By Deidre M. Baker, Esq.
As people continue to enjoy longer life expectancies, the financial burden of paying for long-term care has become enormous. In light of the potentially staggering cost of this type of care, irrevocable trusts have become an increasingly popular vehicle to protect assets. While the word "irrevocable" often makes clients leery, for many, the benefits of this estate planning tool far exceeds the downside.
When reviewing assets with a client concerned about the expense of long-term care, a client's most valuable asset is commonly his or her primary residence. Clients are often understandably anxious about what happens to his or her home in the event long-term care, such as nursing home care, is required in the future. Depending on the age and health of the client, an irrevocable trust may be a great vehicle for protecting the value of the property in the event the client requires community home care or nursing home care and wants to obtain Medicaid benefits to finance such care.
The Medicaid Program
The Deficit Reduction Act of 2005 ("DRA") 1, enacted in 2006, is a federal law implanted in the states, which made considerable changes to New York State's Medicaid program, specifically to the transfer penalty rules for nursing home coverage. The law increased the "look-back" period for nursing home Medicaid eligibility from three years to five years. 2 The DRA also changed how the penalty period itself is imposed. Prior to the law's enactment in 2006, the penalty period was calculated based on when the transfer was made, meaning the day a non-exempt transfer was made, the clock would begin to run. Under the DRA the penalty period for transfers made after 2006 does not begin to run until the applicant is in the nursing home, is otherwise eligible for Medicaid (below the asset limit), and has submitted an application for Medicaid.
Individuals seeking nursing home Medicaid coverage must work with the five year look-back imposed by the DRA for transfers of assets by the applicant or the applicant's spouse. 3 New York State's 2020 budget also made significant changes to the community or home care Medicaid program. Traditionally, the home care Medicaid program did not impose any look-back period or penalty for individuals seeking community-based services. The changes to the home care Medicaid program are expected to go into effect on October 1, 2020. Now more than ever it is important to speak with clients about the need to protect assets and plan for the future.
Unless the transfer of assets meets one of the Medicaid exemptions, the value of the uncompensated transfer or gift will be used to calculate a penalty period. A penalty period is a number of months where the applicant will be ineligible for Medicaid coverage and is responsible for privately paying for services. The penalty period is calculated by combining all of the non-exempt transfers that occurred within the applicable look-back period, and dividing the resulting total by the "regional rate" where services are sought. For example, a nursing home resident in Nassau County seeking services in 2020 would be $13,407 as the divisor when calculating a penalty period.4 While the new regulations have not yet gone into effect, it appears the same regional rates will be used when calculating penalty periods for transfers made within two and a half years of a community Medicaid application. 5
Even with the passage of the DRA, exemptions remain. When applicable, these exemptions allow for greater flexibility in shielding assets. The most commonly used exemption allows unlimited transfers to the applicant's spouse, or to another for the sole benefit of the individual's spouse. Although used less frequently, a transfer made exclusively for a purpose other than to qualify for Medicaid nursing home coverage is also exempt. This exemption is useful when an applicant is in need of care suddenly and had previously made non-exempt transfers.6
When utilizing the spousal transfer exemption, another important tool to consider is the spousal refusal. A spousal refusal is a legally valid Medicaid planning tool in New York. It is designed to ensure that the non-applying or community spouse is not impoverished as the result of his or her spouse's need for long-term care. A spousal refusal is completed by the community spouse and states he or she is refusing to make his or her income and assets available for the applicant spouse's care. At the time of the application, as long as the applicant spouse's countable resources are below the individual Medicaid asset level ($15,750 in 2020), he or she will be financially eligible for Medicaid. Any excess resources must be transferred to the community spouse during the month prior to the application.
Once the Medicaid recipient is approved and receiving care, some practitioners may believe the job is done. However, the final component to consider for a Medicaid recipient and his or her family is estate recovery. The federal government, the purse strings behind every state's Medicaid program, has a policy that requires the states to attempt to recover the costs paid on behalf of the Medicaid recipient. While estate recovery is deferred during the lifetime of the applicant's surviving spouse and minor or disabled children, it is important to plan to ensure assets remain protected.
As the New York Department of Health explains, the state can attempt to recover from the estate of a Medicaid recipient, up to the amount spent on care. The estate, for purposes of Medicaid estate recovery, includes real property and personal property. It includes assets passed via a will, assets passed under intestacy law, and all "other assets in which the decedent had any legal title or interest at the time of death." This includes assets which were conveyed to an heir through joint tenancy or through other forms of shared ownership.7
Medicaid Asset Protection Trusts
When meeting with a client who owns real property and has concerns about the cost of long-term care, an experienced elder law attorney will generally advise the client about the benefits of an irrevocable trustcalled the Medicaid Asset Protection Trust ("MAPT"). The MAPT is particularly useful in protecting a client's primary residence and other real property. It can also be used to protect other assets, making the MAPT an attractive option for clients whose home is their largest or most valuable asset.
A trust is a legal document between three main parties. The grantor is the person who establishes and funds the trust. The trustee is the person who is tasked with following the directives contained in the trust, managing the trust property, and administering the trust at its conclusion. The beneficiaries inherit the trust property at the death of the grantor or at some other pre-determined event outlined in the trust. In order for a MAPT to be effective in having the trust assets disregarded by Medicaid, some person other than the grantor must serve as trustee. This requirement, partly, ensures Medicaid cannot argue the grantor has control over or access to the trust assets.
It is important to note transfers to an irrevocable trust will result in a penalty period if made within five years of either spouse needing nursing home Medicaid and within two and a half years of either spouse needing community Medicaid. This is why irrevocable trusts are a planning tool most appropriate for clients who are healthy enough to have a reasonable belief that they will not require either skilled nursing care within five years or home care within two and a half years of creating and funding the trust.
