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February 2014

Each year brings a new set of important figures for Medicaid (also known as Title 19) in Connecticut.  The new figures will only have meaning, however, if you understand how they work.  We provide the new figures with an example so you can understand how Medicaid works in Connecticut in 2014.

Here are the Connecticut Medicaid figures that apply in 2014:

Community Spouse Protected Amount (Maximum)

$ 117,240.00

 

Community Spouse Protected Amount (Minimum)

$   23,449.80

 

Monthly Maintenance Needs Allowance(Maximum)

$     2,931.00

/mo.

Monthly Maintenance Needs Allowance(Minimum)*

$     1,938.75

/mo.   

Home Equity Exemption

$ 814,000.00

 

Average monthly cost of care for penalty calculations*

$   11,581.00

 

Shelter Allowance**

$        581.63

 

Utility Allowance*

$        694.00

 

Personal Needs Allowance*

$          60.00

 

Connecticut Home Care Program for Elders (Medicaid)

 

 

Asset Limit

$    1,600.00

 

Income Limit

$    2,163.00

/mo.

*          Changes every July 1st

**       Changes every October 1st

Let’s take an example. Teresa, age 70, and Todd, age 69, live in Mystic, CT.  Teresa is out walking her dog, Skittles, and collapses from a heart attack.   Skittles starts barking and saves the day.  Todd comes running.   Teresa goes to the hospital on January 15, 2014, and stays for 4 days.   She is discharged to Overlook Nursing & Rehabilitation Center, a nursing home, which costs $14,000 per month.  They can’t afford this, and must apply to The Connecticut Department of Social Services (DSS) for Medicaid assistance.  

First, DSS will evaluate Teresa and Todd’s combined assets to determine if they are financially eligible.  Teresa and Todd have the following assets:

1.    A jointly owned home (with $300,000 equity),

2.    A joint checking account with $1,000,

3.    Todd has a bank certificate of deposit (CD) with a balance of $50,000,

4.    Teresa has a deferred annuity with a cash surrender value of $65,000.   

Total = $416,000 net worth

The house is an exempt asset under Medicaid as long as the spouse resides in it. Accordingly, they only have $116,000 in countable assets after excluding their home.  Unfortunately, even though Todd and Teresa have countable assets less than the maximum Community Spouse Protected Amount (CSPA) of $117,240, they cannot keep all of their countable assets.  DSS will divide Todd and Teresa assets in half and limit Todd to one-half of the countable assets.   This one-half the spouse gets to keep can be no more than a maximum of $117,240, and no less than the minimum of $23,449.80. 

Thus, under our facts Todd is limited to keeping $58,000 in countable assets in his name calculated as follows: Countable Assets (1,000 + 50,000 + 65,000) ÷ 2 = $58,000. Teresa can keep $1,600 in her name, which is the asset limit for an individual receiving Medicaid.  Between them they can keep $59,600.  To become eligible for Medicaid, Teresa and Todd must spend down $56,400 on eligible expenditures.  

Todd wants to know how much of Teresa’s income will go to the nursing home.   Todd has $1,750 of monthly gross income and Teresa has $1,500 of monthly gross income.  They have a mortgage payment of $500/month, real estate taxes of $500/month, and homeowners insurance of $200/month.  Connecticut gives Todd, the community spouse, a Community Spouse Allowance, which is determined by subtracting the community spouse's monthly gross income from what is known as the community spouse's Minimum Monthly Needs Allowance (MMNA).The calculation of Todd’s MMNA is shown in the following table.

 

AMOUNT

Total Monthly Shelter Costs ($500 monthly mortgage payment + $500 monthly property taxes + $200 monthly homeowners insurance)

 

 

$1,200.00

Standard Utility Allowance (as of 10/1/13)

694.00

LESS Standard Shelter Allowance (as of 7/1/13)

-581.63

Additional expenses from exceptional circumstances resulting in financial duress that are established at a Medicaid Fair Hearing

0

PLUS Minimum Monthly Maintenance Needs Allowance (as of 7/1/13)

 

1,938.75

Tentative Monthly Maintenance Needs Allowance

$3,251.12

Since the amount calculated above is greater than the maximum Monthly Maintenance Needs Allowance of $2,931, Todd’s MMNA is $2,931. From that, we subtract Todd’s monthly gross income of $1,750 to arrive at his Community Spouse Allowance of $1,181. Because Teresa’s monthly gross income of $1,500 exceeds Todd’s Community Spouse Allowance of $1,181, Todd can keep $1,181 of Teresa’s income.  That leaves $319 per month for Teresa.  Teresa receives her personal needs allowance ($60 as of 7/1/13) and the remaining amount ($259) is applied to outstanding bills for Teresa’s medical care or her nursing home costs.

If Teresa goes home and applies for the Medicaid under the Connecticut Home Care Program for Elders, she will also have to meet the Medicaid income requirements.  For 2014, Teresa can have no more than $2,163 in monthly income to qualify for Medicaid at home.  Fortunately, her income is only $1,500 so her income does not exceed the income limit.

