Medicaid Estate Recovery

You’ve met with your elder law attorney, you’ve come up with a plan of action, time has gone by, and your parent has entered the nursing home, with Medicaid paying the full cost. Your family members have managed to preserve virtually all of their assets through careful planning, so you feel that the lawyer’s fee was well worth it!

A number of years go by and your parent has now passed on to a better place, but before you’ve finished grieving you get a letter from the state Medicaid Recovery Unit requesting repayment of every dime they paid out on your parent’s behalf! You’re depressed, angry, confused. You stare at the paper and can’t believe it. “I thought we were all set, that once Mom was on Medicaid we didn’t have to worry about that any more….Can this be correct?” you ask your siblings.

Unfortunately, the answer is “Yes.” What you have just been confronted with is something called Medicaid “estate recovery.” Essentially, it requires repayment of the entire amount of Medicaid benefits that were made during your family member’s stay in the nursing home.

Prior to 1993, such estate recovery was optional—a state could implement it or not. However, in that year a new federal law was passed (known as OBRA ‘93) that mandated that every state must seek estate recovery from its Medicaid-receiving residents, following their deaths.

In essence, while you thought you had qualified your family member for a government handout, all you’ve really received is an interest-free loan! And upon your family’s member’s death, the state wants its loan paid back.

Now if you’re sharp, you may be thinking “Wait a minute…if someone qualifies for Medicaid, they have to be essentially broke. So where exactly is this money coming from to repay the state?” That’s a good question, and the good news is that if your family member died owning nothing, then indeed the state is out of luck. It can’t go after the kids’ money. There must be some assets that the nursing home resident had a legal interest in, at the time of death, in order for the state to be repaid.

In many states, the only “legal interest” of a deceased Medicaid recipient that is taken into consideration is the individual’s so-called “probate estate”; that’s an asset that was titled in the sole name of the individual, or as a “tenant in common” if jointly owned. It’s the assets that will pass under a person’s will. For example, something like a joint bank account, stock owned in “TOD” (transfer on death) form, a bank account with a “POD” (pay on death) beneficiary, an annuity interest, and real estate that’s titled as “JTWROS” or “joint tenants with right of survivorship,” are all non-probate assets and therefore protected against the state’s claim for reimbursement.

A number of other states, however, have passed laws that permit recovery against an “expanded definition of estate.” The federal Medicaid laws permit this. Under such an expanded definition “estate” could now include joint property, life estates, living trusts, and any other asset in which the deceased nursing home resident had any legal interest at the time of death. Boy, that makes it tough! This even goes against hundreds of years of common law, but it is legal, and there have been a number of court cases that have backed this up.

Now if you live in one of the “probate estate only” states, you should feel lucky, but remember that at any time your state can revise its laws and go with the broader definition. And your family member will not be “grandfathered in” if he or she received Medicaid benefits before the change in law in your state; there have been court cases that have ruled on this, stating that it’s the law in effect as of the date of death of the Medicaid recipient that counts.

Well, what should you do to plan for this, assuming you can do anything at all? And are there exceptions to this harsh rule? See my other articles on this topic.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2008 Second Edition available here: www.MedicaidSecrets.com).

Medicaid and Failure to Elect Against the Will of a Spouse

In a recent case in New Jersey a man died survived by his wife, who was then living in a nursing home. Under NJ law (as in most states) one spouse cannot disinherit the other spouse, no matter what the will of the first spouse to die says. If, for example, the first spouse to die has a will leaving everything to the children of a first marriage, the surviving spouse has the legal right to “elect against the will.” That means she would file a piece of paper in the court indicating that she rejects the will and wants to get her “statutory share.” That share is usually between 1/3 and 1/2 of the deceased spouse’s probate estate, again depending on what state the couple lived in.

But what happened in the NJ caase is that the spouse in the nursing home did not elect against the deceased husband’s will. The husband left all of his property into a trust for the wife’s benefit, with distributions to go to the wife in the discretion of the trustee. That might be good, but maybe not as good as getting 1/3 of the property outright!

