Pennsylvania Court Ruling Allowing Support Action Against Adult Children For Parents' Nursing Home Costs Allowed to Stand

The Pennsylvania Supreme Court recently declined to hear a Pennsylvania man's appeal of a lower court ruling that held that the man was responsible for payment of his mother's $93,000 nursing home bill under Pennsylvania's "filial responsibility law."

In the case, Health Care & Retirement Corporation of America v. Pittas, John Pittas's mother entered a Pennsylvania nursing home car after being in an auto accident. She subsequently left the nursing home and moved to Greece, leaving an unpaid bill of approximately $93,000.  Relying on Pennsylvania's filial support law, which requires adult children to provide support for indigent parents, the nursing home sued Mr. Pitta for payment of his mother's bill.  The nursing home prevailed at trial, with the verdict upheld by an appellate court and now by the Pennsylvania Supreme Court.

Pennsylvania is one of 29 states that presently has filial support laws on the books. As shown by this map, New York is not one of them. However, while these laws have been rarely enforced to date, the result in the Pittas case may well lead to an explosion in filial support claims as cash-strapped nursing homes seek to recover for patients' unpaid bills, and states such as New York that presently do not have filial support laws on the books may consider such legislation as a means to reduce reliance on Medicaid expenditures for nursing home care.

Federal Court Approves use of Promissory Note in Crisis Medicaid Planning

The Federal District Court for the Western District of Oklahoma recently struck down Oklahoma's assertion that a Medicaid applicant's sale of assets in exchange for a non-negotiable promissory note rendered the applicant ineligible for Medicaid benefits.

In Lemmons v. Lake (U.S. Dist. Ct., W.D. Okla., No. CIV-12-1075-C, March 21, 2013), Juanita Lemmons sold a farm and investment assets to her son, Gary Lemmons, in exchange for a promissory note.  The note included an anti-assignment clause, which prohibited Mrs. Lemmons from selling the note to a third party.  Soon thereafter, Mrs. Lemmons applied for Medicaid benefits.

Notwithstanding that the note met the requirements set forth by Congress as part of the 2006 Deficit Reduction Act, Oklahoma's Department of Human Services denied Mrs. Lemmons' Medicaid application on two bases:  (1) the transaction constituted a transfer of assets without receipt of adequate value, or (2) the note constituted an impermissible "trust like" device.

Mrs. Lemmons sued in Federal Court, claiming that the promissory note was not a resource. The District Court sided with Mrs. Lemmons, granting her summary judgment. The court held that the note was not a resource, as the anti-assignment clause rendered the note non-negotiable and thus it could not be sold to a third party.  The court further refuted the state's claim that the note was a trust-like device, holding that Gary Lemmons held the farm for his rather than his mother's benefit.

In reaching its decision in favor of Mrs. Lemmons, the court specifically recognized that use of a promissory note "is a valid form of Medicaid planning," and that the State of Oklahoma "may not use [the statute] to penalize Plaintiff for taking advantage of a loophole that Congress has not foreclosed."

Although this decision does not constitute legal precedent in New York, the court's reasoning in Lemmon provides comfort that the common use of promissory notes in "crisis" Medicaid planning cases should withstand any similar challenge that might be brought by any Department of Social Services in New York State.

Transferring Assets to Children For Medicaid Protection? Beware of Your Children's Creditors!

It is commonplace for senior citizens looking to preserve their assets to make gifts of the assets to their adult children.  These transfers are typically made to "start the clock" running on the five-year "look back" period applicable to nursing home Medicaid eligibility.  That is, if the parent does not need nursing home care for at least five years after the transfer of assets, all the transferred assets are deemed "exempt" if the parent subsequently applies for nursing home Medicaid coverage.

But as demonstrated by a just-issued United States Bankruptcy Court decision, parents engaging in asset transfers to their adult children have more than just Medicaid risks to consider.  The case, In Re Woodworth (Bankr. E.D. Va., No. 11-11-51-BFK, Feb. 6, 2013), presents a straightforward set of facts.  In 2002, Dorothy Stutesman transferred assets in an investment account valued at $142,742  to her daughter, Holly Woodworth.  Mrs. Stutesman testified before the Bankruptcy Court that she was unsophisticated about finances, and that she transferred the assets to her daughter to both protect the assets from potential "scammers," and to enable her "to be eligible for Medicaid and other public benefits, should there come a time when she needed such benefits."  Mrs. Stutesman testified that at all times she considered the funds to be her own assets and not her daughter's, notwithstanding that they were titled in her daughter's name.  Holly similarly testified that she always considered the assets as her mother's assets.

