Louisiana Attorney for Divestment Strategies

What is a Divestment?

If you or a family member need to receive long-term care in a nursing home or assisted living facility, you may have been deluged with advice from people who claim to be "experts." These so-called experts may 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 can be corrected.

A divestment is 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 will apply a timeframe, called the lookback period, in which all financial transactions will be analyzed to determine if any divestments were made. Currently, the lookback period is five years. That means a Medicaid applicant's financial transactions will be scrutinized for the five years preceding their Medicaid application. If any divestments are discovered during the lookback period, a Medicaid ineligibility penalty will be imposed.

Understanding Divestment Penalties

The penalty period is the amount of time the patient will be ineligible for Medicaid payments for nursing home services as a result of the divestments made within the lookback period. The length of the penalty will be 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 figure is the penalty period. The divestment divisor is an amount used the state to determine 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.

Examples of Divestments

• Direct transfer/gift: The most common example of a divestment is the direct transfer or gift of an asset to someone else, 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 that can occur 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 for Divestments

• Spouse: A gift or transfer to a spouse is not a divestment, because all assets of both spouses are considered together in calculations for Medicaid eligibility. Transferring the title to an asset from one spouse to the other does not have any effect on the calculation and is not penalized.
• Transfer of a homestead to the following persons:
  • Spouse
  • Child under 21
  • Blind or disabled child
  • 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
  • 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
• Transfers of other assets to the following persons:
  • Spouse
  • Disabled or blind child
  • Special needs trust
  • 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 to be cured, and it will no longer apply.

A divestment penalty can be set aside if the penalty will cause 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. 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 may call for an intentional divestment. In these cases, strategies may include:

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