Under the Medicaid rules, if a person does not take advantage of a legal right to access funds, it’s treated as if the person did access the funds and then made a gift of the funds to the actual recipients of the property. So in this case, the failure of the surviving wife to elect her 1/3 “statutory share” interest in her deceased husband’s estate was treated as a gift by the wife to the children. Such a gift causes the wife to be ineligible for Medicaid coverage for some period of time. The length of time she’s penalized for the deemed gift depends on the value of the estate she did not get.

Although the attorney for the wife argued that in fact the wife’s lifetime interest in 100% of the husband’s property was worth more than 1/3 of the same property outright, the court did not buy that. The court ruled that the test is whether the wife could have made the election, not whether such election was advisable.

So what should the couple have done to avoid this? One possible solution is to leave the minimum amount necessary to satisfy the wife’s elective share to her, outright, and then leave the balance either to the children or in a trust for the wife’s benefit. She would still be disqualified from Medicaid for a certain period of time after the husband’s death because she’d have too much money to qualify.

However, once she got the money, she could implement some of the planning ideas discussed in this blog. For instance, typically she could protect at least half of that money, i.e., 1/6 of the husband’s estate. That’s a lot better than being deemed to have a made a gift of the entire 1/3 elective share, which would cause the wife to be disqualified from Medicaid benefits for twice as long.

Now if you’re really clever, you may have thought, “They should have had a pre-nuptial agreement and that would have solved their problem!” Unfortunately, while such agreements are completely legal in most states, the Medicaid rules simply ignore both pre- and post-nuptial agreements. So once again it’s important to get the advice of an attorney who understands the ins and outs of the complicated Medicaid rules, if Medicaid coverage of nursing home expenses may ever become necessary.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2008 Second Edition available here: www.MedicaidSecrets.com).

Common Law Marriage: Be Careful!

Back in the early days of our country, when justices of the peace and clergy were harder to find and the population more spread out, there arose the concept of a “common law” marriage. The basic idea was that if a man and a woman held themselves out to the community as married, and considered themselves to be husband and wife in all their dealings with the public and themselves, then the law would recognize them as such.

At the present time, only about a dozen states still recognize a common law marriage formed under their own laws. However, under the U.S. Constitution’s “full faith and credit” provision, a common law marriage valid in any one of these dozen states will be recognized as a legal marriage in all of the other states.

Unfortunately, because there is no piece of paper to point to, whether a couple will be recognized as married for purposes of state law (and hence federal law, which follows state law on this determination) is a facts and circumstances test.

Here are some of the factors that judges have looked at in making a determination that a couple were married at common law:

• living together
• holding themselves out as married to the general community
• exchange of wedding rings
• attending holiday celebrations and family gatherings together
• traveling together
• filing income taxes marked as married individuals
• completing medical records as married
• sharing domestic responsibilities

Here are some factors that weighed against a couple being considered in a common law marriage:

• the female’s reference to her partner as her “boyfriend” or “partner” to emergency medical personnel
• failure of one partner to indicate she was married when applying for a mortgage
• holding themselves as married only to a small circle of friends and co-workers but not the general community

Because tax returns are signed under the penalties of perjury, they are particularly persuasive to a court in making this determination.

Why is this important? There are many legal consequences, rights, and responsibilities that depend on a determination of marital status. For example:

• A surviving spouse is entitled to a certain percentage of a deceased spouse’s estate if the spouse died with no will; if declared to be unmarried, that surviving “spouse” gets nothing.
• A surviving spouse is entitled to a certain percentage of a deceased spouse’s estate if the spouse had a will but omitted or left little to the other “spouse”; this is called an “elective share” and could be as much as 50% of the deceased spouse’s estate.
• With larger estates, only a legal spouse can claim the unlimited marital deduction, saving thousands of dollars in estate taxes.
• Only legal spouses can file income taxes as “married filing jointly.”
• Only a legal spouse would have certain rights and access to medical records under federal and state laws.
• Only a legal spouse is entitled to the Social Security payments of a deceased spouse.

Sometimes it’s actually better not to be determined to be married. For example, a healthy spouse’s own assets must be “spent down” on a disabled spouse residing in a nursing home, before Medicaid coverage of the nursing home costs will be allowed. If the couple is not married, then only the nursing home partner’s assets are counted, protecting an unlimited amount of assets of the healthy partner.

