Alimony and the Institutionalized Spouse: Consenting to Alimony Reduction May Jeopardize Medicaid Eligibility

By Donald D. Vanarelli, Esq.

When a divorced elder is receiving Medicaid benefits, alimony payments the elder may be receiving will do little, if anything, to improve the elder’s standard of living. Thus, an ex-spouse’s attempt to reduce court-ordered alimony might be seen as an opportunity to accomplish Medicaid-planning transfers, ultimately for the benefit of the divorced couple’s children. But can the institutionalized elder consent to an alimony reduction without jeopardizing his/her Medicaid eligibility?

The risk to consenting to an alimony reduction is that Medicaid could conclude that the reduction was not the result of a contested court action. Consequently, Medicaid could deem the consent to be a “gift” of the alimony payments from the institutionalized ex-spouse, and could impose a penalty for the transfer.

In L.H. v. DMAHS, 93 N.J.A.R.2d 107 (OAL 1993), the couple filed a complaint for separate maintenance and entered a QDRO by consent, assigning the husband’s pension to the wife. The husband entered a nursing home and applied for Medicaid but was found ineligible based on excess income from the pension. Although the husband argued that the consent order rendered the pension income unavailable to him, the court disagreed. It concluded that the divorce action and consent order were the result of collusion, and that the couple intended to transfer income from the institutionalized spouse to preclude that income from being used for nursing care. The administrative law judge in L.H.concluded that, “while it is true that a wife has certain rights to a spouse’s pension. . .in the event of divorce and equitable distribution, he or she does not have a right, even in a legitimate case, to the entire amount so as to require one spouse to be cared for by public welfare.” The judge affirmed the denial of Medicaid benefits, and the Acting Director of the DMAHS affirmed that holding.

In B.S. v. DMAHS, 93 N.J.A.R. 2d 35 (OAL 1993), a nursing home resident filed a motion seeking compliance with a court order requiring her ex-husband to pay her medical expenses. After extensive negotiations, a consent order was entered which, inter alia, reduced the ex-husband’s alimony obligation. The Director reversed the decision of the ALJ and held that the transaction amounted to a voluntary transfer of resources for less than fair market value, rendering the wife subject to a Medicaid penalty period.

In G.E. v. DMAHS, 271 N.J. Super. 229 (App. Div. 1994), after a spousal support order directed an institutionalized husband’s pension benefits to be paid directly to the wife, DMAHS determined that those funds were nonetheless “available” to the husband for purposes of Medicaid eligibility. The G.E.court acknowledged the DMAHS Director’s finding that “to disregard [the institutionalized spouse’s] pension benefits would constructively eliminate the income standard…for a class of Medicaid applicants. Court-ordered spousal support would become a vehicle to circumvent Medicaid laws…” The court concluded that the pension funds were “available income” to the husband, for purposes of Medicaid eligibility, even through the wife was entitled to receive the funds pursuant to the support order.

However, in L.M. v. DMAHS, 140 N.J. 480 (1995), the New Jersey Supreme Court permitted a similar arrangement without Medicaid penalty. There, after the institutionalized husband was denied Medicaid based upon excess income, he (through his guardian) and his wife divorced and his pension was equitably distributed, pursuant to a separation agreement, to his wife. The Court held that, pursuant to the equitable distribution order, the wife was now the sole owner of the pension, and that the pension income could not be considered “available” to the husband for Medicaid eligibility purposes. Id. at 498. In so ruling, the Supreme Court recognized that its decision “might encourage persons to divorce to protect assets for the spouse of the nursing-home resident…[which would] unfairly place a further burden on the limited financial resources of the State.” Id. at 500.

Following L.M., however, in H.K. v. Cape May Board of Social Services, 2004 WL 374397 (OAL 2004), the ALJ refused to permit a spousal support order to be used to alter a Medicaid community spouse allowance. In H.K., after a husband entered a nursing home and applied for Medicaid, his wife filed for a Divorce from Bed and Board, which resulted in a property settlement agreement ordering that the husband’s pension income be paid to his wife as support. The ALJ found that the support order did not render the wife entitled to an increased community spouse allowance under the Medicaid rules and regulations: “The Divorce Decree that included an alimony payment was not evaluated on the merits by the Superior Court… the Property Settlement Agreement. . .is not a determination, on the merits, that is binding upon the Director in terms of the [Medicaid] community spouse allowance calculation.” Id.

Of course, in many cases, the divorced couple may be of advanced age, and the moving party may be facing retirement or semi-retirement that would justify the reduction or elimination of alimony. See Lepis v. Lepis, 83 N.J. 139 (1980); N.J.S.A. 2A:34-23. However, the issues presented by a community ex-spouse’s motion to reduce or eliminate alimony are complex: Medicaid may look beyond the resulting alimony order to the underlying issues and positions of the parties.

In sum, although the attorney for the institutionalized spouse receiving Medicaid benefits may acknowledge that his client will receive no direct benefit from continued alimony, to consent to an ex-spouse’s request to reduce or eliminate that alimony would be to jeopardize the institutionalized spouse’s Medicaid eligibility. Instead, the best course of action is to object to the application (even if based upon nothing more than the risk that a consent would pose to the institutionalized spouse’s Medicaid eligibility); and to the urge the court to make a reasoned analysis of the merits of the application. 

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