Asset Transfer That Rendered Spouse Insolvent Found to Be a Fraudulent Conveyance

Asset transfers inevitably form a part of almost any asset protection plan where Medicaid eligibility is a primary objective. A brand new New York decision provides a cautionary tale that too much of a good thing may be a bad thing.

On June 9, 2011, the New York State Supreme Court, Appellate Division for the Third Judicial Department, rendered a decision in Matter of Steele. After Mrs. Steele entered a nursing home in July 1998, Mr. Steele filed a "spousal refusal" letter, which excluded Mr. Steele's income and assets from the determination of Mrs. Steele's Medicaid eligibility.  Mrs. Steele received Medicaid coverage for approximately three years prior to her husband's death.  After Mr. Steele died in November 2001, the Saratoga County Department of Social Services ("DSS") brought a recovery action against Mr. Steele's estate, seeking reimbursement towards Medicaid paid by the County for Mrs. Steele's care.

At the time of his death, Mr. Steele relatively few assets.  Years before his death he had purchased an annuity (it is unclear if payments had terminated at the time of his death), and had transfered a summer camp to his children for no consideration, retaining a life estate in the deed of conveyance.  Finally, just before his death, Mr. Steele transferred his car to his caregiver.

It was this final -- and seeminly innocuous -- transfer of the autmobile that ends up as the determining factor.  Among it's many claims, the Saratoga County  DSS contended that Mr. Steele's purchase of the annuity, transfer of the remainder interest in the summer camp, and gift of his car rendered him insolvent and thus constituted a "fraudulent conveyance" under New York's Debtor and Creditor Law.  The court ruled that the purchase of the annuity was for consideration (which it was), and the conveyance of the real estate did not render Mr. Steele insolvent.  The court ruled, however, that the gift of the car did render Mr. Steele insolvent, since upon transferring the vehicle his liability  exceeded his resources by approximately $1,700, and thus did constitute a fraudulent conveyance.  As a result, the court held that the Saratoga County DSS was entitled to recover Mr. Steele's "available resources" at the time of the original Medicaid filing in 1998, plus his "excess income" for the 39 month period between Mrs. Steele's entry into the nursing home and Mr. Steele's date of death.

The implication of this case is that had Mr. Steele retained the car -- and thus remained "solvent' at the time of his death -- DSS would not have prevailed on its fraudulent conveyance claim and would have been entitled to no recovery against his estate. 

This moral of the story: engaging in a planned strategy of asset transfers has been, and likely will continue to be, a key to protecting assets when faced with long-term care cost; however, trying to save every penny will likely backfire under the theory, "pigs get fat, hogs get slaughtered!"

Survey: One-Third of Americans Would Rather Forego Sex Than Create an Estate Plan

A recent survey found that 57% of Americans have not even executed a basic will, including 22% of people over the age of 65. Interestingly, about one-third (32%) said they would rather go without sex for a month or would prefer having a root canal over creating or updating a will.

Here's a link to the article describing the survey.  One important caveat:  the article refers readers to websites that specialize in "do it yourself" estate planning.  Creating a proper estate plan comprises far more than just executing a will or other boilerplate document, so if you choose to do so without professional advice, proceed at your own peril.

Estate Planning for a Terminally Ill Client

People often ask, “When should I do my estate planning?” My tongue-in-cheek reply is, “Call me six months before you know you’re going to die, and we’ll take care of it then.”  People get the point that there is generally no “right” time to do their estate planning, but they should address the issue sooner rather than “too late.”

There are those unfortunate occasions when a person in fact learns that they have a short time to live because of a terminal condition.  While some planning strategies will be unavailable for someone having a terminal illness – for example, the terminal client will be unable to purchase life insurance – many other options remain available to achieve the client’s planning goals.

I recently met with a couple in their 60’s, who I’ll call “Mr. and Mrs. Roberts.”  Mr. Roberts was recently informed that the cancer he has been battling is no longer treatable.  Mrs. Roberts has chronic health issues, but is likely to live for many years.  Their total estate value is approximately $2.5 million, with about half of that amount in the form of two IRA’s of approximately equal value owned by Mr. Roberts.  Under their existing estate plan, all assets would pass directly to the surviving spouse (presumably Mrs. Roberts).

The main planning challenges are:  (1) to protect the Roberts’ assets in the event that Mrs. Roberts needs long-term care, and (2) to minimize estate taxes.  These two objectives are somewhat in conflict, because to achieve estate tax savings, we would typically transfer to each spouse’s name at least $1 million of their assets so that each spouse could take advantage of the full $1 million New York estate tax exemption upon their deaths. However, putting assets directly in Mrs. Roberts’ name would likely provide fewer protections for the assets than if they were to pass under Mr. Roberts’ will into a  “supplemental needs trust” established for Mrs. Roberts’ benefit.  Under federal and New York law, assets passing to a surviving spouse in a supplemental needs trust created under a will are deemed “exempt” for determining a surviving spouse’s eligibility for Medicaid long-term care benefits.

