Buried in the Health Insurance
Portability and Accountability Act of 1996, Pub. L. 104-191, 110 Stat. 1936 (Act), is a provision that could land estate planners and their clients in jail. Section 217 of the Act provides criminal penalties for persons who transfer assets for the purpose of qualifying for Medicaid when the transfer results in the imposition of an ineligibility period.

The Act Section 217 imposes criminal penalties on anyone who:
knowingly and willfully disposes of assets (including any transfer in trust) in order for the individual to become eligible for medical assistance under a State Plan under Title XIX, if disposing of the assets results in the imposition of a period of ineligibility for such assistance under Section 1917(c).

42 U.S.C. 1320a-7b(a)(6). As drafted, it is unclear whether the offense is a misdemeanor ($10,000 fine and one year imprisonment) or a felony ($25,000 and five years). The Act also permits a state, at its discretion, to "limit, restrict, or suspend" the person's Medicaid eligibility for up to one year.

Ineligibility Periods
To begin to understand the new criminal statute, a basic knowledge of the current law on assets transfers is essential. When a person applies for Medicaid, the state is required to examine all transfers made by the applicant or the applicant's spouse in the 36 months preceding the application. If a trust has been established, this "look back" period is extended to 60 months. If the applicant made a transfer for less than fair market value during the look back period, the state imposes a period of ineligibility.

The length of the ineligibility period is based on the state's average monthly cost of private pay care in a nursing home as determined by the state Medicaid agency. This amount varies considerably between states. In 1996 the lowest average monthly private pay rate was in Arkansas at $1,700. In New York City, the 1996 private pay rate exceeded $6,500 per month. These figures change annually. For example, in a state where the average monthly private pay rate is $4,000, the state will impose a one month period of ineligibility for each $4,000 the applicant or the applicant's spouse gave away during the look back period. The period of ineligibility begins on the date the gift is made. Thus, if a person makes a gift of $8,000 in December, a two month period of ineligibility will be imposed and that person will not be eligible for Medicaid until February.

In such a state, if less than $144,000 (36 months x $4,000) is given away, the period of ineligibility will be less than 36 months. If a person makes a gift of more than $144,000, however, and then makes the mistake of applying for Medicaid within 36 months of the transfer, the period of ineligibility may exceed 36 months. For example, if the person gives away $300,000 and applies for Medicaid 35 months later, the person will not be eligible for Medicaid for 75 months from the date of the transfer. In contrast, if the person had simply waited 36 months from the date of the gift to file the Medicaid application, no period of ineligibility would result from that same transfer. Therefore, the timing of filing the application is very important, particularly for large transfers.

A New Penalty System
Congress, in its wisdom and at the urging of the powerful long-term care insurance lobby, decided that the ineligibility period penalty mechanism was not working to stop perceived abuses in the Medicaid system. Instead of simply lengthening the period of ineligibility, Congress imposed criminal sanctions on the transfer of property for purposes of qualifying for Medicaid. Of critical importance to the lawyers of estate planning clients, the Act also imposes criminal sanctions on anyone who aids and abets the applicant in making these criminal transfers.

Situations still exist in which lawyers can assist clients with plan-ning for Medicaid eligibility. As before, there are exceptions to the prohibition against transferring property for purposes of qualifying for Medicaid. According to 42 U.S.C. 1396p(c)(2), the following transfers can still be made at any time with no period of ineligibility and, therefore, no criminal sanctions. Any transfer can be made:

  • to a spouse or to another for the sole benefit of the spouse
  • to a minor, blind or disabled child or to a trust established for the sole benefit of that child; and
  • to a trust established for the sole benefit of a disabled person under the age of 65.

The applicant's interest in the residence can be transferred without a period of ineligibility:

  • to a dependent minor or disabled child;
  • to a sibling with an equity interest in the home who provided care and has resided with the applicant for one year before the applicant is institutionalized;
  • to a son or daughter of the applicant who lived in the home with the parent for two years and cared for the parent; and
  • to a trust established for the sole benefit of a disabled person under the age of 65.
    In addition, the period of ineligibility is waived when:
  • the state determines that the denial of eligibility would work an undue hardship;
  • a satisfactory showing is made that the applicant intended to transfer the property for fair market value or for other valuable consideration; ù the asset was transferred "exclusively for a purpose other than to qualify for medical assistance"; and
  • assets transferred for less than fair market value have been returned to the individual.

