Quarterly Newsletters

June 2007: Alimony, Special Needs Trusts, and Victory

Recently, the Appellate Division of the Superior Court of New Jersey decided J.P. versus the Division of Medical Assistance and Health Services. This case is yet another win in what is becoming a very long line of wins for the disabled who receive Medicaid benefits.

J.P. is a woman who due to severe physical disabilities began residing in a nursing home when she was forty-eight years old. At the time J.P. began residing in a nursing home, she was married.

She applied for Medicaid benefits and was approved. As part of the Medicaid requirements, J.P. paid all of her income to the nursing home, less her $35 per month personal needs allowance.

Sometime later, J.P.'s husband filed for divorce. As part of the divorce proceeding, J.P.'s former husband was required to pay alimony to her; however, in the normal course of things, J.P.'s alimony would simply be paid to the nursing home, and J.P. would still only be permitted to retain her $35 personal needs allowance each month.

In order to mitigate this harsh result, the Court agreed that J.P.'s monthly alimony payment should be paid in to a special needs trust for J.P.'s benefit. The money in the trust could then be used to supplement J.P.'s needs. For instance, J.P. is quite young to be residing in a nursing home, and she still can go out to eat with friends or family. Her income could be used, in part, for this purpose.

When the Medicaid office (called the Department of Medical Assistance and Health Services) learned about J.P.'s alimony income being directed to a special needs trust, Medicaid terminated J.P.'s benefits. Essentially, Medicaid took the position that J.P. transferred the income, which resulted in her being ineligible for Medicaid benefits.

J.P.'s appeal of the denial finally wound its way to the Appellate Division. The Appellate Division, in a well-reasoned decision, held that no transfer of an asset occurred that could result in a period of ineligibility for Medicaid.

Federal (and state) law permits an individual who is disabled and under the age of sixty-five to transfer her assets to a special needs trust without being penalized for the transfer. J.P. is disabled. She is younger than age sixty-five. The question that the Appellate Division needed to address is, did J.P. transfer an “asset” within the meaning of the Medicaid Act to the trust by transferring her alimony income.

Medicaid is a welfare program. A person must have a limited amount of resources to qualify for Medicaid. In addition, for certain programs, such as the Medicaid program from which J.P. received benefits, a person must have a limited amount of income.

In order to prevent an applicant from artificially qualifying for benefits too quickly, the Medicaid Act punishes applicants who transfer assets during an established time period prior to applying for benefits. That period is currently five years and is commonly called the “look back period.” It is the period of time during which Medicaid looks back to see if the applicant has disposed of an asset for less than fair market value.

Only transfers made during the look back period are subject to a transfer of an asset penalty. A “penalty” is a period of ineligibility for Medicaid benefits. Based upon the value of the asset given away, the applicant is disqualified for benefits. If the person is disqualified for benefits, then the person must find another way to pay for her care, that is, pay privately for the care.

Here's the kicker and the lynchpin to the J.P. decision, the word “asset” for purposes of the Medicaid Act includes income and resources. Resources are what people typically think of as assets (bank accounts, IRAs, annuities, stocks, bonds, etc.). Income is what people typically think of as income, for example, alimony payments.

So, since Medicaid permits “assets” to be transferred to a special needs trust without penalty if the applicant is disabled and under age sixty-five, J.P.'s transfer of income to the trust was not subject to punishment.

CARING FOR GRANDMA

There is a generation of individuals between the ages of fifty-five and seventy who are known as the Sandwich Generation. People in this group frequently have very young grandchildren and elderly parents.

This group is called the Sandwich Generation because the people who make up the group find themselves caring for their very young grandchildren and their elderly parents. They are sandwiched between contrasting generations.

With most families being made up of two wage-earners, grandparents often care for young grandchildren, when the parents are at work. And with people living longer-and-longer, it is not unusual for someone who is sixty or more years old to have one or two parents who are still living. These elderly parents need care, too.

