Friday, July 29, 2011

Endless Litigation For Rosa Parks' Estate

Civil Rights icon Rosa Parks died in 2005.  Her will and trust specified that the bulk of her estate was to go to the Rosa and Raymond Parks Institute For Self Development, which she had founded to teach young people leadership and character development.  Since Mrs. Parks' death, however, her estate has been tangled in litigation, with accusations of wrong-doing involving many of Rosa's family members, friends and professional advisers. 

The attorney representing Mrs. Parks' friend and "caretaker," Elaine Steele, claims that the Detroit area judge handling the case improperly awarded to two other attorneys involved in the case attorneys' fees of almost $243,000 -- or almost two-thirds of the assets remaining in the estate.

Click here to read more on this case.

Federal Court Case Attacks Validity of Promissory Note Strategy

The Third Circuit Court of Appeals recently held in Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011), July 12, 2011) that New Jersey's Department of Human Services may properly consider a promissory note purchased as part of a crisis Medicaid planning strategy as a "trust like" device and therefore count the notes as "available resources" subject to a Medicaid spend down. 

What is troubling in this case is that the notes in question appear to have been "DRA compliant."  That is, the notes (1) provided for payment in equal installments, (2) were payable within the lender's life expectancy and (3) could not be canceled upon the lender's death.  Notwithstanding such compliance, the court held that New Jersey DHS could properly determine that the Notes did not evidence "true" loans, since the transactions were not secured by any collateral from the borrowers had failed to meet their burden of showing that the notes were not the product of a "bad-faith arrangement."  Since the Court ruled that the plaintiffs had failed to meet that burden, DHS was permitted to determine that the instruments were essentially "trust like" devices, and thus subject to the Medicaid trust-transfer rules that impose a five-year look back period.

While the Sable decision is not binding precedent in New York, we may expect that the various New York County Departments of Social Services may attempt similar attacks on the customary gift/loan strategy presently used for crisis Medicaid planning.  To rebuff such attacks, practitioners may need to begin engaging in credit checks of our children/borrowers, and going a step further, requiring the children to offer collateral as security for the loans. 

Sunday, July 3, 2011

Understanding the Impact of Gifts on Future Medicaid Eligibility

Without proper legal and financial advice, families sometimes take actions that seem innocent enough at the time, but which later may cause the family all sorts of grief.  Perhaps the most common error is when a parent or grandparent makes gifts to a younger family member without considering the impact such gifts will have on the donor’s potential Medicaid eligibility.  Many people have at least a vague understanding that they are “allowed” to make annual “tax free” gifts of up to $13,000 per beneficiary.  Such gifts, however, may prevent the donor from being eligible for nursing home Medicaid benefits if such gifts are made within five years prior to the donor applying for Medicaid.  As a general rule, gifts made within the five year “look back” period from the date a Medicaid application is filed will create a Medicaid “penalty period” based on the following formula:  the amount of total gifts during the look back period, divided by the “Regional Rate” for private pay nursing home care established each year by the New York State Department of Health.  For 2011, the Regional Rate for the Northern Metropolitan Region is $10,105 per month. 

The potentially dire consequences of this Medicaid penalty formula can be seen in the following example:  assume that in 2010 an Orange County resident in declining health made gifts of $50,000 apiece to each of her two children.  Soon thereafter the mother entered a nursing home and spent her remaining resources to pay for her long-term care.  By July 2011 the mother had “spent down” to the Medicaid eligibility limit of $13,800, and the children were advised by the nursing home to file a Medicaid application on their mother’s behalf.  Based on these facts, mom would be approved for Medicaid, but with a catch: the $100,000 in gifts made during the look back period would result in a period of Medicaid ineligibility for 9.9 months ($100,000 divided by $10,105). Mom would be responsible to pay the ten months of nursing home expense during the penalty period, but without any means to pay it!  Since the nursing home will surely not want to absorb that cost, it may decide to try to evict mom from the home and/or file a lawsuit against mom and the children to recover the gifted funds, typically on a theory of “fraudulent conveyance.”

While the family may contend that such gifts were for a purpose other than to qualify for Medicaid, the legal presumption is that all gifts within five years of the Medicaid application filing are subject to a Medicaid waiting period.  The law puts the onus on the donor to prove – usually at an administrative “fair hearing” – that the gifts were made, for example, to help a child in financial difficulty, or as part of an annual gifting program.  If such arguments are unsuccessful, then the gifts, if not returned to the parent or grandparent, may leave the senior unable to pay for needed long-term care. 
I do not mean to imply that gifts to family members should never be made.  Rather, it is critical that before gifts are made, the parent or grandparent review the gifts with an elder law attorney to understand the potential impact of the gifts in the Medicaid context.  A clear paper trail should be established to show both the source and the purpose of the gifts.  For example, if a parent wishes to give a son and daughter-in-law $25,000 towards the down payment on a home, a notation in the check memo (gifts should always be made by check or other traceable source) should specifically state “gift for home down payment”.  Should the parent suffer a decline in their health and seek nursing home Medicaid assistance within five years of having made that gift, the memo entry will provide support for the claim that the particular gift was for a purpose other than to help the parent qualify for Medicaid, and therefore should not result in a Medicaid “penalty.”