Quarterly Newsletters

December 2009: Federal Court Victory For Disabled

Last week, a federal judge entered a preliminary injunction against the state of New Jersey in a federal lawsuit that I filed involving transfers to disabled children in the context of the Medicaid program. Medicaid is a medical assistance program for needy individuals. In order to qualify for Medicaid benefits, an individual must be unable to afford the cost of his care.

An applicant for Medicaid must have less than $2,000 in countable resources in order to qualify for Medicaid. "Countable resources" are all resources except non-countable resources. "Non-countable resources" are the house, a car, small policies of life insurance, and irrevocable prepaid funerals; however, if the applicant is unmarried and resides in a nursing home, the applicant's house is a countable resource because the house no longer serves as the applicant's home.

When a person requires nursing home care, either he or his family frequently thinks about qualifying the individual for Medicaid. Nursing homes cost in excess of $9,000 a month, so the desire to qualify for Medicaid and have the Medicaid program cover the costs of that care is natural.

A person's first instinct might be simply to give his money away. Medicaid has a resource limit of $2,000, so if the person gives his money away, he will qualify for Medicaid, or so the thought goes. The problem is, the Medicaid program punishes individual's who divest themselves of money during a specified period of time before applying for benefits. Currently, that specified period of time, called the "lookback period," is five years.

So, for instance, if Mr. Smith gives away $100,000 in September 2007 and applies for benefits in October 2009, Mr. Smith will be ineligible for Medicaid benefits for a period of time as a result of the September 2007 gift. The period of ineligibility, or penalty period, is calculated by taking the gross value of the gift, $100,000, and dividing that gift by a divisor number.

The divisor number is based upon the statewide average cost of a nursing home room, as established by the State. The State currently says the statewide average cost of a nursing home room is $7,282 per month. (Good luck finding a nursing home that really only costs $7,282 a month, but that is what the state says the cost of a nursing home is. The State likes to keep the divisor number low because the lower the divisor number, the longer the period of ineligibility that will result from a gift.)

Based upon a $100,000 gift, the penalty period would be approximately 14 months ($100,000/$7,282 = 14).

There are, however, exceptions to the transfer of asset rules. For instance, if the applicant has a child who is blind or who is totally and permanently disabled, the applicant can transfer an unlimited amount of money to the child or to a trust for the benefit of the child without incurring any period of ineligibility for Medicaid. The "disabled child transfer exception" has been in place since 1993, when Congress passed a law that significantly modified the Medicaid transfer of asset rules.

Over the course of my career, I have advised many clients to make transfers to their disabled children, and I have never had a problem with the State, as I shouldn't since the law is clear on this subject. Six months ago, the State decided to violate the Medicaid Act and stop honoring this law. I sued the State in federal court, and last week, a federal judge entered an injunction against the State, enjoining the State from failing to exempt transfers to disabled children.

I view my victory as not just a victory for my client, but a victory for all disabled individuals throughout this State.


Today, the United States Court of Appeals for the Third Circuit decided a case that should signal the death-knell for the state of New Jersey's challenges against annuities in the context of Medicaid planning. The case is Weatherbee v. Richman. I am proud to say that I had a part in the Weatherbee case, contributing to a brief that was submitted to the court.

Historically, annuities have been used in the context of Medicaid planning for couples. For instance, if Mr. Smith enters a nursing home, he is known as the "institutionalized spouse" in Medicaid parlance. Mrs. Smith, who is living at home, is known as the "community spouse" in Medicaid parlance.

When assessing Mr. Smith's eligibility for Medicaid, all of the Smiths' assets are pooled, meaning that whatever Mr. Smith owns, Mrs. Smith owns, and vice-versa. It is irrelevant that assets may be and may have always been owned in Mrs. Smith's name alone. Whatever she owns, he owns.

Medicaid will permit Mrs. Smith to retain a certain amount of "countable" assets. Countable assets would be all assets except the home, a car, personal goods and household effects, and certain prepaid funeral plans. Stocks, bonds, banks accounts-are all examples of countable assets. Medicaid permits Mrs. Smith to retain a maximum of $109,560 in countable assets.

So, assume that Mr. and Mrs. Smith have countable assets of $250,000 when Mr. Smith enters the nursing home. Mrs. Smith can retain $109,560 in countable assets. The couple has approximately $140,000 in excess countable assets. The State would like Mrs. Smith to spend that $140,000 on the nursing home.

Mrs. Smith can avoid this result by purchasing a certain type of annuity. If the annuity is structured properly, the purchase of the annuity will convert the excess assets into a stream of income that belongs to Mrs. Smith, not Mr. Smith.

Unlike assets, income is not pooled under the Medicaid program. Whatever income Mrs. Smith receives is Mrs. Smith's and whatever income Mr. Smith receives is Mr. Smith's. If Mrs. Smith can convert the excess assets into a stream of income in her name, she would effectively remove the excess assets from the Medicaid calculation of Mr. Smith's eligibility.

