"Protecting Assets" (Against the Expense of Long-Term Care)

 

Lisa Nachmias Davis

Davis O'Sullivan & Priest LLC

129 Church Street Suite 503

New Haven, CT 06510

203-776-4400

email: davis@sharinglaw.net

www.sharinglaw.net
www.estate-elder.com

October 18, 2016

 

WARNING: THIS IS NOT SIMPLE STUFF-- THIS ARTICLE IS LONG!
NOT LEGAL ADVICE!!! CONSULT YOUR OWN LAWYER!!
 (not a "Medicaid specialist" -- an actual LAWYER)

Intepretation of the law differs state to state -- I am only licensed in CT

 

            The law is clear:   gifts that you (or your spouse) make exclusively for reasons other than qualifying for Title 19 should not have negative consequences for you or your spouse if either of you needs to apply for Medicaid within five years.  Practically speaking, of course, there may be problems -- you would have to prove your motivation by clear and convincing evidence, and some states make this nearly impossible.  Read my article on this topic.  This article does not address such gifts (or other, exempt gifts, discussed in the same article).  Nor does this article address the last-minute strategies that can be used to help one spouse when the other spouse needs care, such as purchasing a more expensive home, annuitizing an IRA, purchasing a "Medicaid annuity" that will repay the State when the owner dies and the other spouse has received Medicaid, etc.  Read another article on that

 

            Instead, this article addresses your desire to "protect assets from the state" or from being consumed by future long-term care expenses of both yourself and your spouse.  I am not judging this motive positively or negatively. Connecticut cases speak negatively about this motivation, and New York cases take the opposite view.  Transferring assets to avoid paying creditors or becoming insolvent is considered a "fraudulent transfer" (which also doesn't mean bad, or evil, only that the law lets a creditor undo the transfer in order to get paid, in some situations).  On the other hand, it is well established that individuals are entitled to take advantage of / use the law to their own advantage or the advantage of others, at least when it is a question of tax planning, even if the IRS is considered a future creditor!  If you make a transfer and you don't have long-term care expenses right now, you're not avoiding creditors or becoming insolvent!  But that doesn't make it a good thing to do or a "no brainer" either.  This article is not "pro" or "con." You should know the law and the risks before you act.  There is no magic bullet. Any course of action has risks.  Whether the risks are appropriate is your judgment.   But if it sounds too good to be true -- it is.

 

            Some facts and risks you should know and appreciate:

 

  1. Any gift made within the five years prior to applying for Medicaid creates the potential for disqualification from coverage, about one month of ineligibility per roughly $12,388 gifted (CT -- 2016 figure), unless the gift is "exempt."  (The VA currently has no such rule with respect to VA benefits -- this is expected to change.)  The State and nursing homes are continually seeking ways to make the gift recipient pay for the care during this ineligibility period.  Currently Connecticut law technically gives the State the right to sue the gift recipient if the State in fact provides Medicaid to the person who made the gift, and gives the nursing home the right to sue some gift recipients if Medicaid is denied and the nursing home unpaid.  Many nursing homes can and do sue gift recipients if Medicaid is not approved and the bill is unpaid.  Also: making a gift may prevent you from receiving valuable home care benefits which are also paid through Medicaid, if you apply within five years.

  2. Any trust you or your spouse sets up (that is, your assets go into it) that names you or a spouse as a potential beneficiary of "principal" (more than income), is still treated as if it were still yours, and in Connecticut, distributing it out to other beneficiaries is counted as a brand new transfer of assets that affects eligibility for five years.  EXCEPTION:  if one of you dies and leaves assets to the other in a trust that is written into that person's Last Will and Testament, this treatment doesn't apply if the trust has the right language, such as giving the trustee "absolute" discretion.

  3. Moreover, any trust you or your spouse funds (other than in a will) in which you have any interest, even if it is only the right to income, can be "broken" or voided by the State if an application for Medicaid is filed within 5 years of putting assets into it.

  4. A gift to a third person on the express condition that it be used for you later on, is technically a trust.   Failure to admit that might be considered fraud.  On the other hand, if you just "wish" and "hope" that it "might" be used for you someday, but the recipient is not legally obligated -- in writing, orally, etc. -- that is not a trust for your benefit.  Where it gets sticky is you think there is an obligation where there isn't one. If you could sue the recipient and win, it's a trust. If the recipient says "it's mine, I'm keeping it," and would WIN if you sued, it's not a trust.  But caution: the state may still claim it's a sham, and fight about it.
     
  5. This is a reminder that any gift to a third person without legal conditions requiring that it be used for you is a gamble affected by the recipient's wishes, future divorces, creditors, possible death, disagreements, etc.

