Review of Partial Interest in Real Estate

In Post 86, I discussed the advantages and disadvantages of a potential Medicaid applicant transferring property and retaining a life estate. The advantages are that the retained life interest is assigned no resource value nor is it subject to the lien. On the negative side, as pointed out in said Post, New Jersey Practice, Celantano, ¶4.8 indicates that the individual with retained life interest has certain obligations. If an individual is in a nursing home, the social security and/or pension cannot be applied to pay these costs and the burden falls on the remainderman.

In addition, the remainder interest is deemed to be a transfer and could cause a delay of Medicaid. The computations for the value of a life estate and the remainder interest are set forth in a prior Revenue Procedure, which bases its tables on the Internal Revenue Code prior to the IRS adjustment for current interest rates.

The transfer penalty can be avoided by having the remainderman purchase his or her remainder interest. However, the monies paid to the applicant are then available resources.

I have also discussed in Post 48 the fact that inaccessible resources are excludable resources for Medicaid. Therefore, if the applicant owns property jointly with another individual, the property is an inaccessible resource if the co-owner refuses to sell (Post 48).

If the co-owner is a child of the applicant and provided care for at least two years that enabled the applicant to remain at home rather than go into a nursing home, a transfer to the child is exempt from the Medicaid transfer rules (see Post 6). However, if the co-owner is not a child (a stranger), the applicant has an obligation to pay one-half the net cost with no money to do so. Another situation would be if the applicant owned the property jointly with a sibling (see Post 11), and the sibling resided with the applicant for at least one year prior to institutionalization, the transfer to the sibling also results in a non-penalizing transfer.

The advantage of a transfer to the child or the sibling as discussed above, is that the property is also exempt from the Medicaid lien.

From an estate planning point of view, keep in mind that a joint ownership passes by operation of law, while a tenancy in common is a probate asset and passes under the applicant's will.

As in all areas of Medicaid, an applicant after consultation with counsel must review the pros and cons of any planning technique, particularly when we are dealing with jointly-owned real estate.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© September 2011, Post 162

Creativity Required in Elder Law Planning

Very often a situation will arise where it appears that Medicaid eligibility is lost. Often, creative thinking can preserve eligibility.

I can think of two very clear examples which will emphasize this point.

There is a theory in Medicaid known as the "stupid kid" defense. Assume a child has a power of attorney for a single parent and has $3,000 and the parent has a $2,000 liability. Further assume the child neglects to pay the liability so that the amount of resources at the appropriate time is $3,000. Janice Chapin of Central Jersey Legal Services has been successful in arguing what is known as the "stupid kid" defense. That is, Medicaid has allowed eligibility on the basis that the parent should not suffer neglect of the "stupid kid".

Another example comes to mind. Approximately 20 years ago, Hunterdon County Legal Services had a matter where the only applicant's resource was corporate stock and a buy-sell agreement. Such an agreement often provides for the other shareholders to have an option to buy and that upon the death of the shareholder, the purchase can be mandatory. At an administrative hearing, it was held that such stock was not an available resource since it was subject to the buy-sell agreement.

Like in all Medicaid situations, there is no guarantee that these approaches will work with any County board. However, these arguments have worked in the past and creativity should be the key note planning by any Elder Law attorney.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© September 2011, Post 161

The "Pig" Theory in Elder Law

Numerous blogs have discussed excludable resources such as funeral expenses, expenses used to fix up the home, transfers to a disabled child, payments pursuant to a Caretaker Agreement, and related matters.

Underlying these expenditures is an unwritten rule known as the "pig" theory. That is, even for an expense that is exempt, there is a subjective limitation. For example, I doubt whether Medicaid would allow funeral expenses of $50,000. Similarly, fix-up expenses on an excludable resource, such as a home, are limited by the theory. It is doubtful whether Medicaid would allow $200,000 in improvements.

Caretaker Agreements have been limited by the word "reasonable." Although Medicaid has not defined the word "reasonable", there is a subjective limitation limited by the "pig" theory.

Although transfers to a disabled child are exempt, it is my inclination that there is some limitation that Medicaid would not accept.

While one motor vehicle is an excludable resource, it is doubtful whether the purchase of a Lamborghini would be allowable. Although such examples are limitless, such theory must be considered even when making an exempt transfer or purchasing an excludable resource.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2011, Post 160

Key Federal Estate Tax Issues in Elder Law

Numerous blogs have referred to the fact that knowledge of federal estate tax is necessary for an Elder Law attorney.

