Cuomo Commission Proposes Significant Increase in New York's Estate Tax Exemption

A report released this month by Governor Cuomo's New York State Tax Relief Commission recommends, among other forms of tax relief, that New York's estate tax exemption -- which is presently the same $1 million per person exemption that was in effect in 2000 -- be increased to the current federal exemption amount of $5.25 million, indexed for inflation, and that the top rate be lowered to 10% for amounts in excess of the exemption.

This would be a welcome change, as it would impose estate tax obligations on only the largest estates, and would simplify estate tax planning for New York residents.  The proposed exemption increase would also help stem the tide of New York residents seeking to establish residency in lower tax states which either already have a higher estate tax exemption or, like Florida, have no separate state estate tax at all.

The full report is found here.

Planning for Loved-Ones With Disabilities -- Supplemental Needs Trusts

With over 43 million people suffering from some form of disability in the United States, many people face the difficult challenge of assisting a disabled child or grandchild.  A dilemma often arises where the parent or grandparent would like to help enhance a loved-one’s quality of life, but not at the expense of disqualifying either themselves or the disabled person from eligibility for governmental programs such as Medicaid and Supplemental Security Income (“SSI”). Fortunately, we have at our disposal a planning tool called the Supplemental Needs Trust (“SNT”).

There are two basic types of SNT’s:(i) a “third party” SNT established and funded by a person who does not have a legal duty to support a person with a disability (i.e., a disabled adult child or a grandchild); and (ii) a “self-settled” SNT funded with the disabled person’s own assets and/or income. These trusts are specifically authorized in New York under Estates, Powers and Trust Law §7-1.12.

With a typical third party SNT, all distributions from the trust are made in the sole discretion of the Trustee (who is often the person who established and provided the assets for the trust), and are usually paid to third party providers of services to the disabled beneficiary.  If distributions are made directly to the beneficiary, such distributions may reduce or disqualify the beneficiary from SSI, Medicaid and other “means tested” government programs.

Third party SNT’s may be created either during the parent or grandparent’s lifetime (called an inter vivos SNT), or as part of their will or revocable trust, where the SNT “springs” into effect after the parent or grandparent’s death (called a testamentary SNT).Be aware that lifetime transfers into a third party SNT will not qualify for the annual $14,000 gift exclusion and will utilize a portion of the trustmaker’s $5,250,000 gift tax exemption (increasing to $5,340,000 in 2014).  However, gifts made to a third party SNT for the benefit of a disabled child or grandchild will not result in the imposition of a Medicaid “penalty period” for the parent or grandparent making such a gift, even if made within the five-year Medicaid “look back” period.

An additional benefit of a third party SNT is that the state has no right to recover any of the assets in the trust remaining after the death of the beneficiary.  All such assets may be left to other children, grandchildren or any other beneficiaries selected by the trustmaker.

A self-settled SNT operates much like a third party SNT (i.e., the Trustee retains complete discretion to make distributions of principal or income to or for the benefit of the beneficiary), but the assets funded into the trust come from the disabled beneficiary him or herself. Such trusts are often funded with settlement proceeds from a personal injury or similar lawsuit. Or, a disabled beneficiary who is able to work may divert income above the Medicaid allowable level into a self-settled SNT in order to retain eligibility for Medicaid and SSI.  Be aware, however, that use of a self-settled SNT is only viable in New York if funded before the beneficiary turns 65; if used for a beneficiary over 65, the trust assets would be considered countable resources in determining the beneficiary’s eligibility for Medicaid.

A fundamental difference between the third party SNT and a self-settled SNT is that the latter must include a “Medicaid payback” provision. That is, upon the death of the beneficiary, the local Medicaid agency must first be repaid from the trust proceeds in an amount up to the amount of the benefits provided to the beneficiary during his or her lifetime.  Assets that remain in the trust after the Medicaid payback, if any, may be left to other beneficiaries.

Also, under present law a self-settled SNT can only be created by a beneficiary’s parent, grandparent, guardian or a court, even if the beneficiary is an adult and otherwise competent to execute a trust agreement.There is pending proposed legislation in Congress that would amend the law to allow competent disabled adults to create and execute their own self-settled SNT’s.

SNT’s can be extremely beneficial to families facing the already difficult prospect of assisting a loved-one with beneficiaries. Because of the specific legal requirements for establishing and maintaining SNT’s, an experienced elder law and special needs attorney should be consulted to assist with this important planning tool.

