Louisiana Attorney for Divestment Strategies

What is a Divestment?

If you or a family member needs long-term care, may be deluged with advice from "experts" (using this term sarcastically). These persons almost inevitably advise you to "transfer all the assets out of the name'' of the nursing home candidate. This is a terrible idea. Read on to learn why you should not do this, or if it is done, how the mistake could be corrected.

A divestmentis a transfer of a resource or income for less than fair market value. This applies to any transfer completed by the patient, the patient's spouse, or anyone acting on either spouse's behalf. The transfer can potentially create a period of ineligibility for Medicaid coverage if the divestment was made within the applicable look-back period.

When a person seeks qualification for Medicaid long-term care benefits, the local Medicaid office that reviews the application applies a timeframe, called the lookback period, in which all financial transactions are analyzed to determine if any divestments were made. Currently, the lookback period is five years. That means a Medicaid applicant's financial transactions are scrutinized for the five years preceding their Medicaid application. If any divestments are discovered during the lookback period, a penalty of Medicaid ineligibility is imposed.

The penalty period is the amount of time the patient is ineligible for Medicaid payments for nursing home services as a result of all divestments made within the lookback period. The length of the penalty is directly proportional to the amount of the aggregated investments: the larger the divestment, the longer the penalty period. While the lookback period defines the scope to determine which divestments count toward the penalty period, there is no limit to the length of the penalty period.

The penalty period is calculated by adding all the divestments made in the last five years. The total amount of the divestments is divided by the applicable divestment penalty divisor. The resulting quotient is the penalty period. The divestment divisor is an amount declared by the state for use in determining the penalty period. Currently, the divestment penalty divisor in Louisiana is 5,000. The divisor is based on calculating the average room rate for nursing homes in the state.

The penalty period start date is triggered from the lookback date forward when the patient is eligible based on their assets and income and would have been approved for coverage if there were no penalty period. Only then does the penalty period begin.

Examples of Divestments

• Direct transfer/gift - The most common example of a divestment is the direct transfer or gift of an asset, typically to a family member or friend.
• Underselling - Selling an asset for less than fair market value creates a divestment. It is valued as the difference between the value of the asset and the sales price. This is a common pitfall when a person sells an asset to a close family member.
• Overpayment - When a person buys an asset or pays for a service for more than what the fair market value of that asset or service is, the difference is considered a divestment.
• Creating joint ownership
• Immediate annuities or promissory notes that are not Medicaid compliant - A compliant annuity must be a single premium immediate annuity. It also must be irrevocable, not payable in a lump sum, non-assignable, payable in equal installments, and with the state in the proper position as beneficiary. An annuity that does not meet these qualifications will be deemed a divestment.
• Life estate or usufruct - Life estates exist when the owner of a property sells or gifts the property and retains the right to live in and use the property.
• Renunciation or disclaimer of interest in an estate
• Debt forgiveness
• Some life insurance purchases
• Transfer of income
• Inequitable divorce settlement

Exceptions and Cures for Divestments

• Spouse - A gift or transfer to a spouse is not a divestment because all assets of both spouses are considered together in the calculation for Medicaid eligibility, so transferring title to an asset from one spouse to another does not have any effect on the calculation and is not penalized.
• Homestead to the following persons:
  1. Spouse
  2. Child under 21
  3. Blind or disabled child
  4. A sibling who is a partial owner of the property and resided in the home for one year or more prior to the patient entering a nursing home
  5. A child who lived in the home for two years prior to entrance into a nursing home and provided care that delayed entry into the nursing home
• Other assets transferred to the following persons:
  1. Spouse
  2. Disabled or blind child
  3. Special needs trust
  4. Trust for sole benefit of a blind or disabled child

Cure of Divestment

When ALL divestments are returned to the transferring individual, the penalty is considered cured and no longer applies.

A divestment penalty can be set aside if such a penalty causes an undue hardship. An undue hardship occurs when a divestment penalty would deprive a patient of necessary medical care such that it would endanger the patient's life or deprive the patient of necessary food, clothing, shelter, and other basic essentials of life. Such a hardship must be clear and imminent. The gifted asset must be irrevocably lost, and the applicant must exhaust all legal avenues to recover it.

Divestment Eligibility Strategies

Sometimes, Medicaid planning calls for an intentional divestment. Some of these strategies are described below:

• Divest and wait - If the law requires only those divestments made within the lookback period to be penalized, a viable strategy sometimes is to divest and then wait out the lookback period. This can be a dangerous strategy if nursing home care is needed within five years of the divestment, however.
• Modern "half a loaf" with an annuity - To make a divestment, get the full penalty period to start running, and cover the nursing home costs during the penalty period, it is possible to make a divestment of approximately one-half of the assets and use the other half to purchase a Medicaid Compliant Annuity to create an income stream that will pay for the nursing home during the penalty period. Although this is a much-used strategy, especially for an unmarried patient, it is complex and time-sensitive such that it should be employed only under the guidance of a Certified Medicaid Planner.

Contact Our New Orleans Medicaid Planning Attorney for Divestment Strategies

If you have questions about how divestments may affect your eligibility for Medicaid long-term care, contact our office at 504-447-6000 and set up a consultation.