Quarterly Newsletters

June 2009: Protecting the Home

If I had to list the most frequently discussed topics that I have with my clients, protecting a house from the ravages of long-term care costs would be very high on that list. I've written about this topic several times in the past, but with the recent changes in the laws governing the Medicaid program, I thought this topic deserved a fresh discussion.

A common Medicaid planning technique for the home involves the parent gifting an interest in their house to their children while retaining for the parent a right to live in the house for the remainder of his life. Frequently, the retained interest is a life estate, which is a legal ownership interest.

If the parent retains a life estate, the parent would be entitled to all of the rental income that the property might produce and would be entitled to a portion of the proceeds of sale if the house were ever sold. Essentially, a life estate retains for the parent all of the interests that a full-owner might have in real estate for the remainder of the parent's life. Only after the parent dies will the children, who are called the "remaindermen," be entitled to any of the benefits of ownership.

In the past, I have used life estate interests frequently, and most elder law attorneys continue to use life estates. While I still believe that life estates offer an excellent planning opportunity, other interests in real estate might be more suitable in many situations given the provisions of the new laws governing the Medicaid program.

Today, any gift that an individual makes will be counted against the individual for five years. If an individual applies for Medicaid benefits within the five years following a gift, the penalty period, or period of ineligibility for Medicaid benefits, will not begin to run until the person makes an application for benefits and is otherwise eligible for Medicaid benefits, that is, has less than $2,000 in assets.

Prior to the recent changes, Medicaid only looked back three years. More importantly, prior to the recent changes, the penalty period of a gift would begin in the month the individual made the gift, not the month in which the person applied for Medicaid benefits and was otherwise eligible for benefits.

Under the prior law, it was best if you could minimize the value of the gift that you were making. Since the value of a gift was crucial to the determination of the length of the period of ineligibility, the less valuable the gift, the shorter the period of ineligibility would be. The more valuable the gift, the longer the period of ineligibility.

Under the new law, the long-and-short of it is, if you make a gift, the gift counts against you for the next five years. So, gone is the concept of minimizing the value of the gift and more effort can be spent concentrating on the nature of the gift.

Given this, how I like to structure the gifting of a house is as follows. First, I retain a life tenancy for the parent. A life tenancy differs from a life estate in that the tenancy interest is personal to the parent. The parent is not entitled to rental income if the property is rented and is not entitled to any of the proceeds of sale if the house is sold.

As the life tenant, the parent remains entitled to the homestead rebate and other benefits of ownership.

The remainder of the house is transferred to an irrevocable grantor trust with limited retained interests. In short, what the trust does is, protect the house from the children's potential personal problems (lawsuit, divorce, and death) and preserve for the parent the right to claim the $250,000 exemption from gain on the sale of the residence, if the residence is sold during the parent's lifetime.

Essentially, the parent retains his home for living purposes and the benefits of being a home owner, while protecting the house from potential long-term care costs. Since the parent intended on living in the home for the remainder of his life and never intended on selling the house, his retained life tenancy interest is all he really needs. Yet, the structure of the gift could prove beneficial if future circumstances don't evolve as the parent predicted or hoped they might.

CAN THEY THROW MOM ON THE STREET?

The other week, I read an article in the Asbury Park Press about a chain of Assisted Living Residences that were discharging residents who were about to become eligible for the Medicaid program.

Medicaid is a welfare program. Medicaid is a health insurance program; however, unlike most health insurance programs, Medicaid will pay for long-term custodial care, such as nursing home care and care in an assisted living residence. Long-term care costs a lot of money. A nursing home may cost $9,000 to $11,000 a month. An assisted living residence may cost $4,500 to $7,000 a month.

When a resident of a nursing home or assisted living residence qualifies for Medicaid, the facility receives the Medicaid reimbursement rate that it has negotiated with the State. Each nursing home has a different reimbursement rate, which is based upon a number of factors. The Medicaid reimbursement rates for New Jersey nursing homes are in the range of $6,000 to $6,500 per month. So, when a nursing home resident qualifies for Medicaid, the facility receives about 1/3rd less money for that resident's care than the facility received when the resident was privately paying the nursing home.

