Types of Gifts that Don't Result in a Medicaid "Penalty"

Under the Medicaid “look back” rules, gifts made by a nursing home resident within the five-year period preceding a Medicaid application are scrutinized by the Department of Social Services to determine the impact of those gifts on the applicant’s Medicaid eligibility.  Contrary to common perception, however, not all asset transfers made during the look back period will result in the imposition of a period of Medicaid ineligibility.  Rather, there exist a number of transfers that are “exempt” from the imposition of a Medicaid “penalty.” 

The most common exempt transfer is a gift of assets from one spouse to another.  Such spouse-to-spouse gifts – regardless of the amounts transferred – are completely exempt from the imposition of any period of Medicaid ineligibility.  I typically recommend the transfer of virtually all assets into the name of the “well” spouse to enable the “ill” spouse to become immediately eligible for nursing home Medicaid coverage.  The only requirement in spousal cases is that the spouse residing in the nursing home cannot retain assets in excess of $13,800. Often the only asset that will remain in the name of the nursing home resident is the bank account into which his or her Social Security and pension checks are deposited.

In addition to the exempt spousal transfers, there are a number of exempt transfers that apply to the family home.  A home can be transferred without Medicaid penalty to any of the following:

• A spouse
• A child under the age of 21
• A blind or disabled child of any age
• A sibling who has an “equity interest” in the home (which can include payment for taxes and household expenses) and who has lived in the home for at least a year prior to the filing of the Medicaid application
• A “caretaker” child who has lived in the parent’s home for at least two years prior to the filing of the Medicaid application

 Besides transferring a home to a spouse, the most common exempt transfer of a residence is to the “caretaker” child.  To qualify for the exemption, the child does not need to have any credentials as a health-care provider. Rather, the child who has lived with a parent for at least the two-year period must establish to the Department of Social Service’s satisfaction that the child has provided needed assistance to the parent.  Such assistance will usually include: cooking; dispensing medication; shopping for the parent; assistance with dressing, bathing, and similar daily tasks. 

Another exempt transfer is the funding of a Medicaid applicant’s assets into a Supplemental Needs Trust for the sole benefit of disabled family member, provided that such disabled person is under the age of 65 at the time the transfer is made.  This exemption is permitted under the law on public policy grounds.  The federal government recognizes that absent the use of assets from a parent or grandparent to help support the disabled child or grandchild, the disabled person will likely need to rely on governmental programs to provide for their daily needs.  Allowing an elderly parent’s or grandparent’s assets to fund a Supplemental Needs Trust for a younger disabled child or grandchild can help reduce that person’s reliance on public assistance.  Note that upon the disabled beneficiary’s death, any assets remaining in this type of Supplemental Needs Trust must vest in the disabled beneficiary’s estate, and are therefore subject to recovery by the state to recoup the cost of public benefits paid to or for the disabled beneficiary during his or her lifetime.

Class Action Lawsuit Challenges Medicare's "Improvement Standard"

Last fall I posted this entry discussing Medicare's misapplication of a "improvement standard" in determining a whether a person using Medicare days in a nursing home should continue to receive Medicare coverage for the duration of the 100-day maximum Medicare period for each "spell of illness."

On January 18, a number of advocacy groups joined forces and filed a class action lawsuit against the U.S. Department of Health and Human Services alleging that HHS has improperly applied the improvement standard to deny Medicare participants care to which they were entitled.   The lawsuit, Jimmo v. Sebelius, was filed in the United States District Court for the District of Vermont.

A copy of the complaint can be read here.

Expensive Lessons From The Probate Court

You may see references in the media and on the internet about the "high cost of probate."  Probate -- which is simply the process by which an individual's estate is administered in the probate court (called a "Surrogate's" court in New York) -- is in most cases a fairly straightforward process.  If the decedent had a will, the Executor named in the will is routinely appointed by the Surrogate Judge to administer the decedent's probate assets.  If there is no will, one or more persons having an interest in the estate -- typically family members such as a spouse or adult child -- will petition to be appointed as the Administrator who will serve essentially the same general role as an Executor.

As a court proceeding, probate will almost always involve the hiring of an attorney to assist the Executor or Administrator with the estate administration.  In New York, attorneys fees in probate proceedings are based on a broad "reasonable compensation" standard, with the appropriate fee subject to the Surrogate Judge's approval.  Under New York law, the Surrogate must consider a number of factors, including: time and labor required, the difficulty of the questions involved, and the skill required to handle the problems presented; the lawyer's experience, ability and reputation; the amount involved and the benefit resulting to the client from the services; the customary fee charged by the Bar for similar services; the contingency or certainty of compensation; the results obtained; and the responsibility involved.

