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Asset Protection for Seniors: Estate Planning When One Spouse is Facing Catastrophic Nursing Home Care

A. Introduction

Medicaid planning for a spouse facing catastrophic nursing home care typically involves the transfer or disposition of the Medicaid applicant’s resources. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning for the Elderly, §10.14 at 10-122 (Matthew Bender 2003). When those transfers occur within the 36-month “look-back” period,3 the strategy must recognize and take into account various considerations such as the value and nature of the assets of the couple, individually and jointly.

Spending Down of Assets

Given that New Jersey denies Medicaid coverage when a individual’s total resources exceed $2,000.00, N.J.A.C. 10:71-4.5(c), a common general Medicaid planning technique is to “spend down” all but the resource maximum. Notably, “spending down” differs from asset transfers for less than fair market value because, with “spend-downs,” the individual is receiving fair market value in return. Begley, T. and Jeffreys, J., Representing the Elderly Client, §8.02 at 8-6 (Aspen 2003).

Examples of valid spend-downs are the repayment of debts, such as mortgages, automobile loans, and credit cards; payment for services such as medical and legal bills; and prepayment of real estate taxes, where the principal residence is occupied by the community spouse. Id.

Transfer of the Principal Residence

As set forth in Section I, supra, under current Medicaid law, certain transfers of the Medicaid applicant’s principal residence are “exempt” for purposes of determining Medicaid eligibility. One such exempt transfer is a transfer to the Medicaid applicant’s community spouse.

Another exempt transfer is a transfer to the Medicaid applicant’s “caregiver child,” pursuant to 42U.S.C. §1396p(c)(2)(A)(iv). Transfers of the home to a “caregiver child” are exempt under N.J.A.C.10:71-4.7(d)(4) which provides, in pertinent part, as follows:

[A]n individual shall not be ineligible for [Nursing Home Medicaid] because of the transfer of his or her equity interest in a home which serves…as the individual’s principal place of residence and the title to the home was transferred to:

A…son or daughter of the institutionalized individual…who was residing in the individual’s home for a period of at least two years immediately before the date the individual became an institutionalized individual and who has provided care to such individual which permitted the individual to reside at home rather than in an institution or facility.

Another such exempt transfer of the applicant’s principal residence for less than fair market value is the transfer to a child who is under 21, blind or disabled, pursuant to 42 U.S.C. §1396p(c)(2)(A)(ii).

Transfers of the home to a “disabled child” are exempt under N.J.A.C. 10:71-4.7(d)(2) which provides, in pertinent part, as follows:

[A]n individual shall not be ineligible for [Nursing Home Medicaid] because of the transfer of his or her equity interest in a home which serves…as the individual’s principal place of residence and the title to the home was transferred to a child of the institutionalized individual…who is blind or totally and permanently disabled.

Transfers of the home to a sibling of an institutionalized spouse who already has an equity interest in the home are exempt under N.J.A.C. 10:71-4.7(d)(3) which provides, in pertinent part, as follows:

[A]n individual shall not be ineligible for [Nursing Home Medicaid] because of the transfer of his or her equity interest in a home which serves…as the individual’s principal place of residence and the title to the home was transferred to:

A brother or sister of the institutionalized individual who already had an equity interest in the home prior to the transfer and who was residing in the home for a period of at least one year immediately before the individual becomes an institutionalized individual.

Among the benefits of transferring the applicant’s home to the community spouse, caregiver child, disabled child or sibling with an equity interest is that the home will escape the imposition of a “Medicaid lien” as mandated by the Medicaid estate recovery program, pursuant to which the State of New Jersey is entitled to recover payments made on behalf of a Medicaid recipient through the imposition of liens on any real or personal property owned by the Medicaid recipient or in which the Medicaid recipient held legal title at the time of death. N.J.S.A. 30:4D-7.2 et seq.; 42 U.S.C. §1396p(b)(1)(B).

Converting Countable Assets To Exempt Assets

A variety of techniques may be employed in order to convert assets that would otherwise be countable by Medicaid into assets that are exempt.

For example, because property used as a principal residence is an exempt resource, countable liquid assets may be used to purchase a home in order to convert those assets to exempt assets. Regan, J., Gilfix M., Morgan, R. and English, D., Tax, Estate & Financial Planning for the Elderly: Forms & Practice, §I:7[1] at I-50 (Matthew Bender 2003). In fact, because the community spouse-occupied principal residence is an exempt asset, N.J.A.C. 10:71-4.4, one residence may be sold and a more expensive once purchased. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.03[C] at 8-9 (Aspen 2003).