As you can see, important monetary and other benefits turn on the legal determination of whether there was or was not a common law marriage. In most cases there are benefits to the spouse; in some cases there are disadvantages. In any case, this should be thought through by the couple so that they do not get caught unaware! If in doubt, the couple should go downtown and sign that little piece of paper indicating they are officially married. That would end all questions!

Setting Up a Special Needs Trust for a Disabled Relative

Many of us have a family member or close relative with a disability. We’d like to leave a portion of our estate to help this family member but are unsure how best to do this. Should we just make an outright gift? What about a trust? Let’s take a look at some of the options.

The simplest method of assisting the family member is an outright gift, either during lifetime or via our will. However, if the disabled individual is already receiving government benefits such as SSI (Supplemental Security Income) or Medicaid, additional assets could cause them to become disqualified from those programs. On the other hand, some programs such as SSDI (Social Security Disability Insurance) are not “means tested,” i.e., are not affected by the assets or income of the recipient.

Since a person may not need to receive “means-tested” benefits today but may require them in the future, the safest route is to leave them your gift inside a trust. The trustee of the trust will hold your money, invest it, and distribute it to your intended beneficiary as needed, without causing disqualification from government benefits.

Such a trust is called a Special Needs Trust or Supplemental Needs Trust, since it is designed to supplement—and not replace—government benefits. It can be created today and funded with money or other assets now. Such a trust is called an “inter vivos” trust. You can serve as the trustee or permit someone else to serve as trustee; the trust can be revocable or irrevocable; and you can retain power to change the ultimate distribution of the trust assets or not. All of these decisions affect the income tax and estate tax treatment of the trust. If you choose to make the trust irrevocable, then it will have its own federal tax i.d. number and can be set up to be taxed either to you, the trust itself, or to the beneficiary.

You can also set up the trust within your will, to be funded upon your death. Such a trust is called a “testamentary trust.” In this case, you will not have a separate trust document, since the terms of the trust will be contained within the will itself.

Because the rules of each state vary as to whether the terms of the trust will cause or not cause disqualification, you really must work with an experienced estate planning or elder law attorney to draft this trust for you. The attorney will be familiar with both the federal and state programs that might be of benefit at some point to your family member, what the rules are under both federal and state benefits laws, how trusts work, the different income and estate tax ramifications of each trust option, and how best to achieve your objectives.

Examples of distributions that will not cause the beneficiary to lose or have reduced government benefits:

• new car
• attorney/accounting services
• alternative health treatments
• TV, DVD player
• public transportation pass
• camera
• computer hardware, software, internet fees
• courses and classes
• dental work not covered by Medicaid
• fitness equipment
• musical instruments
• non-food grocery items
• physician specialists not covered by Medicaid
• utility bills
• physical therapy not covered by Medicaid
• vacations

The above is by no means an exhaustive list, but is only intended to give you some idea of what your gift via trust can be spent on to make your family member’s life so much better, without causing disqualification. As you can see, your gift will have wide-ranging benefits for your family member and will improve their quality of life for many years.

Wills for a Second Marriage

“I’m concerned that if I died first, and I just left all my assets to John, that he could get remarried or simply decide for whatever reason not to leave my boys anything upon his death.” Sarah’s heartfelt concern is shared by many individuals who are in a second marriage, where children can be his, hers, and theirs. Taxes are not the issue; protecting one’s legacy so that at least some portion of it stays “on your side” is the goal. How can this be achieved while still benefiting the second spouse?

The goal is generally to benefit the surviving spouse while guaranteeing that upon that spouse’s death, whatever is left will pass in accordance with the wishes of the first spouse to die. There are a number of ways to do this.

Contract to Make a Will. First, it is possible for both spouses to have wills that leave everything to the surviving spouse but then divide between both sides of the family that cannot be later changed, based on a written contract signed by both spouses. The risk is that the surviving spouse may remarry, get sued, or get divorced. In any of those situations, the will may continue to be unchanged, but the assets may becomed depleted by the time the spouse dies.

