Positive Change to New Jersey Medicaid

New Jersey’s Medicaid program is about to get a dramatic overhaul. Currently, there are two programs of Medicaid that pay for long-term care, such as care in a nursing home or IN assisted living residence or at home (such as a home health aide).

One program is known as Medicaid Only Medicaid. Medicaid Only will pay for long-term care in a nursing home, in an assisted living residence, and at home, such as a home health aide. The Medicaid Only program has an income cap. Currently, the income cap is $2,163 per month.

If an applicant’s gross monthly income is at or below $2,163 per month, he can potentially qualify for the Medicaid Only Medicaid program (assuming he has very limited assets and requires assistance with his activities of daily living). If the applicant’s gross monthly income exceeds $2,163, even if by only one penny, he will not qualify for Medicaid Only Medicaid under any circumstances. This is what an income cap is all about.

The other program of Medicaid that will pay for long-term care services is known as Medically Needy Medicaid. Medically Needy Medicaid program is for individuals whose gross monthly income exceeds the income cap; however, Medically Needy program will only pay for long-term care in a nursing home, not in an assisted living residence or at home.

So, if a person is looking for assistance with the long-term care services that they need in an assisted living residence or at home (such as a home health aide) and their gross monthly income exceeds the income cap (currently $2,163), they are out of luck. Such an individual will never qualify for Medicaid long-term care services, even if they owned no assets whatsoever.

This is about to change. New Jersey is about to eliminate effectively the income cap. In the future, individuals whose income exceeds the income cap will be able to place the amount of income by which their income exceeds the cap into a special trust, called a Miller Trust after a famous case. Once the income is placed into the trust, the income does not count against the individual for purposes of Medicaid eligibility. The Medicaid beneficiary will then have to “spend down” the excess income in the trust every month by using that income to pay for her medical needs or other specified needs.

The thing is, federal law does not permit a state to use Miller Trusts if the state has a Medically Needy program for nursing home care. New Jersey does have a Medically Needy program for nursing home care, so New Jersey is getting rid of its Medically Needy program. What this means is, Medicaid applicants in a nursing home or an assisted living residence or at home whose income exceeds the income cap will have to start using Miller Trusts to handle their “excess” income.

For instance, if Mrs. Smith is in a nursing home or an assisted living residence and her gross monthly income is $2,263, she will have to place $100 of her income into a Miller Trust every month. Every month, the trustee of Mrs. Smith’s Miller Trust (who cannot be Mrs. Smith) will then have to use that $100 of income to contribute towards the cost of her care, for instance, by paying it over to the nursing home or assisted living residence.

It’s essentially a legal fiction that permits Mrs. Smith to qualify for Medicaid notwithstanding the fact that her income exceeds the income cap. In reading this, you might be thinking, What a pain that will be. But the reality of the situation is, the State is opening up Medicaid long-term care services to a large percentage of people for whom such services have been unavailable, those whose income exceeds the income cap but need long-term care services at home or in assisted living residence.

This change does require more skill and knowledge in order to qualify for Medicaid benefits; however, the pool of people who can qualify for benefits will be much deeper. I applaud the State for making this change.

Is an Inherited IRA a Retirement Account

A recently decided case of the United States Supreme Court may have far-reaching implications with respect to the manner in which individuals structure their estate plans. The case is titled Clark v. Rameker. It involves the interplay of the bankruptcy laws and the laws governing individual retirement accounts or IRAs.

In this case, Mrs. Clark and her husband filed for bankruptcy. Mrs. Clark had inherited an IRA from her mother, who died in 2001. The inherited-IRA was worth $450,000 at the time Mrs. Clark inherited it from her mother. At the time Mrs. Clark and her husband filed for bankruptcy, the IRA was worth $300,000.

Mrs. Clark sought the benefits of a Bankruptcy Code section that exempts “retirement accounts” from being subject to the claims of creditors in a bankruptcy proceeding. In other words, if the IRA that Mrs. Clark inherited from her mother was a retirement account within the meaning of the Bankruptcy Code, then Mrs. Clark could retain the entire account (worth $300,000) without having to pay a dime of the account to the Clarks’ creditors.