After experiencing losses in the financial markets, in 2010 -- eight years after the assets were put in Woodworth's name -- Mrs. Stutesman  and her daughter agreed to move the funds to a new financial adviser.  The new advisers convinced the women to put the assets into a trust "designed to reduce creditor risk, eliminate probate and eliminate estate tax." Holly was the creator (grantor) of the trust.

Unfortunately for Mrs. Stutesman and her daughter, Holly owned an investment property that lost value in the real estate crash, and was ultimately worth less than the mortgage balance. In February 2011 Ms. Woodworth filed a Chapter 7 petition for bankruptcy.

During the course of the bankruptcy proceeding, the bankruptcy Trustee correctly identified the  $142,742 of trust assets as a fraudulent transfer under the Federal Bankruptcy Code.  However, Mrs. Stutesman and her daughter argued that the trust assets were never actually Holly's property, but were simply being held in trust for Mrs. Stutesman, and therefore should not have been included as part of the bankruptcy estate. In legal parlance, the women argued that Ms. Stutesman retained "equitable title" rather than "legal title."

The Bankruptcy Court did not buy the women's argument.  The Court stated that after the assets were transferred in 2002 to Ms. Wooworth's personal investment account, she had full control to do with those assets as she wished.  In citing Mrs. Stuteman's own testimony, the Court stated,

Ms. Stutesman can't have it both ways--she can't part with title for purposes of Medicaid eligibility, and at the same time claim that she retained an equitable title to the asset.  To allow this kind of secret reservation of equitable title would be to sanction Medicaid fraud.

As a result of the Court's complete rejection of Mrs. Stuteman's and Ms. Woodworth's arguments, the entire $142,742 in the investment trust was ordered payable to the Bankruptcy Trustee to be distributed to Ms. Woodworth's creditors.

This case highlights one of the dangers of parents making outright transfers of their assets to their children, and why we almost always recommend against that strategy.  However, there is a technique by which Mrs. Stutesman could have appropriately protected her assets from a potential Medicaid spend down without exposing those assets to her daughter's creditors.  Specifically, in 2002 Mrs. Stutesman could have created and funded her approximately $142,000 of assets into an irrevocable income-only trust, with her daughter designated as the Trustee.  Funding that trust in 2002 would have started the five year Medicaid look back period, which would have then run its course by 2007. Mrs. Stutesman could have retained access to the income derived from the trust assets, with the principal remaining protected.  It is noteworthy that there is nothing in the decision indicating that Holly at any time gave any of the gifted assets back to her mother, which implies that Mrs. Stutesman was able to live comfortably on her income; this is typical of the vast majority of our clients seeking to preserve their assets from a Medicaid spend down.

Fast-forward to 2011, when Holly filed bankruptcy.  Had she merely served as Trustee of her mother's trust, rather than as the owner of the gifted assets, the assets in the income only trust would have been completely excluded from Holly's bankruptcy proceeding, and the assets would have been preserved during her mother's lifetime.  Just as powerful, such a trust could have been structured to provide that, upon Mrs. Stutesman's death, the assets could have remained in a trust for Holly's benefit, with those assets to be further protected from Holly's current and future creditors!

Unfortunately, it appears from a reading of the Court's decision that at no time did Mrs. Stutesman or her daughter seek the counsel of an elder law attorney to help them through the complex issues that surrounding estate and asset preservation issues.  Had they done so, the story would almost surely have resulted in a much happier ending for them; instead, the only ones left smiling in this case were the Bankruptcy Trustee -- and Holly's creditors!



 

Medicare "Improvement Standard" Settlement Approved by Federal Judge

Last October I discussed an important settlement in a class action lawsuit brought against the Department of Health and Human Services that would end Medicare's longtime practice of imposing an "improvement" requirement for persons doing rehab as a condition for continuing Medicare coverage during the statutory 100-day period.

I'm happy to report that on January 24, 2013 the settlement was approved by the Chief Judge of the Federal District Court for the District of Vermont.  

Going forward, Medicare coverage should be provided for up to 100 days (with a patient co-pay beginning the 21st day) so long as a patient requires skilled care, regardless of whether their condition is "improving."

Here is a press release discussing the settlement in more detail.

Blustein, Shapiro, Rich & Barone's Elder Law attorneys can help you plan for, or litigate, elder care.

Crisis Averted -- Federal Estate and Gift Tax "Permancy" Achieved

For years, estate planners have been fretting about the potential impact of a "sunset" of existing federal estate and gift tax legislation that would have resulted in a significant reduction in the federal estate and gift tax exemptions.  As 2012 drew to a close and our federal government crept towards the edge of the "fiscal cliff," we faced the real possibility of a reduction in the federal estate and gift tax exemption from $5.12 million per person with a top tax rate of 35%, to a $1 million per person exemption and a top rate of 55%.