What I have seen on a number of occasions is generations of a family living under one roof. For instance, Mr. and Mrs. Smith might live in their house with Mrs. Smith's mother, and the grandchildren of Mr. and Mrs. Smith might come over twice a week during the day because the cost of day care five days a week is too high for the parents of the grandchildren.

To say the least, it is not easy being part of the Sandwich Generation, and it makes you think about future generations. With life expectancies expanding, there may be multiple Sandwich Generations in the near future.

What I wanted to write about today is some of the planning techniques that the Sandwich Generation might employ in order to preserve a portion of their parents' estate.

Assume that Mrs. Smith's mother comes to live with Mr. and Mrs. Smith. Further assume that the grandmother has $200,000 in assets after she sells her home. Mrs. Smith will be grandma's primary caregiver, but Mr. Smith will contribute as well. For simplicity sake, we can assume that Mrs. Smith is the grandmother's only child.

Now, as dedicated as Mrs. Smith might be to her mother, the fact of the matter is, the care that grandma needs might, someday, overwhelm Mrs. Smith and be too much for her to bear. In that event, grandma might have to reside in a nursing home.

So, grandma comes to an elder law attorney (I always hope that attorney is me) to ask his advice about planning for her future. What can be done with the grandmother's assets in order to protect them from the ravaging costs of long-term care, such as nursing home care?

There are two primary options available in this situation.

The first situation involves Mr. and Mrs. Smith being paid for providing care, and room and board to grandma. Essentially, Mr. and Mrs. Smith are providing grandma with a private assisted living residence. In fact, the care that the Smiths provide to grandma may well exceed the care that a typical assisted living resident would receive.

Assisted living residences, on average, charge between $4,000 and $6,500 per month for the care that they provide to their residents. So, why can't Mr. and Mrs. Smith charge the same rate for the care that they provide to grandma?

The one downside to this technique is that the compensation that grandma is paying to Mr. and Mrs. Smith is taxable income. Essentially, the care agreement that Mr. and Mrs. Smith enter with grandma is made up of three components: rent, pay for services rendered, and reimbursement for food and utility items. The first two components are taxable to Mr. and Mrs. Smith; however, notwithstanding the income tax consequences, this technique has some viability.

If you think of long-term care costs as a tax, then not planning and paying a tax of $8,000 a month to a nursing home is much more onerous than the tax Mr. and Mrs. Smith would pay to the IRS.

The second technique involves grandma purchasing an interest in Mr. and Mrs. Smith's home. If structured correctly, this technique can shelter a significant portion of grandma's money quickly and tax-free.

The bottom line is, people in this situation, and there are thousands of them right in this general area, should plan. The worst thing you can do is nothing and hope that things stay the same.

IT'S NEVER TOO EARLY

In the past two months, I have known of three women in their 30's and 40's who have either suffered a stroke or a heart attack. Two of the women are now completely incapacitated and may remain that way for the rest of their lives.

The health issues from which these women are suffering remind me of an important subject area - planning for disability. On numerous occasions, clients have asked me if I draft Wills, powers of attorney, and living wills for younger people. The client is interested in referring their children to me to have me draft those documents for their children.

For the most part, drafting estate planning documents for older and younger people is the same. Sometimes, Wills for younger people can be slightly different than Wills for older people in that younger people frequently have minor children for whom a guardian should be nominated in the Will, but that difference is so slight it is hardly worth mentioning. Whether for older or younger clients, powers of attorney and living wills are the same, and it is these documents about which I write today.

For the three women that I mentioned at the beginning of this column, having powers of attorney and living wills can be extremely important. Think about all of the decisions that you make everyday. If you suffered a stroke tomorrow and were rendered mentally incapacitated, who would make those decisions for you?

You might think your spouse or children would do it for you, but if you failed to sign a power of attorney and living will in their favor, you'd be incorrect.