The Supreme Court noted how an inherited-IRA differs from an IRA that an individual establishes for herself in three ways. First, unlike an IRA that an individual establishes for herself, the owner of an inherited-IRA cannot contribute additional funds to the IRA; in other words, Mrs. Clark could not add her own money to the IRA she inherited from her mother.

Secondly, the owner of an inherited-IRA must begin to withdraw money from the account no matter how far they may be from retirement. Once Mrs. Clark inherited the IRA from her mother, she was required to begin to take a minimum required distribution from the inherited-IRA. This is true no matter how old Mrs. Clark may have been at the time she inherited the IRA.

With a traditional IRA, the owner is not required to take minimum required distributions until they attain the age of 70-1/2. With an inherited IRA, the owner must begin taking minimum distributions after they inherit the IRA, irrespective of their age.

Finally, the owner of an inherited-IRA can withdraw all the money from the account at any time and for any reason without penalty. The owner of a traditional IRA cannot withdraw funds from the IRA without penalty until she achieves the age of 59-1/2, unless certain exceptions, such as disability of the owner, are present.

The Court held that inherited-IRAs are not retirement accounts within the meaning of the Bankruptcy Code; accordingly, Mrs. Clark’s inherited-IRA is subject to the claims of her creditors. In short, Mrs. Clark cannot shield her inherited-IRA from her debts.

This case can have far-reaching implications on estate planning. For instance, what if Mrs. Clark’s mother had devised her IRA to a spendthrift trust for her daughter’s benefit instead of passing the IRA directly to her daughter. Such a trust would have isolated the IRA from Mrs. Clark’s creditors.

With such a trust, Mrs. Clark would not have to pay the IRA over to her creditors and could enjoy the money for the remainder of her life. Care will need to be taken in drafting estate plans when IRAs involved.

Two Major Victories for Medicaid Beneficiaries

This week was a big week for potential Medicaid beneficiaries. Two discrete events occurred this week and both have to do with a Medicaid applicant’s income and eligibility for Medicaid benefits.

Medicaid is a government health insurance program for needy individuals. Unlike most policies of health insurance, Medicaid will pay for long term care services, such as care in a nursing home or assisted living residence. In order to qualify for Medicaid long term care services, an individual must have limited assets and must require assistance with several of the activities of daily living, for example, clothing, bathing, toileting, transferring, and mobility.

In addition, in order to qualify for Medicaid long term care services at home or in an assisted living residence, an individual must have income that is below an income cap. The current income cap is $2,163 per month. The $2,163 figure is a gross figure, so deductions from the applicant’s income (taxes, health insurance premiums, etc.) must be added back in to determine whether or not the applicant’s income is at or below the $2,163 cut off figure.

If a person applies for Medicaid long term care services at home (for instance, he wants Medicaid to pay for a home health aide) or in an assisted living residence, and his income exceeds the cap by one penny, he will not qualify for Medicaid long term services at home or in assisted living residence. If this individual needs long term care and cannot afford to pay for the care, he will have to go reside in a nursing home. There is no income cap for Medicaid services in a nursing home.

This week, what I have just written changed in substantial ways. The first change came by way of a federal court decision. Many elderly individuals apply for a cash assistance program available through the United States Veterans Administration commonly known as Aid and Attendance. Aid and Attendance will provide approximately $2,100 per month in cash assistance to a qualified veteran and approximately $1,100 per month in cash assistance to the widow of a qualified veteran.

In order to receive Aid and Attendance, the veteran (or his widow) must have income that is insufficient to pay for his/her care. Unreimbursed medical expenses (such as nursing home or assisted living or a home health aide) can be used to reduce income. So, many veterans (or their widows) will qualify for Aid and Attendance when they require long term care.

The problem has been that Medicaid counts Aid and Attendance, or a portion of the award, as income and often this income disqualifies the person from Medicaid services due to the income cap. A federal court held that counting Aid and Attendance is inappropriate when the reason for the receipt of the benefit is due to unreimbursed medical expenses, which it almost always is.

