Quarterly Newsletters

December 2008: Big Win For the Elderly

Last week, the United States Court of Appeals for the Third Circuit, the court immediately below the United States Supreme Court, issued a decision in a case concerning an elder law issue. In my opinion, since I have been practicing elder law, this case, entitled James versus Richman, will have the most influence on my practice and the practice of elder law in the state of New Jersey.

The Third Circuit Court of Appeals is responsible for federal appeals from federal district courts in New Jersey, Delaware, and Pennsylvania. If a party is dissatisfied with a decision of a circuit court, he must take appeal to the United States Supreme Court. The United States Supreme Court frequently does not hear appeals from circuit courts, so for many cases, a circuit court is the last stop.

(As an aside, I was involved in the James case, having helped write one of the legal briefs that was submitted in support of the elderly individual's position in the case.)

The James case involved the use of annuities in Medicaid planning. An annuity is an investment vehicle, like a stock, a bond, or a certificate of deposit. Many insurance companies, such as the Hartford and Jefferson Pilot, sell annuities. In fact, many insurance companies are called "XYZ Company, an insurance and annuity company."

An annuity pays the owner of the annuity principal and interest. For instance, Mr. Smith pays $100,000 to XYZ Company to buy a $100,000 annuity that will pay Mr. Smith $100,000 plus interest over the next ten years.

There are many different types of annuities, with many different features. An annuity might accrue interest without paying it out to Mr. Smith and without having Mr. Smith pay tax on the interest until such time as he takes the interest from the annuity, called a deferred annuity, or the annuity might pay Mr. Smith the interest presently. The annuity might pay Mr. Smith a fixed, equal amount each month for a specified term of years or it might pay him a certain amount for the remainder of his life.

Annuities have long had a place in Medicaid planning. Annuities have been used in Medicaid planning primarily to convert excess resources into income. For instance, assume that Mr. Smith, who is ill, enters a nursing home and Mrs. Smith remains at home. Mr. and Mrs. Smith have $300,000 in cash and own their home.

Medicaid will permit Mrs. Smith to retain the family home and about $100,000 of the $300,000 in cash that the couple owns. Medicaid would expect that Mr. and Mrs. Smith will spend the remaining $200,000 of cash on Mr. Smith's care. After spending the excess resources, the $200,000, Medicaid would permit Mr. Smith to qualify for Medicaid.

Mrs. Smith, seeking to preserve some of the $200,000, may retain the services of an elder law attorney. That attorney might advise Mrs. Smith to purchase a $200,000 immediately-payable annuity in her name alone. By doing this, the lawyer will advise Mrs. Smith, she will convert the excess $200,000 of resources into a stream of income in her name alone. Mr. Smith will qualify for Medicaid benefits the next month.

For obvious reasons, Medicaid has always hated the use of annuities as a Medicaid planning technique and has frequently challenged the technique. For the past five years or more, various Medicaid offices have challenged annuities claiming that the stream of payments from the annuity could be sold to "secondary market" companies that purchase the stream of income from annuities for a discount.

In the James case, the state of Pennsylvania had a high-ranking employee of one of these secondary market companies attest to the fact that his company would purchase the stream of payments from the annuity involved in that case for a discount but still a significant sum of money.

The wife in the James case appealed the Medicaid denial. The crux of her argument was: Under federal law, income of the community spouse, the wife, can not be counted against the husband, the institutionalized spouse. The State's argument that the community spouse must attempt to sell her income on a secondary market frustrates this provision of the federal law.

The Third Circuit Court of Appeals agreed. The Court, reading the federal Medicaid Act strictly, meaning that the Court simply read the law as written and did not attempt to "legislate from the bench,' as the saying goes, held that Medicaid Act prohibits the State from requiring the community spouse to attempt to sell any of her income.


I recently filed my first Medicaid appeal in federal court. Since Medicaid is a joint federal and state program, questions involving the deprival of Medicaid benefits are federal questions.

Not all persons can file a lawsuit in federal court. In order to file a lawsuit in federal court, the lawsuit must be either based upon a federal question or have diversity jurisdiction. A federal question is created when a litigant is deprived of a right under the United States Constitution or under a federal statute. Diversity jurisdiction exists when the plaintiff and defendant in the lawsuit reside in different states and the amount in controversy is greater than $75,000.