No penalty is imposed on the transfer of "exempt assets" other than the home. The reasoning behind this exception is that because the ownership of these assets does not affect the individual's eligibility for Medicaid, the purpose of the transfer could not have been to qualify for Medicaid. The person would qualify for Medicaid whether or not the transfer was made. 42 U.S.C. 1396p(c)(2)(C)(ii). If the donee returns the property, no penalty should be imposed. According to the Health Care

Financing Administration (HCFA) Transmittal 64 (Nov. 1994), "When all assets transferred are returned to the individual, no penalty for transferring assets can be assessed." It appears that if no penalty can be assessed, no criminal charges can be made. Section 217 applies only to transfers when "disposing of the assets results in the imposition of a period of ineligibil-ity." Transmittal 64 provides that "a return of the assets requires retroactive adjustment, including erasure of the penalty, back to the beginning of the penalty period." This suggests that if the donee returns the property at any time, the criminal offense is "cured" because the erasure of the penalty is retroactive.

Interpretation Questions
There continue to be many more questions than answers about the Act, which became effective January 1, 1997. Arguably, transfers occurring before this date should not be subject to criminal penalties. Nevertheless, taking this obtuse law to the extreme, any transfer made by a donor who intends to apply for Medicaid at any time in the future might be a criminal offense. One interpretation would make such transfers criminal because the transfer automatically results in a period of ineligibility. As one commentator has noted, "This is the most severe interpretation. Any transfer, whenever made, if the purpose is to achieve Medicaid qualification, is criminal." Clifton B. Kruse Jr., 22 ACTEC Notes 220 (1996).

Nevertheless, criminal penalties are less likely if the person makes a transfer and then waits 36 months before making an application. According to the Act, a criminal penalty only applies when "disposing of the assets results in the imposition of a period of ineligibility. . . ." If no application is made within 36 months, the penalty cannot be "imposed" (although a penalty would have been imposed if an application had been filed). The "safe harbor theory" for transfers made 36 months before the application is filed is based on the idea that no "period of ineligibility" should be imposed if the transfer took place before the look back date. Under this interpretation, if the transfer is made to a trust, however, a criminal act would occur if an applicant applied for Medicaid within 60 months of the transfer, the look back period for such transfers. Another reading of the Act suggests that a criminal act occurs only if the person actually files an application during the period of ineligibility. Under this interpretation, only persons who apply during a time when they are not eligible anyway are criminals.

For example, assume that a person in a state where the average monthly cost of nursing home care is $4,000 gives away $12,000 and applies for Medicaid five months later. Under this theory, the transfer would result in a three month period of ineligibility but no criminal penalty, because the application was not filed during the period of ineligibility. If, however, the person files an application only two months after giving away $12,000 (during ineligibility), the person has violated the law. A lawyer who assisted this client in making the transfer could be sharing the client's cell.

Some lawyers have suggested that the law may be unconstitutional for vagueness. If the government is to charge someone with a criminal offense, the law should clearly define the elements of the offense so as to put the public on notice of the consequences. Until regulations are issued or until the law is repealed, it will be impossible to know just what transfers are legal or illegal. Regulations may be a while in coming, however. HCFA has not yet issued proposed regulations on the major changes made in the Medicaid statute in 1993.

Another unanswered question deals with how the government will interpret what is meant by the term "knowingly and willfully." The Act applies to anyone who "knowingly and willfully disposes of assets. . . ." Does this require simple cognizance by the transferor that he or she is giving something away? Does it require actual knowledge that the act of making the transfer is a crime? Does it require the applicant to know at the time of the transfer that it might qualify him or her for Medicaid at some point?

The question of whether consciousness of the act itself is sufficient to invoke criminal liability or whether actual knowledge that the act is illegal is required was addressed in Ratzlaf v. United States, 114 S. Ct. 655 (1994). After running up a large gambling debt at his favorite casino, Mr. Ratzlaf arrived at the casino with $100,000 in cash stuffed into a shopping bag. When the casino operator told him that all cash transactions in excess of $10,000 had to be reported to state and federal officials, he retreated from the casino to exchange his grocery bag of cash for checks from various banks in the amount of $9,500 each to pay his debt. While agreeing with the general rule that ignorance of the law is no excuse, the court found that under "principals of lenity," ambiguities must be resolved in the favor of Mr. Ratzlaf. The Court found that the individual must have conscious knowledge not only of the act but also of the fact that the act is illegal before criminal sanctions can be imposed.

What happens if other bona fide reasons exist for making gratuitous transfers? May not grandparents help send their grandchildren to college? Will reading How to Avoid Probate land Granny in a federal penitentiary? What happens when Granny gives her house to her child because she can no longer afford the property tax and cannot pay her medical bills? Surely, if the Supreme Court resolved Mr. Ratzlaf's case in his favor, it will resist the opportunity to throw Granny in jail for her random acts of kindness.

