Category Archives: Preserving Assets & Income for the Spouse

Proper Medicaid Planning May Permit Keeping the Home in the Family

by: Brian E. Barreira, Esq.

(Note to reader: This article was published in the April 2001 issue of Estate Planning.  The Medicaid lookback period and disqualification laws changed to 60 months on 2/8/06, after this article was published; otherwise, the rest of the article remains valid.)

Many aging clients are concerned that, after a lifetime of hard work to acquire and maintain the family home, the house could be lost if they are among the unfortunate but growing number of persons who spend the final months of their lives in nursing homes. The urgency of transferring the home well in advance of institutionalization became an issue with the implementation of the Medicare Catastrophic Coverage Act of 1988 (MCCA) and has grown with each change in the law.

In general, any transfer to a person within 36 months of applying for Medicaid and any transfer to or from a trust within 60 months could disqualify a Medicaid applicant. Further, OBRA ‘93 authorized states to disqualify persons for transfers not only for the portion of Medicaid that pays for nursing home care, but also for home health care, personal care services, or community supported living arrangements.(1) Safe harbors, however, have been created for four categories of transfers, and other categories may exist under state regulations or practice. Due to the disqualification period, these alternatives should be considered before more creative planning techniques are explored.

Estate planning and elder law attorneys can sometimes be confronted with clients whose sole wish is to preserve the home for others, to the exclusion of self-protection concerns. Moreover, elderly persons sometimes consult lawyers who do not specialize in estate planning and elder law, but who nevertheless comply with the client’s wishes to place the home in someone else’s name with little or no advice about the Medicaid or tax ramifications. Proper professional counseling involves much more than simply deeding away the client’s home when the client requests it, as clients are often unaware of all the tax issues involved or their own future options or needs, such as home care or assisted living.

In advising clients regarding transfers designed to permit clients to become eligible for Medicaid, attorneys face section 4734 of the Balanced Budget Act of 1997 as a possible problem. That law makes giving advice about Medicaid planning a crime if the disposition results in a period of Medicaid ineligibility.

In 1997, in response to a lawsuit filed by the New York State Bar Association, the U.S. Attorney General indicated that the Department of Justice would not defend the constitutionality of the law or enforce it.(2) The final judgment entered in that case declaring the law unconstitutional applies only to a limited number of attorneys. Thus, the possibility of the enforcement of this law remains, although the likelihood appears remote. That such a law was enacted in a bill that also provided tax deductions for long-term care (LTC) insurance should be sufficient notice that Congress discourages transfers of assets and encourages the purchase of LTC insurance.

Long-term care insurance

A growing number of estate planning and elder law attorneys believe that the issue of long-term care is first and foremost an LTC insurance issue, and that the insurance should be explored before legal maneuvers are contemplated.

Persons with Alzheimer’s disease who can no longer remain at home run the risk of an extended nursing home stay, reportedly averaging eight to nine years. With such a potential long-term care cost, how can thoughtful tax planning ever be done without factoring LTC insurance into the process? It is difficult for a client to make large gifts if the remaining assets will possibly be insufficient to meet the client’s foreseeable needs. Unfortunately, many persons rationalize not purchasing LTC insurance because of the possibility that the insurance may never be needed.

In the states of Connecticut, New York, Indiana and California—under a national program called the Partnership for Long-Term Care which was initiated by the Robert Wood Johnson Foundation—various amounts of assets are exempt for Medicaid purposes for persons who have LTC insurance policies that meet state certification standards.(3) Accordingly, persons in those states should have ample reason to look at insurance as a way of preserving their homes. Further, in Massachusetts, particular LTC insurance policies exempt the home from the imposition of a lien when an application for Medicaid is made; the same policies also exempt the home in Massachusetts from an estate recovery claim after the applicant’s death if the Medicaid application is handled properly.

For persons who do not have sufficient LTC insurance, Medicaid transfer restrictions can adversely affect the home of an elder who does not wish to give up any current control. The risk of making a transfer that allows a return of the asset to the original transferor is that the law will change retroactively and eliminate the efficacy of the transfer. This result has occurred twice in the trust area.

Transfers to revocable trusts

In recent years, many persons have been sold (literally, in the case of many trust mills) on the notion of placing their homes in revocable trusts to avoid probate. Although a home is normally considered an exempt asset for Medicaid purposes, the transfer of a home to a revocable trust can be worse than taking no action at all, because any asset in a revocable trust (including a home) is treated as a countable asset that must be sold and its proceeds spent. In addition, a transfer to others from a revocable trust would be subject to a five-year lookback period, but a transfer from the client directly would be subject to only a three-year lookback period. For these reasons, elder law practitioners often find themselves in the position of revoking trusts that were sold without full explanation of how the trust would be treated for Medicaid purposes.

The transfer of a home to a revocable trust would be advisable if a person has already been receiving Medicaid benefits for which a state claim for recovery of amounts paid would be made after the person’s death against the probate estate. Avoiding probate in this situation may avoid the estate recovery claim in some states, because if there is no probate estate, there is no estate recovery.

Upon applying for Medicaid, the fact that the home can be returned from a revocable trust to the client is fatal. To be protected, the home must not be returnable to the client. While many of the transfers that accomplish such protection are subject to a period of Medicaid disqualification, some transfers to spouses, children, and siblings can be made even after a nursing home stay has begun.

