Asset Protection for Seniors: Estate Planning When One Spouse is Facing Catastrophic Nursing Home Care
A trust created to qualify as a “special needs trust” and funded with tort damages recovered by a disabled applicant or an inheritance may be established for the benefit of the disabled applicant without resulting in a penalty for transfers into the trust, and the assets of the trust are deemed to be unavailable to the applicant. New Jersey requires that the trust contain a payback provision to benefit the state upon the beneficiary’s death. See, e.g., Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.05 (Aspen 2003). The trust may be established only by the applicant’s parent, grandparent, guardian or a court. New Jersey has established a checklist of provisions that must be included in any special needs trust, as follows:
- The trust must be identified as a Special Needs Trust, established pursuant to 42 U.S.C.§1396p(d)(4)(A);
- The trust must state that it is for the sole benefit of the trust beneficiary;
- It must state that its purpose is to permit the use of trust assets to supplement, rather than supplant, government benefits to which the beneficiary may otherwise be entitled or may be receiving;
- It must state the age of the beneficiary;
- It must state that the beneficiary is disabled under the definition of 42 U.S.C. §1382c(a)(3);
- It must state whether the beneficiary is competent or independent information may be supplied;
- It must identify the source of the trust assets in an attached schedule;
- It must state that any provisions intended to limit invasion or encumbrances by creditors are not intended to limit the State’s right to reimbursement or to recoup incorrectly paid benefits;
- It must state that it is being established by a parent, grandparent, guardian or a court;
- It must state that it is irrevocable;
- It must state the name and address of the trustee;
- It should state that the beneficiary cannot be the trustee;
- It must provide for the naming of a successor trustee if the trustee is unable/unwilling to serve;
- It must state that the trustee is required to comply with all state laws, including the Prudent Investor Act, N.J.S.A. 3B:20-11.1 et seq.;
- It must state that the trustee may only receive compensation as provided by law;
- If it identifies a guardian, the guardian must be identified by name;
- It must state that, on the death of the primary beneficiary, the state will be notified and repaid all medical assistance paid on behalf of the beneficiary, up to the total amount remaining in the trust;
- It must state that, if the beneficiary received Medicaid in more than one state, each state must be repaid on a pro rata basis, up to the total amount remaining in the trust;.
- It must state that, if there is a provision for repaying other assistance programs, Medicaid must be repaid first;
- It cannot permit the estate representative, on the beneficiary’s death, to first repay other persons or creditors;.
- It must state that a formal or informal accounting of expenditures be submitted annually to the appropriate eligibility determination agency;
- It must provide the state with advance notice of any expenditure that would substantially deplete the trust principal, or any expenditure exceeding $5,000;
- The trust cannot create a will for an incapacitated person or minor, and cannot create other trusts within it; the trust funds must pass by intestacy and cannot be left to third parties.
Individual Special Needs Trust Checklist, N.J.A.C. 10:71-4.11(g)(1).
C. Life Estate Deed Without Power of Sale
With some exceptions, the transfer of real property for less than fair market value is subject to a penalty period. In New Jersey, the fair market value of real estate is computed by multiplying the tax assessed value of real property by the inverse of the equalization rate. However, when the individual retains a life estate in the transferred property, the amount of the uncompensated transfer is calculated as the value of the property, minus the value of the life estate. Carlsen, E., Long-Term Care Advocacy, §7.12 at 7-58 (Matthew Bender 2003).
The actual value of a life estate is calculated based upon tables set forth in CMS State Medicaid Manual §3258.9(A). Id.
Notably, if the life estate, by its own terms, does not contain the power of sale, that life estate might be considered valueless. Carlsen, E., Long-Term Care Advocacy, §7.12 at 7-58 (Matthew Bender 2003). On the other hand, if the individual retains a life estate and power to sell, Medicaid considers the property to be worth its full equity value to the owner such that the owner, in effect, has not made a transfer, for purposes of Medicaid eligibility. Regan, J., Tax, Estate & Financial Planning For The Elderly, §10.14[g] at 10-135 (Matthew Bender 1999).
