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Elder Law Considerations in Asset Protection, Estate, and Tax Planning

A signficant part of elder law planning is identifying resources exempt from consideration against the prospective recipient for Medicaid purposes, and then expending the non-exempt resources in a manner beneficial to the prospective recipient and their family. The Medicaid program is the "payer of last resort," and New York along with other states has a definite interest in ensuring other resorts are exhausted first, or that the payer can recover what it can under the law.

Although a resource may be exempt for Medicaid eligibility purposes—such as real estate in which the prospective recipient's "well-spouse" continues to reside—competent elder law planning does not stop there.

Additionally, competent elder law planning should not be premised on "having enough resources to pay for care and then having Medicaid to back me up." Elder quality of life does not require expending resources until the system can "bail you out," and relying on assets to get you as far as they can will only leave you and your family in the poor house. Competent elder law planners do all that is possible to ensure your quality of life is maintained at the highest level possible, which requires maximization of your ability to draw Medicaid benefits. It is the system that you have paid into for several years, for a benefit that is now coming due to you.

1. Medicaid Planning

A five-year "lookback period" is used by the Medicaid program to find resources transferred away for the purposes of receiving Medicaid. Resources transferred during those five years, including both assets and the right to receive income, create a penalty period during which a prospective recipient cannot receive Medicaid and care costs must be paid out-of-pocket. There are certain exempt transfers of resources, such as transfers for fair market value, that will not trigger this penalty period.

The five-year lookback rule only applies for nursing home care. Community Medicaid—including Medicaid health insurance, home attendants, home health aides, and the assisted living program—remain available regardless of when resources were transferred.

New York allows Supplemental Needs Trusts, which will not provide any asset protection features because they are a self-settled trust, but will remove a resource placed into the trust from consideration for Medicaid eligibility. By using this Trust, a prospective recipient can still enjoy the income of their pension or other annuities without their value counting against the recipient for eligiblity purposes, unless the prospective recipient is over age 65 and is applying for nursing home care, in which case the five-year lookback will apply. The Trust is discretionary, meaning that the trustee has the right to make distributions from the Trust for the benefit of the recipient, subject to a few reporting requirements to the county Department of Social Services. The State is entitled to repayment from the Trust after the recipient's death, however, and may pursue the recipient's estate for any additional amounts owed.

Note that trusts that have a provision where grantor access to the principal of the trust is severed if the grantor applies for medical assistance or enters a nursing home (known as "trigger trusts") are void as a matter of policy in New York and elsewhere if created after a certain date, unless part of a trust made by the probate of a will (a "testamentary trust"). (NY EPTL §7-3.1(c); see also Ferrugia v. NY State Dep't of Health, 747 NYS2d 314 (Sup. Ct. Chautauqua County 2002), affirmed 5 AD3d 1116, reversed 3 NY3d 683.)

2. Fraudulent Transfer Law

Even if safe from Medicaid look-back consideration due to the type of transfer or because the transfer is for fair market value, certain transactions may be subject to an assisted living facility claiming that the transfer was fraudulent.

Life Care Contracts

These are contracts where, generally for a lump-sum that is below the fair market value of the services to be rendered, a family member contracts to take care of the prospective recipient. In some states, these arrangements have been held to be fraudulent transfers:

New Jersey. (E.S. v. Division of Medical Assistance and Health Services, N.J. Super. Ct. App. Div., No. A-2564-08T2 (March 26 2010).)
Tennessee. (Beverly Healthcare Brandywood v. Gammon, Ct. App. Tenn (2005).)

The only life care contracts considered in case history in New York are those where a non-family provider contracts to provide care for the remainder of a prospective recipient's life—which usually disqualifies the recipient from Medicaid, not because of fraudulent transfer law but because the provider will pay and Medicaid need not pay. See Barbato v. Department of Health, 65 AD3d 821 (4 Dep't 2009), appeal denied 13 NY3d 712, where a personal service agreement at less than fair market value was held to have properly been included as a look-back transfer resulting in a penalty of ineligibility.