Testamentary Trust for the Spouse. A better alternative is to insert a trust within your will, for the surviving spouse (this can also be done within a living trust). The surviving spouse can be the sole beneficiary of this trust, but there will be limits on the distributions, so that the surviving spouse cannot withdraw all the trust assets, defeating the plan. The spouse would generally be entitled to all the trust income plus discretionary distributions of principal for maintenance and support or at least medical emergencies.

Having someone other than the spouse as the trustee—or at least as a co-trustee with the spouse—adds further protection. Upon the spouse’s death, the trust divides among your children or however you want it to pass. The main advantages of this approach are as follows:

• your spouse has no ability to alter your intended distribution of assets following your spouse’s death
• if your spouse remarries your assets are protected against claims of a divorcing new spouse
• if your spouse remarries the new spouse will not be able to demand a portion of your assets as an “elective share” (see below) upon your spouse’s later death
• creditors of your spouse cannot touch the trust assets during your spouse’s lifetime or after death

Elective Share. Any of the above solutions must take into consideration the “elective share” statute of your state. That law guarantees a certain percentage of your estate must pass to your surviving spouse, no matter what your will says. That percentage varies from state to state, but is generally between 1/3 and 1/2, and some states pro rate the percentage depending on how long you’ve been married. A pre-nuptial or post-nuptial agreement can override this statute, as can a properly worded contract to make a will.

When is a Person Too Incapacitated to Sign a Will, Trust, or Power of Attorney?

As an elder law attorney I am frequently faced with adult children who realize that they simply have to take over for an aging parent. Maybe the parent is falling behind on bills or has trouble dealing with the medical establishment. It is always hard for a “child” to become the caretaker of the once-powerful and dominant parent.

Unfortunately, the parent may be reluctant to sign a power of attorney empowering the child to make legal decisions for the parent, since that act is frequently seen as an admission that the parent may actually need such help. Combine that with the child’s reluctance to bring up the subject for fear that it may anger the parent, and you have a recipe for procrastination. Hence the all-too-common situation where the attorney has to decide if a parent (or spouse) is too incapacitated legally to sign a will, trust, or power of attorney.

Let’s start with wills. Many people are surprised to find out that a person with Alzheimer’s or under a guardianship may still be legally competent to sign a will. That’s because under the laws of most states, a person is legally competent to sign a will if at the time of the signing he or she meets the following tests:

• knows the natural objects of his bounty (i.e., is aware of his spouse and children, if any)
• comprehends the kind and character of his property (i.e., knows approximately his net worth and what kind of assets he owns)
• understands the nature and effect of his act (i.e., realizes that it is indeed a will he is signing, and what that means)
• is able to make a disposition of his property according to a plan formed in his mind

Thus, the lawyer must meet with the parent or spouse and try to discern the above. In some cases, the lawyer may decide that the individual is too incapacitated and thus the lawyer must refuse to prepare a will.

A slightly different test is involved for signing a power of attorney. Here, the individual must be capable of understanding and appreciating the extent and effect of the document, just as if he or she were signing a contract. Thus, the parent may be competent to sign a power of attorney, but not competent to sign a will.

A trust is sometimes deemed to be more like a contract than a will, so that the necessary mental capacity needed to sign a trust may be less than that needed to sign a will. Recognizing that in today’s world living trusts are most often utilized as “will substitutes,” some recent state statutes have made the test for a trust the same as that set forth above for a will.

The mental capacity to sign the document should not be confused with the physical ability to sign one’s name. The law will permit a person to sign an “X” (known as a “mark”), that, so long as properly witnessed, will suffice just the same as a signature. In addition, if even a mark is not possible for the individual to make, then the individual can direct someone else to sign on his or her behalf.

Of course, the best advice is not to wait until it may be too late, but to have those conversations with family members while they are still competent and able to comprehend exactly what they’re signing and why.

I Don’t Have a Will - Do I Really Need One?

A common question estate planning and elder law attorneys often get asked is “Do I really need a will?” (The next question is always, “How much does it cost?” but we’ll discuss that another day!)

Most people would assume that an estate planning attorney would always answer “Yes, of course,” but such is not the case. Many people simply have no need for a will. But let’s take a look at why you may indeed want to have a will.