Estate and Capital Gains Tax Issues Cloud Stan Musial's Estate

A recent post on Forbes.com highlights potential capital gains tax and estate tax issues pertaining to the estate of the late baseball Hall of Famer, Stan Musial.  Specifically, Musial's estate conducted a sale of some of Musial's baseball memorabilia, which brought in a total of $1.2 million to the estate.  The author speculates that while Musial's estate may avoid an estate tax should Musial's total assets be less than the $5.25 federal estate tax exemption in effect for 2013, the estate may nonetheless be subject to the payment of significant capital gains taxes in the event that the date of death value of the items sold at auction -- as determined by an appraisal -- was substantially lower than the actual sale price of those items.

This case highlights that, as fewer estates are subject to the payment of federal estate taxes, it is increasingly important to focus on managing capital gains tax issues when planning an estate during your lifetime -- and providing for flexibility within the plan to minimize capital gains taxes after death.

The Forbes article can be found here.

Maintain a Paper Trail When Transferring a Parent's Assets!

Many people know that when an application is submitted for nursing home Medicaid coverage, the county Department of Social Services is required by law to scrutinize all financial transactions engaged in by the Medicaid applicant during the five year “look back” period prior to the date of the application. Asset transfers to family members during the "look back" period will receive particular scrutiny.  Unless it can be proven that the transfers were made (i) in exchange for goods or services provided, or (ii) for a purpose other than to qualify for Medicaid, then such transfers will result in the imposition of a Medicaid penalty period. With that unfortunate result, Medicaid coverage is delayed and the applicant’s family will be required to shoulder what could be tens or even hundreds of thousands of dollars in long-term care costs.

A recent New York appellate court case, Donvito v. Shah, provides a great example of this pitfall.  Between June 2007 and August 2008, Nicholas Donvito transferred funds totaling $54,162.05 to his son Mark and Mark’s family.  The final transfer of $6,500 was made one month after Mr. Donvito suffered a stroke, and just two months before Mr. Donvito entered a nursing home.  

When Mr. Donvito subsequently applied for Medicaid nursing home coverage, the Onondaga County Department of Social Services (“DSS”) imposed a seven-month penalty period, which was determined by dividing the total amount of the transfers made during the "look back period" by the Medicaid “Regional Rate” then in effect. The effect of the Medicaid “penalty” was that Nicholas Donvito was responsible to cover his nursing home costs during that seven-month period; since he had practically no assets at that time, the nursing home would have then looked to Mark to pay his father’s nursing home bill during the penalty period.  Mark, on his father’s behalf, appealed the DSS determination and filed for an administrative “Fair hearing.”

At the Fair Hearing, Mark raised a couple of issues.  First, he claimed that the final $6,500 transfer from his father was for reimbursement for expenses that Mark had incurred on his father’s behalf, and therefore was not a gift.  Second, while conceding that the approximately $48,000 in other transfers during the "look back" period were gifts, Mark claimed that those transfers were part of a pattern of gift-making by his father, and therefore were made by his father for a purpose other than to qualify for Medicaid, which is a statutory exception to the penalty rules.  The hearing officer disagreed, and after having their claim denied at the Fair Hearing, the Donvito’s sought judicial relief.

Unfortunately for the Donvito’s, they were unable to produce any receipts or other proof that the $6,500 transfer constituted reimbursement for expenses paid on Nicholas’s behalf, so the appellate court rejected that claim.  As to the other transfers that were conceded to be gifts, the court held that the family had failed to prove that such gifts were motivated for a purpose other than to qualify Mr. Donvito for Medicaid.  The court stated that, “[c]ontrary to petitioner’s contention, decedent did not have a consistent history of giving money to relatives; before the transfers in question, decedent’s most recent gift was seven years earlier.”  Accordingly, the court upheld the seven-month Medicaid penalty period imposed by the DSS. 

We regularly see families having moved funds from an ill parent to children, often for the legitimate purpose of reimbursing the family members for expenses they have covered for their parent. As in the Donvito’s situation, however, all too often the family fails to retain receipts or other evidence proving that the transfer of funds from the parent constituted legitimate reimbursement for the parent’s expenses.  As demonstrated by the Donvito case, such shoddy record-keeping may prove to be an expensive oversight if nursing home Medicaid coverage is subsequently sought within five years of any such transfers.