Fortunately, in the wee hours on New Years' Day, 2013, Congress passed sweeping tax legislation - known as the Taxpayer Relief Act ("TRA") -  that incorporated a "permanent" solution to the estate and gift tax issue.  Here are a few key highlights of the TRA as it pertains to estate and gift tax rules:

• Estate Taxes: an estate tax is a federal tax (and in some states also includes a state tax) on the transfer of a deceased person's assets to his heirs and beneficiaries, and can include prior transfers made to those heirs and beneficiaries. However, under federal law, there is a certain amount that can be transferred without incurring any tax liability. In 2010, every individual could transfer (gift) up to $5 million tax-free during life or at death to avoid paying estate taxes on that amount. This amount is called the "basic exclusion amount" and is adjusted for inflation (usually on an annual basis). In 2012 it was raised to $5.12 million per person.
  
  This year's new "fiscal cliff legislation" did not change how much an individual could transfer during life or at death to avoid paying federal estate taxes on that amount. And, on January 11, 2013, the IRS announced that the estate tax exclusion amount for individuals who die in 2013 is now $5.25 million, as the prior figure has now been adjusted for inflation.

• Married Couples: the TRA did not change prior law that stated that spouses do not have to pay estate tax when they inherit from the other spouse. Rather, when the first spouse dies, the other spouse can inherit the entire estate and any estate tax due would be postponed until the second spouse dies. This is called the "marital deduction." If the surviving spouse is not a U.S. citizen, then there are restrictions on how much can be passed to the surviving spouse tax-free. It is also important to remember that this type of tax benefit between spouses is not always automatic - any married couple who may be subject to estate tax should seek the advice of an attorney to make sure their estate plan is properly set up to take advantage of this particular tax incentive.

• Lifetime Gifts: the current basic exclusion amount of $5.25 million per individual is an exclusion for both lifetime gifts and gifts at death. This is often referred to as the "unified credit" amount. For example, an individual could transfer assets of $3 million during their lifetime and an additional $2.25 million at death, and the total, $5.25 million, would not be subject to either gift or estate tax. However, if an individual transferred more than the $5.25 limit, that individual (or the heirs) will owe a tax of up to 40%.
  
  The donor should report any gifts made during their lifetime to the IRS so a proper calculation can be made at the donor's death. Using the above example, the $3 million lifetime gift would have been reported to the IRS even though no gift tax would be due. And, the IRS would then know that individual had $2.25 remaining to pass at death free of estate taxes.

• Annual Gift Exclusion: there is an amount each year that can be transferred without counting toward the $5.25 exclusion amount. In 2013, that amount is $14,000 per year, per person (called an "annual exclusion amount"). For example, an individual can give three different people $14,000 in 2013, and it will not count toward the $5.25 lifetime exemption amount. Couples can double this amount and give $28,000 per person per year.

The TRA provides welcome assurance to Americans that they can engage in estate tax planning with a modicum of certainty that their tax planning will not be undone by a dramatic reduction in the federal estate tax exemption.  But keep in mind that no tax legislation is truly "permanent," and a regular review of one's estate plan with an experienced estate planning attorney is always the best way to ensure the desired outcome.

Keeping Your Affairs a "Secret" From Your Children is Likely a Big Mistake

Some people freely share their financial information with their adult children, and often will invite them to participate in meetings with their estate planning attorneys and financial advisers. When the inevitable occurs and the parents become incapacitated or die, the children are able to step in and handle the parents' financial affairs. They will have at least a reasonable idea as to the nature and location of the parents' assets, and will typically be designated as the parents' attorneys-in-fact under a Power of Attorney, and successor Trustees under the parents' revocable and irrevocable trusts, as applicable. The designated children will then be able to step into the parents' shoes and handle their personal affairs with the least disruption and confusion possible.

Other parents, however, prefer to maintain a cloak of secrecy regarding their personal and financial affairs. Just yesterday I was contacted by a woman whose mother recently died.  Despite being in poor health, the mother repeatedly told her children that her affairs were in order, and that her attorney (who she did not name) had all of her papers. With the mother's passing, her children have been left with chaos. A thorough search of their mother's home turned up disorganized bank account records, and no copy of a Will. Her daughter found some keys that may be to a safe-deposit box, but the bank where the mother had her checking account will not divulge any information to the children without a court order.

Even worse, perhaps, is the children's discovery that their mother -- who of course had her "affairs in order" -- owned real estate and was on title to bank accounts with another relative, with title being held as joint tenants with rights of survivorship. Since the other relative is living, that relative now takes complete ownership of all the jointly-owned assets, including the real estate.