D. Annuities, Life Insurance and Retirement Accounts
If the community spouse has life insurance, a retirement account, or an annuity naming the institutionalized spouse as beneficiary, the beneficiary designation should be changed to a third party. Otherwise, the proceeds would be paid to the institutionalized spouse, rendering him ineligible for Medicaid until those funds were expended for his nursing care.
E. Pitfalls of Guardianships++
Unlike the authority of an agent under a durable power of attorney containing gifting powers, a guardian is not empowered to make gifts of the ward’s estate, except upon application to the court. SeeN.J.S.A. 3B:12-50, 3B:12-58.
In New Jersey, applications by guardians to conduct Medicaid planning on behalf of an incapacitated person has been met with mixed responses by the courts.
The concept of Medicaid planning, involving the strategic transfer of assets aimed at accelerating the ward’s eligibility for Medicaid, is generally viewed as a prudent estate planning technique by which an individual may preserve assets for his or her loved ones. However, the continued rights of an incapacitated person to engage in Medicaid planning through his or her guardian was called into question by the recent Appellate Division decision in In re Keri, 356 N.J. Super. 170, 175 (App. Div. 2002), certif. granted, 175 N.J. 549 (2003).
Prior to the Keri decision, the leading New Jersey case involving Medicaid planning on behalf of an incapacitated person was In re Labis, 314 N.J. Super. 140 (App. Div. 1998), where the Appellate Division approved a Medicaid planning application brought by a guardian/spouse.
In Labis, the guardian-wife of an incapacitated person appealed from an order denying her the right to transfer her husband’s interest in the marital home to her for purposes of Medicaid planning. After concluding that “[a]n effort should be made, in the public interest, to preserve some of [the ward’s] assets, in some way to make it possible to repay a portion of the public expense in supporting the incompetent,” the lower court had denied the application. 314 N.J. Super. at 143. The Appellate Division reversed. .
The Appellate Division found that the lower court had denied the guardian’s application “on an erroneous view that the proposed interspousal transfer was contrary to public policy, and thereby failed to consider that the interspousal transfer would benefit [the ward] in carrying forth his probable actions if he were competent to address the situation.” Id. at 144.
The Labis court relied upon the substituted judgment doctrine, which grants a court the inherent power to manage an incapacitated person’s estate as the incapacitated person would if he possessed that capacity. Id. at 146. The court concluded that such a transfer should be authorized “provided that [it] complies with the best interest of the ward inclusive of his desire to benefit the natural objects of his bounty.” Id. at 147. As the Labis court aptly reasoned, “[c]oncepts of equal protection and inherent fairness dictate that an incompetent should be given the same opportunity to use techniques of Medicaid planning and estate planning as others more fortunate.” Id.
In finding that the interspousal transfer in issue was a reasonable means by which to effectuate Medicaid and estate planning, the Labis court provided the following insight:
We can safely assume by his will that if [the incapacitated person] were competent, he would take every lawful and reasonable action to minimize obligations to the State or a nursing home in order to secure the maximum amount available to support his wife of twenty-seven years through the remainder of her life and benefit his children thereafter.
Id. at 148.
In sharp contrast to the reasoning of Labis, the Appellate Division in Keri took a dim view of the notion of Medicaid planning in general. Whereas the Labis court had deemed “erroneous” the view that Medicaid planning was contrary to public policy, the Keri court referred to the technique as “troubling” and “nothing other than self-imposed impoverishment to obtain, at taxpayers’ expense, benefits intended for the truly needy.” Citing an increased possibility of conflict of interest where the guardian is the child of the ward, the Keri court was even more critical of the technique when sought by a guardian/child on behalf of an incapacitated parent.