I thought it would be helpful at this point to review some of these issues. Major considerations would be the following:

1. If property is transferred with a retained life estate, the property gets a step-up in basis under Section 36.
2. If property is gifted, the transferee gets a carryover basis.
3. The basis of any property is increased by capital improvements such as roofing and improvements for a disabled relative.
4. Cost of maintenance and upkeep after date of death are not deductible.
5. Cost of preparation of property for sale and the cost of sale (such as attorney's fees and broker's commissions) are deductible as administration expenses.
6. Any debt of decedent regardless of its nature, is deductible under Section 2053. Other administration costs that are deductible are costs of sale of any type (such as an auction to sell personal property and commissions to sell stock).
7. For federal estate tax purposes, life insurance over which decedent had any form of ownership and life insurance payable to the estate (including certain items such as post- mortem dividends and post-mortem interest) are includable. However, for New Jersey inheritance tax purposes, life insurance to a named beneficiary is not taxable except for limited items.
8. Other typical administration costs are costs of burial, including the cost of the administrator to travel to administer the estate. However, costs of a beneficiary, are not deductible.
9. Costs of the executor, such as litigation relating to the elective share, are also deductible. However, costs of a beneficiary in seeking elective share are not deductible. An argument can be made that costs of a beneficiary in this case should be deductible as all costs are necessary to resolve the administration of the estate.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2011, Post 159

Planning When One Spouse Enters a Nursing Home

Suppose a couple has approximately $700,000.00 in liquid assets and the wife is about to enter the nursing home. The question is what might be an appropriate plan in such a situation.

Since "reverse half-a-loaf planning" has been incorrectly denied by the Medicaid authorities (see Post 113), the best plan might be to transfer all the assets to the healthy spouse. If the ill spouse lives five years, the maximum community spouse resource allowance ($109,560.00) plus any remaining monies would be saved for the healthy spouse.

In the event the healthy spouse predeceases, it is recommended that the will of the community spouse leave the elective share outright to the ill spouse (see The Final Medicaid Regulations (Finally!), 2001 "Estate Planning Issues", by Levin, Mark) with discretionary income and principal to the ill spouse and others. In the event the ill spouse enters the nursing home, the principal can be distributed to the other sprinkle beneficiaries as the transfer rules for trusts apply only to inter-vivos trusts (see Post 15) and not to testamentary trusts. Of course, it is necessary that words such as "distributions of income and principal be paid in a way that the person qualifies for Medicaid" has the opposite result in light of the statutory language in N.J.S.A. 30:4D-6f.

Such planning is particularly appropriate in the event of the possibility that a child goes into a nursing home so that the "kickout" can be to the other child.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2011, Post 158

The Role of an Elder Law Attorney

As my numerous postings have indicated, there is often a great discrepancy between the federal Medicaid statute and the state's position. That is, the state is often violative of federal pre-emption.

Therefore, your role as an elder law attorney is not to dictate to a client the path to take. Rather, one should point out the various alternatives, the benefits and the risks.

Such areas as the will of the community spouse, spousal refusal and exempt transfers present issues that are equivocal and not easily decided.

Similarly, whether a child has provided the necessary care to be deemed a "protected transferee," is a subjective issue.

Therefore, it is your role to point out the issues, possibly give recommendation, but not dictate to a client the course to take.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2011, Post 157

Testamentary Planning for Will of Husband When Ill Wife Remains in the Community

A client of mine in his forties has an ill wife who will not need nursing home care but requires and will require home care.

Clearly, Medicaid does not pay for home care on a long term basis. Therefore, the format for a testamentary trust of the husband is a major consideration.

The couple have no objects of their bounty other than each other.

Clearly, a restrictive trust or a special needs trust would serve no purpose since the wife receives $2,300.00 in income from a state pension. Therefore, in this situation it would be recommended that the husband's will provide for the wife with discretionary income with broad standards so that she can live in the best manner available. Such language might be "the trustee shall distribute income and principal to or for the benefit of my wife for her health, comfort, welfare and support so that she can live in the best standard and accommodations available."

The inclination to make a restrictive trust should be avoided.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© August 2011, Post 156