The decedent's children are certainly frustrated by the state of affairs left behind by their mother.  As her daughter said to me, "I'd like to be able to grieve for my mother -- but right now I'm just angry at the mess she left behind."

The fact is that the cost to untangle the mother's affairs after her death will likely far exceed the cost she would have incurred to truly put her affairs in order. Just as critical, an estate planning attorney would have identified the problem inherent with the mother's joint ownership of property, and could have helped the woman take affirmative steps to re-title the assets to ensure that her children received their mother's share of the jointly-owned assets.

‘Irrevocable’ Medicaid Asset Protection Trusts Offer the Best of Both Worlds

An Irrevocable “Medicaid Asset Protection Trust” is one of the best planning tools in the elder law attorney’s toolbox. Assets transferred to a properly structured Medicaid Asset Protection Trust will be rendered “unavailable” for nursing home Medicaid eligibility purposes so long as the person creating the trust (the “Trustmaker”) does not apply for nursing home Medicaid coverage for at least five years after funding the trust. The trust must provide that the Trustmaker relinquishes access and control over the trust principal, but can retain rights to the trust income. While the Trustmaker is prohibited from receiving distributions of trust principal, other beneficiaries – typically children and grandchildren -- are permitted beneficiaries of trust principal.

Medicaid Asset Protection Trusts have become especially popular with clients at or near retirement who have a reliable income from Social Security, pensions, IRAs and other retirement vehicles. Clients are often concerned about exposing their assets to the accelerating costs of long-term care, and they are happy to gain the protection afforded by the Medicaid Asset Protection Trust for certain assets, often including their primary residence.

NYS Law Permits Termination of ‘Irrevocable’ Trusts

For all the benefits afforded by the Medicaid Asset Protection Trust, however, clients are often understandably hesitant to do something “irrevocably.” No matter how much income they have, they often ask, “but what if I really need to get at the principal in the trust?” Or, there always remains the concern regarding a possible need for nursing home care within five years of funding the assets to the trust, which results in the trust assets being deemed “countable resources” for Medicaid purposes.

Fortunately, New York law provides a simple method of revoking even an irrevocable trust. To revoke a trust created pursuant to New York law, Section 7-1.9(a) of the Estates, Powers & Trusts Law (EPTL §7-1.9) simply requires the written consent of the Trustmaker and all the trust beneficiaries. Once the trust is revoked, the trust assets can be returned to the Trustmaker, thereby effectively “undoing” the property transfers. There may be gift tax consequences for a revocation,but this is rarely an issue, as very few estates in which a Medicaid Asset Protection Trust are used are large enough to require the payment of gift taxes.

Possible Hurdles & How to Handle Them

A practical problem arises, however, when the trust includes minor beneficiaries (typically grandchildren). Revocation under EPTL §7-1.9 cannot be utilized with minor beneficiaries, since they are legally incapable of consenting to a revocation. Fortunately, there is an easy fix for this problem. The Trustmaker may retain a lifetime “power of appointment” to remove or add additional principal beneficiaries during the Trustmaker’s lifetime. Should the need arise to terminate a trust, the Trustmaker can simply exercise the power of appointment to eliminate the minor beneficiaries from the trust, after which the trust can be revoked by the Trustmaker and the adult beneficiaries.

Another possible hurdle is the circumstance in whiche a trust revocation is necessary because the Trustmaker has a sudden health crisis, such as a stroke, but the Trustmaker is incapable of consenting to the revocation. This problem is easily solved by including in both the trust and in the Trustmaker’s Durable Power of Attorney a provision authorizing the agent under the Power of Attorney to terminate any trusts created by the Trustmaker. This technique was recently sanctioned by the Appellate Division for the Second Department in Matter of Perosi v. Legreci. In that 2012 case, the court held that a Trustmaker may authorize an attorney-in-fact designated under the Trustmaker’s power of attorney to act under EPTL §7-1.9. This attorney-in-fact may amend or revoke the Trustmaker’s irrevocable trust, so long as the power of attorney grants the attorney-in-fact power broad enough, as well as the general authority, to act.

By virtue of New York’s powerful revocation powers, the use of a Medicaid Asset Protection Trust provides seniors with a wonderful vehicle of protecting selected assets while retaining the right to income from the assets, as well as significant control over the disposition of the trust principal. The ability to retain such benefits, however, requires coordinated planning that is best provided by an elder law attorney well versed in this planning technique. The Estate Planning, Probate and Elder Law department at the law firm of Blustein, Shapiro, Rich & Barone, LLP  is fully prepared to aid you in all areas of your elder law and estate planning needs.