Estate Planning When a Spouse is Confronting Health Issues (Estate Planning for the Healthy Spouse)

Estate Planning When a Spouse is Confronting Health Issues (Estate Planning for the Healthy Spouse)

By Donald D. Vanarelli, Esq.


When one spouse is a resident of a nursing facility or medical institution (the “institutionalized spouse”), but the other spouse continues to live in the community (the “community spouse”), the community spouse may take a number of steps to retain a maximum level of resources without jeopardizing the institutionalized spouse’s Medicaid eligibility.1

Medicaid is a joint federal and state program created under Title XIX of the Social Security Act of 1965. It provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify financially. 42 U.S.C. §1396 et seq.N.J.A.C. 10:71-1 et seq. Eligibility for Medicaid is based upon financial need. For example, under the “Medicaid Only” program, an applicant’s countable resources cannot exceed $2,000.00. N.J.A.C. 10:71-4.4.

Following the enactment of the Medicaid program, based upon concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or “penalty periods,” in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself “needy.” See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S. 2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S. 2d 854 (1997). This legislation imposes a 36-month “look-back period,” in which Medicaid officials will “look back” from the application date to analyze asset transfers by the applicant. Id. If a Medicaid applicant disposes of assets for less than fair market value within the 36-month look-back period, the applicant may be subject to a period of Medicaid ineligibility (a “penalty period”), based upon the value of the uncompensated transfer. 42U.S.C. §1396(p).

By understanding the Medicaid rules and designing strategies consistent with those rules, the attorney can assist the community spouse in planning his or her estate when the spouse is confronting health issues.

A. Asset Titling — Deeds, Bank Accounts, And Life Insurance

Transfer Of The Institutionalized Spouse’s Interest In The Principal Residence to the Community Spouse

The Medicaid transfer penalties do not apply to all uncompensated asset transfers. For example, 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 of the applicant’s principal residence for less than fair market value is a transfer to the Medicaid applicant’s community spouse. Retitling a couple’s jointly held home to the community spouse is a significant estate planning measure for the community spouse.

Among the benefits of transferring the applicant’s interest in the home to the community spouse is that the home will escape the imposition of a “Medicaid lien” as mandated by the Medicaid estate recovery program. N.J.S.A. 30:4D-7.2 et seq.; 42 U.S.C. §1396p(b)(1)(B). Under the estate recovery program, 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. Id. New Jersey seeks recovery only from estates of deceased Medicaid recipients.

Thus, by engaging in Medicaid planning and transferring the institutionalized spouse’s interest in the home to the community spouse, Medicaid will not penalize the transfer; moreover, Medicaid will be unable to impose a lien on the home because the institutionalized spouse will have no legal title to or legal interest in the home at the time of his or her death.

Other techniques involving the principal residence may assist in maximizing the resources of the community spouse. The community spouse-occupied principal residence is an exempt asset. N.J.A.C.10:71-4.4. Consequently, prepayment of real estate taxes constitutes a valid spend-down. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.02[C] at 8-7 (Aspen 2003). In addition, because personal effects and household goods are excluded up to a total value of $2,000,2N.J.A.C. 10:71-4.4, such goods may be purchased as part of a spend-down plan.

In fact, because the community spouse-occupied principal residence is an exempt asset, N.J.A.C.10:71-4.4, resources may be converted from countable to excludable by selling the residence and purchasing a more expensive home. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.03[C] at 8-9 (Aspen 2003).

Retitling Of Bank Accounts And Life Insurance

If the community spouse has a life insurance policy, a retirement account (e.g., an IRA), or an annuity naming the institutionalized spouse as beneficiary, the beneficiary designation should be changed to a third party (for example, the couple’s children). Otherwise, if the beneficiary is designated as the institutionalized spouse, the proceeds would be paid to the institutionalized spouse, who would become ineligible for Medicaid until those funds were expended for his or her nursing care.

Similarly, bank accounts should be retitled so that they are not in the name of the institutionalized spouse.

B. Changing The Will To Exclude The Disabled Spouse

If the community spouse has a Last Will and Testament naming the institutionalized spouse as beneficiary, and the will is not changed to name the children or other third parties as beneficiaries, the estate would be distributed to the institutionalized spouse, who would become ineligible for Medicaid util those funds were expended for his nursing care. For this reason, a revision to the community spouse’s will is a necessary element of a Medicaid plan.

