WHEN THE WELL-SPOUSE DIES FIRST

When planning for an ill-spouse to qualify for Medicaid benefits, I have to take into consideration the fact that the well-spouse may predecease the ill-spouse.

For example, let’s assume that the husband, the “ill-spouse,” is in a nursing home. The family believes that the husband/father will remain in a nursing home for the remainder of his life.

The wife is in reasonably good health, for a woman who is eighty-five years of age. In total, the couple owns a home, worth approximately $250,000, and $150,000 in cash assets, for example, bank accounts, stocks. When the family comes to see me, they firmly believe that the husband will pass away before the wife.

By planning for Medicaid eligibility, I will be able to save most of the couple’s assets – the house and probably 75% of the remaining assets. So, after the husband qualifies for Medicaid, the wife will continue to have a significant amount of assets in her name.

In order to qualify for Medicaid and to continue to qualify for Medicaid benefits, the husband must never have more than $2,000 in assets. With that said, what if the wife were to predecease the husband?

Most couple’s have “sweet-heart Wills.” In other words, each spouse’s Will leaves the entire estate to the surviving spouse.

For purposes of preserving Medicaid benefits, such a Will can be devastating. For instance, if the wife were to predecease the husband and if she had a Will such as the one described above, her entire estate would pass to her husband and her husband would be disqualified from Medicaid benefits.

The first response that people tend to have to this scenario is – The wife should disinherit the husband, leaving him nothing. The problem with that approach is, a surviving spouse is entitled to roughly one-third of a deceased spouse’s estate, this is called the “elective share.” If the wife were to disinherit the husband, Medicaid would treat that as a transfer of assets and disqualify the husband from Medicaid benefits.

Up until a few years ago, elder law attorneys would draft rather complicated trusts, called supplemental benefits trusts, into the Wills of the well-spouse. If the wife predeceased the husband, the elective share would pass into the trust for the husband’s benefit. The trust was designed to satisfy the husband’s right to the elective share, yet preserve Medicaid benefits for the husband.

While these trusts remaining viable planning options under federal law, New Jersey has begun to attack such trusts. As with most things the State does, whether it is right or wrong, the State is the entity from whom Medicaid recipients receive benefits, so if the State stops paying benefits – whether right or wrong – the individual pays the price.

Most elder law attorneys now draft Wills for the wife that leave the husband the elective share outright, that is, free of any trust. By doing this, the lawyer is minimizing the financial impact of the wife’s death on the husband.

And a recent case may help this planning option along even further. The husband is only entitled to share in the wife’s estate if the husband and wife, at the time of the wife’s death, were not living separate and apart under conditions that would give rise to a cause of action for divorce. New Jersey law permits a couple to divorce if they have lived separate and apart for eighteen consecutive months.

Oftentimes, the ill-spouse will have resided in the nursing home for eighteen months before the “well-spouse’s” death. Guess what, although the couple may have never thought about divorcing, and that’s not the point, they were living separate and apart, so the husband’s right to an elective share is in doubt. And that’s a good thing.

There is an argument to be made in situations such as this that the husband is entitled to nothing and that the children should inherit the entire estate. In this way, the wife’s entire estate passes to her children and the husband continues to be Medicaid eligible.

The key to preserving this option is drafting the wife’s Will in the proper manner, so you build flexibility into the document. Proper planning can save an estate hundreds of thousands of dollars.