New York's Expanded Estate Recovery Rules to be Repealed

Yesterday it was announced that Governor Cuomo and the New York Legislature had reached a deal on the 2012 New York State Budget.  Included in the new budget is a repeal of the expanded estate recovery rules that were enacted in last year's budget in an attempt to "recover" assets from the estates of Medicaid recipients.  As I explained in a previous post describing the estate recovery rules, the expanded estate recovery rules, among other things, would have unfairly penalized those thousands of New Yorkers who had years ago transferred title to their homes to their children while retaining a life estate in the home.

Prior to last year's enactment of the expanded estate recovery rules, a home transferred with a retained life estate would have been deemed an asset exempt from Medicaid recovery, so long as the Medicaid "look back period" (currently five years from the date of transfer) had elapsed.  Under the expanded estate recovery rules, the parent's life estate interest in the home was deemed an "asset" subject to recovery should the parent receive Medicaid benefits, even if the life estate transfer had been made years or even decades prior to the parent receiving Medicaid!  

The expanded estate recovery rules would have also played havoc with IRA's and similar retirement accounts, and would surely have led to expensive and protracted litigation.

Stay tuned, however, as New York will be looking for other means to raise revenue that will almost surely affect the elderly, the disabled and the poor.

New York's Expanded Estate Recovery Rules Complicate Medicaid Planning

New York law has long provided that only a Medicaid recipient’s probate assets (i.e., those titled solely in the name of the Medicaid recipient) were subject to “estate recovery” after a Medicaid recipient’s death.  Other types of dispositions, including popular planning tools such as joint tenancy, “life estate” deeds, and assets held in revocable and irrevocable trusts were excluded from the reach of estate recovery.

Last March, however, the New York State Legislature’s 2011 budget included “expanded” estate recovery rules that will allow the county Departments of Social Services to recover more assets from the estates of deceased Medicaid recipients.  These new rules were made subject to regulations to be promulgated by the New York State Department of Health.  On September 8, 2011 the Department of Health finally promulgated the regulations required by the statute.

Traditionally, the use of a life estate deed for a primary residence has been one of the most popular planning tools used to protect assets from a Medicaid “spend down.”  So long as the deed in which the grantor retained a life interest was executed at least five years prior to a Medicaid application being filed, the entire interest in the residence would be deemed “exempt” from a Medicaid spend down.  This planning tool has long been popular largely because it is easy to quickly implement, and is considered inexpensive compared to other planning strategies such as irrevocable trusts.

 

The new regulations, however, specifically include as assets subject to estate recovery those owned by the decedent “through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, to the extent of the decedent’s interest in the property immediately prior to death” (emphasis added).  The value of the life estate subject to recovery is deemed to be the “actuarial life expectancy of the life tenant” as of the date of death.  For an 80-year-old, for example, that value is deemed under the life estate tables used by Medicaid to be worth 43.6%.  Assume Mrs. Jones, an 80-year-old long-term nursing home resident on Medicaid, executed a life estate deed in 2003 leaving her residence to her children upon her death. Mrs. Jones dies in September 2011, with the fair market value in her home valued at $300,000.  Under the new regulations, 43.6% of the home value – or $130,800 – would have to be repaid to the Department of Social Services, with the children to receive the remainder.

Some may argue that it is good public policy to permit the government to recoup as many assets as possible from the estates of Medicaid recipients.  But what may trouble many people is that the regulations do not provide any “grandfathering” for pre-existing life estate deeds – even those drafted decades ago.   This provision of the new regulations is sure to spark legal challenges, so it is too soon to tell if this particular rule will “stick.”

Fortunately, the irrevocable “Medicaid Trusts” remains an important planning tool that can used to help protect assets if created and funded well before the time long-term care may be needed.  Under the regulations, estate recovery from any irrevocable trust is limited “to the extent that the person was entitled to the distribution of …principal and interest pursuant to the terms of the trust.”  Since a Medicaid Trust will always restrict the grantor from receiving any of the trust principal, the trust assets may pass at the grantor’s death to the trust beneficiaries without risk of estate recovery, even if the grantor received Medicaid benefits during his or her lifetime.  Also, while the issue is not fully resolved, it appears that these trusts will still permit the grantor retain the STAR, veteran’s and other property tax exemptions without exposing the value of the residence to any form of estate recovery.

While long-term care insurance remains the best way to protect your assets in the event you ever need long-term care, the policies can be expensive and not everyone can qualify medically for the insurance.  With the ever-shrinking state and federal budgets putting the squeeze on Medicaid benefits, it is more important than ever that people looking to help protect assets against the high cost of long-term care seek the advice of an experienced elder law attorney to investigate the alternatives.

Thinking of Doing a Life Estate Deed? Think Again!

As people enter their "golden years," they become more acutely aware that they may someday need long-term care assistance. They may hear horror stories from family and friends about other people in similar circumstances who had to go to nursing homes and had their assets wiped-out by the costs, which in the Hudson Valley exceeds, on average, $10,000 per month.

Given the prospect of the potential loss of their life's savings, people understandably look for ways to protect their assets.  One commonly used strategy over the years has been for parents to transfer title to their home to their children, with the parents retaining a "life estate" interest.  On its face, a transfer of a home with a retained life estate holds great appeal.  It is a simple strategy to implement, and the execution of the deed immediately triggers commencement of the five-year "look back" period imposed by Medicaid for asset transfers.  That is, so long as the parent does not require long-term care for at least five years after executing the life estate deed, the home will no longer be subject to a lien by the county Department of Social Services should the parent thereafter apply for long-term care Medicaid coverage.  Because the parent retains "life rights" in the home, they retain sole and exclusive occupancy rights to the home, and ll property tax exemptions, including STAR, Enhanced STAR, and Veteran's.

However, there are serious disadvantages associated with the life estate deed.  This recent news article highlights one of the greatest deficiencies of this planning tool. As described in the article, an ailing 81-year-old widow, Joan Fleming, owns a home on Long Island that is valued at $300,000.  Some years ago, Mrs. Fleming executed a deed to her two children, reserving to herself a life estate interest.

Unfortunately in Mrs. Fleming's case, "the estate planning move went horribly wrong" when her son Michael subsequently filed for bankruptcy.  Since upon execution of the life estate deed Michael owned a vested interest in the home, the bankruptcy court ordered that Michael's 50% share of the remainder interest be put up for public auction to satisfy his creditors.

As a practical matter, Mrs. Fleming's life rights cannot be disturbed by any successful bidder for Michael's share of the remainder interest in his mother's home.  But since Mrs. Fleming's motives for engaging in this planning strategy almost certainly included preserving the value of the home for her children, these developments will undermine her goals.


What could Mrs. Fleming have done differently?  She, and her children, would almost certainly have been better served had she instead transferred her home to a Medicaid Asset Protection Trust ("MAPT").  Like the deed with a retained life estate, transferring a home to a MAPT triggers commencement of the Medicaid look back" period upon execution of the deed.  Unlike the life estate deed, however, none of the children or other trust beneficiaries receives a vested interest in the home during the parent's lifetime.  Had Mrs. Fleming conveyed her house into a MAPT, Michael's creditors would have had absolutely no claim on his interest in the home during Mrs. Fleming's lifetime.  Even betters, were such a MAPT structured to provide that after Mrs. Fleming's death the trust property was to be held in separate creditor protected trusts for each of her children, Michael's creditors would even then be unable to seize Michael's interest in his mother's home, regardless of the extent of his indebtedness.