Of course, when changing the Last Will and Testament of the community spouse, the attorney must consider the impact that such a change would have on the elective share.

A successful strategy for addressing these two concepts is the execution of a new will in which the community spouse leaves the institutionalized spouse’s elective share in a testamentary Special Needs Trust that will not affect his/her eligibility for Medicaid or other needs-based governmental programs.

Under the state elective share statute, N.J.S.A. 3B:8-1, et seq., the surviving spouse has a right to take one-third of the augmented estate of a deceased spouse. Because the statute also provides that half of anything placed in a trust for the surviving spouse counts against the elective share, if the community spouse puts two-thirds of his or her estate in a Special Needs Trust for the surviving spouse, the elective share is satisfied.

The testamentary elective share trust may be designed as a Special Needs Trust so that all distributions of principal are left to the sole discretion of the trustee and may be made only for products and services which supplement governmental benefits received by the disabled spouse.

The amount of the estate above the elective share may be left outright to the children or other heirs.

C. Durable Power Of Attorney With Gift-Giving Power

A financial power of attorney is a legal instrument by which an individual (the “principal”) authorizes another person(s) (the “attorney(s)-in-fact” or “agent(s)”) to perform specific acts enumerated in the instrument on behalf of the principal See N.J.S.A. 46:2B-8.2; 2A C.J.S. Agency § 44; Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[1] at 13-5 (Matthew Bender 1999). An agent under a power of attorney is specifically authorized by New Jersey statute to conduct banking transactions on behalf of a principal. N.J.S.A. 46:2B-11.

Care must be taken by the attorney in the structuring and execution of a power of attorney instrument. In order to execute a power of attorney, the principal must possess the capacity to contract, or to understand the nature and the effect of the act of appointing an agent. See Mazart, G., New Jersey Elder Law Practice, §2 at 2-3 (New Jersey Institute for Continuing Legal Education 1999).

Because an ordinary power of attorney is only effective during the time that the principal is competent, it is void when the principal becomes incapacitated, rendering it ineffective as a tool for addressing disability. Consequently, New Jersey statutory law authorizes the use of a “durable” power of attorney, in which the instrument is not affected by the disability of the principal. N.J.S.A. 46:2B-8.2. A power of attorney is “durable” if it states: “This power of attorney shall not be affected by subsequent disability or incapacity of the principal;” or “This power of attorney shall become effective upon the disability or incapacity of the principal;” or similar words. Id.

When a power of attorney is durable, all action taken by the agent pursuant to that power during the principal’s disability or incompetence has the same effect, and binds the principal as if the principal were competent. N.J.S.A. 46:2B-8.3. Thus, the durable power of attorney provides the principal with the opportunity to select his or her own agent to act in the event of incapacity, which is a favorable alternative to, and may avoid, resorting to the courts for such appointment in a guardianship or conservatorship proceeding. See J. Regan, R. Morgan and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[2] at 13-6 (Matthew Bender 1999).

Critical for purposes of Medicaid planning is the fact that a power of attorney cannot be construed as authorizing the attorney-in-fact to “gratuitously transfer property of the principal to the attorney-in-fact or to others except to the extent that the power of attorney expressly and specifically so authorizes.”N.J.S.A. 46:2B-8.13a. Consequently, if the power of attorney is to be used to conduct Medicaid planning including gifting strategies on behalf of the institutionalized spouse, it must specifically include gifting powers.

While blanket gifting provisions, giving authorization generally to make gifts of the principal’s property, allow the agent authority to conduct Medicaid planning, blanket gifting powers may also create problems. For example, such a provision could be used by an agent/child to make gifts favoring himself over the principal’s other children. While such conduct could be considered contrary to the agent’s fiduciary duty to avoid self-dealing, the blanket gifting provision could also be deemed to be a waiver of the agent’s fiduciary duty to avoid self-dealing.

For these reasons, as well as the fact that blanket gifting provisions may trigger tax traps, it may be prudent to tailor gifting provisions (for example, to permit gifting, including to the agent, as long as the agent and siblings are treated equally; or to permit gifting to the agent only when prior approval for the transfer is given by the alternate agent).