Such a broad standard can -- and does -- lead to widely disparate results.  Two recent cases demonstrate the broad discretion afforded the Surrogate Judge in approving attorneys' fees in probate matters.  Estate of Trapani Bove, 1/10/2011 NYLJ 24 (Col. 3) (N.Y. Cty. Surrogate's Court, January 10, 2011), involved a bitterly constested estate involving the Executor and various beneficiaries.  The total value of the estate was approximantely $1,750,000.  One of the many items in contention between the Executor and the beneficiaries was the fees to be paid to the various attorneys who were involved in the representation of the various parties involved in the estate.   

In its decision the Court noted that the attorneys were seeking "an astonishing $813,965.00, a sum equal to just over 46 percent of the gross value of the estate" (emphasis supplied).  Ultimately the Court approved a fee award of "only" $300,000, which still represented a whopping 17% of the estate value.

Another recent probate attorney fee case is the Estate of Bubalo, 1/18/2011, NYLJ 20 (col. 4) (N.Y.  Cty. Surrogate's Court, January 18, 2011).  In Bubalo, the American Diabetes Association -- which was a beneficiary of the "residuary" of Mr. Bubalo's estate -- filed an objection to the Executor's accounting claiming, among other things, that the attorney was seeking fees for work that was duplicative of the Executor's work.  The attorney was seeking attorneys fees of just under $84,000 on a total estate of approximately $2.6 million.

The Court in Bubalo -- while making a point to note that "the attorney's experience, ability and reputation are not in dispute" -- shaved approximately $8,000 of the attorney fee award on the basis that that portion of the fee sought was executorial in nature, leaving a total fee award of $75,781.25.  This reduced attorney fee still represented over 3.3% of the total estate value.

In my view, both of the above-cited cases are examples of estate plans that "did not work."  That is, the decedent in each case surely would have been disappointed to know that their estates were subject to litigation between their designated heirs, causing emotional hardship and resulting in significant legal fees.  Invariably these poor outcomes likely could have been minimized had more time and resources been invested on the "front end" of the estate planning process -- that is, through an extensive counseling and design process involving an in-depth discussion between the client and the estate planning attorney that will work through all the client's goals, dreams and aspirations for themselves and their loved-ones.

Our practice was developed using the counseling and design model.  While our "up front" fees will almost always be higher than the usual "word processing" based estate plan, experience shows that the total cost of our planning -- which includes the cost to fund, maintain and adminster the plan at death -- will be substantially less than under the "traditional" model.  For clients in our lifetime maintenance program, our firm agrees to a 1% "fee cap" to provide the legal work for the administration of the estate, which is a far cry from the 3.3% fee in Bubalo, and light years from the 17% fee in Trapani Bove!

Elizabeth Edwards' Will Disinherits John? Perhaps Not!

It has been widely reported that in the will she signed just days before her death, Elizabeth Edwards left her entire estate to her children.  In fact, her estranged husband John apparently is not even mentioned in the will.
But that's not necessarily the end of the story. The law of North Carolina, like most states, includes a right for a surviving spouse to "elect" against the estate of a deceased spouse.  North Carolina provides that a surviving spouse may "elect" to receive distribution of one-third of the deceased spouse's estate, which is similar to the law in effect in New York.

However, it is almost certain that the separation agreement executed by the Edwards' would have included a provision that each spouse "waived" the right to an elective share from the estate of the other spouse, even if one of the spouse's were to die prior to a divorce.  Accordingly, there is little chance that even if he were inclined to do so, John Edwards will be entitled to excercise the right to elect against Elizabeth's will.

New Estate and Gift Tax Law Set To Go Into Effect

It's official:  President Obama has signed into law new Estate and Gift Tax legislation that, while no providing complete repeal of the federal estate tax, does provide that all but the wealthiest estates will remain exempt from the imposition of federal estate taxes.  The fundamental provisions of the law are outlined here.

In my view, the most dramatic impact of the law is the new $5 million per person lifetime gift tax exemption.  Through 2010, lifetime non-charitable gifts (beyond the $13,000 per donee annual exemption gifts) made by any donor in excess of the cumulative sum of $1 million were subject to a gift tax at a rate of 35%.  In 2011 and 2012, donors can make cumulative gifts of $5 million without the imposition of any gift tax.  This hugely expanded amount will provide wonderful opportunities for owners of closely-held businesses and valuable real estate holdings to transfer those assets to their children and grandchildren without being subject to onerous gift taxes.  And, many clients will likely elect to make such transfers without relying upon valuation "discounts" that have forever been subject to IRS attacks.