 

  1. What about a trust for your benefit that you don't set up? what if your children create the trust?  You must disclose to the State any trust of which you are named as a beneficiary, even if set up by someone else entirely, and the State will evaluate whether you have the legal right to compel the Trustee to pay for your care. If you have the legal right to require that it be used for your "general or medical support," it is counted.  (For VA benefits, any kind of trust that names you may be doomed.)  The State may examine how the money got into the trust -- it may ask for the source of that money.  If you are the source of the money, the state may say that this trust is really a trust you established-- see #2 -- and is countable.

  2. How about a trust that does NOT name you or a spouse?  Setting up a trust like this is just a fancy way of making a gift to the beneficiaries named in the trust.  True, the assets won't be counted as available and required to be spent, but you won't control the assets and you still have the five-year look back problem.  A trust is a relationship between (1) the person who signs the document or if no document, transfers the asset (the "grantor"); (2) the person who is managing the asset, the Trustee; and (3) those named to benefit from the asset, the "beneficiaries," with respect to what is held in trust. The historical term for what's in the trust is the "res" -- this is also called the "trust property." A Trustee owes a DUTY to the beneficiaries, defined by the terms of the trust document.  If the Trust document says "this trust is for the health and support of my children" then arguably the Trustee has no right to take the money out and give it to the children if they don't actually need it because they really want to give it to you. If the Trust document says "this trust is for whatever the Trustee thinks will make the beneficiaries' happy, for their general well-being," then the Trustee might have the right to pay the money to your children, who could then, if they chose, use it for your benefit. On the other hand, if the beneficiaries say "I'll really be happy if I can take a cruise," nothing stops the Trustees from taking out money for that.  And it won't work if you are the Trustee -- the state may reasonably argue that you could give the money to a beneficiary to pay for your care.  You cannot write a trust that says it is intended to benefit A and B, and instead, agree that it is really going to benefit C, you, and make that legally binding.  Some trusts will require an "independent" trustee (not A, B or C) to sign off on distributions. The idea here is that your lawyer will be the independent trustee and will only release the money if A and B agree to use it for you.  How independent is this trustee?  What will the state say, if the person is your own lawyer?  And could A or B or their children sue the Trustee for making bad decisions? And what if the trustee dies and someone else becomes trustee?  Ultimately, if this type of trust is set up, you are putting a lot of faith in the Trustees to do what is right, and you are hoping that the people you name as Trustees will remain in charge.

 

  1. AND, if you set up a trust that says "anytime the beneficiaries ask for the money, they can get it out," this will make it easy to get the money out to help you if needed -- but would also leave the trust property exposed to the creditors, divorce, etc. 

All this being said, is there anything you can do if you foresee your hard-earned assets being "wiped out" by the cost of long-term care and feel this is unfair and/or will make you unable to maintain your lifestyle just because your spouse had the misfortune to get sick?

 

            If part of your motivation is to benefit others, not yourself, the answer is "yes." You may choose to assume some of the risks noted and make gifts to children or other beneficiaries, outright or in a trust described in #7 or #8, subject to the risks described above.  This is not illegal, although it may have serious ramifications if you need care within five years.  You will be assuming the risk that doing this may cause you harm, and you are weighing that risk against your desire to benefit your children (or other beneficiaries).  Besides, it is natural to think that if you give money to your children, they will thank you by helping you later.   Gifts in trust may mitigate some of the risks, but they are more expensive and more complicated.  Sometimes necessary -- but more expensive. My fee for doing a trust of this kind will be at least $2,500.

 

            If your motivation is primarily to benefit you or your spouse, out of concern that if one spouse gets ill, the law won't let the other spouse keep enough to maintain his or her lifestyle, making gifts outright or in trust seem like a poor choice to me.  Anything that causes you both to part control of assets puts those assets at risk of not being used for your benefit.  You may have other wants and needs besides long-term care and not controlling those assets will mean they may or may not be used to meet those wants and needs.  It may all work out as you intend, but there are no guarantees.    As long as you are both living, most of the assets can be preserved for the "healthy" spouse, and he or she can then use a trust in his/her will to ensure that those assets (other than annuitized funds) can be used to provide supplemental needs to the survivor.   If you, the healthy spouse, feel it is virtually certain that this scenario will play out -- that one spouse will have expensive care needs; the law won't let the other spouse keep enough to maintain his or her lifestyle; that the money will be wiped out anyway -- you might choose to do this kind of gift planning, keeping in mind that it won't work completely if Medicaid is needed within five years.

 

            If you are prepared to assume these risks, have weighed the pros and cons, the advantages and drawbacks, the risk of "using up" assets on long term care versus the risks of losing access and control to assets for your wants or needs or to meet long-term care expenses that come up during the next five years, what are your options?

