Getting Stuck with the Bill

I recently re-read a New Jersey case that should be of great interest to many people who sign their family members into nursing facilities.  When a family member is sick or infirm and requires care in a nursing home, his family is often upset and concerned for his well-being.  The family wants to ensure that the elderly family member receives the best care money can afford.

Unfortunately, long-term care costs a tremendous amount of money.  A nursing home in New Jersey can cost anywhere from $8,000 to $12,000 a month.  In order to ensure payment of their bills, nursing homes will frequently ask a family member to sign the nursing home’s admissions agreement as a “responsible party” for the elderly individual.

But what is a “responsible party” under the terms of these nursing home agreements?  Can a nursing home compel a child to pay for her father’s care in a nursing home?

The fact of the matter is, federal law prohibits a nursing home from seeking or accepting a third-party guarantee of private payment.  This means that a nursing home cannot ask a third-party, for instance, a daughter, to guarantee the payment of the nursing home bill of her father.  Given this law, few nursing homes have blatant third-party guarantees of private payment drafted into their admissions agreements.

Being in the business, though, nursing homes seek to skirt the prohibition against third-party guarantees by carefully wording their admissions agreements.  For instance, a nursing home may say that the responsible party who is acting as the power of attorney for the resident is responsible to use the resident’s assets prudently and to apply for Medicaid benefits when appropriate.

If the daughter—who is the power of attorney agent for her father and who signed the admissions agreement for him as his power of attorney agent—now fails to use the assets of her father prudently or fails to obtain Medicaid benefits for her father at the appropriate time, the nursing home will sue the daughter personally, claiming that she failed to fulfill her obligations as his power of attorney agent and responsible party under the admissions agreement.  The nursing home will say that they never sought a third-party guarantee of private payment from the daughter, they merely sought and obtained a guarantee from the daughter that she would prudently manage her father’s assets and timely apply for Medicaid benefits.

Any way you slice it, the daughter may now be held liable for her father’s nursing home bills.  The nursing home is pushing any misstep in handling the father’s financial affairs unto his daughter.  His daughter, as power of attorney agent and responsible party, is probably doing the best she can.  Being a power of attorney agent is often a lot of work and a thankless job.  For instance, a power of attorney agent is a non-paying job unless the power of attorney document specifically addresses payment to the agent, and most power of attorney documents fail to provide for payment of the agent.

So, the daughter in our hypothetical, not only assumed a boatload of work and liability, she assumed all of that work and liability gratuitously.

In the case that caused me to bring these facts to your attention, the family member signed the admissions agreement as the power of attorney agent, but the family member wasn’t even the elderly individual’s power of attorney agent.  Moreover, the family member was the sole beneficiary of the elderly individual’s estate, and after he died, the family member took the money with which the elderly individual died as an inheritance without paying the nursing home for the services it rendered.

In that case, the court held the family member liable to pay the elderly individual’s nursing home bill, an obvious result.  But there is language in the case that could be used to hold any power of attorney/responsible party liable for a family member’s bill if they fail to handle the elderly individual’s affairs with utmost prudence.  Bad facts make bad law, they say.

Be careful what you sign.

Planning for Long-Term Care

I have so many people who come to me interested in protecting their assets in the event they require long-term care at some point in the future.  The most common asset that a person wants to protect is his home.  The home is often the most valuable asset that a person owns.  The home is also the asset for which people feel the greatest connection.  Home is where the heart is, they say, and that saying has a lot of truth to it.

Long-term care takes many forms nowadays.  There are home health aides who provide care in your home.  Assisted living residences, which try and offer a home-like setting for the long-term care that they provide, and nursing homes, which are more hospital-like than assisted living residences.  Depending upon the type of care a person is receiving, long-term care can cost anywhere from $2,000 to $12,000 a month.

The primary methods of paying for long-term care are private payment and Medicaid.  Private payment is simply you paying for the care with your money.  Medicaid is a government health insurance program for needy individuals.  Many people who require long-term care would like to qualify for Medicaid benefits, so they can stop private paying for their care.

In order to qualify for Medicaid, a person must have a very limited amount of assets.  For this reason, people come to me and ask how they can “hide” their assets if they ever need long-term care.  My answer to this is, you cannot hide your assets, but if we transfer your assets early enough, Medicaid won’t be able to see your assets simply because they cannot look at the transfer you made.