In my case, the lawsuit is based upon a federal question. I claim that the New Jersey Medicaid office is wrong depriving my client of benefits under the Medicaid program. As such, my case involves a federal question.

My clients applied for Medicaid waiver programs. Medicaid waiver programs are Medicaid programs that provide services to individuals seeking care in assisted living residences or in their home. These programs are called "waiver programs" because through these programs the various states can waive certain requirements of the Medicaid Act. Waiver programs are designed to increase the population of individuals who are served through the Medicaid program.

Specifically, my case involves the Medicaid transfer of asset rule and how this rule is implemented for individuals who are applying for Medicaid waiver programs in New Jersey. Medicaid is a welfare program. In order to qualify for Medicaid, an applicant must have a very limited amount of assets, typically, less than $2,000.

In order to discourage applicants from simply giving away their money in order to qualify of benefits, Medicaid punishes individuals who have given away their assets during a specified period of time prior to applying for benefits. This specified period of time is known as the "lookback period." Currently the lookback period is five years.

The way Medicaid punishes applicants who have transferred assets during the lookback period is by making the applicant ineligible for Medicaid benefits for a period of time known as a "penalty period." A penalty period is a period of time that has a beginning point and a termination point; however, a penalty period can be longer than the lookback period.

In other words, Medicaid can only look at transfers that occur during the lookback period, but if the applicant transfers assets during the lookback period, the penalty for that transfer can be very long. For instance, when calculating a penalty period, the Medicaid office takes the value of the assets transferred and divides that figure by a divisor number, which is based upon the cost of a nursing home room in New Jersey. Currently, the divisor number is $6,942.

So, if Mr. Smith gifts $100,000 to his son in September 2008 and applies for Medicaid benefits in October 2008, Medicaid will make Mr. Smith ineligible for Medicaid benefits for 14.4 months ($100,000/$6,942 = 14.4.). If Mr. Smith transferred $1,000,000 in September, Medicaid would make Mr. Smith ineligible for 144 months ($1,000,000/$6,942 = 144). On the other hand, if Mr. Smith gifted $1,000,000 in September 2008 and waited until September 2013 to apply for Medicaid benefits, five years after the transfer, Medicaid could not see the transfer, and Mr. Smith would be eligible for benefits, because the $1,000,000 transfer would have occurred outside the lookback period.

What the New Jersey Medicaid Office is saying with Medicaid waiver programs is, if you make a gift of any value (say $200) during the lookback period, the Medicaid Office will assess a penalty, not a penalty period, against you, and you will be ineligible for the entirety of the lookback period, that is, five years.

This policy violates federal law. Because I believe it is such a gross violation of federal law, I have filed a lawsuit in federal court. In my suit, I seek counsel fees and damages against the State. I believe that the only way to stop the State from taking the frivolous position that it is taking is to obtain an award of counsel fees and damages against the State.

We shall see. I will keep you posted.


Medicare does not pay for long-term care. Most older people, people who are actually receiving Medicare benefits, know that Medicare does not pay for long-term care benefits. Many younger people, people who do not actually receive long-term care benefits, think that Medicare does pay for long-term care.

What Medicare will pay for is a certain amount of skilled or rehabilitative care. For instance, assume that Mr. Smith falls and breaks his hip. Mr. Smith is seventy-five years of age and receives Medicare benefits.

In all likelihood, Mr. Smith will go to a hospital for surgery for his broken hip. Let's further assume that Mr. Smith stays in the nursing home for a total of seven days. Mr. Smith's doctor recommends that Mr. Smith be discharged from the hospital to a rehabilitation center for rehabilitation of his newly mended hip.

Medicare will pay for up to one hundred days of rehabilitative services for Mr. Smith. Days one through twenty are paid in full by the Medicare program. Days twenty-one through one hundred are also paid by the Medicare program; however, for these days, there is a co-payment. The current co-payment is $128 per day. The co-payment frequently goes up every year.

