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Effective: September 1, 2008 |
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19.40.05ar3 - Purchases as Transfers (Archive) |
Archived: July 1, 2010 |
A transfer takes place when a person purchases personal care or other types of services, personal or real property, or an interest in a financial arrangement such as a promissory note, loan, or mortgage. The purchase may be made with cash or with another asset that has a value equivalent to the agreed upon purchase price. An uncompensated transfer occurs when a person pays an amount or exchanges an item of value that exceeds the value of what is purchased. This section discusses how to evaluate purchases under transfer rules.
Purchase of Personal Care Services.
Purchase of Interest in Promissory Notes, Loans, and Mortgages.
Purchases made on or after July 1, 2006.
Purchases made before July 1, 2006.
Purchase of Personal and Real Property.
Purchase of a Life Estate Interest in Another Person’s Home.
Purchase of Personal Care Services
The purchase of personal care services is not an uncompensated transfer if:
1. the care or services directly benefit the person; and
2. the person provided compensation in an amount consistent with customary fees charged for providing similar services in the community in which the person resides; and
3. the care or services were provided by a relative(s) of the person and a written and notarized agreement was in place on or before the date the care or services began. To meet this criteria, the agreement must:
n be signed by the person receiving the care or services and the relative(s) who will be providing the care or services.
n include an itemized list of the care or services that will be provided.
n specify the amount of time that is anticipated to be spent providing the care and services.
n state the period of time the agreement covers.
Note: The requirement to have a written agreement prior to services being provided is waived when compensation for the services provided by the relative(s) was made within 60 days after the services were provided.
Example:
Norman entered a long-term care facility (LTCF) in June 2007. He applies for MA payment of LTC services the following April when he can no longer pay for his care. He reports that he gave his daughter, Rhiannon, $4,000 in June 2007, for personal care services she provided from April 15 through June 10, 2007, prior to his entering the LTCF.
Action:
Norman paid fair market value for the services his daughter provided and she was paid for those services within 60 days of the services being provided. Therefore, the transfer was compensated and no transfer penalty is applied.
The purchase of services other than personal care services is not an uncompensated transfer if:
l the service directly benefits the person; and
l the person paid an amount consistent with customary fees charged for similar services in the community in which the person resides.
Example:
Frank entered a LTCF in May and immediately applied for MA payment of LTC services. Frank rented an apartment prior to moving to the LTCF. Frank’s bank statement showed a withdrawal of $500 early in May. Frank stated that he had paid his nephew $500 to pack and move his belongings into storage.
Action:
The $500 Frank paid his nephew is consistent with fees charged by local moving companies for a similar size move. Frank did not make an uncompensated transfer to his nephew.
Purchase of Interest in Promissory Notes, Loans and Mortgages
The purchase of an interest in a promissory note, loan, or mortgage occurs when a person buys the right to receive the payments under a contract from another person or entity.
Example:
Juan sold his home on a contract-for-deed to James. James agreed to pay Juan principal and interest payments equaling $430 each month for 30 years. After 10 years, Juan sold his interest in the contract-for-deed to his son, Miguel. Miguel purchased the right to receive the $430 monthly payments from James for the balance of the 30 year contract.
The purchase of an interest in a promissory note, loan, or mortgage is evaluated differently depending on the purchase date.
Evaluate purchases made on or after July 1, 2006, as follows:
1. Determine if the contract in which the interest was purchased meets all of the following:
n The terms of the contract provide for payments to be made in equal amounts.
n There is no provision for deferral of payments.
n There is no provision for balloon payments.
n Cancellation of the balance due upon the death of the purchaser is prohibited.
n The repayment terms are actuarially sound.
Determine actuarial soundness as follows:
a. Determine the life expectancy of the purchaser using the Social Security Administration (SSA) Period Life Table. Use the age of the purchaser on the date the interest in the promissory note, loan, or mortgage was purchased.
b. Determine the annual amount of payments the purchaser will receive under the contract.
c. Multiply the annual payments by the life expectancy of the purchaser.
d. Compare the amount calculated in Step c, with the amount the purchaser paid for the interest in the contract. If the amount in c above is:
m Equal to or greater than the amount the purchaser paid for the interest in the contract, the purchase is actuarially sound.
m Less than the amount the purchaser paid for the interest in the contract, the purchase is not actuarially sound.
2. Continue to Step 3 if all of the criteria outlined above are met. If one or more of the criteria above in Step 1 are not met, count the outstanding balance of the amount owed on the promissory note, loan or mortgage on the date of the person’s request for MA payment of LTC services as the uncompensated value of the transfer. No further analysis is required.
3. Compare the purchase price with the total amount the purchaser expects to receive from the date of purchase of the interest in the promissory note, loan or mortgage. If the purchase price of the interest in the promissory note, loan or mortgage is:
n Less than or equal to the total amount the purchaser expects to receive for the interest in the promissory note, loan or mortgage from the date of purchase of the arrangement, no further evaluation under transfer rules is required.
n More than the amount that the purchaser expects to receive for the interest in the promissory note, loan or mortgage, an uncompensated transfer has occurred. Count the difference between the purchase price and the total amount, (including principal and interest) that the purchaser expects to receive for the interest in the promissory note, loan or mortgage as the uncompensated value.
