PRIME TIME
Advertorial
Medicaid Trusts under Attack By Steven L. Friedman, Esq. The high cost of long-term care makes it inevitable that most residents in skilled nursing facilities will run out of money before they run out of time. Increasing attempts to limit the availability of governmental assistance have made the planning process much more complex. Medicare is an entitlement program for individuals who are over 65 or disabled, but will only cover skilled nursing care, only for a short period of time, and only if it is preceded by a hospitalization of at least 3 days. Medicare will not pay for custodial care. Medicaid is a need-based program that will subsidize the cost of custodial care for those who meet strict asset and income guidelines. Medicaid is not an entitlement program. Medicaid applicants will be subject to a period of ineligibility when they have given away assets within five years prior to applying for benefits. This is referred to as the Medicaid look-back period. The length of the look-back period means that Medicaid planning must be completed long before the need for long-term care arises, at a time when the prospective application is still relatively young and healthy. Consider the example of a healthy 80-year widow who decides to give her home and other assets to her adult children, retaining sufficient assets to provide for her support over the next five years. Under current law, there would be no gift tax consequence as long as the value of the gift did not exceed $11,200,000. But the potential tax and security concerns may be significant. Tax on Capital Gains When an asset is sold, the seller realizes a taxable gain equal to the difference between the net sales price and the seller’s tax basis. That tax basis is determined by how the asset was acquired, generally in one of three ways: 1. If seller purchased the asset, the tax basis would be equal to the purchase price, referred to as “cost basis.” 2. If the seller received the asset as a gift, the tax basis would be equal to the donor’s tax basis, referred to as “carryover basis.” 3. If the seller inherited the asset, the tax basis would be equal to the fair market value of the asset on the date of death of the decedent, referred to as “adjusted basis.” The tax basis rules, therefore, impose a significant disincentive to making lifetime gifts. The capital gains rules add an additional disincentive when gifting one’s home. In our example, if the house is sold during the mother’s lifetime, the children would use the carryover basis to calculate their gain on the sale. On the other hand, if the mother still owned the home when it was sold, the first $250,000 of capital gain would have been exempt from taxation. Tax on Interest and Dividends Another disincentive to lifetime gifts is that the children would be required to report the interest and dividends earned by the gifted assets. That tax cost will be higher to the extent the children are in higher tax brackets than their mother, or if they live in jurisdictions with higher state income tax rates. Security Giving away a substantial portion of one’s assets carries risk. That risk is greater when the donor is retired and no longer able to rebuild their nest egg if something goes awry. Medicaid planning gifts are often completed with the tacit understanding that the gift will not be spent while the donor is still living. Even assuming that the donor’s wishes are respected, the possibility of divorce or bankruptcy places the gifted assets at risk. To resolve all these concerns, irrevocable trusts were designed to allow the trust corpus to be excluded from the donor’s available resources, and to provide security from the risk of having the donee own the assets outright. For income tax purposes, the trusts were designed to allow the trust assets to be treated as if still owned by the donor, understanding that it would be counted as the donor’s income. Often these trusts, referred to as incomeonly trusts, contained provisions directing or authorizing the Trustee to use the income for the donor, understanding that the income would be considered available to the donor for Medicaid purposes. Since the trusts are often established by those who are still young, healthy, and with no foreseeable thought of long-term care, access to the income made the gift less stressful, particularly for those who needed the income for support. The prevailing theory had always been that the donor’s right to income would still protect the corpus of the trust. States have long sought to limit the use of irrevocable trusts and those efforts appear to be intensifying. In April 2017, the Director of the Division of Medical Assistance & Health Services (DMAHS) issued a final decision, denying Medicaid benefits to an applicant who had established an income-only trust more than five years earlier. The Director cited the public policy of limiting benefits to the indigent and preventing perceived abuse of the system by those who transfer assets to irrevocable trusts. The ruling was corrected to protect the corpus, but it required an administrative law hearing and a federal court action to achieve that result. In August 2017, the Director issued a final decision in another matter involving an income-only trust that had been created 10 years earlier. While the decision accepted the trust, it mandated an accounting of the administration of the trust before a decision would be made on the application for benefits. The law also allows the State to recover benefits paid from the estate of a deceased
