by Thomas D. Begley, Jr., CELA
Types of Trusts. Trusts established and funded after August 10, 1993, are governed by OBRA-93. The Medicaid-qualifying trust rules were repealed by OBRA-93, and new rules for revocable and irrevocable trusts created after August 10, 1993, were established. OBRA-93 also created special disability trusts, each of which has rules. These trusts include Self-Settled Special Needs Trusts and Pooled Trusts. OBRA-93 also established a Miller Trust, to be used when a potential Medicaid recipient has income in excess of the income cap. The fourth trust authorized under OBRA-93 is a sole benefit of trust.
The commonly-used trusts in Medicaid Planning include the following:
What Constitutes a Transfer. The key to understanding the transfer rules pertaining to trusts is to understand when the transfer has taken place. If there is a transfer from an individual then to a trust under conditions by which the trust assets are still available to the individual, for Medicaid purposes there has been no transfer. Therefore, where the trust is revocable, the assets are still available to the individual after the trust is funded so there is no transfer at this point. The transfer is considered to have taken place on the date of payment from the trust to a third party.
If the trust is irrevocable, the transfer is considered to have been made as of the date the trust was established and funded, or upon such later date that payment to the settlor was foreclosed. However, if the settlor can still benefit from the assets with which the trust is funded, those assets are still available so there is no transfer. If and when those assets are paid out to a third party, the transfer occurs. If the settlor places assets in an irrevocable trust and can no longer benefit from any of the trust corpus, there has been a transfer of assets when the trust is funded.[1]
Drafting Considerations for Trusts. There are seven main issues to be considered in drafting any trust involving a potential Medicaid recipient. These considerations are:
[1] 42 U.S.C. § 1396p(c)(1)(B); HCFA Transmittal 64 § 3258.4E.
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New Jersey is an income cap state for purposes of nursing home level of long-term care services. Nursing home level of services includes nursing homes, assisted living and most home care. The income cap is 300% of the Federal Benefit Rate (FBR). For 2015, 300% of the FBR is $2,199. This figure is indexed for inflation. This means that if an individual’s income exceeds $2,199 in 2015, they would not be eligible for Medicaid long-term care services. Historically, individuals with income in excess of the income cap were eligible for Medicaid in a nursing home setting, because New Jersey had a “Medically Needy” program. This enabled individuals to spend down income to obtain Medicaid eligibility. The Medically Needy program applied only to nursing home care and not to assisted living or home care.
New Jersey has obtained a waiver from the federal government to abolish the Medically Needy program. In place of the Medically Needy program, New Jersey will not permit Miller Trusts. Under a Miller Trust, monies in excess of the income cap are deposited into a trust known as a Miller Trust or Qualified Income Trust (QIT). Any income deposited into the Miller Trust is non-countable. A problem typically arises when an individuals has both Social Security and a pension. Let’s suppose an individual has Social Security income of $2,000 per month and pension income of $1,500 per month. That would place that individual over the income cap of $2,199 per month. Under the New Jersey regulation, 100% of either source must be placed into the Miller Trust. In our example, either 100% of the individual’s Social Security or 100% of the individual’s pension could be deposited into the Miller Trust and bring the applicant’s income down below the income cap.
The Miller Trust must meet certain conditions:
From the Miller Trust only certain expenses are permitted. These include the following:
The PNA is $35 per month for a nursing home resident, $107 per month for an assisted living resident; and $2,199 per month for an individual receiving home care. The MMMNA is $1,966.25 per month for the community spouse increased by a certain calculation for an excess shelter allowance and reduced by any other income being received by the community spouse. The trustee is almost always going to be an individual who is unfamiliar with trusts, so, in the author’s opinion, it is simpler to pay only the bank fees and the provider out of the trust and pay all of the other expenses listed above out of the funds not deposited into the trust.
The trust can be established by the individual trust beneficiary, someone holding a power of attorney on behalf of the individual, or the trust beneficiary’s guardian.