While we are just beginning planning for the Roberts, we discussed a few options at our initial meeting.  One idea is to name their two children as the beneficiaries of one of the IRA’s (worth about $650,000), since it appears Mrs. Roberts can live comfortably without it.  She would remain the beneficiary of Mr. Roberts’ other IRA, which is worth approximately the same amount.  We will likely recommend using “retirement plan trusts” for each child, which will allow each child to take the required minimum distributions (“RMD’s”) over their own individual life expectancies.  These “stretched out” IRA distributions will result in significantly more income tax deferral.  An additional benefit to the retirement plan trusts is that the RMD’s will be distributed to creditor-protected trusts for each child.

We will also likely recommend that certain assets (i.e., the residence) be transferred to Mr. Roberts’ name only.  Upon his death, those assets will be funded into a discretionary supplemental needs trust for Mrs. Roberts’ benefit, and under current law will be considered “exempt” assets for Medicaid purposes without a five-year “look back period.”  In doing so, we will have to evaluate the estate tax implications of the asset funding.

The plan will surely evolve as we and the Roberts’ engage in more in-depth discussions to fine-tune their goals and objectives.  However, the bottom line is that planning for a seriously ill client requires consideration of all the potential outcomes, and the final plan should be designed to ensure maximum flexibility to address changing circumstances.

Proposed GOP Budget Plan Would Slash Nursing Home Medicaid Benefits

Most of the analysis of the Republican's proposed budget (crafted largely by Wisconsin Rep. Paul Ryan) has focused on its potential impact to the Medicare program.  As discussed in yesterday's New York Times, however, the impact of that budget on seniors might be felt more acutely in the reduction in Medicaid payments for nursing home costs. 

Approximately seventy percent of all nursing home residents are on Medicaid. A significant portion of those residents began receiving nursing home Medicaid coverage only after spending down most of their assets (or if they had good legal advice, after protecting a portion of their assets through effective planning).  Under the proposed GOP budged, Medicaid (like Medicare) would be doled out in block grants to the states, with the annual grants to increase only at the rate of inflation.  Since health care costs have consistently increased well in excess of the inflation rate, states would necessarily have to curtail their Medicaid expenditures, unless they were to raise state taxes to cover the shortfall.

Click here to read the New York Times article. 

Long-Term Care Insurance: Only The Wealthy Need Apply?

No surprise here:  a new report released by the Urban Institute indicates that only 10.7 percent of all Americans over the age of 55 have purchased any type of long-term care insurance ("LTCI"), but that almost 20 percent of the 55-and-over set with incomes over $100,000 per year have purchased LTCI.  The vast middle class -- a group that suffers the greatest financial impact when facing the cost of long-term care (since the poor will qualify for Medicaid) -- find themselves frequently priced out of the LTCI market.

The full report can be read here.

Reverse Mortgages Become Dicier

Reverse mortgages can be effective tools that allow cash-strapped seniors to leverage the equity in their homes to maintain or enhance their standard of living.  Too often, however, the complexity and costs of these vehicles diminish the value that they might provide.

In an effort to help protect seniors who are evaluating a reverse mortgage, the Department of Housing and Urban Development has required lenders to provide counseling to every proposed borrower prior to consummating the loan.  Unfortunately, the budget deal just reached between Congress and President Obama has cut-out the funding for the counseling program.  Unless the money miraculously reappears, reverse mortgage counseling will end as of October 1, 2011.

New York's 2011 Budget Includes Modest Changes to Long-Term Care Medicaid Rules

In my last post, I described the significant changes that were proposed by Governor Cuomo's "Medicaid Redesign Team" as they pertained to the Community Long-Term Care Medicaid program.  Specifically, the proposals included the elimination of "spousal refusal" and the imposition of transfer penalties for the Community Medicaid program.  Longstanding New York law has permitted the "well" spouse to refuse to contribute their income and assets towards the care of the "ill" spouse.  In addition, a person applying for Community Medicaid is permitted to transfer any amount of assets to children or other family members without having those transfers result in a period of Medicaid ineligibility for the person seeking Community Medicaid benefits.

To the surprise of many elder law attorneys and other senior advocates, the budget bill approved last night by the Legislature did not include either the repeal of spousal refusal or the imposition of transfer penalties for Community Medicaid.  One change that we will see will be the expansion of "estate recovery" against the assets of a deceased Medicaid recipient to include "non probate" transfers including transfers from trusts, retained life estate interests and similar "testamentary substitutes."  Under existing law, estate recoveries are permitted only against probate assets, or those that pass via intestacy.