For Medicaid purposes, the Department of Social Services is entitled to count any income or principal as available to the applicant-grantor that the trustee has the discretion to distribute to the grantor or use for his or her benefit. 8 Therefore, to ensure the principal of the trust is unavailable for Medicaid purposes, a properly drafted MAPT must include clear language that the principal of the trust shall not be distributed directly to the grantor or used for his or her benefit. If the trust requires the distribution of income to be payable to the grantor, the income can be treated as an available asset if not actually distributed to the Grantor for eligibility purposes.
Once the MAPT has been properly drafted and executed, it must be funded by re-titling assets. If this crucial step is ignored or performed incompletely, the trust will not achieve its intended goal of protecting assets from Medicaid. In order to re-title real property in the name of the trust, a new deed and recording documents must be signed by the grantor and the trustees. Once the transfers have been completed, the "clock" begins to run in the event the Grantor or the Grantor's spouse require long-term care. If the applicable amount of time passes (five years for nursing home Medicaid and two and a half years for home care Medicaid), the trust assets will be deemed unavailable by Medicaid.
Other Important Benefits to Irrevocable Trusts
While protecting assets from the potential cost of long-term care is an important benefit, it is not the only one enjoyed by clients when they utilize an irrevocable trust as part of an estate plan.
A properly drafted MAPT commonly includes a provision creating a right to reside in the property for the remainder of the grantor's life, also known as a right to use and occupy the premises. This protects the grantor's right to remain the property, collect any rental income, and have a veto power against the unwanted sale of the property. The grantor continues to benefit from any homestead property tax exemptions he or he is entitled to, such as veterans' or School Tax Relief ("STAR") 9 exemptions. When the grantor retains a power of appointment in the trust, the transfer into the trust is deemed to be "incomplete" for tax purposes. The incomplete trust means the trust property qualifies for a step-up in basis at the grantor's death. 10 The step-up basis can result in the trust beneficiaries avoiding significant capital gains tax liability when the trust assets are sold or distributed after the grantor's death.
Like most trusts, a MAPT not only provides for the management of assets during the lifetime of the grantor, it also distributes the trust assets to the named beneficiaries at the grantor's death, without the necessity for probate. Avoiding probate means the trust assets are administered based on the directions laid out in the trust, and not under a will, which requires the supervision of the Court. The trustee also has immediate access to the assets, rather than waiting for court approval to make distributions.
Irrevocable Trust Advantages in Comparison to Other Changes in Title
It is important to note there are other changes to the title of a piece of real property that can be made in order to achieve some of the benefits discussed above.
If a client's goal is avoiding probate shielding an asset from creditors, one option is an outright gift of the property to another person. The client could also add a second individual as a joint owner. An estate planning attorney frequently hears that a client wants to "give my house to my children". While this seems like a desirable option, it has several drawbacks. First, unlike property held in trust, an outright gift to an individual renders the property available to creditors through bankruptcy and foreclosure, as well as during divorce proceedings. Second, unlike property held in trust, if a primary residence is gifted outright, when the new owner or "donee" later sells the property, the appreciated value would be subject to capital gains tax. Third, the new owner can also attempt to sell the property over the objection of the original owner, despite not having to make any financial contribution to the property. These issues can be avoided by transferring the property into a MAPT, affording the grantor more control and protection.
Alternatively, probate is avoided by transferring property to individual while reserving a life estate for the grantor. A life estate is created when the grantor transferrs his or her ownership interest to another person by deed with language indicating lifetime ownership in the property. At the death of the grantor, his or her life estate extinguishes and the "remainderman" owns the property outright, avoiding probate and capital gains taxes. While this may be more attractive than an outright transfer, it can still present issues for the Medicaid applicant. First, if the property is sold during the life of the Medicaid recipient, his or her life estate has a numerical value, which will be treated as an available asset for Medicaid purposes. This will likely result in a period of ineligibility. In this scenario, the remainderman will likely be responsible for paying capital gains tax on his or her portion of the proceeds unless they qualify for the $250,000 exemption by residing in the property for 2 of the 5 years immediately preceding the sale. 11 Second, the remainderman can sell the property or mortgage it, over the objection of the grantor. Third, as discussed above, the life circumstances of the remainderman still render the property vulnerable in the event of a creditor or lawsuit.
While not an option for all families due to timing, cost, or other factors, irrevocable trusts remain an important tool for Medicaid qualification and asset protection. They allow clients to have the government pay for medical care, home health aides, and nursing homes. A Medicaid trust is a valuable tool that helps protect assets and allows clients to leave those assets for the next generation.
Deidre M. Baker is an associate attorney with Makofsky Law Group, P.C., located in Garden City, New York. The firm concentrates its practice on trusts, estates and Medicaid planning, Medicaid applications, guardianships, and estate administration. The attorneys can be reached at (516) 228-6522.
1. (Pub.L. 109-171, S. 1932, 120 Stat. 4, enacted February 8, 2006).
2. 06 OMM/ADM-5; Deficit Reduction Act of 2005 - Long-Term Care Medicaid Eligibility Changes.
3. 42 U.S.C. §1396(p); Social Services Law §366; 18 N.Y.C.R.R. 360-4.6; O6 OMM/ADM-5.
4. GIS 19 MA/01, GIS 19 MA/06, GIS 19 MA/12.
5. Social Services Law §366 subd. 5(e)(S).
6. 1996-ADM-08; OBRA '93 Provisions on Transfers and Trusts.
7. 02 OMM/ADM-3; Medicaid Liens and Recoveries.
8. 18 NYCRR § 360-4.5 (b)(1)(ii).
9. Real Property Tax Law § 425.
10. 26 U.S. Code § 1014(a).
11. See 26 U.S. Code § 121.
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