 

            1.         Outright Gift to those who may, possibly, return the favor by helping you later.  Naturally, this is best done when you really don't anticipate needing the help within five years and/or have additional reasons for making the gift.  This has the advantage of simplicity, and the disadvantage of the greatest exposure to the recipient's risks.  If the gift is a house, money in an IRA, or an appreciated security, there are additional tax drawbacks, which can be discussed.

 

            2.         Outright Gift, which you expect (but can't require) will be put into a trust for the benefit of you or your spouse.  Provided the gift is outright to children or other third parties, they could (after an appropriate interval of time) set up a trust with you/spouse or including either of you beneficiaries.  This provides you with the greatest protection against completing claims on your children, but is quite risky, because the trust must be disclosed and the State might decide it is an available resource, that it was really created with your money and thus, by you.   The gift cannot be made on the condition that such a trust be set up and should not be part of a single transaction.  Any gift recipient would do well to use his or her own, different attorney, and to wait a significant interval (at least thirty days, preferably longer) before setting up the trust; assets should go into it from the third parties, not from you.  This is mentioned purely by way of information to children who feel guilty about accepting such a gift, or worried about accessing the money later on if you need help.  The benefit of your children naming you in the trust is more protection for you; the drawback is that ultimately, this will complicate Medicaid and may fail to "protect" the assets.

 

            3.         Gift to Trust for Third Parties (see #7 and #8 above).  Instead of giving outright to children, you could give to a trust for the benefit of your children or other third parties, not naming either of you as beneficiaries.  The purpose of the trust would be to make sure that there will be some control over the property during your lifetime in the event of the death, divorce, or bankruptcy of a beneficiary.  This still leaves you exposed to the risk that the beneficiaries will be unwilling or unable to access the trust property to use it for your benefit.   You should not be the Trustee of this trust.  Example of things the trust document might include which are legally OK but which could probably create problems if the existence of the trust comes to light in future and is reviewed by the state:

 

  • You might retain the power to re-arrange the beneficiaries by adding some, dropping others, or reallocating, provided you cannot do it in return for payment or benefit.  This is called a "power of appointment" and can be important for capital gains tax reasons.
  • You might retain the power to name a new trustee if the old trustee quits or dies, or the power to remove the trustee if you can't appoint a successor.
  • You might retain the power to switch what's in the trust for other property of identical value -- sometimes important for income tax reasons.
  • You might include a third-party "trust protector" --- someone who could remove the trustee, but isn't you.  Or, you could include an "independent" trustee (who will probably charge for being trustee).
  • You could require the Trustee to send you copies of the trust's accountings during your lifetime.
  • Practically speaking the Trustee could tell the broker, etc. to send a courtesy copy of the statements to you every month.

 

            4.         Gift of Home with Retained "Life Use" or other right retained by deed.  A popular choice is a gift of the home while retaining a life use or a more limited "right of occupancy" on the deed.  The disadvantage is that the home is an asset that the healthier spouse can keep anyway if one spouse requires care, so it seems a shame to complicate matters by a gift; this is more often done by a widow or widower, or a single person.  There are some other disadvantages in the event that the house is sold during your lifetimes; you can lose the benefit of the exclusion on capital gains from sale of a personal residence, among other things.  One way to resolve this is by giving the remainder to a trust (as described above), rather than the children. Sometimes you can retain the powers discussed above in the deed itself.

            5.         Protecting Assets Only After One Spouse Dies.  When both spouses are living, the Medicaid rules do offer some asset protection possibilities so as to prevent premature impoverishment of the "healthy" spouse.  This is no longer an option when a person is a widow or widower.  A couple may hedge their bets by dividing assets and each having a will leaving the deceased person's share in a trust for the benefit of the surviving spouse.  The surviving spouse doesn't have control over the property, but the trust can say it is for the benefit (not support) of the surviving spouse.  It may be necessary to require that 1/3 is held in a trust that entitles the surviving spouse to income.

 

            6.         Personal Services Contract.  If you anticipate a lengthy period of time during which someone will be helping you or your spouse without expectation of payment -- you may be able to set up a contract to pay that person. This is a chore, has some tax consequences, and has its own risks, but over time the effect might be to remove assets that later on would in practical terms be available if the recipient chose to help you later.  You may be able to set it up so that the care is provided now, and the payment later. The State may require the helper to keep track of his or her time.

GOOD LUCK!
THERE ARE NO "RIGHT" ANSWERS

IF WE COULD FIND THAT MISPLACED CRYSTAL BALL,  LIFE WOULD BE SO MUCH EASIER.
This is not legal advice, but a general analysis. 

CONSULT A LAWYER  - NOT A "MEDICAID SPECIALIST"