New Jersey Estate Planning & Elder Law Blog : New Jersey Estate Planning Lawyer & Attorney : Deirdre Wheatley-Liss : Fein Such Kahn & Shepard Law Firm : Elder Law, Tax Planning

New Jersey accounted for 30% of the most important court rulings on elder law issues in 2011. The crib notes version?  Stay within the line and intent of the law to get the results that you want. The courts are supporting Medicaid's ability to create a period of denial because of a transfer of assets to family members.  This is in line with one of the core principals of Medicaid eligibility - the state will pay for your long term care if you have a dire financial need, but not if you manufactured that need in the past 5 years by transferring assets to your family. 

The key takeaway - effective plans are put into place well before they are needed and fully conform to the law.

This "Top 10" list comes courtesy of elderlawanswers.com:

1. Medicaid Applicant's Penalty Period Does Not Begin Until Returned Assets Are Spent Down
The U.S. Court of Appeals, Third Circuit, rules that a New Jersey Medicaid applicant who transferred assets and then had some of the transfers returned cannot get credit toward her penalty period for the time before the transfers were returned that she was resource-eligible. Marino v. Velez (U.S. Ct. App., 3rd Cir., No. 10-2324, Jan. 10, 2011).  

What do you need to take away?  If you made a gift in the 5 years before you applied for Medicaid, and you lost the "bet" that you wouldn't need Medicaid for 5 years, the ENTIRE gift needs to be returned, and spent down, before you will qualify for Medicaid.  To be successful, you need to plan early so that you have a greater likelihood of not needing care for 5 years.

2. State Cannot Recover Assets That Were Transferred Before Medicaid Recipient Died
In a case pursued by ElderLawAnswers member attorney Peter C. Sisson, an Idaho district court rules that the state cannot recover assets from the estate of a Medicaid recipient's spouse that were transferred to the spouse before the Medicaid recipient died. In Re: Estate of Perry (Idaho Dist. Ct., 4th Dist., No. CV-IE-2009-05214, March 16, 2011).  

3. Federal Court Rules Ahlborn Does Not Bar Medicaid Recovery From Future Medical Expenses
A federal district court rules that a state Medicaid agency may recover the cost of a beneficiary's medical care from the portion of her personal injury settlement that was allocated to medical expenses, regardless of whether the funds were allocated to past or future medical care. Perez v. Henneberry (D. Colo., No. 09-cv-01681-WJM-MEH, April 26, 2011).  

4. Court Upholds Nursing Home Resident's Eviction Prior to Resolution of Medicaid Appeal
A Kentucky appeals court holds that a nursing home may evict a resident for nonpayment despite a pending Medicaid appeal. King v. Butler Rest Home, Inc. (Ky. Ct. App., No. 2010-CA-001467-MR, June 17, 2011).  

5. Payments to Caregivers of Dementia Patient Are Deductible Medical Expenses
The U.S. Tax Court rules that payments to caregivers of a dementia patient are deductible medical expenses, even though the caregivers were not licensed health care providers. Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011).  

What do you need to take away?  This is a win for caregivers.  Catastrophic medical expenses in excess of 7.5% of your adjusted gross income are deductible. This may offset some of the costs of care.

6. Third Circuit Affirms That N.J. May Count Promissory Notes As Available Resources
In a long-running case that has bounced back and forth between two federal courts, the Third Circuit Court of Appeals rules that New Jersey's Medicaid agency may analyze promissory notes as trust-like devices and count the notes as available resources. Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011). 

What do you need to take away?  While the court specifically advised that this case was not precedential, if you are making loans, they need to be real and fit within the requirements of the law.  They need to be in writing, actually repaid, and consistent with the law.

7. Transfer of Medicaid Applicant's House to Son Falls Within Caregiver Child Exception
A New Jersey appeals court rules that the transfer of a Medicaid applicant's house to her caregiver son is not subject to a Medicaid penalty period because it falls within the caregiver child exception. V.P. v. Dept. of Human Services (N.J. Sup. Ct., App. Div., No. A-2362-09T1, Sept. 2, 2011). To read the full summary, click here.

What do you need to take away?  The Medicaid applicant was successful because the caregiver child was able to prove that he actually provided a high level of care including walking, bathing, and cooking.  In short, he had good facts.  If you are a caregiver child looking to someday keep your home by taking advantage of this exemption, you will also need good facts. Start keeping a log of what you do now.

8. U.S. Court Rules Connecticut Likely Cannot Refuse Spousal Refusal Doctrine
Ruling that a state statute violates federal Medicaid law, a federal district court grants a preliminary injunction preventing Connecticut from denying Medicaid benefits to an applicant seeking to disregard his spouse's assets using the doctrine of spousal refusal. Fortmann v. Starkowski (D. Ct., No 3:10cv1562 (JBA), Sept. 28, 2011).  

9. Medicaid Applicant's Transfer to Daughter Created Trust-Like Device
A federal district court rules that when a Medicaid applicant transferred money to her daughter with the intention that the daughter pay for her care during the resulting penalty period, she created a trust-like device, so the money is still an available resource. Pfeffer v. AHCCCS (U.S. Dist. Ct., D. Ariz., No. CV-11-0891-PHX-GMS, Sept. 29, 2011). 

10. Irrevocable Trust Set Up by Medicaid Applicant's Children Is Available Asset
A Wisconsin appeals court rules that a Medicaid applicant who transferred funds to her children, who then put them in an irrevocable trust for her benefit, is ineligible for Medicaid because the trust is an available asset under state law, even though the transfer occurred 17 years before she applied for Medicaid. Hedlund v. Wisconsin Dept. of Health Services (Wis. Ct. App., No. 2010AP3070, Oct. 13, 2011).  

