The Value of an Irrevocable Income-Only Trust

Trusts were originally the tool of the wealthy. Now they also serve the interests of middle class Americans as well!

Imagine this: you transfer your house to your children to protect the value of your house from Medicaid. Then one of your children gets divorced or sued in a personal injury lawsuit, and your house is considered an asset of your child’s and gets taken through that proceeding.

How do you prevent this from happening? Well, in a word, create a TRUST.

Clients become worried when they hear the word trust. What is a trust? How will it work? It’s this esoteric thing that clients find intimidating. They think it’s just for the rich and famous. Not true! Trusts are the friend of the middle class as well. I tell clients to think of trusts as a small business. They have their own bank account and their own operating terms, as specified in the trust agreement. Your lawyer will help you create the trust agreement and administer it in accordance with the law.

For asset protection purposes, if you create a trust, you will be foregoing your right to withdraw the principal of the trust, but if done right, you will receive income and a right to live in the house if you transfer a house. You will retain enough other rights to the property of the trust so that if you were to die, the beneficiaries of the trust receive a date of death value on the trust property for capital gains purposes, instead of a cost-basis value of trust property.

If you are thinking “huh” to that last part, consider this example:

Husband and wife purchase a house in 1950 for $45,000. They make capital improvements to the house valued at $25,000. The present value of the house in 2011 is $700,000.

1. If they GIFTED the house to their children for Medicaid asset protection purposes, the children would only receive a cost basis of $70,000. If they sold the house thereafter, they would owe capital gains tax on $630,000. At the present rate of 15%, this would result in a tax of over $65,000.

2. In this same scenario, if the parents transferred the house to a qualified trust, at the death of the parents, the children would receive a basis in the house equal to the value of the property on the date of death of the parents. This means that no capital gains tax would be owed if the house sold for $700,000. Additionally, if certain rights are reserved, the house can still qualify for certain special tax exemptions, including the VA and enhanced-STAR property exemptions, during the lifetime of the parents. This is a huge advantage over a straight asset transfer!

So there are many benefits to an irrevocable trust. Here they are:

• Trust principal would be protected from creditors
• Immediately upon transfer, assets would not count as a resource for Community Care Medicaid
• Trust Income still available to support mom and/or dad
• Trust funds remaining at death can pass automatically to named beneficiaries, without probate!
• Date of death value of assets, instead of original cost basis

Of course, a trust is not right for every person. There are also a few drawbacks. They include:

• Initial burden of transferring assets into trust
• If either spouse needs Institutional Medicaid within the next five years, the trust would need to be unraveled and the entire initial principal at time of funding returned to the husband and wife

o Gift tax issues to children should they need to receive trust principal and transfer same to parents

To set up an Irrevocable Income-Only Trust to protect your or a loved one's assets, contact attorney Moira Laidlaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.

How Does NY Medicaid Treat Gifting of Assets to Qualify for Medicaid?

In New York, there are no penalties for gifting assets if you need to qualify for Community Medicaid, also known as Home Care. However, in determining Medicaid eligibility for Institutional Care (aka Nursing Home care), there are strict rules in place for transferring assets.

Institutional Medicaid applicants are subject to a 5 year look-back period on assets that are given away. Medicaid will then examine each asset given away, assign a value to it, and assess a penalty period during which the applicant will have to privately pay for Medicaid.

The penalty period is calculated by dividing the amount transferred by what Medicaid assesses the average private pay cost of a nursing home in your County. The penalty period does not start to run until the applicant is receiving institutional care (i.e., residing in a nursing home) AND has applied for Medicaid and would otherwise be eligible to receive Medicaid but for the transfers.

As stated above, the 5 year look-back period does not apply to Community Care. Also, certain gifts are not subject to penalty. Examples of gifts that are not subject to a transfer penalty are those made to a spouse or directly to a disabled child or to a trust for the sole benefit of a disabled child. There are other exemptions to penalties as well.

If you have a question on how to gift assets and qualify for Medicaid Institutional Care, contact attorney Moira Laidlaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.

It’s Never Too Late To Do Medicaid Planning

People sometimes think that it’s too late to do Medicaid asset protection planning, especially if a loved one is already in a nursing home. But that’s not true! It’s NEVER too late to do Medicaid planning, even if your loved one is already in a nursing home. There are emergency Medicaid planning strategies that can be used that can protect half of the assets of the nursing home patient, and possibly more.

In New York, one of the best emergency planning strategies is a gift and loan strategy. It requires precise calculations, but here’s a sketch of how it generally works:

Gift/Loan Strategy:

• Medicaid Applicant (or person acting under a power of attorney) gifts approximately 50% of assets
• Medicaid Applicant loans the remaining 50% to a responsible person
• The Medicaid Applicant then qualifies for Medicaid as the loan does not count as an asset, but rather as an income stream to MA (see our post on how most income overages won’t disqualify you for Medicaid)
• The Medicaid Applicant then applies for Medicaid and is issued a penalty period
• The penalty period begins to run on 50% gifted
• Loan income covers cost of care during penalty period

There are a couple of risks with respect to the gift and loan strategy. You need to make sure you work with legal counsel to properly calculate the exact amount that should be gifted and loaned. You also need to make sure to loan the money to a trustworthy relative or friend.