Recent Elder Law Cases of Note

Here is a brief summary of two important recent court decisions pertaining to Medicaid and Medicare long-term care eligibility issues:

1.  Geston v. Anderson -- On September 10, 2013, the 8th Circuit Court of Appeals struck down as invalid a North Dakota law that provided that an annuity is treated as a countable resource for Medicaid eligibility purposes unless the income derived from the annuity did not exceed the Maximum Monthly Maintenance Needs Allowance ("MMMNA") and unless the combined income of the institutionalized spouse and community spouse did not exceed 150% of the MMMNA.

In its ruling the Court held that North Dakota's law was more restrictive than federal law and thus violated the federal Medicaid statute.

This decision provides helpful validation for the common strategy whereby a community spouse would purchase an annuity to convert a non-exempt resource to a more favorably treated stream of income.

The full decision can be read here.

2. On the other side of the coin,  on September 23, 2013, the Federal District Court for the District of Connecticut ruled in Bagnall, et al v. Sebelius, that a patient who goes to a hospital but is placed in a hospital's "observation status" does not qualify as "an admitted patient" to satisfy the Medicare rule that requires a 3-day hospital stay in order for Medicare to cover any portion of the patient's follow-up care in a nursing home (minimally 20 days, but up to 100 days).

Hospitals' use of observation status has become more prevalent in the past few years as a result of financial disincentives under Medicare rules for hospital admissions.  This ruling, although technically applicable only to Connecticut, confirms the policy that Medicare has enforced nationally.

Spousal Refusal - a Powerful Planning Tool for "Crisis" Medicaid Planning

Many married couples of advancing age fear that they may be forced to deplete virtually all of their assets if one or both of them requires long-term care. Given that the private pay rate for nursing home costs in the Hudson Valley averages over $11,000 per month, and 24-hour per day home care runs about $250 per day, that fear is not unfounded.

Under current law, the spouse applying for Medicaid will be eligible if his non-exempt resources do not exceed $14,400.  The “well spouse” – also referred to as the “Community Spouse” – is permitted to retain their residence, and other “non-exempt” resources in the maximum amount of $115,920 (the Community Spouse Resource Allowance, or “CSRA”).  Because there are no Medicaid penalties imposed for transferring assets from one spouse to another, rendering the ill spouse Medicaid eligible is often as simple as putting virtually all of the couple’s assets in the Community Spouse’s name.

In addition to the resource allowance, in 2013 the Community Spouse’s income allowance (the Minimum Monthly Maintenance Needs Allowance, or “MMMNA”) is $2,898 per month.  If the Community Spouse’s own income is below the MMMNA amount, a portion of the institutionalized spouse’s income will be “budgeted” to the Community Spouse so that she will be entitled to receive enough of the institutionalized spouse’s income to bring the Community Spouse’s total monthly income up to $2,898.  For example, if the Community Spouse has monthly pension and Social Security income totaling $1,898, and her husband in the nursing home has monthly income of $2,000, $1,000 of the husband’s income will be allocated to the wife to bring her total monthly income to $2,898, with $950 of the husband’s remaining monthly income paying for his care (the husband is allowed to keep the other $50 in a personal needs account).  On the other hand, if the Community Spouse’s own income is in excess of the MMMNA, he or she will not be entitled to receive any portion of the institutionalized spouse’s monthly income, which will be payable towards the institutionalized spouse’s cost of care (less the $50 personal needs allowance).

In circumstances where the Community Spouse’s resources and/or income exceed the CSRA and MMMNA exemptions, in most states the Community Spouse would be required to “spend down” such excess amounts towards the cost of the other spouse’s care.  Faced with such a scenario, some Community Spouses may decide that their best option is to divorce the ill spouse to preserve as much of the couples’ assets as possible. Under New York law, however, divorce should rarely be contemplated, since a Community Spouse may submit along with their spouse’s Medicaid Application a “spousal refusal.” In effect, a spousal refusal provides that the Community Spouse refuses to make his or her income and/or resources available towards the cost of care for the ill spouse. Upon the filing of a spousal refusal, the Department of Social Services must consider only the resources and income of the applicant spouse in determining that spouse’s Medicaid eligibility, regardless of the Community Spouse’s net worth at the time the Medicaid application is filed.