Medicaid is only permitted to look back five years for transfers the person may have made when he files an application for Medicaid benefits.  This five-year period of time is called the “look back period.”  In short, what the look back period means is that Medicaid is permitted to see all financial transactions that a person made during the five-year period of time prior to the date he applies for Medicaid benefits.

Any gift that the person made during the look back period will subject the person to a period of ineligibility for Medicaid benefits.   The more valuable the assets the person gave away during the look back period, the longer the period of time for which the person will be ineligible for Medicaid benefit.

Any gifts that occurred more than five years prior to the date the person applies for Medicaid benefits cannot be scrutinized by Medicaid and cannot result in a period of ineligibility for Medicaid benefits.  So, for instance, if Mr. Smith transferred $500,000 to his son on November 1, 2008, and waits until November 1, 2013, to apply for Medicaid which is sixty-one months after the 2008 gift, then Medicaid cannot punish Mr. Smith for the 2008 gift of $500,000.  The gift is outside the look back period.

When a client comes to me and tells me that he wants to gift his home (or any asset), I inform him about the look back period.  If the client is healthy, the fact that Medicaid can look back five years may be wholly irrelevant to him.  He doesn’t anticipate needing care in the next five years anyway.  Or, if he is transferring his home but is retaining a fair amount of other assets in his name, then the fact that the home transfer may count against him for the next five years may be irrelevant as well, because he has sufficient other asset to pay for his care if he requires care in the next five years.

When transferring the home, I typically recommend that the client transfer his home to an irrevocable trust, while continuing to retain the right to live in his home for the remainder of his life.  This technique accomplishes many of the goals that most clients have.

For one, it guarantees the right of the client to live in the home for the remainder of his life.  For another thing, the trust protects the home from any issues that his children may have, such as death, divorce, or credit problems.  For instance, because the home is owned by a trust, and not the children directly, if a child is sued, the child’s creditors will not be able to attach the home because the child doesn’t own the home; the home is owned by a trust of which the child is a beneficiary, but not by the child.

I Need a Living Trust

In recent weeks, I have had several people come to my offices interested in a living trust … very interested in a living trust.  It’s made me wonder if a “living trust salesperson” has been giving seminars in the area about all the wonderful things living trusts can do for you.  Living trust sales pitches are the snake oil sales pitches of the legal system.  When a person is overly interested in a living trust, they typically use certain catchphrases—privacy, keeping it in the blood line, taxes, and avoiding probate.

Before I can tell you why each of these sales points are silly, I need to explain some of the basics.  A trust is a contract, a contract between the grantor, the trustee, and the beneficiary.

The grantor is the person who had the trust drafted and who puts his money into the trust.  The trustee is the person who manages the money in the trust and makes distributions of the money to the trust’s beneficiary.  The beneficiary is the person for whom the trust was designed to benefit.

A “living trust” is a trust that has legal effect during the grantor’s lifetime.  A testamentary trust, on the other hand, is a trust that is contained in the last will and testament of the grantor and, therefore, has no effect during the grantor’s lifetime.  The benefit of a living trust is that the grantor can place assets into the trust during his life; for instance, the grantor can re-title his bank accounts and real estate into the trust during his life.

Most living trusts are revocable, meaning that the grantor can revoke or modify the trust anytime he wants to do so.  An irrevocable trust, on the other hand, is a trust that cannot be revoked.

A revocable living trust is frequently called a Will-substitute, because a revocable living trust is merely the last will and testament of the grantor.  Typically, when a person has a revocable living trust, they also have a last will and testament that leaves their entire estate to the living trust after their death.  In this way, the living trust governs who receives the entirety of their estate after they die.

So, let’s take the selling points of a living trust one-by-one.  Privacy.  Does a living trust offer privacy.  The short answer is, No.  A Will typically says something such as the following:  “I leave my estate to my spouse and if my spouse predeceases me, to my children.”  Why does someone need to keep that private.  Moreover, if a person disinherits one of his children, everyone in his family and everyone who knows the family is going to know.

Keeping it in the bloodline.  Living trust salespeople tell their audience that a living trust can ensure that their money never goes to their in-laws in the event of the death of their child or a divorce.  The fact of the matter is, the only way to accomplish this effect is to put a sub-trust inside the living trust that holds the child’s money for the remainder of the child’s life.  You can do the exact same thing in a Will.