Many Medicare recipients also have a Medigap policy of insurance, which is a private health insurance program designed to fill the gaps (the co-payments, deductibles) of the Medicare program. Mr. Smith may very well have a Medigap policy of insurance that pays the $128 co-payment for days twenty-one through one hundred.

The one hundred days is a maximum. In other words, Mr. Smith might receive one day of rehabilitative services paid for by Medicare, two days, seven days, twenty days, thirty days, or one hundred days. There is no guarantee that Mr. Smith will receive any specified number of days short of the fact that he will not receive more than one hundred days; however, the one hundred days is renewable.

If Mr. Smith leaves the nursing home after receiving twenty-five days of rehabilitative services and if Mr. Smith does not receive any Medicare covered services for a period of more than sixty days, then Mr. Smith will receive an entirely new one hundred days of rehabilitative services.

On the other hand, if Mr. Smith goes back into the nursing home after only being out of the nursing home for forty days, when he returns to the nursing home for rehabilitative services, he will only have seventy-five days of rehabilitative services, even if he re-enters the nursing home for a condition wholly unrelated to his broken hip.

As an aside, most rehabilitation centers are nursing homes. Just about every nursing home provides two services-rehabilitation services and long-term care custodial services. Rehabilitative services are typically delivered to a patient on a short-term basis, several days, weeks, or months.

Long-term care custodial services are nursing facility services that are provided to a person for the remainder of his life. A person may receive long-term care services for years. Unlike rehabilitative services, long-term care services are not designed to make the person better.

Now in my example, I said that Mr. Smith was in the hospital for seven days. The rule governing the Medicare program is that Mr. Smith must be in the hospital for at least three days before being discharged to the nursing home if he is to receive the one hundred days of rehabilitative services.

In a recent federal court case, entitled Estate of Landers v. Leavitt, the Second Circuit Court of Appeals held that days spent in the emergency room or in the hospital for observation do not count towards the three day hospitalization requirement. As the son of parents who are in their eighties, the type of people who frequently require hospitalization, I can tell you that patients in hospitals spend a lot of time, sometimes days, in the emergency room.

The last time that my father was in the hospital, he spent an entire day in the emergency room because the hospital did not have any beds. So, this court ruling could have a significant affect on the number of Medicare beneficiaries who receive rehabilitative services.


In New Jersey we have two state "death taxes," the New Jersey estate tax and the New Jersey inheritance tax. The federal government also has an estate tax.

These death taxes only affect certain estates. For the New Jersey and federal estate tax, the tax is only imposed on estates that exceed a certain value. For the New Jersey estate tax, the estate must have a gross value greater than $675,000. For the federal estate tax, the estate must have a gross value greater than $2,000,000. For federal estate tax purposes, that $2,000,000 figure is increasing to $3,500,000 in 2009.

The "gross estate" includes all property that the decedent owned. In other words, the value of his real estate, stocks, bonds, IRAs, and the proceeds of his life insurance. When you factor in the proceeds of life insurance, a number of estates could be subject to either New Jersey or federal estate tax, or both.

The New Jersey inheritance tax is a tax that is assessed based upon the relationship of the beneficiaries to the decedent. If the beneficiary is closely related to the decedent (a child, parent, or spouse), there is no tax. If the beneficiary is more distantly related to the decedent (a nephew, cousin), there is an inheritance tax.

For estates that exceed the New Jersey estate tax credit amount ($675,000), the effective rate of the estate tax is about 10%. For federal estate tax, the taxable rate is between 40% and 45%. The New Jersey inheritance tax rate is between 11% and 16%, depending upon the beneficiary's relationship to the decedent.

Many of the estates with which I deal are subject to New Jersey estate tax. A married couple may have an estate worth $900,000. While this couple is not rich, they are facing a New Jersey estate tax when both of them pass away. The tax on an estate of that size would be around $22,000.

That estate tax can be easily eliminated or reduced with some basic estate tax planning. From time to time, however, I have a client come to me after her spouse has died with a taxable estate. When I inform the client that when she passes away there will be an estate tax, say of $22,000, she often feels bad that she failed to plan for the tax when her husband was alive, so they could have eliminated the tax through planning.