Image: Idea go / FreeDigitalPhotos.net

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A recent appeals court case underscores the importance in New Jersey of being able to factually prove that a child in fact provided care to a parent for the transfer of the home to that child to be an exception to the Medicaid transfer rules.

Generally speaking, a transfer of assets without compensation within 5 years of an application for Medicaid will cause a penalty period to be assessed.   One very important exception to this is the "Caregiver Child Exception". The Caregiver Child Exception basically indicates that if the child has (1) resided in the parent's home for at least 2 years, and (2) provided a level of care to the parent that allows the parent to stay at home and not have to enter into an assisted living or nursing facility, then the transfer of the home to that Caregiver Child does not create a penalty for Medicaid purposes. See N.J.A.C. 10:71-4.10(d).

The recent case of  V.P. v. Dept. of Human Services, decided by the New Jersey Appellate Division September 2, 2011, underscores the importance of being able to prove that the Caregiver Child actually provided assistance to the parent, which allowed the parent to remain at home instead of needing to enter a care facility. In this case, the Caregiver Child brought a variety of witnesses  to testify to the fact that the Caregiver Child actively helped the parent. The key lesson here is that if the family is planning on potentially using the Caregiver Child exemption to allow the caregiver child remain in the home after the parent needs to enter the nursing home, then the family must maintain credible and substantiated evidence of the fact that the child is in fact providing care to the parent.

Elderlawanswers.com has kindly provided a summary of this important case:

A New Jersey appeals court rules that the transfer of a Medicaid applicant's house to her caregiver son is not subject to a Medicaid penalty period because it falls within the caregiver child exception. V.P. v. Dept. of Human Services (N.J. Sup. Ct., App. Div., No. A-2362-09T1, Sept. 2, 2011).

V.P. lived with her son, R.P. Following a stroke, she entered a nursing home, transferred her house to her son and applied for Medicaid benefits. The state determined V.P. impermissibly transferred her home and was subject to a penalty period.

V.P. appealed, arguing her house was not a countable asset because the transfer fell within the caregiver child exception. At a hearing, several family members and V.P.'s doctor testified that R.P. helped V.P. walk, bathe, and cook, among other things. The administrative law judge (ALJ) found the witnesses credible and determined the caregiver child exception applied. However, the state's Medicaid director rejected the ALJ's decision and concluded V.P. needed only normal support services, so the transfer was not eligible for the caregiver child exception. V.P. appealed.

The New Jersey Superior Court, Appellate Division, reverses, holding that V.P. is entitled to Medicaid benefits with no penalty period. The court rules that the director did not demonstrate that the ALJ's findings were arbitrary and capricious. According to the court, "the credible evidence in the record supports the ALJ's finding that V.P needed, and R.P. provided, special care and attention essential to her health and safety."

For the full text of this decision in PDF, go to: http://www.judiciary.state.nj.us/opinions/a2362-09.pdf

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Besides the negative effect we are seeing in the market today from the S&P downgrade of the US credit rating, the debt deal may have far reaching consequences to seniors.  Medicare, Medicaid and Social Security are a huge proportion of the US budget.  Elderlawanswers.com has provided a summary of what seniors need to pay attention to:

Congress has agreed to allow the President to raise the debt ceiling in exchange for $2.4 trillion in budget cuts over 10 years. How this deal will affect the three major programs crucial to the elderly -- Medicare, Medicaid and Social Security -- may not be known until almost year's end, but the impact could be significant.

The agreement calls for two stages of spending reductions. In the first stage, which will pare $917 billion from the budget, "entitlement" programs like Medicare, Social Security and Medicaid are spared. Instead, the cuts are evenly divided between defense and non-defense "discretionary" programs. Some aging and poverty programs that the elderly rely on, such as heating assistance, could be hit with budget reductions, but so will defense programs.

In the second stage, a 12-member Congressional committee - six members from each party -- must agree on an additional $1.5 trillion in cuts by Thanksgiving, and Congress must vote on their proposal (with no modifications) by December 23. Here, Medicare, Medicaid, and Social Security will all be back on the table. In the case of Medicare, the powerful panel will be looking at changes like raising the eligibility age, increasing premiums for wealthy recipients, hiking deductibles and co-pays, and slashing payments to providers and drug companies.

To cut Medicaid, this joint committee will consider giving states more flexibility to reduce eligibility and benefits, meaning that it might become even tougher for elderly nursing home residents to qualify for Medicaid. The committee will also be looking at cutting payments to nursing homes, which just got hit with a more than 11 percent reduction. Nursing home residents could feel the impact in the form of reduced services and compromised care.

For Social Security, one thing the panel will undoubtedly consider changing is how the program's cost of living increase is calculated, which will result in lower benefits. Pushing back the eligibility age for future retirees could also be on the table.

Although President Obama will be pressing the joint committee to not just cut programs but to increase revenues by raising taxes on the wealthy and corporations, it is anybody's guess whether the panel's Republican members will agree to this.

"The future of the programs really hangs in the balance," said Joe Baker, president of the Medicare Rights Center, an advocacy group. "It could lead to deep cuts and irreversible changes to Medicare and Medicaid that shift costs to beneficiaries."