D. Other Techniques


Divorce from an institutionalized spouse may be troublesome concept, from a personal standpoint. In fact, a divorce consummated in the context of Medicaid planning is considered to be one of the more “extreme Medicaid planning strategies.” H. Fliegelman and D. Fliegelman, Giving Guardians The Power To Do Medicaid Planning, 32 Wake Forest L. Rev. 341, 364 (Summer 1997). Nevertheless, it may be a prudent financial strategy for a community spouse.

If the court grants an equitable distribution to a community spouse, or recognizes a Qualified Domestic Relations Order (“QDRO”) incident to a divorce, the resulting distribution to the community spouse may greatly exceed the Community Spouse Resource Allowance available to the community spouse absent a divorce.

The New Jersey Supreme Court was presented with a property settlement agreement entered into between the guardian/child of an incapacitated nursing home resident and the community spouse seeking to divorce him in In re L.M., 140 N.J. 480 (1995). There, the settlement agreement provided for the transfer of the ward’s pension interest to the spouse. The Supreme Court recognized the agreement as, in whole or in part, an attempt at Medicaid planning. Id. at 489. Nevertheless, it held that the transfer, which was incorporated into a Qualified Domestic Relations Order (“QDRO”), successfully shielded the pension from Medicaid consideration. Id.

The Community Spouse Resource Allowance (“CSRA”)

The Community Spouse Resource Allowance (“CSRA”) is the amount of non-exempt resources (owned jointly or separately by either spouse) that the law permits the community spouse to retain without jeopardizing the Medicaid eligibility of the institutionalized spouse. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[3] at 10-63 (Matthew Bender 1999).

In 2004, the community spouse is permitted to retain a maximum of $92,760 and a minimum of $18,552. The CSRA is computed as of the first day that the institutionalized spouse begins a 30-day or more period of institutionalization. Id. As of the date of computation, the community spouse is permitted to retain $18,552 (as of January 1, 2004) or half of the couple’s resources, up to a maximum of $92,760 (as of January 1, 2004). If that amount is more than the actual resources in the community spouse’s sole name, the difference will be recouped by a transfer from the institutionalized spouse.

In order to maximize the community spouse’s resource allowance, a sound Medicaid plan will aim to transfer the couple’s countable assets, with the exception of an amount equal to twice the CSRA ($185,520 in 2004). Then, after the spouse is institutionalized and the CSRA is calculated (ideally at $92,760), the remaining $92,760 will be spent down on nursing home care and other medical costs and preserved using various planning techniques.

Because the CSRA is calculated based upon assets but not liabilities, if the couple’s resources are less than twice the CSRA maximum, one technique aimed at maximizing the community spouse’s CSRA involves the spouse obtaining a loan from his or her children in the amount of the couple’s resources. After the CSRA is calculated, the loan can be immediately repaid from the institutionalized spouse’s resources, i.e., the spend-down requirement. See id.

The Minimum Monthly Maintenance Needs Allowance (“MMMNA”)

When a spouse is institutionalized, the Medicaid rules permit the community spouse to keep her own separate income titled in her sole name, plus one-half of the income in the couple’s joint names. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003); Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[2] at 10-58 (Matthew Bender 1999). If that amount does not equal the minimum monthly maintenance needs allowance (“MMNA”), calculated at $1,515 until July 1, 2004, the community spouse may seek the shortfall from the income of the institutionalized spouse, pursuant to the “income first rule”. Id.

If the income of the institutionalized spouse is insufficient to meet the shortfall, then the community spouse may seek to receive that amount of resources above the CSRA calculated to generate income necessary to meet the shortfall.

The Excess Shelter Allowance

The community spouse also has the right to an excess shelter allowance. Shelter expenses are defined as “rent or mortgage (including principal and interest), taxes and insurance, a utility standard for the individual’s utility expenses, and in the case of a condominium or cooperative, the monthly required maintenance charge.” N.J.A.C. 10:71-5.7(c)(1). If the cost of the community spouse’s monthly shelter exceeds a specified amount ($454.50 through July 1, 2004), he or she is entitled to payment of that difference from the income of the institutionalized spouse.

The community spouse’s total excess shelter allowance and MMNA cannot exceed a certain amount ($2,266.50 in 2003), except by resort to a fair hearing. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003).


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