The trustee can be the spouse, child, someone holding a power of attorney on behalf of the beneficiary, or a guardian for the beneficiary, but cannot be the trust beneficiary. Whether a facility can serve as trustee is an open question. The trustee does not have to post bond. Statutory trustee’s fees are 6% of income; however, Division of Medical Assistance and Health Services (DMAHS) has not indicated what constitutes income. If all monies deposited into the trust are income, the trustee will receive a fee, if only monies remaining in the trust after payment of all disbursements are considered income, there will, in effect, be no trustee’s commissions. The state has published a template for a Miller Trust. It makes sense to use this template, because Medicaid workers will be familiar with it. If the lawyer drafts his or her own trust document, it will undoubtedly have to be sent to Trenton for review, and the application process will be significantly delayed. If a trustee resigns, the resigning trustee must provide an accounting. A successor trustee should be named in the document, and that trustee will take over responsibility for trust administration. If there is a trustee resignation, notice must be given to the remainder beneficiaries, to DMAHS, and to the County Board of Social Services (CBSS).
While the trust is being administered, there must be annual accountings to CBSS. The accounting must list all checks, including the date, the check number, the amount, and the payee. Receipts for all trust expenditures must also be provided. The accounting must also include the balance in the trust, copies of bank statements, and any change in the beneficiary’s income or resources. The accounting is given at the time of redetermination.
The trust will terminate if Medicaid medical assistance is no longer being provided or if the beneficiary is no longer over the income cap. This might occur if the individual is receiving annuity income for a term of years and the term of years expires. Upon termination, there must be notification to DMAHS and a payback. Theoretically, remainder beneficiaries can be named to receive any monies in the trust in excess of the payback, but no one will take a trip around the world on this money.
The trust must contain a spendthrift provision. The assets in the trust must be non-assignable. The trust must contain payback provisions. Anyone currently on the Medically Needy program will be grandfathered. It is likely that individuals will be grandfathered even upon redetermination. However, if a situation arises where an individual is on Medicaid pending the sale of a home and the home is then sold rendering the individual no longer eligible for Medicaid, upon reapplication will that individual be grandfathered? Likely, the answer is no, but DMAHS has not yet clarified this issue. Under Medically Needy the resource limit was $4,000 for an individual and $6,000 for a married couple. That resource limit is now reduced to $2,000 for an individual and $3,000 for a couple. The trust must be approved by CBSS and reviewed annually by DMAHS.
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By Thomas D. Begley Jr.
WHAT SHOULD YOU KNOW ABOUT LONG-TERM CARE?
Long-term care is an area of growing concern to older Americans and their families. Approximately 70% of individuals age 65 or older eventually require some form of long-term care. Whether that consists of home healthcare, assisted living or nursing home care, the costs can be substantial. Without adequate planning, long-term care costs can quickly deplete a lifetime of savings. That, in turn, can jeopardize the financial security of a surviving spouse and undo any plans for transferring wealth to children.
Given the complexity of long-term care planning and the potential for costly errors, it is important to retain an experienced Elder Law attorney to guide you through the process.
HOW CAN YOU PLAN FOR LONG-TERM CARE NEEDS?
Generally, the long-term care planning process involves:
WHAT ARE YOUR GOALS?
The first step in long-term care planning is identifying goals and priorities. Typically, individuals want to:
WHAT SHOULD YOU KNOW ABOUT TAX PLANNING?
As you consider which assets might be used to fund long-term care and which you would like to leave to your children, it is important to understand the income tax ramifications of the following:
HOW WILL YOU PAY FOR LONG-TERM CARE?
There are five ways to pay for long-term care: private pay, long-term care insurance, Medicare, Veterans Administration benefits, and Medicaid.
Private pay
Paying for long-term care privately is the least desirable option since few families can afford the $100,000+/- annual price tag over an extended period of time.