If the 12-member panel can't agree on a plan to pare at least $1.2 trillion from the budget -- or Congress votes down its proposal or President Obama vetoes it -- automatic spending cuts totaling that amount would kick in beginning in 2013. Medicaid, Social Security and veterans programs are among the programs that will be exempt from these mandatory cuts, but Medicare is not exempt. There would be a 2 percent cut to Medicare, although the savings would have to come from payments to providers like doctors and hospitals, not from beneficiaries. Such a reduction to providers would be on top of a 6 percent drop in provider payments already enacted to help finance health care reform. Doctors and hospitals would feel the impact initially, but Medicare beneficiaries would experience it soon enough as more providers refuse to treat Medicare patients, reduce services or go out of business.

There is, however, a strong incentive for the joint committee to avoid these automatic cuts and instead agree on a plan that Congress can pass and the President can sign: Along with the 2 percent automatic Medicare cut would be an automatic 8 percent reduction in defense spending, or nearly $500 billion. The thinking is that both Democrats and Republicans would view defense cuts of this magnitude as too damaging to their parties to contemplate.

Further reading:

"Five cuts the debt commission might make to Medicare, Medicaid" (Washington Post blog)

"FAQ: Debt Deal 'Super' Committee's Impact On Health Spending Explained" (Kaiser Family Foundation Health News)

"Tea Party groups see Medicare overhaul chance" (Reuters)

"Social Security, Medicare dodge bullet, but cuts loom" (Reuters blog)

"Debt Deal Triggers Nerves In Health Industry; Providers Brace For Cuts" (Kaiser Family Foundation Health News)

"What Does the Debt Ceiling Agreement Mean for Medicare?" (Center for Medicare Advocacy, Inc.)

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One of the biggest questions in determining Medicaid eligibility for long term care is what are the person's "Available Assets" our "Countable Assets".  The Countable Assets must be spent down to $2000/$4000 for Medicaid eligibility (depending on the program being applied for).  A new case decided today says that New Jersey can look at certain promissory notes as being Countable Assets.

Elderlawanswers.com reports:

In a long-running case that has bounced back and forth between two federal courts, the Third Circuit Court of Appeals rules that New Jersey's Medicaid agency may analyze promissory notes as trust-like devices and count the notes as available resources. Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011).

A group of New Jersey residents lent money to close relatives in return for promissory notes. After the individuals applied for Medicaid, the state denied their applications, claiming that the promissory notes were trust-like instruments that qualified as available resources.

The residents filed suit in federal district court seeking to enjoin the state from counting the notes as available resources. The district court denied the request for preliminary injunction, holding that there was nothing in the Medicaid Act or the POMS that prevented the state from analyzing promissory notes as a trust-like device if the situation warranted it. The residents appealed to the U.S. Court of Appeals for the Third Circuit, which vacated and remanded, holding the district court committed legal error when it analyzed the notes as trust-like devices without first determining whether they would be counted as resources under the regular resource-counting rules. The court agreed with the plaintiffs' argument, which was based on the federal statutory requirement that the Medicaid program may not use eligibility rules that are more restrictive than those used by the SSI program (see 42 U.S.C. 1396a(a)(10)(c)(i)(III)).

The district court again denied the preliminary injunction, holding that the relationship of the parties and the terms, amount and timing of the loans indicated that the loans were not bona fide cash loans or promissory notes. The residents appealed.

In a ruling that is "not precedential," the U.S. Court of Appeals for the Third Circuit affirms, holding that the Medicaid applicants are not entitled to a preliminary injunction because they "failed to show that it was more likely than not that their notes would be considered cash loans or promissory notes under the regular SSI resource-counting rules or that their notes should not be considered trust-like devices."

 For the full text of this decision, go to: http://www.ca3.uscourts.gov/opinarch/104647np.pdf

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It's not really a surprise, but a recent decision confirmed that trying to prove to New Jersey that a transfer was made within the Medicaid 5 year look back period for reasons "other than qualifying for Medicaid" is an uphill battle with a low probability of success.

Fellow New Jersey elder law attorney John Callinan represented A.M., who transferred $22,103 in September 2006.  A.M. had a sudden onset illness, and applied for Medicaid August 2009.  She was found eligible for Medicaid,but a transfer penalty was imposed due to the the gift.

Elderlawanswers.com provides details on A.M.'s appeal:

A.M. appealed, claiming that she transferred the money exclusively for reasons other than to qualify for Medicaid. She explained that she gave money equally to all of her children over the years, but she had set aside money for her son because he was addicted to cocaine and going through a divorce, and she transferred the money to him only after he had been rehabilitated. A hearing officer reversed the county's decision, determining A.M. had met her burden of proof. However, the director of the Division of Medical Assistance and Health Services reversed the hearing officer, holding that A.M. had not produced evidence to show why she suddenly transferred more than half her assets to her son. A.M. appealed to court (she died while the appeal was pending).

The New Jersey Superior Court, Appellate Division affirms, holding that A.M. did not establish that the transfer was done exclusively for reasons other than to qualify for Medicaid. The court notes that A.M. "failed to present any evidence as to how [A.M.] was allegedly able to live independently during the period between her substantial gift to her son and her admission to the nursing home."

For the full text of this decision in PDF, go to: http://www.judiciary.state.nj.us/opinions/a4789-09.pdf 

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The estate tax, even at a $1 million exemption amount, applies to only 2% of Americans at death.  Medicaid estate recovery can apply to anyone over the age of 55.  Jeffrey A. Marshall, CELA* at Marshall Elder & Estate Planning Blog has a great post today "Medicaid Estate Recovery - A Medicaid Death Tax" asking why there is so much noise and media coverage about the estate tax when Medicaid estate recovery rules essentially act as a death tax on the poorest of seniors.