But submitting a spousal refusal doesn’t necessarily let the Community Spouse off the hook financially.  In such a case, the Department of Social Services retains the right to bring an action in state Supreme or Family Court to seek support from the Community Spouse towards the cost of the other spouse’s care. Historically some counties have been more aggressive than others in seeking recovery against a refusing spouse, but even when recovery is sought, the Community Spouse’s obligation to reimburse the County is at the Medicaid rate, which is significantly less (often 40-50% less) than the private pay rate.

For Community Spouses with resources significantly above the CSRA level (which is often the case after the couple’s assets have been transferred solely to the name of the Community Spouse), one effective technique is for the Community Spouse to consider using a portion of their excess resources to purchase an immediate annuity, which effectively converts the excess resources into a stream of income. For example, assume a Community Spouse with total excess resources of $300,000 uses those funds to purchase an immediate annuity that pays her $1,500 a year per life (the actual income stream will be determined by the Community Spouse’s age at the time the annuity is purchased as well as the prevailing interest rate).  If the Community Spouse’s other income was $2,000 per month, the additional annuity income will bring her recurring income to $3,500 per month. Although that sum is over the MMMNA amount of $2,898, DSS will request a spousal contribution of only 25% of the Community Spouse’s income above the MMMNA level.  In the above example, the spousal contribution would be only $150.50 per month (or 25% of the difference between the Community Spouse’s monthly income of $3,500 and the $2,898 MMMNA amount).  While it is true that in using this technique the Community Spouse may forfeit the right to receive any of the ill spouse’s income, the Community Spouse would also remove any threat that they can be sued for having excess resources, which may be of paramount importance.

Used appropriately, spousal refusal can help a couple preserve a significant amount of their hard-earned assets. Consultation with an experienced elder law attorney is advised whenever long-term care needs arise.

Options for Care When Home is No Longer an Option

While people almost always prefer to stay in their homes as they age, sometimes circumstances make this impractical.  All the same, a person who is unable or unwilling to live alone at home often will not need the level of care provided by a nursing home.  Fortunately, there is an array of “intermediate” living arrangements that may be appropriate for seniors with different needs and circumstances.

One popular option is the Continuing Care Retirement Community (“CCRC”).  A CCRC provides a “tiered” approach to addressing the aging process.  A person who can live independently would pay an “entrance fee” that can range from the low six figures to up to $1 million depending upon the facility, the type of apartment unit chosen, and the refund option, if any, selected.  People paying the lowest entrance fee would not receive any of the fee in return upon leaving the facility, and nothing would be paid to their heirs upon their death.  Those paying the higher buy-in fees would be entitled to a refund upon departure or death, typically ranging from 50% to 90%. In addition to the entrance fee, the resident would also pay a monthly fee typically ranging from $3,000 to $6,000 that usually includes one meal a day and unlimited use of the CCRC’s facilities, which may be quite luxurious.
 
One of the key benefits of a CCRC is that if a resident’s health declines, the facility offers varied levels of care that are included as part of the entrance fee and the monthly fee. A person may move from the independent living apartment to an assisted living unit, and finally to a nursing home unit, all within the same facility.  For married couples, this may be especially appealing since the “well” spouse can stay in the independent living apartment and still remain close to their spouse. 

New York also boasts a significant number of traditional Adult Homes, also known as Assisted Living Residences (“ALRs”). ALRs are licensed adult homes or enriched housing units that house five or more adult residents.  There are presently over 7,700 licensed ALR beds in New York State.

To pass muster, ALRs must provide twenty-four hour on-site monitoring, personal care services and/or home care services, daily meals and snacks, case management services, and an individualized service plan.  ALR costs are not covered by Medicaid or Medicare, although a resident’s medical care may be covered by one or both of those programs.  Long-term care insurance will usually (but not always) cover ALR costs, which can range from $1,500 to $6,500 a month.  There are currently approximately 550 ALR beds in Orange County.

Another level of care is the Enhanced Assisted Living Residence (“EALR”).  These facilities enable persons who require fairly significant assistance with daily needs such as walking or who may be incontinent to reside as independently as possible. With limited exceptions, EALRs are not suitable for persons requiring 24-hour skilled nursing care. 
 