Most nursing homes in the state of New Jersey participate in the Medicaid program. I have only encountered one or two facilities in my career that do not accept Medicaid and neither of those facilities were in this area. If a nursing home does accept Medicaid, it must accept, at a minimum, 45% of its residents as Medicaid beneficiaries; however, many facilities have far more than 45% of their residents on Medicaid and some facilities have nearly 100% Medicaid beneficiaries as residents.

Many people believe that nursing homes discriminate against Medicaid beneficiaries, treating those residents differently than residents who are paying privately. First of all, since at least half of the residents in any given facility are receiving Medicaid, it would be impossible for staff to discriminate against Medicaid recipients, since most of the residents are Medicaid recipients; therefore, the treatment the Medicaid residents received would be the facility's standard of care.

Secondly, the Nursing Home Reform Act of 1987, a federal law that provides rights and protections to all nursing home residents who reside in a facility that accepts either Medicare or Medicaid, prohibits nursing homes from discriminating against Medicaid residents.

Assisted living residences are governed by different rules than nursing homes. Assisted living residences, for instance, are not governed by the Nursing Home Reform Act of 1987. Since the Act is the primary source of protection for nursing home residents, the fact that the Act does not apply to assisted living residences means that individuals residing in assisted living residences have far fewer rights than nursing home residents.

New Jersey has no law similar to the Nursing Home Reform Act that protects residences of assisted living residences. Unlike nursing homes, assisted living residences do not have to accept Medicaid, unless the facility was licensed after June of 2001. If the facility were licensed after that date, the facility must accept 10% of its residents as Medicaid beneficiaries.

Moreover, unlike nursing homes, if an assisted living residence has met its Medicaid quota, the facility does not have to accept any more Medicaid residents. A nursing home cannot discharge an individual simply because he qualifies for Medicaid, even if the nursing home has met its Medicaid quota.

Finally, unlike nursing homes, all assisted living residences in the state of New Jersey receive a fixed amount of money per day for each resident who is receiving Medicaid benefits. I believe the figure is $75 per day. The $75 per day is designed to pay for the health care aspect of the assisted living residence. Medicaid does not pay for the room and board aspect of the assisted living residence.

The Medicaid beneficiary must contribute towards the room and board costs. The current cost share amount is approximately $650 per month; however, most residents have more income than $650, so all of their income is owed to the facility less a $100 per month personal needs allowance that the resident can retain. (The monthly personal needs allowance for a nursing home resident is $35.)

So, can an assisted living residence discharge a resident who is about to qualify for Medicaid? I can tell you that the opportunity for the facility to discharge such a resident is far more prevalent than it is for nursing homes. I can also tell you that a law similar to the Nursing Home Reform Act is needed to protect assisted living residents, otherwise articles such as the one that appeared in the Asbury Park Press will repeat themselves.

IS MEDICAID PLANNING DEAD?

Is Medicaid planning dead? If the State has its way, it may be, but I don't think the State will have its way.

In New Jersey, the Division of Medical Assistance and Health Services (DMAHS) is charged with administering the Medicaid program. DMAHS contracts with the County Boards of Social Services (CBOSS) in each county to administer the Medicaid program. Each county has a supervisor or two who is in charge of a group of caseworkers.

Every month the Medicaid supervisors from the various counties get together in Trenton to have a meeting and at those meetings they discuss policies and procedures. In essence, these supervisor meetings establish the law that governs the Medicaid program.

Now, if it seems odd to you that a group of bureaucrats at a private meeting are establishing the law that governs New Jersey's Medicaid program, it should. It violates the law. The New Jersey Administrative Procedures Act requires that policies be established in writing through a public process, not through word-of-mouth at a private meeting.

But enough of that, as that is not what I am writing about this week. What I am writing about is the State's campaign to prevent individuals from engaging in Medicaid planning. Medicaid planning is a process through which an individual seeks to preserve a portion of his estate for himself or his family before spending all of his assets on the costs of long-term care.

In February of 2006, the federal government changed the Medicaid Act in several ways. Primarily, these changes affected the transfer of asset rules of the Medicaid program.

Since Medicaid is a welfare program, Medicaid punishes individuals who dispose of their assets for less than fair market value. For instance, if grandma gives away $10,000 to her grandson to help pay his college tuition and two years later applies for Medicaid benefits, grandma will be ineligible for Medicaid benefits for a period of time.