His central arguments:

• Medicaid, not Medicare, is the biggest government source of payment for long term care.
• In a curious exercise of age discrimination, the [estate]  recovery program only applies to people who are over age 55.
• Because most assets must be spent before a senior becomes eligible for Medicaid, recovery efforts focus on real estate – mainly the home or family farm.
• In some cases, the fear of losing their home or farm to estate recovery deters seniors from getting the care they may desperately need.

Jeff also gives a great example of how Medicaid estate recovery works.

What really struck me is that I had never really considered before is that estate recovery doesn't apply to everyone - just recipients over 55.  While the state certainly needs to balance the care it offers with payment for that care, why is it only that seniors have to give up their homes to get the care they need?

 Image: jscreationzs / FreeDigitalPhotos.net

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Over the weekend the Wall Street Journal ran When Prepaid Funeral Plans Are Wealth Killers subtitled "Long Pitched to People of Lesser Means, the Controversial Deals Are Going Upmarket—and Now May Carry Bigger Risks".

Prepaid funerals at the heart are just what they say - you pay now for your funeral upon your death. Elder Law attorneys commonly advise clients who have a loved one in a nursing home and are spending down all their assets to consider purchasing a prepaid funeral.  The expense of a funeral will exist for the family whether their loved one has assets or not - such as in the case of a person who has needed spend down all their assets to qualify for Medicaid to pay for their long term care needs. The purchase of an irrevocable pre-paid funeral is a permissible spend-down before applying for Medicaid.  For many, it is a sensible choice to prepay the $10,000 a funeral averages than to pay another month privately to the nursing home - it is not as if a person who has qualified for Medicaid will have an estate with assets to pay the funeral costs.

A key point is that the payment must be made to in irrevocable funeral trust in New Jersey so that the amount of the prepaid funeral is not "countable" and thus must be liquidated and spent down before Medicaid can be qualified for.  Compare this to a "funeral insurance" life insurance policy, which is a countable asset for Medicaid purposes, and thus potentially must be liquidated and spent-down before a person qualifies for Medicaid.

The article takes issue with situations of potentially unscrupulous sales of pre-paid funerals, whether into trusts where the assets weren't there at the end, or the family didn't get the services they thought they paid for, or they ended up paying more in insurance premiums than the value of the policies.  It notes that " In November, New Jersey started requiring cemeteries to deposit all of the prepayments they receive for burial services into a trust fund for safekeeping."

Notwithstanding that a person always needs to be aware of the "small print" on any large purchase, prepaid funeral will remain in the Elder Law attorneys arsenal, and are a good solution for families who find themselves in a position of potentially having no estate to pay funeral expenses.

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Over the weekend the Wall Street journal ran an article on elder law  planning entitled "Inoculating Estates From Health Costs". While I'm always happy to see an article about elder care planning in the news because it's such a critically important and mis-understood problem, in this article the Wall Street Journal missed the mark.

The article opens as follows:

Should you give away your nest egg to your heirs—and then stick Medicaid with your nursing-home tab when the time comes? Outrageous though it might seem, it is a perfectly legal estate-planning strategy.

 The author seems to think that this is what Medicaid asset protection planning is all about -- happily giving away millions in assets so you can "stick it" to the government should you get sick. This assumption couldn't be further from the truth.

The vast majority of clients I see who seek elder care advice from an attorney are not rich -- they typically have a modest home that they have owned for 40+ years which has appreciated in value primarily because of its location in Northern New Jersey. They may have $100,000 to $300,000 in savings - they may have less or none. They are generally living off of the fixed income of Social Security, a small pension, and income off their meager assets, in the most expensive state in the country. Real estate taxes for that modest home easily range between $6000 and $15,000 per year.  Given current interest rates, the income off of a $100,000 CD may be approximately $4000 a year (which might cover part of their real estate taxes).

The clients and audiences I speak to about elder care planning are retired -- they generally worked their whole lives for one company or a small business, and are falling further and further behind every year as promises made about pensions and healthcare are reneged upon, or the companies that they work for go out of business, while living expenses, and most dramatically health care expenses, spiral beyond their means. They typically have little or no debt, because it was always important to them to pay their bills. Many are veterans, because they cared enough to serve their country.  They're scared - scared that they might lose their house, scared that their spouse will not be able able to financially survive if they get sick, scared that their illness might bankrupt their children.

And let's talk about the author's assumptions about how "great" it is to be on Medicaid should you get sick.  In order to qualify for Medicaid, you must have less than $4000 of assets in your name. When was the last time you had less than $4000 of assets? Needing Medicaid means that you are stripped of all financial security whatsoever. Do you want to ask your kids for money whenever you need it? Well, neither do my clients.  Furthermore, under Medicaid, your choice of care is limited -- generally Medicaid only pays for care in an institutionalized setting (i.e. nursing home), and will not pay for you to be cared for in your home (even though that will cost less). So, not only have you been stripped of all your finances, but you are also stripped of the comfort and dignity of aging and dying at home. Gee, doesn't that sound like something you should "plan for"?

So why does it matter to plan to pay for long-term care for yourself? Well, nursing homes in New Jersey easily run at $10,000 after-tax dollars a month. That's four times as much as you might pay for tuition for a single year of a college education. Our seniors didn't plan for this -- heck, those of you reading this right now have not planned for this. It is mind-bogglingly expensive and could wipe you out financially.

So, should the result be to punish people for getting old and getting sick before they die?  Does a person "deserve" to be institutionalized because they didn't "strike it rich" during their working years?  Or, should our seniors be afforded the most dignity and security that they can in the face of a whole host of bad choices, each one worse than the one before it?