First, only in a will can you name the person(s) whom you would prefer to handle your estate after your death. Such person is called the “Executor” in some states, the “Personal Representative” in others. In any case, this person is the one who files the original will in court (usually with the help of an attorney), gathers and protects all your assets, pays all your debts, files the estate tax return (if necessary), and distributes your property in accordance with your directions as set forth in the will.

With no will, someone still has to go to court to get the legal authority to deal with your property and do the same tasks as the Executor, but this time it is up to the probate court judge who that person is. Since you left no indication whom you wanted, a battle could ensue. A will solves that problem, since it is rare that the court will not appoint the person(s) you named as Executor in your will.

The second big reason to have a will is if you wish to distribute your property in a way that differs from the default rules of your state. Every state has a statutory will, essentially, for those who did not write their own will. This scheme of distribution is called “intestacy” (”testate” means will, so “intestate” means with no will). For example, most state intestacy laws say that upon your death all of your money, assets, and real estate pass to your surviving spouse, if any, then in equal shares to your children, outright.

So a good reason to have a will would be any of these reasons:

• You don’t want to leave everything to your spouse.
• You want to leave more to one child than another.
• You have minor children and want to hold back their access to your money until they are at least age 25 or 30.
• You’d like to leave $10,000 to your alma mater or your church or temple.
• You want to “cut out” one of your children.
• You’d like to leave money to a family member in a way that is protected against lawsuits, creditors, and divorcing spouses.
• You’d like to leave a small sum to each of your grandchildren or a daughter-in-law.
• Your parents are living, you have no spouse or children, and you want your assets to go to your siblings and not your parents.

So who does not need a will, then?

• Your estate is relatively small and you’re happy with how your estate would be divided and distributed under your state’s intestacy laws.
• You’ve completely avoided probate by using “P.O.D.,” “T.O.D.,” joint ownership with right of survivorship, a trust, or beneficiary designations on all your assets.
• You’re content having all your assets be immediately distributed to your heirs, regardless of their age or ability to handle money.
• You’re not overly concerned with who will handle the affairs of your estate after your death.

Finally, before you consider the cost of a will, consider the real cost if your wishes were not carried out because you needed a will but did not have one. Sometimes even the simplest will is better than no will at all!

The Inheritor’s Trust

Many times Baby Boomer client has parents who have a fair amount of money, as does the Boomer client. If the parents simply leave their money to the child as an outright gift under the parents’ wills or living trusts, that money will be includible in the taxable estate of the child and also be subject to creditors, divorcing spouses, etc.

Now, the child can certainly go to his or her parents and suggest they go back to their lawyer and pay the lawyer a hefty fee to draft up a trust to hold the child’s inheritance, but the parents may be reluctant to pay that money, don’t want to focus on the complexities of the trust, and may simply keep putting it off.

However, a better idea is for the child to hire his or her own lawyer to draft the trust, so that the trust contains provisions beneficial to the client. After this is done, the client–let’s call him Sam Jones–goes to the parents and says “I would like you to go to your attorney and make this simple change. I want you to add the following sentence to your wills (or living trusts, as the case may be): ‘Notwithstanding anything in this instrument to the contrary, any time a distribution is indicated to be distributed to my son, Sam, it shall instead be payable to the Sam Jones Irrevocable Trust dated August 14, 2006, to be held as provided therein.’”

Because it’s simple and won’t cost the parents much money to have the lawyer do it, and it doesn’t take much involvement or thought on the part of the parents, the parents are much more likely to get this small change done. The inheritance will now flow directly into the trust the child created, and have the following benefits:

• it will be excluded from the child’s taxable estate
• it will be outside the child’s probate estate
• it will be protected from lawsuits, creditors, and divorcing spouses
• it can still be controlled and managed by the child, who can serve as trustee (although even greater protection will result if the child is not a trustee, or is a co-trustee)
• it can still allow the child to decide how the remaining trust assets will pass after the child’s death

In other words, by having the child set up the trust, but having the parent fund it via a small change in the parent’s will or living trust, the child can still receive his or her inheritance, but in a form that will protect it as the years go by.