No one can make decisions for you other than you unless they have a power of attorney/living will or they are your guardian. Neither your spouse nor your children could make decisions for you simply because they are your spouse or your children.

Most of my clients tend to think that a spouse can automatically make decisions for them. Some believe this to be true simply based upon marriage. Others believe that they don't need a power of attorney because all of the assets they own are held jointly with their spouse or children.

Here's reality. When it comes to making financial decisions for you, no one can make those decisions except you - not your spouse, not your children. While many of the assets that you own may be held jointly with a spouse or a child, I'm fairly certain that all of your assets are not held in this manner and even some jointly held assets cannot be accessed unless both owners consent.

For instance, you might own your house jointly with your spouse, but if your spouse does not consent to the transfer of the house then no transfer can occur. Furthermore, in most situations, there is an asset that is only in one spouse's name, such as an IRA or 401(k) or life insurance policy. Certainly these assets cannot be accessed by the other spouse or a child.

When it comes to health care decisions, a doctor or hospital may listen to a family member, but they won't listen to any family members if there is disagree among the family. If there are two children and one says “keep mom alive” and the other says “mom wouldn't want to live like this,” the doctors are going to error on the side of life and keep mom alive.

Furthermore, access to health information has become a very significant issue with the enforcement of the Health Insurance Portability and Accountability Act. Many doctors, hospitals, and insurance companies are reluctant to share your health care information with anyone other than the patient. Addressing this issue in a living will can prove to be invaluable.

My point - it's never too early (assuming you're over the age of 18) to get a power of attorney and living will. As my clients' situations prove, disability can strike at any age.

WHO PAYS DAD'S NURSING HOME BILL?

Placing a family member or friend in a nursing home is not a pleasant event. I have never had a client say that he wants to go live in a nursing home. On the other hand, I have had numerous clients tell me that they never want to live in a nursing home or that they never will live in a nursing home, a statement that is typically followed by the statement “just kill me.”

Now, I don't like to bash nursing homes. I think these facilities are necessary, and I think that, for the most part, the staffs of nursing homes work very hard, doing very difficult and often unappreciated work.

I also think that running a nursing home is a business and that like any business, nursing homes deserve to be paid for the services they render.

But today I'm going to write about nursing home admission agreements, particularly one phrase that is often found in these agreements, the “responsible party” phrase.

With the exception of questions about gift tax, questions about the “responsible party” clause in nursing home admission agreements are the most frequent questions that I receive. A daughter places her father in a nursing home, and she is handed a twenty page contract that asks her to sign as the “responsible party.”

Frequently, these contracts indicate that she, the daughter, is responsible to pay her father's nursing home bills if he does not or that she is responsible to pay his bills to the extent that she handles his assets, perhaps as his power of attorney agent. Needless to say, the thought of signing these contracts scares people. With nursing homes costing anywhere from $7,500 to $9,500 a month, few children could afford to pay a parent's nursing home bill.

What is my opinion on the “responsible party” language?

My first thought for any child faced with the prospect of having to sign such a contract is, don't. An adult child is not financially responsible for an adult parent, so why would the child sign an agreement that may give the nursing facility the ability to argue that the child is responsible.

If the parent is unconscious or otherwise mentally incapacitated such that he cannot sign the agreement and the facility is insisting that someone sign the agreement, then the child should sign as the parent's power of attorney agent, assuming that the child is the parent's power of attorney. By signing as the parent's agent, and not personally, the facility should not be able to argue that the child is personally, financially responsible based upon the agreement.

If the parent has not signed a power of attorney, then the only way that the child could sign as an agent would be to have the parent adjudicated mentally incapacitated in a guardianship proceeding. This route is rather costly (typically, costing $4,000 to $5,000) and typically taking two months to accomplish, so the child may not wish to proceed with this method.