If you have ever considered making large lifetime gifts to your loved-ones, the next two years might provide the best planning opportunities in our lifetime!

Congress Set To Vote on Dramatic Changes to Estate & Gift Taxes

After years of speculation, it is expected that before year's end Congress will vote on the compromise tax legislation hashed-out between President Obama and Congressional Republicans.  Incorporated in the legislation are dramatic changes to the federal estate & gift tax rules.  With much thanks to information disseminated by national expert Bob Keebler, here is a summary of the key modifications:

• The individual exemption amount for estate, gift and GST tax for 2010, 2011 and 2012 would be $5 million per person, $10 million per couple.
• The estate, gift and generation skipping tax rate will be 35% through 2012
• Beginning in 2011 the exemption amount will be indexed for inflation
• Estates of descendants dying in 2010 can choose either to apply the estate tax rules or the modified carryover basis rules that have been effect under the estate tax "repeal" for 2010
•  In a significant change from prior law, there will be "portability" of the individual estate tax exemption from one spouse to another; that is, a decedent's executor can transfer any unused exemption amount to the surviving spouse without the requirement that the deceased spouse's exemption amount pass into a credit shelter trust
• The estate and gift tax exemption will be "reunified" beginning in 2011

If it passes, the legislation will make only truly large estates subject to federal estate and gift tax liability.  Note, however, that for residents of states (like New York) that have "decoupled" from the federal estate tax regime, much smaller estates will remain subject to a state estate tax.  In New York, for example, the state estate tax exemption will continue to remain at $1 million per person. For a decedent with a $2 million estate, the New York State estate tax in 2011 would be $99,600.

Also, the new law will again "sunset" this time at the end of 2012.  So, depending upon which way the political winds blow, we could very well find ourselves in a similar state of uncertainly in 24 months. But in the meantime, the proposed legislation will provide a number of wonderful tax planning opportunities for larger estates.  And, those with "smaller" estates should not put-off estate planning even though they may believe they no longer have estate tax concerns. All the standard personal planning goals -- asset protection, divorce protection, catastrophic health protection, disability planning, long-term care planning -- remain as important as ever.

What the Return of the Federal Estate Tax Will Mean To You

Unless Congress enacts new estate tax legislation before December 31, the federal estate tax – which under the Bush 2001 tax laws was repealed for 2010 – will return with a vengeance in 2011.   Beginning January 1, estates for deceased individuals will be taxed at a rate of 55% for assets in excess of $1 million that pass to anyone other than a spouse.  Assets that pass to a spouse – either outright or in a qualified “marital deduction trust” – will qualify for the same “unlimited marital deduction” that existed under prior law.

The impact of a $1 million estate tax exemption will be dramatic for many estates.  For example, assume a widow residing in New York dies on December 31, 2010 with a $5 million taxable estate.  Her estate would be subject to payment of New York state estate tax of $391,600, leaving $4,608,400 to go to the widow’s heirs.  If she were to die on January 1, 2011, however, the total federal and New York state estate tax obligation would jump to $2,045,000, leaving $2,955,000 for the heirs.   

If the $1 million estate tax exemption in fact returns in 2011, here are a few key planning ideas for consideration:

• For married couples, your wills and/or living trusts should include estate tax planning clauses that allocate the maximum exemption amount to a “credit shelter trust” after the first spouse’s death.  This relatively simple strategy will ensure that each spouse will be able to use their respective $1 million exemption – thereby sheltering a full $2 million from federal and New York state estate tax.  One caveat is that each spouse (or their respective living trust) must individually own assets that will be made available for funding into the credit shelter trust after the first spouse’s death. If assets are owned jointly between spouses, the tax planning clauses will be rendered useless, since the jointly owned assets will pass automatically to the surviving spouse.
• For larger estates, life insurance held in an “irrevocable life insurance trust” will, in most cases, pass to the heirs exempt from both estate taxes and income taxes.   Life insurance held in this type of trust is especially helpful if a majority of your assets are illiquid, such as real estate or business interests.
• Couples (both married and unmarried) can use “spousal gifting trusts” that allow for the transfer of assets to each other that will be exempt from estate taxation in either partner’s estate. 
• Consider making annual gifts up to the exemption amount (currently $13,000 per year) to children, grandchildren or other desired beneficiaries.  Note that neither qualified medical expenses nor educational expenses (e.g., college or private school tuition) are subject to the $13,000 annual cap.

 Rarely in our nation’s history have we faced such a dramatic change in our estate tax law.  Given the ever-changing landscape, you’re well advised to seek competent professional advice to update your estate plan to ensure that both your tax and non-tax planning objectives are satisfied.