For years, I have been using irrevocable trusts to transfer a client’s assets to her children. The benefits of transferring assets to a trust, instead of transferring the assets directly to the client’s children, are many.
To illustrate, let’s assume a hypothetical set of facts. Mrs. Smith, aged 70, is interested in protecting her home from the ravages of long-term care costs. She knows that if someday she needs nursing home care, she will have to spend all of her assets before she will be eligible for Medicaid benefits. She is interested in removing her home from her name in order to protect the home from long-term care costs.
Mrs. Smith has four children. She wants to transfer her home to her children, but she worries that a child might get sued or divorced or die and the impact such an event might have on her home.
If Mrs. Smith transfers her home directly to her children, her home would be exposed to any of children’s future problems. For instance, if a child gets into a car accident and is sued, the child’s creditor could attach Mrs. Smith’s home.
If the spouse of a child files for divorce, the soon-to-be ex-spouse might try and lay claim to the child’s share of Mrs. Smith’s home. While the claim of the ex-spouse for a share of mom’s house may not succeed, the frustration such a claim would cause to the child and Mrs. Smith can be substantial.
If a child dies, the child’s share of the home will, in all likelihood, pass to the child’s spouse. Mrs. Smith would probably prefer that the child’s interest pass to the deceased child’s children, Mrs. Smith’s grandchildren, not the child’s spouse.
All of these issues can be avoided with a properly structured Medicaid trust. Attorneys have been using Medicaid trusts for years, and the law governing these trusts is firmly established.
In 1993, a federal law was enacted detailing when the assets and income of a trust are available to a Medicaid applicant. The test for availability is called the “any circumstances” test. In short, if there are any circumstances under which the assets or income of the trust can be distributed to the Medicaid applicant, then those assets or that amount of income that can be distributed is available to the applicant.
The opposite of the “any circumstances” test is when the assets or income, or both, cannot under any circumstance be distributed to the Medicaid applicant. If there are no circumstances under which the assets or income, or both, can be distributed to the applicant, then the assets or income are unavailable to the applicant.
When a person transfers her assets to an unavailable trust, the five-year lookback for asset transfers begins. When Mrs. Smith comes to see me in order to protect her home, I tell her about the five-year lookback and the concept is that Mrs. Smith will not apply for benefits for five years following the transfer.
In 1993 and in 1998, the Centers for Medicare and Medicaid Services—the federal agency responsible for administering the Medicaid program, issued letters re-stating the law as I just presented it to you. So, the fact that the law (passed in 1993) is now twenty-five years old and that the federal agency responsible for administering Medicaid said twenty-five and twenty years ago, respectively, that this is the law means that the state of New Jersey cannot claim that the law is something other than what I have presented to you.
I bring this up because from time-to-time, the State tries to make up its own rules, rules that are more stringent than the federal law permits. But Medicaid is a cooperative federal-state program, and states that accept Medicaid funds, such as New Jersey, must comply with federal law. If the State does not comply, it can be sued in federal court and when the law and the federal agency say the State’s position is wrong, it is wrong.