Sure, there are people out there who "game" the system -- but that's called fraud, and there are civil and criminal penalties to address that. The seniors that I talk to just don't want to be scared anymore -- they want to have a sense of security about their future, to know what it could cost them if they get sick, and to know how it is that they're going to pay for it. The Wall Street Journal article uses far too wide of a brush -- don't paint those seeking education to make informed decisions about a harsh reality as leeches on society.

Image: Maggie Smith / FreeDigitalPhotos.net

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My colleague Don Vanarelli has a great post about what to consider when entering into a collaborative divorce.  I think of a collaborative divorce as when reasonable people have determined for whatever reason that the marriage is no longer working, and they are willing to work together to create a win-win situation for themselves in light of the changed facts.   Other advisors that will be involved include matrimonial attorney on both sides to represent each party (even though it is collaborative it needs to be fair), a financial planner to do the tire-kicking of if the split of the pie will support both parties lifestyles, and a perhaps a counselor to act in a mediator role.

My colleague Jody D'Agostini introduced me to the concept of collaborative divorce through her experience with it from the financial planning side.  She has a great interview with Fox 5 News about how this approach can save money and protect the family from devastating emotions.

For those considering a divorce, a collaborative divorce approach may work for you - or it may not. Before moving forward with anything you need to get your own independent legal advice about your situation.  This is  particular sensitive with seniors as if Medicaid deems that you have "given away" too much in the divorce, they may treat it a transfer that creates a penalty period.

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Life estates are commonly used in elder law asset protection planning.  Mom owns a house worth $400,000.  She gives the house to her children(a "remainder interest"), and keeps the right to live in the house during her lifetime (a "life estate interest").  The gift of the remainder interest is "transfer" for Medicaid purposes, and starts the clock on the 5 year lookback period.  

The gift of the house subject to a life estate is a popular asset protection planning technique because it is easy to understand and less invasive to lifestyle than other transfer techniques. Making a gift of a remainder interest simply involves the attorney preparing a deed and associated real estate transfer documents.  There are no realty transfer tax consequences - realty transfer tax is not assessed in New Jersey for transfers without consideration (i.e.: a gift). Also, using a life estate technique not much changes from a practical perspective as the life estate holder (ie: Mom) continues to be responsible for all property taxes, maintenance and upkeep - and is still entitled to the Senior property tax rebate.  Perhaps most importantly, you don't spend your house, so it is emotionally easier to give away an interest in a house than to give away cash dollars that you may still want to spend.  For those who think they are at least 5 years away from a nursing home, a transfer of a house subject to a life estate can be a home run as the house tends to be the most valuable single asset.

But what happens from a tax perspective when the owner dies? (Assuming the death is not in 2010 when we have no federal estate tax - see my prior post on estate tax implications for deaths in 2010)

If you give away an asset and keep a life estate in that asset, the life estate acts like a "string" that pulls 100% of the value of the asset into your taxable estate.  From an estate tax perspective, this mean that (1) 100% of the value of the house is included in decedents taxable estate, and (2) the cost basis of the house is "stepped-up" to the value of the house on date of death (IRC 2036).  So, if Mom bought the house for $40,000 and it is now worth $440,000, Mom's estate includes the house valued at $440,000, and kids get the house with a $440,000 basis.  When they sell the house for $450,000 down the road, then they only have $10,000 of capital gain.  The $400,000 of appreciation that occurred during Mom's lifetime essentially disappears (you potentially pay estate tax instead).  If the total estate is less than $675,000 (New Jersey) or $1,000,000 (federal starting in 2011 - unless congress changes it), then there will be no estate tax due.  If there is a New Jersey estate tax, the rate ranges up to 16% on amounts over $675,000 - this is far less than the capital gains tax (15% federal plus 7.5% NJ) on $400,000 if Mom simply gave the house to the kids without keeping the life estate.  

In New Jersey we also need to contend with the Inheritance Tax if the remainder beneficiaries are not children - for example, Aunt gives her house to her nieces and nephews and retains a life estate.  The Inheritance Tax is a separate tax from the estate tax that is assessed against a beneficiary based on their relationship to the decedents - transfers to spouses and children are exempt, transfers to other family members are not.  For example, when Aunt dies, the life estate acts to make 100% of the value of the house subject to inheritance tax (NJAC 18:26-5 et seq).  So, nieces and nephews get the house, but they need pay an inheritance tax at the rate of 15%-16% with no exemption.  The inheritance tax is a credit to the estate tax, so you don't end up paying both taxes if the estate is subject to estate tax and the beneficiaries are not children or spouses.

The benefits of making  a transfer of a house subject to a life estate can significantly outweigh any estate tax or inheritance consequences in many situations.  The key is to get advise for YOUR situation to see if transfer of a house subject to a lift estate make sense to protect your assets from a Medicaid spend-down.

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The most important Elder Law decisions from around the country are summarized here.  Each case is relevant to New Jersey as elder law often involves Medicaid, which is subject to "supposedly uniform" federal regulation as jointly funded and administered by the federal and state governments. As a result, treatment of a question about Medicaid in one state may eventually become the law of the land in all states.  

Elderlawanswers.com has created this top 10 list from the popularity of the cases on its website - I have added topic heading and notes about what impact these cases might have in New Jersey.

1. Estate Recovery - State That Has Not Expanded Definition of Estate May Still Recover Non-Probate Asset

   A Missouri appeals court finds that the state may use an accounting statute to recover Medicaid benefits from a decedent's estate even though the only asset is a non-probate asset and Missouri has not expanded its definition of estate to include non-probate assets. In Re Estate of Jones (Mo. Ct. App., W.D., No. 69310, Jan. 13, 2009).  Note that NJ has an expanded estate recovery statute so that Medicaid can have a lien against assets passing by joint ownership or a beneficiary designation when a person dies.

