business often depends on being able to pass it along to children at something less than fair market value. Children who have worked on the farm seldom have the amount of money needed to buy this appreciated asset outright. Families may set up a plan to transfer the farm to the children over a period of time, to enable the children to gradually take control of the business.
Example: Farmer Bob and his four children have been working the family farm together for years while Bob gets closer to retirement age. They have set up a business arrangement where Bob and his children are members of a partnership to run the farm. The plan is for Bob gradually to turn over his shares of the partnership to the children. At age 72, Bob has a debilitating stroke and requires nursing home care. Under Wisconsin’s new law, Any transfers that he made as part of the succession plan could cause a penalty if he applies for Medicaid, and to complete the plan will require the children to buy the business at fair market value. They do not have sufficient assets to do this. To make things even worse, Bob cannot sell it to his children on a loan because this will be considered divestment also (even if the children make regular payments and pay interest – yes, you are reading that correctly, the new Medicaid law treats loans differently and prohibits them when they are among family members). In order to pay for his care, Bob has no choice but to sell the farm to outsiders.
In Wisconsin, over 99% of farms are family owned. A large percentage are operated as a family partnership. Therefore, this change in the law will affect many of Wisconsin’s farm families. Ironically, Wisconsin has numerous tax credits for farm businesses, including a credit for an established farmer to lease the farm to a new farmer. Presumably, the changes in Medicaid law are to preserve tax dollars. However, this argument as applied to the specific change that was made here, doesn’t seem to make any sense when at the same time Wisconsin hands out significant business and farm tax credits.
This law similarly affects family businesses such as auto shops, grocery stores, family owned hardware stores, beauty shops, and the like, in urban areas. If the business owner parent falls ill and needs long term care, selling the business may become necessary.
Undoubtedly this law will be challenged in court if it is ever enforced, because it is clearly in violation of federal law. Until then, it is bound to create high levels of uncertainty in family business succession planning.