There are a few other emergency Medicaid planning strategies. They include personal care contracts and funding exempt assets, especially prepaying for burial expenses and/or plots.

When a loved one is in a nursing home, it’s not too late to qualify for Medicaid. To discuss emergency Medicaid planning strategies, contact attorney Moira Laidlaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.

NY Income and Asset Eligibility Requirements for 2011

Medicaid distinguishes between two types of service levels, Community Care and Institutional Care. Depending on the level of care you need, the eligibility requirements differ. Before delving into those requirements, let me restate the difference and first clarify the types of care.

COMMUNITY CARE (aka “Home Care”): Community Care refers to staying in the home and receiving in home health aids or skilled care in your home.

INSTITUTIONAL CARE (aka “Nursing Home”): Institutional Care is Medicaid’s term for a nursing home, whether it’s a short or long term stay.

Regardless of which Medicaid service you are applying for, the eligibility criteria are determined by both income and resources.

To qualify for Community Care, the income for a one person household is $767 and a two person household is $1,137. The resources of a one person household is $13,800 and for a two-person household is $20,100 plus exempt assets. (Please see our related post on Exempt Assets.)

For those applicants needing Institutional Care, the applicant’s income cannot exceed $50 while the spouse remaining in the home (aka “Community Spouse”) is $2,739. The Community Spouse’s resource allowance ranges from $74,820 up to $109,560. This allowance can be increased if a hearing is requested and judicial approval is received, and is only granted in “exceptional circumstances.” See also our related post on Spousal Refusal.

For help in determining whether you or a loved one meets the current income and asset eligibility requirements for Medicaid, contact attorney Moira Laidlaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.

Demystifying Medicaid: What is “Spousal Refusal”?

“Spousal Refusal” is a technique to avoid having the assets and income of the “well” spouse count when the “ill” spouse applies for Medicaid. If the “well” spouse submits a statement to Medicaid stating that he or she is unwilling to contribute financially toward the medical costs of “ill” spouse, then Medicaid is not permitted to include the “well” spouse’s assets in determining eligibility for the Medicaid applicant.

Spousal Refusal is legal and recognized by the legislature and courts as a valid Medicaid planning tool. However, just because it is legal, does not mean that there are no consequences to Spousal Refusal. Medicaid has a right of recovery against the refusing spouse. It doesn’t always pursue the refusing spouse, but the right to do so is there.

So a common question is:

If the “well” spouse can be sued by Medicaid, why execute a Spousal Refusal?

Here’s why: Medicaid obtains better rates for services than you would if you private paid. So repaying Medicaid will be more affordable than private paying, even if you have to repay Medicaid 100%.

Also, Medicaid doesn’t always pursue every spouse, so there is a chance that a demand won’t be made. Morever, if a demand for reimbursement is made, with proper legal advocacy, you can negotiate down significantly the final amount due.

In summary, here are the benefits and drawbacks to Spousal Refusal:

Pros:

• Applicant (“ill spouse”) can transfer all assets to spouse and immediately qualify for Medicaid
• Spouse will not have to relinquish rights to any assets
• Even if have to repay, rate for services will be less expensive rate paid by Medicaid, not more expensive private pay rate

Cons:

• Spouse may receive a demand for repayment from Medicaid, during the lifetime OR against the probate estate of the spouse
• Could jeopardize spouse’s eligibility for future Medicaid benefits. The “well” spouse’s health would need to be reviewed to determine if this is an appropriate planning strategy

To discuss Spousal Refusal as a Medicaid planning strategy for you, contact attorney Moira Laidlaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.

Protecting Assets against Long-Term Care Costs is LEGAL and NECESSARY

Courts have held that planning for Medicaid by transferring assets is not against public policy. As one New York state court opined:

“[N]o government agency has the right to complain that middle class people choose to voluntarily inflict poverty on themselves, when it is the government itself which has established the rule that poverty is a prerequisite to the receipt of government assistance in defraying the costs of ruinously expensive but absolutely essential medical care.” In re Shah, 257 A.D.2d 275 (2d Dep’t 1999), order aff’d, 95 N.Y. 2d 148 (2000) (emphasis added).

This means that as long as you don't violate Medicaid's eligibility rules, it is not illegal to gift assets to a trust or relative in order to qualify for Medicaid. As with anything, though, time is of the essence.

Medicaid has different eligibility rules and penalties depending upon the type of care you need.

Medicaid Community Care, such as home health aids and skilled care in your home, does not carry a penalty period for transfers. You can transfer assets today and qualify on the first day of the next month for Medicaid.

Medicaid Institutional Care, such as nursing homes, will impose a penalty period for uncompensated gifts/transfers made within the last five years. Such transfers include funding an irrevocable trust, gifts to family members (with certain exceptions to be discussed in a future blog post), disclaiming/refusing/renunciating an inheritance, or failing to exercise a right of election in a spouse's estate. It's important to do your Medicaid planning today in order to avoid any penalty period.

It's important to do your Medicaid planning today in order to avoid any penalty period. Get help now with your Medicaid planning by calling attorney Moira LaidLaw at (914) 767-0646 or email Moira at mlaidlaw@laidlawfirm.com.

The information provided in this web site is attorney advertising. It is for informational use only. Do not construe this as legal advice. You should not act or rely on any information at this website without seeking the advice of an attorney.