The more money grandma gives away during the five years preceding her application for Medicaid benefits, the longer grandma will be ineligible for Medicaid benefits. If grandma is ineligible for Medicaid, she must find another way to pay her nursing home bill, perhaps by having the grandson return the money. (Good luck, Grandma.)

The change in the Medicaid Act that occurred in February 2006 was hailed by the State. The personnel at DMAHS believed that the changes signaled the end of Medicaid planning. But they were wrong. What the changes did was to make Medicaid planning more complex, more legal … more dependent on lawyers.

So, at the most recent supervisors' meeting, the personnel at the DMAHS instructed the Medicaid supervisors to deny just about every Medicaid application utilizing the common Medicaid planning techniques that have come into favor since February 2006. The reasons for the denials are so frivolous that I believe it would be unethical for a State attorney to defend DMAHS's actions in court. Lawyers are forbidden from bringing or defending frivolous actions.

What the State is hoping is that lawyers will stop Medicaid planning because of the chilling effect of the State's actions. What client would want to get involved in a lawsuit against the State?

The thing is, the State's actions leave individuals with no other choice. It is either fight the State or spend $200,000 on a nursing home. Either way the money is gone. Why not sue the State in federal court and seek damages against the State? Hey, you just might win if the law means anything, and to those not invited to those monthly meetings, I think it does.

DE-CLUTTER YOUR LIFE

As my elder law practice ages, I find myself assisting more and more executors with the process of estate administration. Estate administration is the process through which a decedent's estate is wound down and, ultimately, distributed to the beneficiaries (assuming there is a sufficient amount of assets to pay all of the debts of the estate).

Estate administration involves submitting the last will and testament to probate, collecting all of the assets of the decedent, paying the debts of the estate, accounting to the beneficiaries of the estate, and distributing the assets of the estate. Not every executor needs the assistance of an attorney in this process, but many do.

If an estate has to pay a death tax (for instance, federal estate tax, New Jersey estate tax, or New Jersey inheritance tax), then the executor probably should retain the services of an attorney. Trying to handle these returns on your own may cost you more than the services of the attorney, and if you overpay these taxes because you neglect to take a deduction or neglect to take the benefits of a valuation rule, the government will not point out your mistakes to you. They will simply accept your payment without even a thank you.

And unless all of the beneficiaries get along, I would strongly recommend that the executor provide each beneficiary of the estate with an accounting and obtain a release and refunding bond from each beneficiary. The rules governing the New Jersey courts establish the format of an executor's accounting. The executor should follow this format.

A release and refunding bond is a document through which a beneficiary releases the executor of his obligations to the estate (and there are many obligations that an executor has) and agrees to return any money given to him if debts of the estate are discovered later. A release and refunding bond is very important.

Being an executor is a lot of work. It also comes with a lot of responsibility and potential liability. This is why an executor is compensated through a commission for his work on behalf of the estate.

Many of my estate planning clients ask me how they can make things simpler for their executor. Many clients seem to believe that if their last will and testament is a short document their estate will be easier to administer. According to this philosophy, the fewer pages the Will has the simpler the estate will be to handle. I can tell you that these thoughts are a complete misconception.

But there are things that a person can do to make the administration of his estate more manageable. First, the executor should complete a letter of instruction.

When a client signs a Will with me, I provide them with a blank letter of instruction. The letter includes space for information such a list of professionals used (lawyers, accountants, financial planners), location of important documents, list of assets, and persons to notify in the event of death or disability. If the client completes the letter of instruction, the executor will have valuable information to assist him in the process of administering the estate.

Secondly, you should consolidate your assets. If you hold stock certificates in fifteen different companies, administering your estate is going to be more difficult than if you hold fifteen stocks at a broker (whether the broker is a full service broker or an on-line broker).

Lastly, you may want to consider cleaning up your house. Both my wife and I have moved parents who were getting older from houses that the parents lived in for decades. In each move, the parent threw away a dumpster full of personal property that nobody wanted, not even the parent. Doing this kind of work after someone dies would create more work for the executor.

