Fagan v. Bremby: What Happens When an Institutionalized Spouse Receives a Lump Sum of Excess Resources

Krause Financial has recently received several inquiries regarding institutionalized spouses that have received an inheritance or the proceeds from a settlement after eligibility has been achieved.  The lump sum of excess cash will disqualify the institutionalized spouse from Medicaid benefits, and crisis planning must be done in order to protect as much of the proceeds as possible.  There is debate, however, over how this crisis planning should be conducted in order to re-qualify the institutionalized spouse for benefits.  We have learned of a recent court decision out of Connecticut (Fagan v. Bremby) regarding an institutionalized spouse that received a personal injury settlement while receiving Medicaid benefits that helps shed light on how these funds may be handled, and how we can conduct crisis planning for those in need.

Medicaid Regulations for Married Couples

To better understand the issue at hand, let us first examine the rules that govern married couple situations in most states.  When an institutionalized spouse (“IS”) applies for Medicaid, the State totals the countable assets of both spouses as of the first continuous period of institutionalization.  This is the “initial determination of eligibility.”  The community spouse (“CS”) is allowed to keep one half of the total assets, not to exceed a specific maximum (currently $120,900.00 in most states.)  This amount is commonly known as the Community Spouse Resource Allowance (“CSRA”).  Once the CSRA is determined, the couple must “spend-down” any assets above this amount in order for the institutionalized spouse to qualify for benefits.  Any assets in excess of the CSRA are considered available to the IS.

Prior to the IS achieving eligibility, he or she may make unlimited transfers to the CS or for the sole benefit of the community spouse.  In that most institutionalized individuals may keep no more than $2,000.00 in his or her name, the IS may transfer assets in his or her name to the CS in order to spend-down excess assets.  These transfers are exempt from the Medicaid 5-year lookback period.

After the IS achieves eligibility, he or she may still transfer assets in his or her name to the CS, however this amount cannot exceed the CSRA.  Additionally, the IS has a limited window of time to complete these transfers.  They must be completed “as soon as practicable” after eligibility is achieved.  Many states give the IS one year to transfer any remaining assets to the CS.  Any assets owned by the CS after eligibility is achieved will be considered unavailable to the IS.

Fagan v. Bremby

Martin Fagan was institutionalized in 2011 after suffering severe injury in a motorcycle accident.  Mr. Fagan applied for Connecticut Medicaid benefits the following year and achieved eligibility in March of 2012.  Then, in May of 2015, Mr. Fagan received a large settlement disqualifying him from Medicaid benefits.  After paying outstanding liabilities, he transferred the remaining proceeds to his wife, Mrs. Fagan – the community spouse.  Mrs. Fagan purchased a new primary residence and a Medicaid compliant Single Premium Immediate Annuity (“SPIA”) in order to reduce her total assets below her original CSRA of $115,240.00 (the maximum CSRA at the time).

In September of 2015, Mr. Fagan reapplied for Medicaid benefits.  Instead of gaining immediate eligibility, Mr. Fagan incurred a penalty period due to improper transfers totaling $952,006.52 to Mrs. Fagan, resulting in an almost 7-year period of ineligibility.  The Fagans appealed, stating that unlimited pre-eligibility transfers between spouses are allowable under Medicaid regulations; and, in that Mr. Fagan was not eligible for Medicaid benefits at the time of the transfers, the “unlimited” statute applies.  Therefore, the transfers do not constitute a penalty period of ineligibility.  Unfortunately for the Fagans, the State of Connecticut disagreed.  After the attempted appeal, the initial judgment was upheld – the transfers to the community spouse in excess of the CSRA constituted an improper transfer of assets, and a penalty period must be applied.

“Initial Determination of Eligibility”

The main point of contention in the Fagan case is the “initial determination of eligibility.”  The Fagans argued that Mr. Fagan, as the IS, could make unlimited transfers to Mrs. Fagan, the CS, because the transfers occurred pre-eligibility, as Mr. Fagan was not receiving Medicaid benefits at that time.  The State contends, however, that because Mr. Fagan was continuously institutionalized since 2012, when he became ineligible for Medicaid benefits in 2015, he was not awarded a new “initial determination of eligibility.”  In short, the rules that apply to those seeking for Medicaid for the first time do not apply to those attempting to requalify for benefits during the same period of institutionalization.  As such, Mr. Fagan’s transfers to Mrs. Fagan in excess of the CSRA were improper transfers.

How Do We Conduct Crisis Medicaid Planning in These Situations?

It has been the experience of our office the best way to preserve excess assets in these situations is to conduct a gift and annuity plan for the institutionalized individual.  If the community spouse’s assets are currently below the CSRA, the IS may transfer the difference to the CS.  A portion of the remaining funds are divested and the other portion are used to fund an annuity that will assist in paying for care during the divestment penalty period.  While this strategy does not allow for the couple to save all the assets, it does allow for a conservative planning option to save a portion of the assets – at least half, in most cases.

Any time an institutionalized spouse receives a lump sum of excess countable resources, the local Medicaid office should always be consulted.  While it is the experience of KF that the interpretation in the Fagan case is how most Medicaid agencies will treat this situation, it is always possible some states or counties will treat these circumstances differently.

Read the full text of the Fagan v. Bremby case by clicking here.