Applicability of Fraudulent Transfer Law via Power of Attorney

Some states have allowed creditors to pursue attorneys-in-fact, meaning the people who hold a power of attorney from someone else, under fraudulent transfer laws:

Ohio. (Aristocrat Lakewood Nursing Home v. Mayne, 729 NE2d 768 (Ohio App. 1999).)

And by contrast, certain states have forbade creditors to claim transfers made by an attorney-in-fact under a Power of Attorney are fraudulent:

Pennsylvania. (Presbyterian Medical Center v. Budd, 832 A2d 1066 (PA Super, 2003) (attorney-in-fact not debtor under meaning of UFTA, contrasts Aristocrat).)

Applicability of Fraudulent Transfer Law to the Well-Spouse

New York has held that well-spouses can make fraudulent transfers after signing a Medicaid "Declaration of the Legally Responsible Relative" indicating that the well-spouse will not contribute. In Sherman v. Wontrobski, 11 Misc3d 1090(A) (NY Sup Nassau Cty. 2006), the state Medicaid recovery enforcers were allowed to amend their complaint against a well-spouse, alleging that the well-spouse fraudulently transferred real estate into an irrevocable trust two years after signing the Declaration.

Applicability of Fraudulent Transfer Law to Renunciation of Distributions

New York has held that although a recipient has an absolute right to renounce a distribution, a renunciation of the right to distribution under a trust or from an estate can be considered a fraudulent transfer and thus trigger ineligiblity for Medicaid or public assistance. Molloy v. Bane, 214 AD2d 171 (2d Dept. 1995); Keuning v. Perales, 190 AD2d 1033 (4th Dept. 1993).

3. Medicaid Liens Against the Estate

Certain resources, although exempt from consideration for Medicaid eligibility, are not exempt from "Medicaid Recovery," where the state recovers monies paid in Medicaid from assets within the estate after the death of a recipient. Commonly, real estate has a lien placed against it for the value of the services paid for through Medicaid. Careful trust planning can mitigate the effectiveness of any Medicaid recovery liens, and we can help.

4. Retirement Accounts

Before April 1st of the year after the recipient becomes age 70 and a half, a Traditional IRA is an available resource for Medicaid and must be spent down, unless the IRA owner has converted the IRA to an annuity and has begun taking the distributions from it and put it into "pay" status.

After April 1st of the year after the recipient becomes age 70 and a half, Traditional IRAs begin requiring minimum distributions. At this point, the IRA is considered to have entered "pay" status, and is considered as monthly income of a recipient—of which the recipient is entitled to keep the first $50 in a month, and the remainder goes to the cost of care.

Roth IRAs, by contrast, never enter "pay" status and are therefore always an available resource.

5. Real Estate

Life estates are not considered an available resource, and they retain a certain amount of value of the home, reducing the amount taxable as a transfer. The amount of value transferred does count for computation of the five-year lookback period, however, so it is best to transfer real estate and retain a life interest five or more years before considering applying for nursing home Medicaid. If the life estate remains owned by the transferor at the transferor's death, the real estate will pass through the transferor's estate at death and the transferees will receive the step-up in basis for capital gains tax purposes.

A prospective recipient can sign a letter of intent to return home, and then immediately sell the real estate and negotiate with the county DSS the amount to be held in escrow to satisfy the Medicaid recovery lien. This option will generally allow the recipient to keep some of the sale proceeds.

Alternatively, the recipient can transfer the real estate into a revocable living trust to ensure that the real estate skips probate and thus frustrates Medicaid recovery collection. However, Medicaid will still have a lien on the real estate that will require satisfaction on sale of the property.

As a further alternative, the recipient can transfer the real estate into an irrevocable trust and sell the real estate after the Medicaid waiting period, allowing the recipient to use the capital gains exclusion but the proceeds to go to the trust beneficiaries.

Finally, and perhaps most effectively, the recipient can create a life estate for his or herself and specify an irrevocable trust as the remaindermen of the life estate. So long as the real estate is not sold during the recipient's life, the proceeds of the sale corresponding to the value of the life estate will not be considered available for Medicaid.