Long-term care insurance
While long-term care insurance is an excellent way to pay for care, only 6- 8% of the elderly have this type of insurance. There are four reasons people don’t buy long-term care insurance:
When buying long-term care insurance, it’s important to consider these factors:
Medicare
If you expect to have Medicare cover long-term care costs, you should know that it:
Veterans’ benefits
If you believe you are eligible to have Veterans’ benefits cover long-term care costs, you should be aware of the following:
Medicaid
If you may need to rely on Medicaid to cover long-term care costs, you should be aware of the following:
If there is a joint account owned by the applicant “or” another individual, Medicaid takes the position that the entire account is a countable resource for the Medicaid applicant. If the account is owned by the applicant “and” another individual, Medicaid assumes that there was a transfer of assets when the applicant(‘s/s’) child was added to the account, but that each joint owner owns a pro rata share of the account. If the child contributes the assets and later withdraws them, there is no transfer-of-asset penalty. The child bears the burden of proof regarding whether he or she made a contribution to the account.
The Community Spouse Resource Allowance is 1/2 of the countable resources with a maximum of $119,220 and a minimum of $23,844 for 2015.
Penalties may be for a period of months or partial months. The larger the transfer, the longer the period of ineligibility. The penalty does not begin until the applicant is eligible for an institutional level of care, is otherwise financially eligible for Medicaid (i.e. has spent down assets to $2,000) and has no other period of ineligibility outstanding.
For example, assume that a person transferred $50,000 within the lookback period, triggering a seven-month penalty or period of ineligibility for Medicaid. The penalty period would begin when that person was already in a nursing home, had spent down assets to $2,000 and had no other period of ineligibility outstanding. Consequently, the individual would have no money with which to pay for the nursing home care for seven months.
Spend Down. It is possible to spend down assets through:
Transfers. Despite the five-year lookback, in many instances, it is still possible to transfer assets. For example, some transfers are exempt from Medicaid transfer-of-asset penalties. In some cases, tax advantages can be achieved by transferring assets. Additionally, assets may be transferred from one spouse to another through divorce.
Transfer alternatives. There are several ways to transfer assets.
If assets are transferred to a grantor trust, the trust can be designed so that, at the parent’s death, the assets will receive a step up in basis. That will result in significant tax savings for the children. The trust also can stipulate that the income tax on the trust assets will be paid by the parent. If a home is transferred to a trust and later sold, the trust can be established to preserve the $250,000 or $500,000 exclusion from capital gains tax on the sale of a principal residence. Additionally, trusts can eliminate risk factors associated with outright transfers to children. Even if a child is serving as trustee, the assets would not be subject to the claims of that child’s creditors or become involved in an action for divorce. These assets would not need to be disclosed on a grandchild’s application for college financial aid.
Several types of trusts are used when Medicaid planning is at issue. All of these trusts are irrevocable.
Care agreements. In many cases, a child provides care to a parent. To accommodate such an arrangement, the child may move into the parent’s home or the parent may move into the child’s home. Alternatively, the child may provide care while retaining a separate residence from the parent if the parent resides in a nursing home or assisted living facility. It is possible for the parent to compensate the child for this care, effectively transferring assets to the child. This can be done without triggering a penalty, provided that three requirements are met:
Note that the income paid to the child is taxable because it is for services. In some circumstances, the parent must withhold from the child for FUTA and FICA. Withholding from income tax is not required unless both parties agree. Medicaid resists these care agreements and great caution must be taken in properly drafting the documents and in delivering appropriate services.
There are several ways to transfer a home.
