Medicaid Planning in the Wake of Keri

By Donald D. Vanarelli, Esq.

The concept of “Medicaid planning,” involving the strategic transfer of assets aimed at accelerating an individual’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, No. A-5949-01T5 (App. Div. Dec. 19, 2002).

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 of 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, last month 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 matter in issue herein has far-reaching policy implications. Not only is the decision troubling in terms of an incapacitated person’s equal protection rights to self-determination; it is also troubling on a more practical level. With an aging population and escalating costs of care for that population, this precise issue will arise again and again in the future. 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.

The Keri decision is now on petition for Certification.