New York also boasts a number of facilities covered under the Assisted Living Program (“ALP”).  An ALP is available to persons who are medically eligible for nursing home coverage but can be cared for in a less intensive setting.  Unlike ALRs, payment for residency at an ALP may be covered under the Medicaid program.  To be eligible, the resident is permitted to retain “non-exempt” resources of up to $14,400, and can retain monthly income of $1,404 per month.  Since an ALP is under the Community Medicaid program, there are no asset transfer penalties or “look back” periods imposed for Medicaid eligibility, unlike the nursing home Medicaid program that incorporates a 5-year look back period and imposes asset transfer penalties for non-exempt asset transfers made within the 5-year look back period.

While ALPs are attractive on many levels, the reality is that there are only 4,200 ALP beds throughout New York State, and only 95 eligible beds in Orange County, leaving many otherwise eligible folks searching for other options.

Aging is fraught with many emotional and possibly physical difficulties.  Having to to leave the comforts of one's home is a stressful reality for many seniors.  Given the range of choices available, it may be prudent to consult with an elder law attorney so that you can be sure that you are choosing the best option for your circumstances.

Estate Planning and the Value Proposition

About once a week I’ll receive a call that goes something like this:  “Hello Mr. Shapiro, my name is Mary Jones.  I need to update my will -- it’s really simple. I know exactly what I want to do, so can I just give you the information on the phone and then come in to sign?”

Such a request underscores a serious misconception about what constitutes an effective estate plan, as well as the appropriate role of an estate planning attorney.  Some people expect their attorney to serve merely as a “scrivener” who records the client’s dispositive wishes and transforms that information into a legally effective will.  The result of that scenario will be a “word processed” will that, while satisfying the legal requirements for creation of a valid will, in substance is no different than what the client could have done for themselves using a do-it-yourself online website.  

But doing such a “fill in the blanks” estate plan provides the client with a false expectation that the “estate plan” (I use that term loosely) in fact assures the client that their goals will be addressed. Almost inevitably the client’s true objectives will be frustrated, although the client will never know it since the ultimate success or failure of the plan will not be known until after their death – and sometimes not for many years after their death.

For example, married couples routinely own assets as joint tenants with rights of survivorship.  It is simple to set up, it gives each spouse comfort that they have “skin in the game,” and title automatically passes to the surviving owner upon the first death without the need to go through probate.  

But joint ownership is fraught with pitfalls.  The assets are only truly owned by the surviving joint tenant, who is free to dispose of the assets as he or she desires after the first owner’s death.  Perhaps the surviving spouse remarries and then dies before the new spouse.  Even if the deceased spouse has a will or trust leaving assets solely to the children of the first marriage, in the absence of a prenuptial agreement, the second spouse can assert spousal rights to at least one-third of the assets of the deceased spouse.  Even if there is no remarriage, the jointly owned assets may be exposed to estate taxes upon the second spouse’s death, will likely be subject to probate, will not be Medicaid protected, and will likely be exposed to the surviving spouse’s creditors.

Proper estate planning requires that an attorney well-versed in current estate planning and elder law information and techniques gather a significant amount of financial and personal information about the client, their family, and other “key people” in the client’s life. Only after the attorney has learned about the family, their assets, and their planning objectives can the attorney work with the family to craft a customized estate plan that will address all of the client’s planning goals.

A significant part of the attorney’s role is to educate the client about the myriad planning possibilities, and to challenge the client’s assumptions.  For example, most people intuitively assume that the “appropriate” way to leave an inheritance to an adult child is to simply leave it to them as an outright distribution, rather, than in a trust for the child.  People are wary of “controlling from the grave,” and they incorrectly believe that leaving a child’s inheritance in trust necessarily means that the child will not have any control of, or access to, their inheritance.  But after they have been informed that they can establish a trust for a child’s inheritance that will allow the adult child to have access to the trust assets as trustee while the same time shielding the assets from the child’s creditors, a divorcing spouse, or the dissipation of assets as a result of a catastrophic illness or injury, clients almost always choose to leave the children’s inheritance in some form of a trust.

It is important to keep in mind that hiring an estate planning attorney should not be treated in the same manner as if you are purchasing, say, an appliance.  Seeking the "cheapest" professional without focusing on the value you will (or won't) receive for your money is likely to lead to disappointment - if not for you, then certainly for your heirs when they need to settle your estate and are left with chaos and the resulting additional costs resulting from a "word processing" based estate plan that provides no correlation between the planning documents and title to the client's assets.