2. Medicaid Annuity - Annuity Purchased to Benefit Community Spouse Is Available Resource

   A New Jersey appeals court holds that under the Deficit Reduction Act of 2005 (DRA) a state may consider the value of an annuity purchased for the sole benefit of the community spouse in determining whether the Medicaid applicant is eligible. N.M. v. Div. Medical Assistance and Health Servs. (N.J. Sup. Ct., App. Div., No. A-0828-07T1, Feb. 26, 2009). See prior posting for a full discussion of New Jersey treatment of Medicaid Annuities.

3. Promissory Note - Non-Saleable Promissory Note Is Improper Transfer

   The Ohio Court of Appeals finds that a non-saleable promissory note is a prohibited asset transfer for Medicaid eligibility purposes because the interest was deferred and it wasn't clear the note barred cancellation upon the loaner's death. Brown v. Ohio Dept. of Job & Family Servs. (Ohio Ct. App., 8th Dist., No. 92008, March 12, 2009). There is a current pending case on the question of the use of promissory notes in New Jersey.

4. Trusts as Countable Assets for Medicaid - Trust Is an Available Resource Despite Discretionary Language

   The Minnesota Court of Appeals finds that a trust's principal and income are both available resources for Medicaid purposes even though the trust's language requires only payments of income to the beneficiary and gives discretion to the trustee to distribute principal. In The Matter of the Stephanie L. Wilcox Trust (Minn. Ct. App., No. A08-1458, May 19, 2009).  The lesson here?  Trusts must clearly specify if the assets are not available to satisfy long term care needs.

5. Estate Recovery - Property Owned in Joint Tenancy Falls Under Estate Recovery Rules

   A Minnesota appeals court rules that the state may assert an estate recovery claim against property that was owned in joint tenancy at the time of a Medicaid recipient's death and that flowed into her surviving spouse's estate. In re the Estate of Grote (Minn. Ct. App., No. A08-1691, June 2, 2009).  Again, New Jersey has an expanded estate recovery statute, so Medicaid can recoup money it expended against joint assets when a person dies.

6. Trusts as Countable Assets for Medicaid - Irrevocable Trust Forbidding Distribution of Corpus Is Still Countable by Medicaid

   The Massachusetts appeals court finds that although an irrevocable, income-only trust expressly prohibits distributions of principal, other provisions in the trust could conceivably permit the trustees to invade trust assets, and thus the trust is countable for Medicaid purposes. Doherty v. Director of the Office of Medicaid (Mass. App. Ct., Essex, No. 08-P-939, June 18, 2009). Again - trusts must clearly specify if the assets are not available to satisfy long term care needs.

7. Trusts as Countable Assets for Medicaid - Property of Trust That Bars Distributions That Interfere With Medicaid Eligibility Is Available Asset

   An Illinois appeals court finds that a trust that prevented the trustee from making distributions if it would interfere with public assistance is an available asset for Medicaid eligibility purposes. Vincent v. Dept. of Human Services (Ill. Ct. App., 3rd Dist., No. 3-08-0096, June 18, 2009). Seeing a theme here? Trusts must clearly specify if the assets are not available to satisfy long term care needs.

8. Medicaid Annuity - Community Spouse's Post-DRA Annuity Purchase Is Not an Improper Transfer

   An Ohio appeals court holds that the purchase of a post-DRA annuity by a community spouse is not an improper transfer of assets. Vieth v. Ohio Dept. of Job & Family Services (Ohio Ct. App., 10th Dist., No. 08AP-635, July 30, 2009). I expanded on this case and how it might apply in New Jersey in a prior post.

9. Trusts as Countable Assets for Medicaid - 10th Circuit Reiterates: States Need Not Exempt (d)(4) Trusts From Asset Calculations

   Confirming an earlier decision, the 10th Circuit Court of Appeals rules that Congress left states free to count (d)(4)(A) and (d)(4)(C) trusts as available resources for Medicaid purposes. Hobbs v. Zenderman (10th Cir., No. 08-2099, Sept. 1, 2009). New Jersey considers so called (d)(4)(A) trust as non-countable assets so long as the State is the primary beneficiary upon death.

10. Medicaid Annuity - Annuity Purchase by Community Spouse Upheld in Federal Appeals Court Decision

    In a much-anticipated decision, the Third Circuit Court of Appeals affirms a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009). I blogged about this excited development in an earlier post as New Jersey is in the Third Circuit so this case applies to our clients.

      

Image: Salvatore Vuono / FreeDigitalPhotos.net

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 Elderlawanswers.com reports today that:

In a much-anticipated decision, the Third Circuit Court of Appeals has affirmed a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009)."

This is an incredibly important ruling.  New Jersey is in the 3rd Circuit, so this ruling may have application to New Jersey Medicaid cases.

The Deficit Reduction Act or "DRA" states that a purchase of a Medicaid Compliant Annuity is not a transfer of assets that creates a penalty period under Medicaid.  As I discussed at "Annuity Purchased by Spouse Tarnished in NJ - But is There Light from Other State's Analysis" New Jersey has not enforced the federal law. Instead New Jersey, like Pennsylvania (the state at issue in the case) took the position that a purchase of an annuity by a community spouse is a transfer that results in a penalty period - essentially, even though you used $200,000 to purchase an annuity that can only give you $3500 a month, you are still treated as owning the $200,000 and then penalized for not having it liquid to spend on nursing home care.

