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Effective: December 1, 2006 |
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19.40.05ar1 - Purchases as Transfers (Archive) |
Archived: October 1, 2007 |
Specific types of purchases are considered a transfer of assets for Medical Assistance (MA) purposes if made during the look back period and must be evaluated to determine if the purchase was improper.
Determine if an improper transfer has occurred if, during the look back period, a client purchases any of the following on or after July 1, 2006:
l Promissory note.
l Loan.
l Mortgage.
l Life Estate Interest in another person’s home.
Promissory Notes, Loans and Mortgages.
Determining Actuarial Soundness.
Life Estate Interest in Another’s Home.
A written promise to pay at a fixed or determinable future time a sum of money to a specified individual or to bearer. An example is a contract for deed.
Consider the purchase of a promissory note, loan or mortgage on or after July 1, 2006 an improper transfer.
Exception: If the purchase meets all of the following criteria, it is not considered as improper:
l Provides for payments to be made in equal amounts during the term of the purchased agreement.
l Does not have deferral of payments.
l Does not have balloon payments.
l Prohibits the cancellation of the balance upon the death of the lender.
l Has a repayment term that is actuarially sound.
For information on how to determine the uncompensated value of these types of transfers see Determining Uncompensated Value.
Determining Actuarial Soundness
Actuarial soundness of a purchased promissory note, loan or mortgage is determined by comparing the term of the purchased agreement (the period of time the payments are to continue) to the life expectancy of the person making the purchase.
Follow these steps:
1. Determine the life expectancy of the purchaser based on the gender and age of the purchaser on the date of purchase using the Annuity Life Expectancy Table.
2. Determine the annual payment amount. Multiply the amount of each payment by the number of payments in a year to get the total annual payment.
3. Determine the term of the purchased agreement. This can be done by dividing the purchase price by the annual payment amount or checking the agreement for a provided length of term.
4. Compare the life expectancy figure to the term of the purchase agreement. If the life expectancy figure is:
l Equal to or greater than the term of the purchased agreement, the purchase is actuarially sound.
l Less than the term of the purchased agreement, the purchase is not actuarially sound and is considered an uncompensated transfer.
Example:
Josiah, age 75, applies for MA on August 15, 2006. He was placed in an LTCF on August 10, 2006. At application Josiah reported purchasing a contract-for-deed from his brother on July 18, 2006. He purchased the contract for $150,000. The contract includes the following provisions:
l The purchaser of the contract will pay a monthly amount of $550 until the balance of the contract is paid in full.
l There are no deferred payments, balloon payments or cancellation provisions.
Action:
The purchase of the contract for deed is considered an improper transfer because all of the criteria to meet the exception as an improper transfer are not met.
The purchase is not actuarially sound. Actuarial soundness was determined by:
1. Josiah’s life expectancy is 9.58 years, based on the Life Expectancy Table for a man age 75.
2. The annual payment amount is $6600. ($550 monthly payment amount X 12 months).
3. The term of the purchased contract is 22.72 years. ($150,000 purchase amount divided by $6600).
4. The life expectancy of 9.58 years (Step 1) is less than 22.72 years (Step 3). Determine the uncompensated value of this improper transfer.
Life Estate Interest in Another’s Home
Consider the purchase of a life estate interest in another person’s home on or after July 1, 2006 an improper transfer.
Exception: If the purchaser resides in the home for 12 consecutive months following the purchase of the life estate interest, the purchase is not considered a transfer.
See Determining Uncompensated Value for information on the amount to use to determine the transfer penalty.
Example:
Donna rented an apartment for the 15 years. In August 2006, due to a hip replacement, Donna moved into her daughter’s home because she needed more help. She purchased a life estate interest in her daughter’s house for $200,000 that same month. The life estate interest entitles Donna to live in the house. Donna applies for payment of LTC services in September 2006 when she enters an LTCF.
Action:
Donna has not lived in the home for 12 consecutive months. The purchase of the life estate interest is an improper transfer.
Follow policy provided in Life Estates to evaluate the life estate interest when the purchase of the life estate interest is not considered an improper transfer.
l Determine if the client received adequate compensation for the purchase based on the fair market value of the property.
l Determine if the value of the life estate interest is a counted asset.