The annuity must be irrevocable, meaning that Mrs. Smith cannot simply cash the annuity in for a lump-sum payment. If Mrs. Smith could cash the annuity in, then the annuity would be a resource.

The annuity must be actuarially-sound, meaning that the payment term of the annuity must be no longer than Mrs. Smith's expected life. For instance, if Mrs. Smith were 80 years old, she may have an expected life of 10 years, so the annuity term cannot exceed 10 years.

The annuity must payout immediately without deferral. Many annuities are deferred annuities, meaning that the interest the annuity accrues merely builds up inside the annuity. An immediate annuity would begin returning/paying to Mrs. Smith principal and interest in equal installments.

There are other, very helpful tips for structuring the annuity that I will leave as part of mine (and a select group of attorneys) knowledge bank, but suffice it to say that an annuity can be structured to convert excess resources into an income stream.

For years, the State has challenged annuities. In fact, since I have been an elder law attorney, for over the past ten years, elder law attorneys have not been using annuities. For that long the State has been aggressively challenging the use of annuities, but with the Weatherbee decision, those challenges will end, because they must end. At this point, any continued challenge to the use of annuities in the Medicaid planning context would simply be frivolous.


Big things are about to happen with the federal estate tax. Next year, 2010, the federal estate tax will be repealed. In other words, if John D. Rockefeller, Sr. (he was the richest man in the history of mankind, by the way), were alive and if he died in 2010, his estate would pay no estate tax.

So, should you be excited about this event? Probably not. First of all, for your estate to benefit from the repeal of the federal estate tax, you would have to die next year. There's nothing exciting about that, unless you anticipated dying this year. The repeal only lasts for one year, 2010.

In 2011, the federal estate tax law would revert to the law that existed in 2001. Under the 2001 law, the credit against federal estate tax would be approximately $1,000,000, meaning that if you die with an estate greater in value than $1,000,000, your estate will pay estate tax. That is a fairly low threshold, particularly in light of the fact that the federal estate tax rate is between 40% and 45%.

Secondly, in order to even be affected by the federal estate tax, the value of your estate must exceed $3,500,000 and you have to leave more than $3,500,000 to someone other than your spouse. While we do live in a very affluent area of the country, few people have an estate in excess of $3,500,000.

Lastly, and here's the main statement that I wanted to make in this article, I don't believe the repeal is ever going to happen. If you are someone waiting for that distant, millionaire relative to make it to 2010 in order to pass away, stop holding your breath.

The national debt is currently 1.4 trillion dollars. There is a Democratic president and a democratically controlled House of Representative and Senate. If you think this is an environment in which the government is going to let the repeal of a death tax on the estates of millionaires happen, you are sadly mistaken.

I have said this for years, actually. I have never thought the repeal of the estate tax would happen. And despite the fact that it is currently mid-October 2009, I still do not believe the repeal will ever happen.

I believe the Congress will pass and the President will sign a law freezing the estate tax credit at a relatively high number, say $3,500,000, either before a repeal occurs, that is, before the end of 2009, or before any estate benefits from the repeal. What I mean by my latter comment is, even if we enter 2010 and have the repeal of the estate tax, the government will pass a new law before September 2010 retroactively repealing the repeal of the estate tax.

A federal estate tax return is not due until nine months after an individual dies. So, even if a person dies in January of 2010 and the repeal of the estate tax is still in place, the federal government need only act to terminate the repeal before September of 2010 before any taxpayer-estate could complain about being harmed by the repeal, since the estate tax return wasn't even due before September 2010.

In my opinion, the government will simply push a new law through before the end of this year, but even if that does not occur, I have no doubt that the law will be repealed retroactively.

Of course, even if the federal estate tax is repealed (if only for one year), estates with a value in excess of $675,000 will still have to pay New Jersey estate tax. Like the federal estate tax return, the New Jersey estate return is due nine months after the individual dies. Unlike the federal estate tax, the New Jersey estate tax rate is, on average, about 10%, so the burden is not nearly as onerous as the federal estate tax liability.


In the recent past, I have been reminded of the soundness of a piece of advice that I have given to my clients for years-don't put your children's names on your bank accounts. Most elder parents add a child's name to their bank account in order to permit the child to use the parent's money to pay the parent's bills. The bills that the parent is thinking about may be bills that the parent incurs during life or, perhaps, post-death bills, such as the funeral bill.

I have long advised against joint bank accounts. A joint bank account offers nothing but negatives. For instance, if the child/joint account owner is sued, the parent's money will be exposed to the child's problems. A creditor of the child could levy against the account and take what is really the parent's money in satisfaction of the child's debt.

If the child gets divorced, the soon-to-be ex-spouse of the child might make a claim for the money in the account, claiming that the money is really the child's money or that the parent intended to gift half the money to the child. While the spouse may not be successful in the claim, the spouse may gain some advantage over the child just by making the claim. The child, not wanting to involve mom in his divorce problems, may concede some other point just to avoid his spouse making a claim against mom's money.