But, as I frequently tell my now, somewhat despondent client, there is a silver lining to this cloud. When an individual dies with assets in his name, those assets typically receive a step up in basis. Because of this step up in basis, when the beneficiaries, typically the children of the decedent, sell the assets of the estate, the children will not have to pay the capital gains tax that the decedent/parent would have had to have paid if he sold the assets during his life.

Assume that Mr. Smith purchased his house in 1960 for $40,000. In 2008, Mr. Smith dies and his house is worth $400,000. Mr. Smith made $40,000 of capital improvements to his house.

At the time of his death, Mr. Smith had a basis in his house of $80,000. If Mr. Smith sold his house during his life, he would have had a long-term capital gain of $320,000, and Mr. Smith would have paid a capital gains tax.

Yet, because Mr. Smith died with his house, his children will receive his house with a stepped up basis. The children will have a basis in the house of $400,000, the date of death value. When the children sell the house, they will not have to pay a capital gains tax.

The same is true if Mr. Smith bought IBM stock in 1960 for a split-adjusted value of $5 a share that is now worth $100 a share. If Mr. Smith had sold the stock during his life, he would have had $95 in capital gains on which Mr. Smith would have paid capital gains tax. His children, however, will inherit the stock with a basis of $100 basis and will pay no capital gains tax.

A step up in basis is typically what happens, but with the stock market and housing market the way it is, beneficiaries could be receiving a step down in basis. Property that a decedent owned receives its date of death value. While typically the date of death value results in a step up in basis, date of death value could be a step down in basis.

An estate worth $1.3 million a year ago and $1 million today, could find itself paying New Jersey estate tax and having some assets that receive a step down in basis. Mr. Smith might have bought that IBM stock for $150. The value when he dies might be $100, so the children will receive a basis of $100. A double whammy.


I advise clients to obtain general durable powers of attorney and living wills. In my opinion, these documents are even more important than a last will and testament because powers of attorney and living wills are for the client, whereas Wills are for other people.

If a client does not have a power of attorney or a living will and he cannot make decisions for himself, then a family member will have to become his guardian. A guardianship is a court procedure through which one person, the guardian, is granted authority by the court to make decisions for another person, the ward.

Once a guardian is appointed for a ward, the ward cannot, legally, make decisions for himself. The guardian makes all decisions for the ward-health care decisions, financial decisions, and residential decisions.

But a guardianship is not as comprehensive as a power of attorney. For example, if a guardian is appointed for a ward and if the guardian wants to sell the ward's house (for instance because the ward is living in a nursing home and will not be returning home), the guardian must go back to court and obtain the court's permission to sell the ward's house. If the guardian wants to engage in Medicaid planning for the ward and gift a portion of the ward's assets to the ward's family in an attempt to save those assets, the guardian must go back to court to ask the court's permission to engage in Medicaid planning and gift the ward's assets.

If the client signs a power of attorney, the power of attorney can be drafted in a broad manner that would permit the power of attorney agent to sell the client's house and engage in Medicaid planning for the client without asking anyone else's permission. So, my advice to clients is almost universal-get a power of attorney and get a living will.

In most cases, having these documents avoids the need to ever have to obtain a guardianship over the person. But having these documents doesn't always avoid the need to obtain a guardianship over the client.

A power of attorney and a living will are voluntary documents. The client can revoke the power of attorney/living will at any time. Even if the client has developed dementia and is unaware of the consequences of his actions, if a court has not adjudicated the client to be mentally incapacitated, the client can revoke the power of attorney/living will.

Let's say that Mr. Smith has two children-Mary and Joseph. Mary is Mr. Smith's power of attorney agent and lives with Mr. Smith. Joseph lives in California.

Joseph comes to visit Mr. Smith, but Mary denies Joseph access to Mr. Smith. Joseph then calls the police, but the police will not get involved in a family dispute. The relationship between Mary and Joseph quickly breaks down to the point where neither is speaking with the other. Joseph begins to think that Mary is financially exploiting Mr. Smith, using his money for her benefit.

In the past month, I have personally been involved in two cases that fit this fact pattern, so if you think it doesn't happen, think again. Situations such as this may necessitate a guardianship because through a guardianship Joseph may be able to get Mary to account as to Mr. Smith's assets and to obtain a fixed visitation schedule with Mr. Smith.