OBRA '93: Recent Changes in Federal Medicaid Rules

Government Benefits Guardianship in IL Home Control Obra '93 Parent as Advocate Social Security Benefits Special Needs Trust

Spain, Spain & Varnet, P.C. 33 North Dearborn St. Suite 2220 Chicago, IL 60602 (312) 220-9112 Fax: (312) 220-9261

Reprinted with the permission of Theresa M. Varnet Spain, Spain & Varnet, P.C.

Recent changes in Federal Medicaid rules have made it possible for a person who is disabled and under the age of 65 to remain eligible for Medicaid even if he or she receives money or assets in excess of $2,000 from a direct inheritance, law suit, divorce settlement or other financial windfall, if that windfall is placed in a qualifying trust. In August of 1993, Congress passed the Omnibus Budget Reconciliation Act (referred to as OBRA '93) which changed the Medicaid rules pertaining to the transfer of assets. The new law also contains another noteworthy exception which allows parents who are in need of nursing home care to transfer their assets to an OBRA "Payback" Trust for the sole benefit of a child or grandchild who is disabled.

Under the old law, a person could not qualify or requalify for Medicaid if he or she transferred assets to another person within a certain time frame of applying for Medicaid. This meant that persons with disabilities who rely on Medicaid, and parents of persons with disabilities in need of Medicaid funded nursing home care, had to spend down their assets to $2,000 or wait 30 months to qualify for Medicaid.

The bad news is:

1. Congress has extended the so-called look-back period for the transfer of assets from 30 months to 36 months for outright gifts and to 60 months for transfers to most trusts; and
2. Congress eliminated a person's ability to disclaim any inheritance. If a person with a disability was in line to receive an inheritance, and if the receipt of this inheritance would jeopardize his or her eligibility for government benefits, prior to OBRA '93, he or she could simply disclaim the inheritance. OBRA '93, however, treats disclaimers as a transfer of an asset and a person will lose his or her eligibility for Medicaid if he or she disclaims an inheritance.

The good news is there were two (2) important exceptions carved out in the new legislation which help individuals with disabilities and parents of persons who are disabled. The new rules allow:

1. An individual with disabilities under the age of 65 who receives funds can remain eligible for Medicaid by transferring his or her funds to an irrevocable "OBRA '93 Payback Trust." The trust is called a "payback" trust because if there are any funds left in the trust when the beneficiary dies, the state is entitled to be paid back for the full amount of Medicaid monies paid on behalf of the beneficiary; and
2. Parents, who require long term nursing home care, to transfer their own funds to an OBRA Payback Trust for the sole benefit of a child who is disabled and become eligible for Medicaid without a waiting period. This exception answers the prayers of parents who have worried about what would happen to their son or daughter with disabilities if all their money had to be spent on their own nursing home care.

The two exceptions carved out by OBRA '93 offer exciting planning opportunities for lawyers working with persons who are disabled and their families in the areas of guardianship, personal injury, divorce, estate planning and elder law planning.

It is important that families not confuse the OBRA '93 "Payback Trust" with the special needs, or supplemental needs, trusts recommended by estate planners for parents of persons with special needs. Not all persons who are disabled can qualify for an OBRA '93 Trust. Also, an OBRA '93 Trust requires that the State be paid back from the remaining balance of the trust assets. As such, the OBRA '93 Trust does not take the place of, or reduce, the need for families to leave a will with a special needs trust for their son or daughter who is disabled. It is, however, a wonderful safety net for those families who failed to plan and have left their child with an inheritance which otherwise would have resulted in the loss of Medicaid.

This material is intended to offer general information to clients, and potential clients, of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Spain, Spain & Varnet P.C. assumes no responsibility for any individual's reliance on the information disseminated unless, of course, that reliance is as a result of the firm's specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be reverified from time to time to ensure it is still current. This information was last updated August 18, 1996.