Deficit Reduction Act of 2005 and Reverse Mortgages

Both houses of Congress passed (by the narrowest of margins) new legislation that the President signed into law on February 8th, 2006. This bill, the Deficit Reduction Act of 2005 (DRA 2005), was “presented” as cost-cutting legislation and it does that (via cuts in many social programs), but through changes created in this legislation, it will dramatically effect both the estate and long-term care planning for many senior homeowners.

The key issues are:

- It will extend Medicaid's "look-back" period for all asset transfers (gifts) from three to five years and change the start of the penalty period (for the value of those transferred assets) from the month after the date of transfer, to the date when the individual [who transferred the assets] applies for Medicaid.

- The law also will make any individual with home equity above $500,000 ineligible for Medicaid nursing home care, and states will have the option to raise this threshold only to as high as $750,000

- It will establish new rules for the treatment of annuities, including a requirement that the state be named as the remainder beneficiary.

- This new legislation will allow Continuing Care Retirement Communities (CCRC) to require residents to spend down their declared resources before applying for medical assistance. It will also set forth rules under which an individual's CCRC entrance fee is considered an available resource.

- It requires all states to apply the so-called “income-first” rule to community spouses who appeal for an increased resource allowance based on their need for more funds invested to meet their minimum income requirements.

- The new law will extend long-term care partnership programs to any state [currently there are only four states offering Partnership Programs].

This legislation will affect the work of elder law/trust & estate attorneys, long-term care specialists and reverse mortgage brokers to assist seniors in protecting themselves accordingly.

Reverse mortgage programs can be utilized to help senior homeowners deal with the changes created by the DRA 2005 in the following ways:

- A reverse mortgage can be the source of funds to pay for nursing home care during the Medicaid penalty period before Medicaid payments begin should the homeowner have gifted assets within the (phased in) 5-year look-back period.

- A reverse mortgage will reduce the home equity in a property upon closing which will allow the homeowner to qualify for Medicaid. Example – a 70-year old homeowner can reduce their home equity in a $600,000 home by taking an FHA HECM reverse mortgage and withdrawing $100,000, thereby leaving a home equity balance of $500,000 – which would allow them to qualify for Medicaid. The borrower can then withdraw additional funds from this reverse mortgage [of which Medicaid may not make a claim, because it is not considered either income or a liquid asset] and use it for whatever purpose they wish (probably to pay for additional care that Medicaid may not provide).

- A reverse mortgage can be used to supplement the income of a community spouse without affecting the “income first” rules

- A reverse mortgage can be used to fund the premium of a Long-term Care Insurance Policy. By doing so, the homeowner can purchase the LTCi they may need (provided they qualify for the insurance) without affecting their current or future cash flow. They can literally use a little bit of their house to protect their whole estate.

- A reverse mortgage can be used to protect a significant amount of liquid assets in the future from Medicaid. Reverse mortgage funds borrowed today, can be refunded with other liquid assets in the future prior to applying for Medicaid. Medicaid rules allow for the refunding of debt against a home before these liquid assets can be claimed by Medicaid.

In addition, the legislation incorporates provisions in the original budget bill passed by the Senate closing certain asset transfer "loopholes," among them:

- The purchase of a life estate will be included in the definition of "assets" unless the purchaser resides in the home for at least one year after the date of purchase.

- Funds to purchase a promissory note, loan or mortgage will be included among assets unless the repayment terms are actuarially sound, provide for equal payments and prohibit the cancellation of the balance upon the death of the lender.

- States will be barred from "rounding down" fractional periods of ineligibility when determining ineligibility periods resulting from asset transfers.

- States will be permitted to treat multiple transfers of assets as a single transfer and begin any penalty period on the earliest date that would apply to such transfers.

- The adult children of elderly parents in many states may be held liable for their parents' nursing home bills

In light of these new regulations created through the DRA 2005, a reverse mortgage can be strategically utilized to help senior homeowners retain their independence, meet their current needs, strengthen their financial future and protect their legacy.