In Keri, in conjunction with an application to the trial court by Richard Keri for appointment as guardian of his mother, Mildred Keri, Richard Keri sought permission to sell his mother’s home and to transfer a portion of the proceeds of sale to her heirs (her two adult sons, Richard and Charles Keri), as a part of a Medicaid spend-down plan to accelerate her eligibility for Medicaid while preserving a portion of her estate for her heirs. In her will, Mrs. Keri had named her two sons as the beneficiaries of her estate.
The Medicaid planning proposal by Richard Keri was unopposed; in fact, it was recommended by the court-appointed counsel for Mrs. Keri.
Nevertheless, after granting Richard Keri’s application to be appointed guardian of his mother, the trial court had denied Mr. Keri’s application to conduct Medicaid planning, announcing that,
I do not [pauperize] human beings and citizens of the United States solely to make them [wards] of the taxpayers. I don’t know when probate judges got in to this business of doing estate planning post-incompetency, but I don’t do it.
On appeal, the Appellate Division distinguished the Keri case from those involving Medicaid planning applications filed by a guardian/spouse of the ward. It articulated a more stringent standard for analyzing Medicaid planning applications filed by a guardian/child, and affirmed the denial of the guardian’s Medicaid planning application. .
It has been in reliance on the Labis decision that practitioners have advocated the concept of Medicaid planning by guardians on behalf of their incapacitated wards. Until the Keri decision, Appellate Division decisions have generally permitted Medicaid planning by guardians under the same analysis as other estate planning applications by guardians: such planning has been permitted unless there is evidence of contrary intent by the ward, formed during competency.
Under the Keri holding, this presumption in favor of permitting Medicaid planning is reversed where a guardian/child applies to the court for permission to conduct Medicaid planning on behalf of the ward/parent: such planning is denied unless there is evidence that the ward, while competent, expressly indicated a preference to engage in Medicaid planning. Unless there is express evidence of a preference to engage in Medicaid planning, the court will presume that Medicaid planning had been considered and rejected by the now-incapacitated person, and will deny the application.
Although Mrs. Keri had executed a will leaving her estate to her two sons (who would have been the recipients of the proposed Medicaid transfers); executed a general power of attorney naming Richard Keri has her agent; and authorized the agent to “deal on my behalf with respect to…Medicaid,” the Appellate Division concluded that Richard Keri failed to satisfy that new standard, and denied the Medicaid planning application.
As a result of the December 19, 2002 Keri decision, the future of Medicaid planning in the context of guardianship actions has been thrown into doubt. The Keri decision requires that an elderly, now-incapacitated person had possessed the foresight and the legal understanding to have reflected upon and expressly indicated a preference to conduct Medicaid planning in order to have a substituted decision-maker carry out such a plan. Requiring a guardian to make such a showing effectively forecloses the guardian from engaging in Medicaid planning in the vast majority of cases.
On petition for Certification, the New Jersey Supreme Court accepted the Keri case for review. Oral argument was held on October 20, 2003.
Even assuming that the Keri decision is reversed by the Supreme Court, the time and expense involved in making Medicaid-planning applications to a court render the use of durable powers of attorney (with gifting powers) a preferred mechanism by which to conduct Medicaid planning on behalf of an incapacitated person.
F. Income Tax Traps With Gifts
If a durable power of attorney contains a blanket gifting provision, giving general authorization to the agent to make gifts of the principal’s property, it may be subject to income (and other) tax traps.
For example, under Internal Revenue Code sections 2041 and 2514, if a power of attorney authorizes the agent to make unlimited gifts to himself or herself, that power of attorney is deemed to confer a general power of appointment. Consequently, should the agent exercise or release that power of appointment, or die while the power of appointment is in effect, substantial gift and estate taxes may become due.
With regard to income tax, if an agent under a power of attorney makes “gifts” to a person to whom the principal actually owes a duty of support, such as minor children or a spouse, the agent may trigger unanticipated income tax consequences. Friedman, L., Gifts By Incapacitated Persons: Tax Traps and Other Issues in Drawing POAs, The ElderLaw Report, Vol. XIII, No. 2 (Panel Publishers September 2001).