Throwing this accumulated junk out when the parent is alive has a cathartic benefit. My guess is, it would be more sad than cathartic if you had to do this work after the parent died.

If you provide relevant information, consolidate your financial assets, and de-clutter your life, both you and your executor will benefit from your efforts.

VICTORY FOR THE DISABLED

In New Jersey, the New Jersey Division of Medical Assistance and Health Services ("DMAHS") administers the Medicaid program. Medicaid is a welfare program. Medicaid is a health insurance program; however, unlike ordinary health insurance programs, Medicaid pays for long-term care costs, such as nursing home care or assisted living care.

When you apply for Medicaid benefits, you apply through a local county board of social services, with whom DMAHS has contracted to carry-out this task. The county may approve your application for benefits or it may deny your application. If your application for Medicaid benefits is denied, you have the right to appeal that decision.

When you appeal you are asking for a "fair hearing." A fair hearing is a trial before an administrative law judge. Since the decision of the county is an administrative decision-it's the decision of an administrative agency-you are said to be taking an administrative appeal of that decision.

The administrative law judge may rule in your favor or he may rule against you. Either way, the decision of the administrative law judge is not a final decision. The Director of DMAHS reviews the administrative law judge's decision, and the Director makes the final agency decision.

Last week, the Director of DMAHS issued a final agency decision in a case involving a special needs trust. The case is entitled E.C. versus the Division of Medical Assistance and Health Services. (Applicants for Medicaid benefits are entitled to confidentiality, so whenever a person applies for Medicaid benefits, his initials are used to maintain the applicant's confidentiality.)

The facts of the E.C. decision can be stated rather succinctly. E.C. is a physically and developmentally disabled individual. E.C.'s mother and father died leaving their estates to a testamentary trust for E.C.'s benefit and the benefit of E.C.'s two brothers. (A testamentary trust is a trust inside a last will and testament, which can be contrasted with a living trust.)

Both the trust in the mother's Will and the father's Will are identical. The trust states that the trust's assets can be used for any of the three children's benefit at the discretion of the trustee for any of the children's health and support. In other words, if the trustee wanted to use some of the trust's assets for the one of the brother's benefit, he could. If the trustee wanted to use some of the trust's assets for E.C.'s benefit, he could. It was up to the trustee to use the money for any one or all three of the children's benefit as the trustee deemed appropriate.

Soon after the death of E.C's parents, a lawyer brought an action in court to reform the trust. The lawyer claimed that the parents' intent in making the trust was to enable E.C. to benefit from the assets held in the trust in a manner that would not displace E.C. from Medicaid. The court did reform the trust and established three separate trusts, one for the benefit of each child, with E.C.'s trust being a special needs trust.

Special needs trusts are trusts that permit a disabled individuals to remain on Medicaid benefits, and other welfare programs, yet to still have the benefit of the money held in the trust.

When the local county board of social services was informed of this turn of events, it denied E.C.'s Medicaid benefits, claiming that the reformation of the testamentary trust constituted a gift by E.C. Gifts result in an applicant for Medicaid benefits being ineligible for Medicaid benefits.

The administrative law judge issued a decision holding that the reformation of the trust was not a gift. The judge held that the original trust was not an available asset to E.C., since the trust was designed to benefit three people, not just E.C., and distributions from the trust were wholly discretionary with the trustee; accordingly, the reformation of the trust could not be a gift. The Director of DMAHS agreed and upheld the administrative law judge's decision.

This is a big win for the disabled.

What's New

It has been sometime since I last wrote about what is new in my life. When I first opened my own law offices, I was single.

Now, I have been married for six years and have three children-Jack (age 5), Catherine (age 3), and Maeve (twenty-two months). My life has changed in many ways.

My sister, Beth, who works with me, has also had many changes. Beth adopted a daughter from Ukraine who was fifteen months old at the time. Her name is Cara. Now, Cara is nearly six and is about to begin first grade.

My son, Jack, and Cara are best friends.

Like most children, my children have boundless energy. They leave me in a constant state of exhaustion. But they remind me of the fact that you should enjoy life while you can live life.

My clients constantly remind me to enjoy my children and life while I can. As simple of a lesson as that is, it is probably one of the more important lessons I am still learning.