In another twist, Teresa gave $20,000 to her daughter, Lori, 3 years ago to help her buy a home.  Teresa is going to be ineligible for Title 19 for 2 months after she applies for Title 19 because she transferred assets to Lori within the 5 year look back period.  The penalty period is calculated as follows: $20,000 ÷ average monthly cost of care in Connecticut ($11,581) = 1.7 months. The penalty will not start to run, though, until she applies for Title 19 so she might as well go ahead and apply once she spends down to the $1,600 asset limit.  She may have to borrow money from Lori or other family members during the penalty period to pay the nursing home.

For many people, the new $5.34 million applicable exclusion amount is more than adequate to avoid the federal estate tax. But, if you transfer more than $5.34 million upon your death, you will be taxed at the estate tax rate of 40 percent. 

Moreover, the new federal estate tax exemption does not apply to state estate taxes.  Many states, including Connecticut, impose a separate estate tax.  The Connecticut applicable exclusion amount is only $2 million. Thus, if a taxable estate exceeds $2 million, a Connecticut estate tax will be due. The Connecticut estate tax rate ranges from 7% to 12% depending on the amount above the Connecticut estate tax exclusion.  So for example, a $2.5 million taxable estate would owe approximately $36,000 in Connecticut estate taxes (this is a simplified calculation not accounting for administration expenses and assuming no lifetime taxable gifts).

Due to the low state exemption amount, many Connecticut residents should take steps to avoid estate taxes.  The following is a brief overview of two trusts that can help you avoid estate taxes.

Irrevocable Life Insurance Trusts (ILIT)

Did you know that the value of the death benefit of your life insurance policy will be included in your taxable estate even though your policy pays directly to beneficiaries and bypasses your probate estate?  For example, a $1 million life insurance policy made payable to your spouse still becomes part of your taxable estate.  A large policy like this could easily push many estates into the taxable bracket. 

The good news is you can exclude the entire amount of your life insurance policy by transferring ownership to an Irrevocable Life Insurance Trust (“ILIT”) or buying a new policy in the name of an ILIT.  You will need to name the ILIT as the owner and beneficiary of the life insurance, but you can name your spouse as a lifetime beneficiary of the Trust with a remainder to your children or grandchildren. You can use an ILIT to establish an education fund for your children or grandchildren, or to fund the buy-out of a business.  Each premium payment is a gift for gift tax purposes so a gift tax return may be due if the premium exceeds the $14,000 per person annual gift tax exclusion or if beneficiaries do not have the right to withdraw any trust contributions used to pay the premiums. An ILIT can be an effective tool for transferring wealth to your spouse or your descendants tax free. 

Credit Shelter Trust to combine exemptions of married couple

Another tax saving trust is commonly referred to as the Credit Shelter Trust.  Each spouse has his or her own estate tax exemption or credit.  By combining their exemptions, spouses can shelter a combined $10.68 million for federal and $4 million for Connecticut purposes. Spouses also have the benefit of the unlimited marital deduction.  The marital deduction allows the tax free transfer of assets of any amount between spouses.  By combining both spouses’ estate tax exemptions with the use of the marital deduction, a couple can avoid estate taxation upon the death of the first spouse and shelter up to the full amount of both exemptions upon the death of the surviving spouse.

The new federal law makes the estate tax exemption "portable" between spouses. This means that if the first spouse to die does not use all of his or her $5.34 million exemption, the estate of the surviving spouse may use it. For example, John dies in 2014 leaving an estate of $3 million to his wife Mary. He has no taxable estate because of the unlimited marital deduction.  His wife, Mary, can then pass on up to $10.68 million (her own $5.34 million exclusion plus her husband's unused $5.34 million exclusion) free of federal tax.  Mary must make an "election" on John's estate tax return to take advantage of portability and preserve John’s unused exclusion.

Unlike the federal law, however, Connecticut law does not provide for portability of the estate tax exemption. The only way for a Connecticut couple to ensure the use of their entire combined $4 million estate tax exclusion is by using a Credit Shelter Trust. 

A Credit Shelter Trust is designed to hold up to your remaining applicable exclusion amount.  So, for example, John dies in 2014 and passes on $3 million to his wife Mary. Without a credit shelter trust, the entire $3 million could pass to Mary because of the marital deduction.  However, John’s unused Connecticut exemption would be lost.  If Mary died later that year, she would only have her own $2 million Connecticut exemption available to cover her $3 million estate.  One million of her estate would be subject to estate taxation and Mary’s estate would owe approximately $72,000 in Connecticut estate taxes (this is a simplified calculation not accounting for administration expenses and assuming no lifetime taxable gifts). 

Alternatively, John could fund a Credit Shelter Trust with $2million upon his death.  This amount would be sheltered by his available $2 million exclusion amount.  The remaining $1million could pass to Mary using the marital deduction.  Upon Mary’s later death, she would only have $1 million in her estate, which she could cover with her $2 million exclusion.  The balance of John’s Credit Shelter Trust will pass outside of her estate to their children without being reduced by estate taxes even if it grew beyond $2 million.