If the child dies, the money in the account will be included in his estate. If his estate is taxable, either because of the relationship to him of the people to whom his estate is passing or because of its gross value, a death tax may be imposed on what was really the parent's money. The parent would then have to prove that the money in the account was actually hers, which she may or may not be able to substantiate through documentary evidence.

If the parent dies, the bank account will pass to the child. Sure the child could use the money to pay the parent's bills, such as the funeral bill or medical bills, but he may not use the money for those purposes. The child may claim that mom or dad wanted him to have the money and keep the money for himself.

Lastly, in most cases, adding a child's name to a bank account does not shelter the money in the account or half the money in the account from long-term care costs. If the parent needs long-term care and is looking to qualify for Medicaid, all of the assets in the account will continue to be treated as her assets.

Over the course of my career, I have seen children have credit problems and creditors of the children levy against the parent's accounts because the parent had added the child's name to the accounts. I have seen children get divorced and the spouse make claims against the parent's assets. I have seen children retain money that the parent intended to be used to pay bills of the parent. So, don't think these issues are only theoretical. I assure you, these are not theoretical issues.

What I suggest every client have in order to avoid these problems is a power of attorney and a last will and testament. The purpose for which most people add a child's name to an account-to permit the child to pay the parent's bills-can be accomplished through a power of attorney and last will and testament. In attempting to do an end-around these documents, the parent is exposing themselves to many potential problems, which is something that can be said about most shortcuts that people take in life.

There is an entire body of law on powers of attorney and last wills and testaments. If a person could simply accomplish the same thing these legal documents accomplish by adding a child's name to a bank account, why would powers of attorney or last wills exist at all? Let's face it, it's not as if people enjoy going to see a lawyer. It would be an odd bird who woke up in the morning and said, "I hope I see a lawyer today." (Well, my wife may say that, but coming from most people, it would be odd.)


I have given hundreds of seminars on topics of elder law, covering topics such as estate planning, Medicaid planning, estate administration. When you present that many seminars, you hear the same type of questions.

I just finished giving my bi-annual series of seminars at Monmouth-Ocean Educational Services Commission. One attendee asked me a question that I have heard before and that I believe many people would like to ask: "Do I need a lawyer to draft my Will or can I draft my own Will?"

My standard answer to this question through the years has been: You can draft your own Will. You could also operate on yourself if you wanted, but I wouldn't recommend it.

While my thoughts on the subject haven't changed, I think they deserve a bit more explanation given the plethora of television ads that I see, advertising services that assist you with drafting legal documents for a minor fee. I am also cognizant that more-and-more people are computer savvy and there are a number of other programs, not advertised on television, on the internet. (Al Gore is getting older now, and he invented the internet, as you may know, so my target audience is getting more-and-more computer savvy.)

I went to law school for three years. My practice is concentrated in elder law. All I do, six days a week, is work on elder law issues-estate planning, Medicaid planning, estate administration, and guardianship issues. I have been practicing elder law for over ten years. I am a certified elder law attorney, meaning that I passed an examination with a very high failure rate, was recommended by five other attorneys who concentrate their practices in elder law, and work on a very high number of elder law files every year.

So, given the above, do I think you know as much about elder law as me? Quite honestly, for 99.99% of the people reading this article, the blunt answer is, no. Do I think you would know as much as I know about New Jersey elder law issues if you use a really spiffy computer program? Same answer, no. That's the fact.

I may not be good at sports. I don't know anything about engineering or medicine or plumbing, but I know a lot about New Jersey elder law issues.

I have met thousands of people with regard to their estate planning issues. I can tell you that almost universally, if left to their own devices, people would make mistakes if they drafted their own Will.

In order to draft a Will correctly, you must understand what happens after a person dies, how an estate is administered. I always tell people that a Will is not for you, it's for your family. A Will is not even an effective document when you are alive.

So, even if a computer program prompts you with multiple options on a given issue, do you truly understand what those selections entail and how those selections work with other selections that you may have made? Do you understand how property even passes when you die?

When a person dies, their property passes in one of three ways-either by operation of law, by contract, or as part of the probate estate. An example of property passing by operation of law is when a husband and wife own real estate together. If the husband dies, the property will automatically pass to the wife. An example of property passing by contract is a living trust. A trust is a contract, so when a person dies owning property in a living trust, the living trust controls who receives the assets in the trust, not the person's Will.

Most people would think that a living trust is great because they are "avoiding probate," but do you want to avoid probate in New Jersey? In Florida or California, you might want to avoid probate because probate is expensive in those states, but in New Jersey, probate is very simply and inexpensive. Two of the most prominent TV personalities selling these do-it-yourself programs (Suze Orman and Robert Shapiro) are from California. So, if you purchase those services, you may be getting advice for what is best in California.

Avoiding probate could cause disastrous results for your executor. It may leave your executor with bills that he cannot pay because he has no money. The executor may then have to sue the people who received your money as surviving joint account owners and under beneficiary designations.

So, do I think you can draft your own Will? Yes, but I still also think you can operate on yourself, and I wouldn't advise either cost-saving technique.