In the Weatherbee case, Mrs. Weatherbee purchased a Medicaid compliant annuity for $400,000, which paid her $4,423 a month.  Pennsylvania took the position that the $4,423 a month was an "available resource" that she could sell (i.e.: she could sell the income stream, get a lump sum amount, and spend that amount on care). Normally, an annuity payment is deemed income, and not an asset (assets have to be spent down for Medicaid, but income of the spouse not in the nursing home is not considered).

Pennsylvania's approach (which is similar to New Jersey's) was soundly rejected.  The Third Circuit Court of Appeals confirmed that "treating the income from an otherwise compliant annuity as an available resource is inconsistent with the treatment of annuities under the Medicaid Act."

My colleague Don Vanarelli has a lengthy post  at his blog on the Weatherbee case with some great insight into how it might be effective in New Jersey.   The issue is that while NJ is in the Third Circuit, there are issues of deference and authority between state and federal laws and courts. 

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Generally speaking, a transfer of assets from a parent to a child within 5 years of making an application for Medicaid for long term care benefits creates a "Penalty Period".  During the Penalty Period, the parent will not receive Medicaid under the basic theory that if the parent had not transferred their assets, they would still have them and would not need Medicaid.

If anyone remembers the TV show Ed, the premise was that the main character was fired from his job at a big law firm because of where a comma was - this is much the same case.  (Only attorneys could argue so much about a comma, but the legislature should do a better job of how they write laws).

At issue is the "Disabled Child Exemption" to the transfer penalty rule.  Transfers to a disabled child are exempt from creating a transfer penalty period.  New Jersey took the position that transfer to a disabled child were exempt ONLY IF the transfer was made to a trust for the sole benefit of disabled child.  The plaintiff/Medicaid applicant had made the transfer outright to their disabled child, and not in trust, and argued that that the transfer should not create a penalty period, whether made to a trust for the disabled child, or to the child directly.

In Sorber v. Velez, the US District Court the District of New Jersey agreed with the plaintiff/Medicaid applicant that that a transfer to a disabled child does not have to be in trust to qualify for the exemption from the transfer penalties.

The problem in the case arises from a section of the Medicaid statutes that the court correctly describes as "not a model of legislative draftsmanship".  The statute (42 U.S.C. § 1396p(c)(2)(B)(iii)) reads in relevant part:

“An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that . . . the assets were transferred to, or to a trust (including a trust described in subsection (d)(4) of this section) established solely for the benefit of, the individual’s child [who is blind or disabled].”

So, does "established solely for the benefit of" describe the "trust" or "assets transferred to". The court found it described the trust, so that the trust the assets were transferred to needs to be "solely for the benefit of" the disabled child, not that a transfer must be in a trust.

I have to say that the court's analysis seems just plain common sense from the reading (the words "trust" and "solely for the benefit of" are in the same sub-phase set aside by commas - thank you Ed again for showing the world how important commas can be).  So, as a taxpayer I have to ask why Health and Human Services would expend the dollars to fund the time and energy of a legal battle when a plain reading of the language, giving the commas the proper weight, seems to answer the issue?

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In response to my post NJ Medicaid Key Figures - Starting July 2009 I received 2 questions if it was "better" to move to Florida for Medicaid purposes.  Not being a Florida practitioner, I cannot really compare Medicaid rules in the two states.  Note the Medicaid is federal law - so while it is implemented on a State by State level, the overarching rules are the same for everybody.  What I can do is give you the Florida Key Medicaid figures, courtesy of The Law Offices of Sean W. Scott, Esq.

 2009 Florida Medicaid Asset/Income Numbers.  

• Gross income for the applicant - Less than $2,022* per month
• Gross income for the spouse - Unlimited 

• Spousal income diversion - min. $1,750 max. $2,739
• Spousal excess shelter standard - $525 

• Assets** allowed for the applicant - $2,000
• Assets** allowed for a low income (less than $808 per mo.) $5,000
• Assets allowed for the well spouse - $109,560
• Transfer penalty divisor - 5,000

*If income is higher an income trust will be required.

**Assets must below the limit at least one day during each month the application is pending for approval.

If you need Florida specific legal counsel, search for Florida Elder Law attorneys through the Attorney Locator of the National Academy of Elder Law Attorneys.

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Oftentimes a client asks "I heard that Medicaid law changed recently - when did it change and how does it effect me?"

The change those clients are referring to in the enactment of the Deficit Reduction Act of 2005 or DRA.  The effective date of the DRA is February 8, 2006 (the date President Bush signed the DRA into law).

February 8, 2006 is a line in the sand from a Medicaid Asset Protection perspective.  Transfers or gifts made prior to that date are subject to a 3 year lookback period, and the penalty for transfers reduces each month starting with the month of the gift.  Transfers or gifts made after that date are subject to a 5 year lookback period, and the penalty for transfer doesn't begin to run until after you are already in a nursing home.  For more detailed information, look to my prior post What is the Medicaid Look-Back Period under the DRA?

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My colleague Donald D. Vanarelli has a great post at The Law Offices of Donald D. Vanarelli Blog about how Ohio and Massachusetts have taken a different approach to whether or not an Medicaid Qualifying Annuity purchased by a Community Spouse is considered an Available Asset of a Community Spouse.