Furthermore, having a trust that last the entirety of your child’s life just in case he divorces or for when he inevitably dies, you will have a trust that goes on for decades.  Who is going to be the trustee of this trust?  How much are they going to charge?  How resentful will your child become when he doesn’t have access to “his money” many years after your death.

Taxes.  There is no tax planning that can be done in a living trust that cannot be done in a Will.  A revocable living trust—and extremely simply estate planning document—cannot, in and of itself, save you tax.  A living trust, like a Will, must have tax planning provisions in it to help save your estate tax.  That planning can be accomplished with a living trust or with a Will.

Avoiding probate.  Probate in New Jersey costs about $150 and takes about thirty minutes.  Nothing to avoid there.  On the other hand, probate in some states, such as Florida, can be quite complex and quite expensive.  For this reason, I draft living trusts all the time, because my clients own real estate in other states, such as Florida.  But if a client doesn’t own real estate in another state, I see no reason to have a living trust.

Can $1 Buy Peace of Mind?

“Don’t I have to leave him a dollar or something?”  I get this question, or something similar to it, quite frequently.   A client wants to disinherit some family member—whether a child or a sibling—and the client believes that he has to leave the disinherited child some arbitrary and minor dollar amount.

The fact of the matter is, the only person you cannot disinherit is a spouse.  Even if you disinherit your spouse, your spouse has the right to file a claim for a share of your estate.  In New Jersey, that right to make a claim is called the “elective share.”

The elective share is one-third of the “augmented estate.”  Essentially, to calculated the disinherited spouse’s share of the deceased spouse’s estate, you take all the assets in both spouse’s name, add them together, and give the disinherited spouse one-third of the combined estate.

If the surviving spouse already owns one-third of the estate in her name, then she receives no part of the deceased spouse’s estate.  If she owns less than one-third of the combined estate, then she gets an amount sufficient to bring her up to one-third of the estate.

As the name may imply, the surviving spouse must elect to take her share of the estate.  If she fails to make the election within six months of the executor being appointed to administer the estate, then she loses that right for all time.

With the exception of the spouse, there is no other person who has an unfettered right to a person’s estate.  So, for instance, you don’t have to leave your estate to your children or your siblings or whomever you may think you cannot disinherit.  If you failed to have a Will, then your estate is going to pass by intestate succession to certain people.  But if you have a Will, the choice of who will receive your estate is yours to make.

Leaving someone one dollar when your estate is worth $400,000 isn’t going to appease anyone.  In fact, it may anger them more.  For instance, if mom has four children and an estate worth $400,000, her leaving $1 to one son and the remainder of her estate to the other three won’t make the child who is receiving $1 happy.  It isn’t going to make the child say, “Well, mom left me $1 so there’s nothing I can do about it.”

In fact, by leaving the child $1, you make the child a beneficiary of the estate.  As a beneficiary, the executor, who is probably another one of the mother’s children, is obligated to account to the effectively disinherited child.

An interested party—and a child would certainly be an interested party—can always challenge the mother’s Will, claiming that the child lacked testamentary mental capacity to make the Will or that the mother was unduly influenced to draft her Will the way she did.  Perhaps mom suffered from dementia for years before she died and couldn’t comprehend the nature of her actions in making the Will.  Or, perhaps one child was unduly influencing the mother to disinherit her child.

Leaving the disinherited child $1 doesn’t prevent that child from raising any and all claims he may have against the Will.  In my opinion, it does nothing other than make him a beneficiary of the estate, whereas if he were disinherited then he wouldn’t be a beneficiary.

If you are going to disinherit a close relative, such as a child, then you should mention the child in the Will.  For instance, “I have four children:  Moe, Larry, Curly, and Shemp.”  The Will could then go on to leave everything to three of the children and make no mention of the other child.

You shouldn’t state why you are disinheriting the child, because that only service to give the child something to argue about.  For instance, “I am not leaving Shemp any portion of my estate because he stole money from me.”  Now, Shemp can come in and say, “I didn’t steal money from her.  She wasn’t thinking straight.”

Leaving someone $1, or some other magical, small dollar amount, isn’t going to prevent people from challenging your Will, but having a lawyer who knows what he’s doing when drafting your Will may.