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Medicaid recipient. New Jersey has adopted an expanded definition of “estate” to include trusts in which the Medicaid recipient had an interest at the time of death. The intent of this language seems to permit estate recovery from an income-only trust. Listed below are several guidelines to consider when using irrevocable trusts in Medicaid planning: 1. A Medicaid applicant’s income will be deemed to include any income or corpus of a trust that is actually distributed to the applicant. If the individual’s income exceeds the Income Cap, a Qualified Income Trust is required. 2. A Medicaid applicant’s countable resources will include any amount of undistributed income or corpus of a trust that could be distributed to the applicant, but is not. This will generally cause the individual’s resources to exceed the Medicaid limit. Special care is needed when deciding how a trust’s undistributed income is treated. 3. A Medicaid applicant will be deemed to have “made a gift” to the extent that any income or corpus of a trust could have been distributed to the applicant, but was instead distributed to someone else. This is true even if the applicant had no control over the distribution decision. 4. To the extent the applicant is eligible to receive income or corpus from a trust, the Trust will likely be subject to estate recovery. 5. Irrevocable trusts must be administered in a manner consistent with the terms of the trust, and the trustee must maintain records that will allow a detailed accounting to be produced. Irrevocable trusts are likely to become the subject of additional litigation in the future, but for now it seems clear that DMAHS will seize on every opportunity to treat a trust’s assets as available resources to a Medicaid applicant. Irrevocable trusts have been used in Medicaid planning for decades, assuming that they would afford the intended protection. Given the enhanced scrutiny, it is important to have those trusts reviewed by an experienced Elder Law attorney to determine whether the trust still achieves its original objective and, if not, whether anything can be done to change the outcome. Attacking income-only trusts will not stop Medicaid planning. In fact, it may encourage seniors to give their assets away without the safeguards that those trusts provide. As a practical matter, those with modest means will be the most affected, since they are the ones who find themselves unable to relinquish the income from their assets. The anti-abuse provisions of the law are often illogical. While the rules penalize gifts, there is no disqualification for those who choose to spend their assets supporting opulent lifestyles or expensive vices, provided they do not acquire assets of value in the process. Consider that the rules exempt gifts for the benefit of a disabled child, but not for a disabled grandchild. Similarly, the gift of one’s home to a caregiver child is permitted (subject to strict residence requirements and monetary limits), but penalized if the caregiver happens to be a grandchild. Gifts for the education of grandchildren and great-grandchildren are not exempt at all. The challenge is complex and the solutions are challenging. Universal solutions that work in every case do not exist. For some, long term care insurance offers a viable solution. For others it may be lifetime gifts. Planning is most effective when implemented early and revisited often to prevent issues before they arise.
2018 Prime Time
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2018 Prime Time
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How Empty-Nesters Can Transform Their Homes
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fter bringing home a bubbly baby boy or girl, it can be hard for parents to imagine that a day will come when their kids are off to college and then onto their own apartment or house. After spending decades nurturing and caring for children, parents are then left with a suddenly quiet house and probably much more time to spare. If saying goodbye to the kids also means extra house, there’s the option to downsize or make that extra space more useful. Homeowners who choose to stay put can renovate vacant rooms into spaces that meet their newfound needs. • Hobby haven: If you’ve always meant to set up a crafting room, home-brewing station or an artist’s studio, now is an ideal time to do just that. Figure out which supplies you will need and begin reworking that former bedroom into a new sanctuary for leisure interests. • Guest suite: If you’ve never had a spare bedroom to entertain guests, a child’s former bedroom can fit the bill. It may not be that difficult to transform such spaces into relaxing and inviting rooms for overnight guests. Be sure there is at least a queen-sized bed and a dresser or chest of drawers to stash belongings. Select paint colors and linens in neutral tones so the room will be inviting to guests. • Living room redo: When there’s an entire soccer team coming over to hang out, that large sectional sofa or modular seating may be ideal. Now that the kids are out of the house and their friends are no longer coming over for movie night, living rooms can be made more intimate with small-scale seating. A small sofa and two comfortable chairs may be a more fitting option. • At-home gym: Save on gym membership fees by building a mini studio right at home. Choose one of the larger bedrooms and then fill it with some fitness equipment, such as an elliptical trainer, a bench press bench and some free weights. Store rolled-up mats in the closet for yoga or Pilates sessions. • Expanded bathroom: If space has always been at a premium in the bathroom, borrow area from an empty 6
2018 Prime Time
bedroom and turn it into a spa. Install a soaking tub separate from the shower, and fill the room with other amenities, such as a warming lamp or even a small sauna. • Home office: Working from home a few days a week may be more plausible when nearing retirement, as it will be a smoother transition from heading to the office each day to spending more time at home. Turn a bedroom or den into an office space with a new desk and bookshelves. An empty nest can be a bittersweet experience, but parents can make such situations work for them by transforming their homes to better reflect their current needs. — Metro Creative Connection An empty bedroom can be turned into a cozy sitting room.
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71 East Prospect Street - Hopewell Borough