This is a big victory because it means that a Medicaid applicant’s receipt of Aid and Attendance will not disqualify him from receiving Medicaid benefits when the time arises.

The second major event of the week eclipses and, from a practical standpoint, renders moot the first major event. The State of New Jersey received approval in October 2012 to eliminate the income cap from its home-based Medicaid long term care services program. To date, the State failed to implement that change, but this week, the State announced that it will implement the change.

It gets a bit complicated. A person’s income that exceeds the income cap will need to be placed into a trust commonly known as a Miller Trust, but the exciting thing is that there now is a route for individuals with income that exceeds the income cap to qualify for Medicaid at home and in an assisted living residence.

A Will for a Second Marriage

I often meet with married couples in second marriages. Each spouse frequently has children from a first marriage. The couple may have been married to each other for ten years or more. Sometimes their families get along well, sometimes they do not.

In most instances, these clients want to have mutual Wills drafted. Mutual Wills are Wills that mirror one another—the husband’s Will leaves everything to the wife and the wife’s Will leaves everything to the husband. In a first marriage situation, the couple names their mutual children as their remainder beneficiaries; in other words, the couple’s children will ultimately receive the couple’s estate when both members of the couple pass away.

The issue that is presented with a second marriage is that each spouse has their own children. The couple could have Wills drafted wherein they both name all the children from both marriages as remainder beneficiaries, but the second-to-die spouse could always change her Will to disinherit the first-to-die spouse’s children.

In other words, assume that Mr. and Mrs. Smith are married. The marriage is a second marriage. Mr. Smith has three children from his first marriage. His first wife passed away. Mrs. Smith has two children from her first marriage. Her first husband passed away. Assume further that the Smiths have Wills that leave everything to each other then to the five children (three from his first marriage and two from her first marriage).

If Mr. Smith were to die, everything would pass to Mrs. Smith. Mrs. Smith is now free to change the terms of her Will. She could disinherit Mr. Smith’s children and leave everything to her two children.

The solution for this issue is a trust. In order to ensure—or better ensure—that Mr. Smith’s children receive the remainder of his estate upon the passing of Mrs. Smith, Mr. Smith would have to draft a trust in his Will for Mrs. Smith’s benefit. Upon Mrs. Smith’s passing, Mr. Smith’s children would be named as remainder beneficiaries of the trust. Mrs. Smith would have a similar trust in her Will for the ultimate benefit of her children.

In order for the trusts to work, the Smiths’ assets would have to be divided so that Mr. Smith held title to his assets in his name and Mrs. Smith held title to her assets in her name. Any assets that are jointly held will pass to the surviving spouse automatically, irrespective of what the Wills say. Also, the Smiths will have to be mindful of the beneficiaries designations that they place on assets. If Mr. Smith names Mrs. Smith as the beneficiary of his IRA, then Mrs. Smith will inherit that IRA outright and free of the trust in Mr. Smith’s Will.

By drafting these trusts into their Wills and by having their assets titled appropriately, the Smiths can better ensure that each of their respective children will ultimately receive some benefit from their estate. I say better ensure because even a trust is not foolproof.

For instance, if Mr. Smith names Mrs. Smith as the sole trustee of the trust in his Will for her benefit, Mrs. Smith might substantially deplete the trust before she dies, living off the assets in the trust instead of living off the money she has. To prevent this, either a co-trustee would have to be named with Mrs. Smith—for instance, one of Mr. Smith’s children—or one of his children would have to be named as sole trustee. Of course, that all sounds nice in theory, but Mrs. Smith probably won’t like that idea at all, and she’ll (or he’ll, with respect to Mrs. Smith’s Will) convince him not to name someone else as trustee or co-trustee.

Spouses, even spouses in second marriages, don’t want to offend their spouse, and they want to provide for their spouses. So, in most cases, after I present the options, the couple will decide to have simple Mutual Wills drafted naming all the children as remainder beneficiaries. They’ll tell me that they trust their spouse not to change his/her Will.