Example:
Josiah, age 75, requests MA payment of LTC services in August 2008. He reports that he purchased the seller’s interest in a contract for deed from his brother for $99,000 in May 2007. The outstanding balance, including interest, as of the date he purchased the contract for deed was also $99,000. The outstanding balance of the contract as of the date of his request for MA payment of LTC services in August 2008, is $96,195. The contract for deed included the following provisions:
n The purchaser will provide payments consisting of both principal and interest in the amount of $550 each month for 30 years.
n There are no deferred payments, balloon payments or cancellation provisions included in the contract for deed.
Action:
Determine if the purchase of the contract for deed was actuarially sound as follows:
1. Josiah’s life expectancy is 10.24 years, based on the SSA Period Life Table for a man age 75.
2. Calculate the annual principal and interest payment amount:
$550 monthly payment X 12 months = $6,996 annual payment.
3. Determine expected payments that Josiah will receive during his lifetime.
$6,996 (annual payment) X 10.24 years life expectancy = $71,639.04 of expected payments.
4. Compare the amount Josiah expects to receive during his lifetime ($71,639.04) to the amount that he paid for the interest in the contract ($99,000). The purchase is not actuarially sound because the purchase price of the promissory note will not be returned to Josiah within his expected lifetime.
5. Calculate a penalty period based on the outstanding balance of $96,195 on the date of Josiah’s request for MA payment of LTC services because the purchase of the contract for deed was not actuarially sound.
Evaluate purchases before July 1, 2006, as follows:
Compare the purchase price with the amount the purchaser expects to receive for the purchased interest. If the purchase price for the interest in the promissory note, loan or mortgage is:
l less than or equal to the total amount the purchaser expects to receive for the interest in the arrangement, no further evaluation under transfer rules is required.
l more than the amount the purchaser expects to receive under the arrangement, an uncompensated transfer has occurred. Count the difference between the amount of the purchase price and the total amount of payments the purchaser expects to receive under the contract as the uncompensated value.
Example:
Fred lent $10,000 to his son, Barney. Barney agreed to pay Fred back with 3% interest over five years. Fred later lost his job and needed cash so he sold his interest in the loan to his brother Dino for $8,500. The outstanding principal and interest owed on the loan was $7,250. Dino applied for MA payment of LTC services two years later and reported the purchase of this loan.
Action:
Dino made an uncompensated transfer of $1,250 because he paid Fred more than will be returned to him over the remaining terms of the loan. A transfer penalty will apply.
Purchase of Personal and Real Property
In general, a purchase price for personal property or real property in an amount that exceeds the value of the personal or real property is an uncompensated transfer. The amount of the uncompensated transfer is the difference between the value of the personal or real property and the purchase price.
Purchase of a Life Estate Interest in Another Person’s Home
The purchase of a life estate interest in another person’s home gives the purchaser the right to occupy the property and may allow the person to retain income earned by the property depending on the terms of the life estate agreement. Evaluate the purchase of a life estate interest in another person’s home to determine if an uncompensated transfer has occurred.
Note: Establishing a life estate in a person’s own home may be an uncompensated transfer. See Life Estates for more information.
Take the following steps to determine if an uncompensated transfer occurred through the purchase of a life estate interest in another person’s home.
1. Determine if the purchaser paid fair market value for the life estate interest. Compare the value of the life estate interest on the date of purchase with the amount of compensation provided for the life estate interest. If the value of the life estate interest is:
a. more than or equal to the purchase price of the life estate interest and the purchase of the life estate interest was made before July 1, 2006, no further evaluation under transfer rules is required.
b. more than or equal to the purchase price of the life estate interest and the purchase was made on or after July 1, 2006, go to Step 2.
c. less than the purchase price of the life estate interest, an uncompensated transfer has occurred. The uncompensated amount is the difference between the value of the life estate interest and the purchase price.
2. Determine if the person resided in the home for at least 12 consecutive months following the date of purchase if the purchase was made on or after July 1, 2006. Count the entire purchase price of the life estate interest as an uncompensated transfer if the purchaser did not reside in the home for at least 12 consecutive months following the date of purchase.
Example:
In August 2006, when Donna was 83, she purchased a life estate interest in her daughter’s home for $200,000. The fair market value of her daughter’s home was $305,000. Donna continued to live in her daughter’s home until September 2008, when she entered a LTCF and requested MA payment of LTC services.
Action:
Donna made an uncompensated transfer even though she lived in her daughter’s home for more than 12 consecutive months after purchasing the life estate interest because the purchase price exceeded the fair market value of the life estate interest. Calculate the value of Donna’s life estate interest by multiplying the amount from the Life Estate Mortality Table (.38642) by the value of her daughter’s home ($305,000) resulting in a value of $117,858.10. The value of the uncompensated transfer is $82,141.90 (the difference between the value of the life estate and the purchase price).