The Deficit Reduction Act of 2005 (DRA) addresses situations where the purchase of an annuity can be Medicaid Compliant and the value of the annuity not deemed to be an available asset to the Community Spouse.  Regardless, as Don points out:

As I blogged here, the New Jersey appellate court, in N.M. v. Division of Medical Assistance and Health Services, 405 N.J. Super. 353  (App. Div. 2009), certif. den., 199 N.J. 517 (2009), held that an annuity purchased for the sole benefit of the community spouse after the effective date of the Deficit Reduction Act of 2005 (DRA) may be considered in determining whether the resources of the institutionalized spouse exceed the resource limit for Medicaid eligibility. This case is one of major importance in the Medicaid estate planning area, and it is a major setback for those trying to help couples protect sufficient assets for the community spouse to live on when the ill spouse is institutionalized. However, based upon recent case law developments in other states, it appears that the New Jersey court’s analysis in the N.M. case may be less persuasive than anticipated. In that regard, courts in Ohio and Massachusetts have recently ruled, contrary to the court in New Jersey, that a community spouse’s annuity purchase is not an improper transfer.

But an Ohio and Massachusetts Court have looked at similar facts and reached different conclusions.  Notably the Ohio appeals court considered and rejected New Jersey's analysis in N.M.:

Significantly, the Ohio appellate court in the Vieth case considered, but refused to follow New Jersey’s N.M. case, instead finding “more reasonable the interpretation and analysis” of the applicable federal statute set forth in the federal district court case entitled Weatherbee v. Richman, 595 F. Supp. 2d 607 (W.D. PA 2009), which held that a post-DRA annuity purchased for the community spouse is exempt for Medicaid eligibility purposes. I blogged about the Weatherbee v. Richmancase here.

Given that the treatment of annuities is set forth in federal law, perhaps these cases will lend weight to a revised interpretation in annuities in New Jersey that is in fact consistent with the law.

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The Federal Health and Human Services Agency, which administers Medicare and Medicaid, has a fabulous Nursing Home Compare Tool.   The Tool has detailed information and ratings about every Medicare and Medicaid certified nursing home in the country (a actual good use of federal tax dollars in my opinion).  

You can search for nursing homes by name or geography.  The search results are then rated on a scale of 1 to 5 stars (with 5 being the highest).  You can compare up to 3 nursing homes side by side with detailed information on the facilities, staffing, health inspections, and quality measures.

A search within 10 miles of me shows 20 nursing homes.  Of those, the following 5 facilities have an overall rating of 5 out of 5 stars, demonstrating that they are much above average:

• ATLANTIC REHABILITATION INSTITUTE 
  95 MT KEMBLE AVENUE
  MORRISTOWN, NJ 07960
• INGLEMOOR REHABILITATION AND CARE CENTER OF LIVING 
  311 S LIVINGSTON AVE
  LIVINGSTON, NJ 07039
• SAINT ANNE VILLA 
  190 PARK AVENUE
  FLORHAM PARK, NJ 07932
• ST CATHERINE OF SIENA 
  7 RYERSON AVENUE
  CALDWELL, NJ 07006
• TROY HILLS CENTER 
  200 REYNOLDS AVE
  PARSIPPANY, NJ 07054

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 In today's USA Today, Matt Kranz answers a question about asset protection:

Q: My father may be put into a nursing home and would like to protect his investments, including his home and $250,000 in cash and stocks. Is there a way to do this?

Matt's first point is a good one, "In hindsight, the best thing to have done would have been to start planning farther ahead. "  However, the reality is that most families don't see the need for or value in asset protection planning until the crisis is upon them.  Then families ask the question posed above.

So what is to be done in this situation?  One solution Matt speaks about is combining a gift and a "Medicaid Annuity".  I have detailed the concept below.  The problem?  While Medicaid Annuity planning may be effective in California, it is of very limited used her in New Jersey.  In the recent case of N.M. v. Div. of Med. Assistance & Health Services the court found that New Jersey may consider as a countable resource the value of the income stream from a "Medicaid Annuity" purchased by a community spouse. An excellent summary of the case can be found on Don Vanarelli's blog.

If a Medicaid Annuity worked in New Jersey for asset protection planning, this is what it might be structured as:

Otherwise, [Michael Gilfix of elder law specialists firm Gilfix & La Poll Associates of Palo Alto, Calif.] [suggests your father might consider trying to protect some assets by using a combination of an annuity and gifts. Let's assume the cost of a nursing home is $5,000 a month and your father's monthly income is $1,000 including Social Security. With the $250,000 cash in the estate, your father might give a gift of $125,000 to a relative. That exceeds the $13,000 annual exclusion for gifts. However, your father could avoid gift tax on the $125,000 by claiming $112,000 of his $1 million lifetime gift tax exclusion, Gilfix says. He would need to file a 709 gift tax return with the IRS.

The $125,000 gift would make your dad ineligible for Medicaid reimbursement for 22 months, Gilfix estimates. So, with the remaining $125,000 in the estate, your father could buy an annuity with a 22-month term so it pays $4,000 a month.

Your father would qualify for Medicaid, since there would be no assets in the estate. And the annuity would cover the cost of the nursing home for 22 months. After that time, your father would qualify for Medicaid. Meanwhile, the $125,000 gift would be protected, Gilfix says.

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The key figures for Medicaid eligibility are updated frequently.  These figures will determine if a person qualifies for long term health care to be paid under Medicaid, as well as what assets a spouse can maintain if one spouse enters a nursing home.  These figures change frequently, some on an annual basis as a result of inflation, and other by administrative action.  Unfortunately, they are not broadcast by the Department of Human Resources as frequently.  Here is where they stand as of July 2009:

New Jersey Medicaid Reference – July, 2009

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This is a test to see how the new  posts work

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