In reality, it may be unlikely that these cases will be prosecuted. Nevertheless, the existence of the statute will have a chilling effect on what are otherwise legitimate transfers. It may also cause elderly citizens to divest themselves unwisely and prematurely out of fear that the state will "take everything" if they have to go into a nursing home some day.

The Act represents a double-edged sword for a lawyer who takes part in planning a criminal transfer. That lawyer will be violating the law. The problem is that planners cannot be sure what constitutes a criminal act under this statute. If the lawyer fails to advise clients of legitimate methods of preserving assets, the lawyer may be committing malpractice. A recent article describes the increase in malpractice actions against personal injury, divorce, worker's compensation and estate lawyers who fail to advise their clients of Medicaid planning options. That article recommends discussing government benefits planning at the outset of the engagement and cautions the lawyer to document these discussions in the client's file. Great American Insurance Companies, Risk Management Memo 4 (Fall 1996).

With the passage of the Act, documentation of the reasons for making transfers has become critical even when Medicaid eligibility is not an issue. OBRA '93 provides a waiver of the period of ineligibility for transfers that are made "exclusively for a purpose other than to qualify for Medicaid." To prove that eligibility for Medicaid was not one of the reasons for the transfer, Transmittal 64 requires the caseworker to:

Require an individual to establish, to your satisfaction, that the asset was transferred for a purpose other than to qualify for Medicaid. Verbal assurances that the individual was not considering Medicaid when the asset was disposed of are not sufficient. Rather, convincing evidence must be presented as to the specific purpose for which the asset was transferred.

Section 217 does not contain the "exclusively" language found in the eligibility section of the Medicaid statute. Must Medicaid eligibility be the primary reason for the transfer for the criminal sanctions to apply? Does the fact that the client even considered the possibility of eligibility for Medicaid benefits trigger these sanctions? Can Granny prove that when she gave the college tuition check to her grandson at his high school graduation, she never pondered her future move to the nursing home?

Until these questions are answered, it is important to advise clients in writing that making a gratuitous transfer may result in criminal sanctions if the client applies for Medicaid within 36 months of the transfers. Lawyers and their clients should document the legitimate reasons for making such gifts. Practitioners should also advise the client to consult with a lawyer about the status of the Act before filing a Medicaid application, even if the client does not expect to apply for Medicaid. Fortunes can change in 36 months.

Public Policy Issues
If the correct interpretation is that the Act does not apply to persons who make transfers and then wait 36 months to apply for Medicaid, then it is aimed clearly at the middle and lower middle class. Wealthy persons and persons who can afford long-term care insurance to cover the first three years of nursing home care can continue to pass on their estates to their children and then qualify for government benefits. It is only the working class individual with moderate savings who will be penalized. If the interpretation is correct that the criminal penalties apply only to persons who apply during the period of ineligibility, the law entraps not only the poor but also the most unsophisticated and the unrepresented members of society.

The law is a minefield for lawyers and their elderly clients. Planners routinely advise clients with estates exceeding $600,000 in value to consider making gifts to avoid the estate tax. No lawyer can be sure that the client who has a $600,000 estate today will not file an application for Medicaid benefits within three years. It is advisable to routinely advise clients (both verbally and in writing) that criminal penalties may result if they apply for Medicaid after making such a gift. It is also important to document in a letter to the client the client's legitimate purpose for making the gift_such as to avoid estate taxes and probate_when the transfer is made. This documentation may help lawyers and their clients avoid criminal prosecution by showing that a transfer was not made "in order for an individual to become eligible for medical assistance."

Lawyers should resist the temptation to hide their heads in the sand and refuse to recognize the legal options available to a client wishing to do legitimate Medicaid planning. An estate planner who fails to advise a client about legitimate means of preserving assets because of the lawyer's personal feelings about divestment is akin to an accountant withholding information from a wealthy client about the ability to claim a deduction for medical expenses. If the lawyer does not have at least a working knowledge of the Medicaid rules, the client will miss the opportunity to legally pass on wealth to eligible family members. With the passage of the Act, however, and its lack of clarity, giving this advice is a more difficult task.

Bills have been introduced in both houses of Congress to repeal 217. But for the present, thorough education of clients about the consequences of gifts on Medicaid eligibility and documentation of these discussions is essential to avoiding criminal sanctions.

Patricia L. Harrison is a sole practitioner in Columbia, South Carolina.

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