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Effective: October 1, 2007 |
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19.40.05ar2 - Purchases as Transfers (Archive) |
Archived: September 1, 2008 |
Specific types of purchases are considered a transfer of assets for Medical Assistance (MA) purposes if made during the lookback period.
Determine if an uncompensated transfer has occurred if a client or the client's spouse purchases any of the following on or after July 1, 2006, within the lookback period or while MA for LTC services is pending or active:
l Promissory note.
l Contract for deed.
l Loan.
l Mortgage.
l Life Estate Interest in another person’s home. See Life Estate Transfers for other transfers involving life estates.
Promissory Notes, Contracts for Deed, Loans and Mortgages.
Determining Actuarial Soundness.
Life Estate Interest in Another’s Home.
A written obligation to pay a specified indebtedness to a specified individual.
Contract for Deed:
A written obligation by a seller to deliver the deed to the property when certain conditions have been met, such as completion of payments by the purchaser. A contract for deed is a type of mortgage in that it places an encumbrance on the land.
Evaluate the purchase of a promissory note, contract for deed, loan or mortgage on or after July 1, 2006, as a possible uncompensated transfer.
Exception: If the purchase meets all of the following criteria, it is not uncompensated:
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.
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 to determine if the purchase of a promissory note, loan or mortgage is actuarially sound:
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 principal payment amount. Multiply the principal amount of each payment by the number of payments in a year to get the total annual principal payment.
3. Determine the period of time during which payments will be made under the terms of the agreement.
4. Multiply the annual principal payments by both:
l The number of years payments are expected to continue under the terms of the agreement.
l The purchaser's life expectancy from Step 1.
5. Compare the amounts from Step 4. If the principal payments expected during the purchaser's life expectancy figure are:
l Equal to or greater than the amount expected during the term of the purchased agreement, the purchase is actuarially sound.
l Less than the amount expected during 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 for payment of LTC services on August 15, 2006. He reports purchasing a contract for deed from his brother on July 18, 2006. He purchased the contract for $99,000. The contract includes the following provisions:
l The purchaser of the contract will pay a monthly principal amount of $550 until the balance of the contract is paid in full. No interest payments are required.
l There are no deferred payments, balloon payments or cancellation provisions.
Action:
The purchase of the contract for deed is uncompensated because it does not meet the actuarial soundness requirement.
The worker takes the following steps to determine actuarial soundness:
1. Determines that Josiah’s life expectancy is 9.58 years, based on the Life Expectancy Table for a man age 75.
2. Calculates the annual principal payment amount of $6600. ($550 monthly principal payment amount X 12 months).
3. Determines the period over which payments will continue at 15 years ($99,000 at $6600 per year).
4. Determines expected payments of $63,228 to be received during Josiah’s lifetime by multiplying $6600 by his life expectancy of 9.58 years.
5. Compares the amounts expected to be received during Josiah’s life time to the amount that would be paid over the term of the contract. Because the payments expected during Josiah’s lifetime are less than the payments expected under the terms of the contract, the transfer is uncompensated.
Life Estate Interest in Another’s Home
Evaluate the purchase of a life estate interest in another person’s home on or after July 1, 2006, as a possible uncompensated transfer.
If the purchaser lives in the home for less than 12 consecutive months following the purchase of the life estate interest, the entire purchase price is an uncompensated transfer.
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 requests 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 uncompensated transfer.
If the purchaser lives in the home for 12 consecutive months or more following the purchase, compare the purchase price to the life estate interest of the purchaser on the date of purchase. See Determining Life Estate Interest. If the life estate interest is less than the purchase price, the difference is an uncompensated transfer.
Example:
In August 2006, Ethel purchased a life estate interest in her son’s home for $75,000. In May 2008, she enters a LTCF and requests MA for payment of LTC services.
Action:
Ethel lived in the property for more than 12 consecutive months after the date of purchase. The worker determines that the property’s equity value was $103,000 on the date of purchase and Ethel’s life estate interest was $48,460 based on her age at the time. Since she paid $75,000, there is an uncompensated transfer of $26,540.