With the enactment of the Deficit Reduction Act of 2005, signed into law by President Bush on February 8th, 2006, Congress has drastically limited the options available to the poor and needy for Medicaid planning, and have made Medicaid planning the realm of the rich. Briefly, the DRA has changed the following aspects of Medicaid planning, among others:

The look back period for transfers. The DRA now applies a five year look back period for all transfers rather than three years for outright transfers and five years for transfers to irrevocable trusts. As a result, transfers that would have otherwise been exempt will now be seen and used to calculate the penalty period.

When the penalty period begins. Instead of the penalty period beginning in the month of the transfer, the DRA now requires that the penalty period not begin until the applicant has spent down to eligibility amounts ($2,000 of countable assets), is requiring skilled assistance, and has applied for Medicaid. As a result, it will now be possible for persons who have gifted assets away for non-Medicaid planning reasons to find themselves facing a lengthy period of ineligibility with no means of paying for the required skilled assistance during that penalty period.

How the penalty period is calculated. With the DRA, the penalty period will now be calculated to include fractions of months rather than the States rounding down to the nearest whole month. As a result, transfers will now run longer and may over lap, causing more serious penalty period exclusions.

The exempt value of a residence. Now, applicants with equity in their personal residence over $500,000 will find that equity countable unless a spouse, a child under 21, or a blind or disabled child is living in the home. As a result, the heretofore useful strategy of using the residence as the “receptacle” for otherwise countable assets has been effectively minimalized if not eliminated.

The potential use of annuities. With the signing of the DRA, all annuities are required to have the State as the primary beneficiary for the remainder of the funds upon the death of the annuitant to the extent of the total amount of medical assistance paid on behalf of the annuitant. If a community spouse, minor child, or disabled or blind child survives and is the primary beneficiary, the State becomes the secondary beneficiary. As a result, the State now will be able to claim an interest in a recipient’s annuity with priority over other family members or loved ones.

How income for the recipient and community spouses are to be allocated. Increased resources may be granted to meet increased resource allowance needs for a community spouse only after the community spouse first receives the income of the institutionalized spouse.

The ultimate impact of the changes wrought by the DRA is yet to be known. We will provide additional information as we see how Colorado implements this law and drafts its own regulations.