Because an automobile is an excluded resource (up to a current market value of $4,500), countable assets may be converted to exempt by purchasing an automobile. Notably, if an automobile is needed for medical treatment, or has been specially modified for use by a handicapped person, the total value of the automobile is excluded. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning for the Elderly, §8.14 at 8-40 (Matthew Bender 2003).

Because repairs made to an exempt asset are likewise exempt, the individual should consider making repairs to the personal residence or automobile.

Burial plots for the individual, spouse and members of the immediate family are entirely exempt, as are agreements to purchase burial space for the individual, spouse and immediate family members. Id. at 8-41.

In addition, the individual may purchase personal effects and household goods, which are exempt up to a total value of $2,000.4 N.J.A.C. 10:71-4.4.1

B. Irrevocable Trusts — Medicaid Issues

The Medicare Catastrophic Coverage Act of 1988 created the concept of the Medicaid qualifying trust (“MQT”), which applies to trusts created before August 10, 1993 (regardless of when the individual applies for Medicaid). Regan, J., Gilfix M., Morgan, R. and English, D., Tax, Estate & Financial Planning for the Elderly: Forms & Practice, §I:20[2] at I-129 (Matthew Bender 2003). An MQT is an inter vivostrust, created by the Medicaid applicant or his/her spouse for the benefit of the applicant, in which the trustee is given discretion to distribute income or principal to the institutionalized spouse. Because the trust is deemed available to the institutionalized spouse, the effect of such a trust is to disqualify the institutionalized spouse from Medicaid coverage.

Irrevocable trusts created after August 10, 1993 (other than by will) containing some assets of the Medicaid applicant/recipient are governed by the Omnibus Budget Reconciliation Act of 1993 (“OBRA 93”). (Id. at I-131 to I-132). For these trusts, OBRA 93 expands on the MQT rules by deeming the corpus and income from such trusts “available,” regardless of the following: the purpose for which the trust was established; the discretion (or lack thereof) given to the trustee; and the restrictions on when, whether, or how distributions may be made. Nevertheless, assets transferred into such a trust will not be deemed available to the extent that income and/or corpus cannot under any circumstances be paid to, or for the benefit of, the grantor. Id. at I-132. The funding of such a trust would be subject to the 60-month (rather than the 36-month) look-back period. Id.

A brief description of some common trusts used in the context of Medicaid planning follows.

An “income only” trust is created and funded by the Medicaid applicant. The trust corpus is not considered in determining Medicaid eligibility. Trust income may be payable to the applicant but the corpus is not payable to anyone until the applicant’s death. Under New Jersey regulations, the state must be the first remainder beneficiary. With an “income only” trust, the income is deemed available to the applicant and the corpus is deemed a transfer for less than fair market value, subject to a 60-month “look-back” period.

A “family” trust is created and funded by the Medicaid applicant. Trust income is payable to the applicant or to others, and the corpus is payable to the applicant’s descendents (at the discretion of the trustee). As with an “income only” trust, with a “family” trust, the income is deemed available to the applicant and the corpus is deemed a transfer for less than fair market value, subject to a 60-month “look-back” period.

With a third-party “donee” trust, the applicant transfers assets to children or heirs. At their discretion, the heirs use the transferred assets to fund a revocable, or irrevocable, trust. The applicant has no interest in either the trust income or corpus. Distributions are made at the discretion of the heirs. With a third-party “donee” trust, the corpus is deemed unavailable but the transfers are subject to a penalty period, and the 36-month “look-back” period applies.

An elective share trust is a testamentary trust, created under the will of the community spouse, for the benefit of the applicant spouse. Distributions of income are mandatory. Distributions of corpus may be made at the trustee’s sole discretion to meet the applicant’s supplemental needs (i.e., those that supplement, but do not supplant, needs-based government benefits). The remainder beneficiaries may be the testator’s children or heirs.

A “sole benefit of” trust is established so that no one other than a spouse, blind or disabled child, or disabled person may benefit. Under federal regulations, the trust is required to direct that the distributions be made on an actuarially sound basis. Some states, including New Jersey, require that the trust contain a payback provision naming the state as first remainder beneficiary at the beneficiary’s death. Assets transferred to a “sole benefit of” trust for a community spouse cannot exceed the CSRA. A trust for the “sole benefit of” a disabled or blind child or a disabled person who is receiving needs-based government benefits should be designed as a special needs trust so the trust assets will not affect the beneficiary’s eligibility for benefits based on need.

A “retained interest” trust is one which is created and funded by a Medicaid applicant. It is irrevocable, and subject to a 60-month look-back period. The beneficiaries are the children or the heirs. The applicant retains an interest in the trust property, such as a special power of appointment, causing the trust corpus to receive a step-up in basis to current market value at the applicant’s death.

 

Asset Protection for Seniors: Estate Planning When One Spouse is Facing Catastrophic Nursing Home Care (Continued) >