Medicaid and the Living Trust

You’ve probably gotten a postcard or seen an ad for a seminar on “Living Trusts” and all the benefits they supposedly offer you. Basically, a Living Trust is a trust you create and fund during your life and which you retain the ability to change and revoke at any time. They have their place and can be quite useful, in the right circumstances, but the question of today is whether they are useful if you may be applying for Medicaid.

The problem with Living Trusts for someone applying for Medicaid is that everything titled in the name of the Living Trust is considered an available asset, even if it was exempt outside of the Living Trust. For instance, your home is exempt (a single person’s home is almost always exempt up to at least $500,000), but if you deed it into your Living Trust, it suddenly loses its exemption. That alone can cause you to become ineligible for Medicaid, forcing you to deed your house out of the Trust back into your own name. The same would be true of your car or even your other personal property.

Now bank accounts and investments can certainly be titled in the name of the Living Trust, since such assets are countable whether they are titled in your name or in the Trust’s name. However, if you are single, you will have to spend down those assets in any case, in order to qualify for Medicaid, so that’s a dubious benefit.

Since you basically have to withdraw all the Trust assets and retitle them back into your own name, as you can see it makes absolutely no sense to pay an attorney to create a Living Trust for you if you are single and facing long-term care, and if you think that you may need or want to apply for Medicaid at some point.

If you are married, it is possible for the Community Spouse (i.e., the spouse not in the nursing home) to have assets titled in the name of a Living Trust, but there is usually little advantage to doing so if you reside in a state like Colorado which has relatively inexpensive and simple probate procedures.

As a matter of fact, there is a type of trust that the Community Spouse can set up to be funded after the death of the Community Spouse, which can hold assets for the benefit of the nursing home spouse yet not count against that spouse’s Medicaid eligibility. However, such a trust cannot be used in a Living Trust and can only be used in a Will.

So the lesson of all this is that Living Trusts may be useful for general estate planning purposes but are inappropriate–or worse–in a Medicaid planning situation.

Can’t I Just Deed the House to My Child and Apply for Medicaid?

It is certainly possible for a parent to sign a deed transferring complete title of the parent’s home to a child. However, the parent should be very sure he or she understands the ramifications of signing such a deed.

First of all, this is a taxable gift. However, in most states there is no state gift tax to worry about, and if your total gifts during life will never exceed $1 million, you’ll have no federal gift tax to worry about, either.

Second, and more importantly, you no longer own the house. That means that you’re at the mercy of your child who now owns it. But you’re not worried about your child kicking you out, you say? That’s not necessarily the issue. What you should be concerned about is if your child gets sued because of a business deal gone bad or a car crash where the injuries exceed your child’s auto insurance policy limits. You should also be concerned if your child gets divorced, with the divorce rate being as high as it is. You see, although even after you’ve signed the deed you may still think of your home as “your” house, it is now really an asset of your child’s, and those creditors will have no problem foreclosing on “your” house and booting you out.

Third, there is the impact on Medicaid eligibility. If you or your spouse deed your home to one or more of your children, that transfer will cause a period of disqualification from Medicaid. This is called a “penalty period.” The length of the penalty period depends on the value of your house. The formula the states use is this: amount of gift [divided by] penalty divisor = # of months penalty. The “penalty divisor” is a figure set by each state, roughly equivalent to the average cost of a nursing home in your state.

Example: You deed your house worth $150,000 when your state’s “penalty divisor” is $5,000. $150,000/$5,000 = 30. Thus, if you applied for Medicaid the next day–or anytime prior to five years from now–you would be disqualified for the next 30 months. The only way around that is if you waited at least 5 years and then applied for Medicaid. At that point, the gift of the house would be ignored, since it is outside of the 5-year “lookback” period.

If in the above example your house were worth $350,000, the penalty period increases to 70 months! Of course, in that case, you would definitely want to wait to apply for Medicaid until after the expiration of the 5-year lookback period. If for some reason you forgot and actually did apply before the 5 years were up, you would be faced with a 70-month penalty period. There is no upper limit to the length of the penalty.

There are exceptions to the above rule that allow a transfer of the house without it causing a penalty. These exceptions will be discussed in future blogs. Stay tuned!

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2008 Second Edition available here: www.MedicaidSecrets.com).