Medicaid estate recovery
At the death of a Medicaid recipient, the state is entitled to recover from his or her estate. In New Jersey, an estate includes all assets in the name of the decedent, as well as assets in which the decedent had an interest through joint tenancy, tenancy in common, right of survivorship, a living trust, or another arrangement. Effectively, this means that if a husband and wife own a home together and the husband is a Medicaid recipient, at his death, Medicaid can file a lien on the home. If the home is owned as tenants by the entirety, which is the usual way married couples own homes, the lien will be for 100% of the value of the home. In Pennsylvania, estate recovery is limited to the probate estate. The recovery will be for all Medicaid benefits received after age 55. No recovery will be made if there is a surviving spouse or a surviving child who is under age 21, blind, or permanently and totally disabled. Life estates established during the parent(’s/s’) lifetime are exempt from estate recovery. Recovery cannot be made against the estate of the surviving spouse. If a lien is placed against the home, the spouse will not be forced from the home, but Medicaid will want payment if the home is sold or the spouse dies.
WHAT TOOLS ARE AVAILABLE FOR LONG-TERM CARE PLANNING?
WHAT SHOULD YOU KNOW ABOUT APPLYING FOR MEDICAID?
Medicaid applications are filed with the Board of Social Services for the county in which the care is being provided even if the applicant lived in a different county. Applicants must report all assets under penalty of perjury. The Board of Social Services has 30 days to approve or deny an application, but typically, the process takes about 60 days. Applicants have a right to appeal in the event of a denial. Medicaid can be granted retroactively for three months prior to the date of application if the Medicaid applicant was eligible at that time. Otherwise, eligibility begins on the first day of the month following the Medicaid application.
Medicaid eligibility rules are complex, and it is possible for errors to result in a delay in eligibility. In such cases, the facility must be paid by the family on a private-pay basis until Medicaid eligibility is granted. Given the potential for this outcome, many applicants choose to have an elder law attorney represent then during the application process. An elder law attorney also can help with periodic redeterminations for Medicaid eligibility. These occur annually for recipients on the Medicaid Only program and every six months for those on the Medically Needy program.
WORKING WITH BEGLEY LAW GROUP
For over 70 years, the attorneys of the elder and disability law firm Begley Law Group have been dedicated to helping clients plan for long-term care concerns. We have expertise in all aspects of elder law and provide clients with the most up-to-date information and advice. The firm participates in the formulation of legislation related to elder law issues. We also advocate for the rights of seniors on both national and state levels.
Clients requiring long-term care planning can benefit from our Asset Protection Planning program, designed to help identify goals and find the best strategies and solutions for achieving them. At the initial meeting, we will discuss your situation and ascertain your needs. We will then advise you of our fee, which is a flat rate that covers everything within the scope of the service.
LONG TERM CARE SELF-DIAGNOSTIC TEST
Many clients involved in long-term care planning find it useful to complete the following Self-Diagnostic Test. Please take a few minutes to answer these questions.
1. Am I willing to risk all that I have accumulated through a lifetime of hard work and disciplined saving, including my home, my car, and all of my liquid assets, rather than take the time to plan for the future? □ Yes □ No
2. Do I understand that the cost of planning is insignificant when compared to the cost of paying for long-term care? □ Yes □ No
3. Do I understand that the risk of my needing some form of long-term care (e.g., home care, assisted living, nursing home care) is roughly 70%? □ Yes □ No
4. Do I know what long-term care will cost? $________________
5. Do I know how I will pay for that care if I need it?____________________________________________
6. Do I know what the impact will be on my spouse and children if I spend $100,000 ± per year on long-term care?__________________________________________________________________________
7. Should I explore the possibility of buying long-term care insurance? □ Yes □ No
If no, why not?___________________________________________________________________________
8. Should I hope this problem never arises and ignore it? □ Yes □ No
9. Should I take steps to try to protect my life savings now? □ Yes □ No
What are my reasons for these decisions?____________________________________________________
________________________________________________________________________________________
10. Do I understand that if I become sick, it may be impossible for my spouse or children to care for me, regardless of how much they are committed to doing so? □ Yes □ No
11. Are my wills, trusts, living wills, powers of attorney and other legal documents up to date? □ Yes □ No
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