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While the Sable decision is not binding precedent in New York, we may expect that the various New York County Departments of Social Services may attempt similar attacks on the customary gift/loan strategy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. 

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.”

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.