If the child has to sign the agreement as the responsible party, she may be happy to know that these agreements are, for the most part, unenforceable. Now, the fact that I believe the agreements to be unenforceable doesn't mean that I think people should freely sign these agreements. As I mentioned, my first thought would be to not sign the agreement at all, but if the child must sign for the parent and if the facility does attempt to enforce the agreement against the child, there are strong arguments to be made against the enforceability of the agreement.

The Nursing Home Reform Act of 1987, a federal law that applies to all nursing homes accepting payment from Medicaid or Medicare, prohibits a facility from obtaining a third-party guarantee of payment as a condition of a resident's admission or continued stay in the facility.

This law would almost assuredly bar a nursing home from requiring a child to use her personal funds to pay for her parent's care. Yet, notwithstanding the fact that the law has been on the books since 1987, nursing homes continue to insert responsible party clauses in their contracts and attempt to scare family members into believing that they are responsible for their parent's nursing home bills.

YOUR HOME, YOUR WEALTH

In 1997, the Internal Revenue Code, the series of laws governing the taxation of individuals, were changed with regard to the taxability of gain on the sale of a primary principal residence. Ten years later, I'm amazed by the number of people who are unaware of this change.

Up until last year, it seemed as if you couldn't lose with real estate. Real estate appreciated significantly between the years of 2000 and 2005. With that appreciation, many homeowners attempted to cash in and pocket the gain they had realized.

As many of us heard during that boom time, you cannot lose with real estate over time, as real estate has appreciated in most years since they began tracking such data. Of course, that concept might be more difficult for some to swallow since the end of 2005 when real estate values have been declining, and I don't know if I believe anyone who tells me that I can't lose. But what I do know is that even with the recent downturn, I'd still like the opportunity to buy many of the homes in this area at pre-2000 prices.

Homes do go up in value over time. We all might dream of being able to purchase a home for its value in the 60's or 70's.

One of the reasons that homes are a good long-term investment is the special tax treatment that the gain on the sale of a primary principal residence receives.

Most of us work or have worked. When we work, our wages are taxed at ordinary income tax rates, which range from 10% to 35%.

Some of us invest in assets such as stocks and mutual funds. If we own a stock for less than a year and sell the stock at a gain in value, we realized short-term capital gain. Such gain is also taxed at ordinary income tax rates.

If we hold the stock or mutual funds for more than a year then sell the asset, we realize long-term capital gains. Such gains are taxed at capital gains rates, which are currently 15%.

Real estate is much like stocks and mutual funds. If you own a parcel of real estate for less than a year and sell the property for a gain, you realize short-term capital gain. If you own the parcel of property for more than a year, you realize long-term capital gain.

But the government sought to encourage people to own a primary principal residence and to own that home for a long period of time while building up equity in the home. So, Congress has passed various laws that shelter a certain amount of gain on the sale of a primary principal residence from taxation.

Prior to 1997, an individual could shelter the gain on the sale of his primary principal residence if he purchased another home of equal or greater value with the proceeds realized from the sale. In other words, if Mr. Smith purchased a home for $50,000 and twenty years later sold the home for $200,000, he could avoid being taxed on the $150,000 in gain that he realized if he purchased another home for $200,000 or more.

That was the law prior to 1997. Unfortunately, many people that I meet - so I am sure that the same is true for many people in the general population - believe that this is still the law.

In 1997, Congress changed the exemption. Since then, an individual taxpayer can shelter $250,000 in gain from taxation if he owns and lives in a property as his primary principal residence for two of the last five years. A married couple, that is, two taxpayers, can shelter up to $500,000 in gain.

So, if Mr. Smith owned his home since 2003 and realized a dramatic increase in the value of the home, let's say of $200,000, he could sell his home in 2007 without paying any tax on the $200,000 in gain that he realized.

For obvious reasons, this tax exemption gives taxpayers a very strong incentive to purchase a home and to use the home as their primary principal residence for at least two years. The possibility of sheltering so much gain from taxation encourages home ownership.