Preventing Impoverishment of 
the “Community Spouse”

 by H. Clyde Farrell, Attorney at Law*

When one spouse needs long term care, it often spells disaster for the other spouse. In addition to the inevitable emotional loss, the couple is suddenly faced with additional bills of $2,000 to $4,000 per month. No wonder that 78% of Texas nursing home residents are on Medicaid—90% of whom became impoverished and qualified for Medicaid in less than 26 weeks!

History of Protection of the Spouse at Home

Until about twelve years ago, all the assets and income of both spouses were counted by the Medicaid program. Therefore, neither spouse could qualify until both were impoverished. As a result, people who had been married for 50 years—and who loved each other—were forced to go to the District Court to get a divorce, to protect the one left at home.

Fortunately, federal protections against such “spousal impoverishment” now make such tragedies unnecessary—provided you know the complicated rules for obtaining those protections. Here is a very brief summary of those rules. (The dollar amounts are effective in Year 2002 and will change on January 1, 2003 with inflation.)

How Much Can We Keep?

First, the “community spouse” is entitled to keep a “protected resource amount.” The starting point is to subtract from all the couple’s property (both community and separate) certain exempt property including the residence, household goods, personal goods, one car, and certain funeral and burial arrangements. The non-exempt property is valued as of the first day of the first month one spouse is in a nursing home. The “protected resource amount” is one-half of the total value of the non-exempt property, provided it cannot (in 2002) be less than $17,856 nor more than $87,000—unless it is increased at a hearing, as explained below.

How Can We “Spend Down” Quickly?

Take for example a couple with $100,000 in countable assets, who will be allowed a “protected resource amount” of $50,000. The one who needs Medicaid can become eligible as early as the first day of the second month in the nursing home by “spending down” $50,000 in one or more of the following ways:

•  Pay debts (such as a home mortgage)

• Buy “exempt” property, such as home improvements or an automobile

• Buy an irrevocable annuity meeting certain specific requirements, such as paying in equal amounts monthly in the name of the spouse at home

Some annuity sales organizations promote annuities as the best solution in all cases. However, when presented with the option of going through a hearing (discussed below), most couples choose to protect all their assets with a hearing. Usually, the annuity option is preferable only when the spouse at home has more than $2,232 per month in Social Security and pension income coming in her or his own name.

What Happens to Our Income?

In addition, the community spouse is allowed to keep a limited amount of countable income, known as a “spousal needs allowance.” In 2002, the maximum amount is $2,232 per month. If the combined countable incomes of both spouses (after certain deductions) exceed the “spousal needs allowance,” the excess amount (to the extent it consists of income of the spouse in the nursing home) must be paid to the Medicaid program; provided, the community spouse can keep all income coming in her or his name, without limit. Here are some ways the community spouse’s income can be protected:

• Shift pension income of the Medicaid-eligible spouse to the community spouse (usually requiring a court order). (This is not necessary if the spouse at home can have just as much income through the use of a “Miller Trust.”)

• Request an increase in the spousal allowance to prevent hardship

• Transfer all investments to the community spouse

Although these protections are most often applied when one spouse needs nursing home care, they are also available (to some extent) for those needing home care under the Community Based Alternatives program.

How Can We Increase the Amount We Can Keep?

If the combined incomes of the spouses are not sufficient to provide the community spouse the full “spousal needs allowance,” the couple has a right to obtain an increase in the protected resource amount. They will be allowed to keep an amount sufficient to produce enough income to provide the spousal needs allowance of $2,232 for the spouse at home.

For example, if the spouses’ combined noninvestment incomes (such as Social Security and pensions, after certain deductions) total $1,200, the spouse at home can keep enough assets (to the extent they own enough) to produce an additional $1,032 per month, at the rate of interest being paid locally on one-year certificates of deposit. In this example, if CD’s are paying 3.0% interest, the spouse at home can keep $412,800. If CD’s are paying 2.0% interest, they can keep $619,200.

Moreover, even if the net combined incomes of both spouses exceed the $2,232 level, it may still be possible to keep more than the standard “protected resource amount,” by “shifting” some income to the cost of nursing home care. For example, if the couple in the example above have $2,200 per month noninvestment income, they can still keep $412,800 in assets (if the CD rate is 3.0%) by agreeing to pay $1,000 per month to the nursing home out of the income of the spouse on Medicaid. The spouse at home will still have approximately $2,232 per month income (including investment income), and they will get to keep all their assets.

To obtain this benefit, the applicant spouse must request a “fair hearing” by the Department of Human Services. This is a right guaranteed by federal law, but as of this writing, it is not in the handbook used by DHS eligibility workers.                      Therefore, they are unlikely to suggest it and may be unaware of its existence. You may need an attorney’s help to obtain this benefit.

The difficulties of the one left at home are great enough without adding preventable financial distress. For more information on preventing “spousal impoverishment,” contact an Elder Law Attorney, the Legal Hotline for Older Texans, the Texas Department of Human Services, Family Eldercare (in Austin), your local Area Agency on Aging, or a private Geriatric Care Manager.

 Nothing contained in this publication is to be considered as the rendering of legal advice for specific cases. This article is for educational purposes only. Readers are responsible for obtaining such advice from their own legal counsel.

 H. Clyde Farrell is an attorney in Austin who specializes in financial planning and is certified as an Elder Law Attorney by the National Elder Law Foundation. His e-mail address is cfarrell@texas.net. This article is an update to an article published in an earlier issue of the TPJ.