Permissible transfers to the spouse

The first and most commonly-used safe harbor is a transfer of the home to the person’s spouse. A jointly-owned home would be considered an exempt asset if one spouse applies for Medicaid. It is usually advisable, though, not to leave the home in joint names when one spouse enters a nursing home, for if the community spouse (i.e., the non-institutionalized spouse) were to predecease the institutionalized spouse, the home would end up in the institutionalized spouse’s probate estate and would be subject to an estate recovery claim.

The transferor-spouse could reserve a life estate in the deed, but such a reservation could unduly complicate any sale of the home which the non-institutionalized spouse might wish to make during the transferor’s incompetence. Not only would the signature of the transferor (or someone acting in a fiduciary capacity for the transferor) be required, but the transferor could be legally entitled to a portion of the sale proceeds based on the actuarial value of the life estate. It would seem, then, that a full transfer should often be made to the person’s spouse if a nursing home stay has begun or appears imminent.

A gift to a spouse is free of gift tax with one notable exception: if the transferee is not a U.S. citizen, a gift in excess of $117,000 (as of 2005) results in a federal gift tax. Under IRC Section 1041, the transferee receives the transferor’s basis, and no gain or loss is recognized on the transfer, except if the spouse of the individual making the transfer is a nonresident alien.

From a family standpoint, this transfer may end up being fruitless if the institutionalized spouse will receive the home under the community spouse’s will. The community spouse receiving the home should therefore execute a will that gives the transferor a life estate or the equivalent. To protect any income generated by the home during a stay by the transferor in a nursing home, the life estate could be limited to the right of occupancy.

Until recently, it was uncertain whether the community spouse could take any further steps to preserve the home, including making further transfers or limiting the institutionalized spouse’s inheritance rights. Under the recently disclosed national position of the Health Care Financing Administration (HCFA) in letters from regional offices to Medicaid administrators in Idaho and Massachusetts, the spouse remaining in the couple’s home is permitted to take any action with respect to the home and other assets beginning in the month following the institutionalized spouse’s eligibility for Medicaid.

For some married couples, sometimes both tax planning and Medicaid planning should be attempted, and it is desired to use the applicable credit amount of the institutionalized spouse. It sometimes can be advisable to make a transfer of the home to the institutionalized spouse prior to making a gift of the home to others. The possibility of interspousal transfers maintains the possibility of such tax planning.

The major step married couples should take in advance to keep transfer possibilities available is to execute durable powers of attorney with specific gift-giving powers, including the power to self-deal. Without such documents in place, a state court proceeding could be necessary to authorize gifts by an incompetent spouse.

Married couples where one spouse has a terminal illness should consider the use of a testamentary trust, which is exempted from the onerous Medicaid trust laws in many states. If the home is owned by the first spouse to die, and is left in a discretionary testamentary trust for the benefit of the surviving spouse, the home may then be preserved if the surviving spouse ever requires nursing home care.

Because Medicaid is a federal-state program, differences in state laws can cause different outcomes in almost any transfer suggested in this article. In the context of a discretionary testamentary trust for a surviving spouse, for example, two state law factors could minimize or eliminate its value. First, in a community property state, the surviving spouse may be deemed to own one-half of all of the married couple’s assets. Second, a state that has chosen to administer its Medicaid program under the so-called 209(b) option can use the more restrictive Medicaid eligibility requirements in effect prior to the implementation of the Supplemental Security Income (SSI) program.

In the case of a discretionary testamentary trust, IRC Section 1014(e) can become an important consideration. Although Section 1014(e) denies a step-up in basis for assets that are given to a person who then dies within one year of the gift, this prohibition is specific to situations where the assets must be returned to the gift-giver. The discretionary nature of the trust should allow a complete step-up in basis as of the deceased spouse’s date of death for capital gains tax purposes.

Often overlooked in the estate tax planning and probate avoidance processes is how a revocable trust established by a now-deceased spouse is viewed if the surviving spouse applies for Medicaid. A funded trust that avoided probate is considered completely available for the surviving spouse’s care. Consequently, funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if a testamentary trust had been established in the deceased spouse’s will and probate avoidance had not been accomplished.

Permissible transfers involving other family members

Permissible transfers to or for a blind, disabled, or minor child. The second safe harbor is a transfer of the home to a transferor’s child who is blind, disabled, or under age 21. If the child is a minor, however, probate problems could result if the child predeceases the transferor or if the family wishes to sell the home. If the child is blind or disabled and is receiving governmental or charitable benefits, the benefit program should be reviewed prior to any transfer of the home, to determine whether the child’s eligibility for the benefits could be adversely affected by receipt of the home. In particular, recent changes in the SSI law impose transfer disqualifications and thereby limit the ability of a recipient to receive the home as a gift and take further action to preserve this asset.

A transfer of the home can be made to a special needs trust for the sole benefit of the disabled child instead of directly to the child, so long as the trust provides for post-death reimbursement to the state for any Medicaid benefits furnished to the child. Given the vagaries of state administrative interpretations of federal Medicaid law regarding special needs trusts, it is essential that the state regulations, practices, and procedures be carefully reviewed.

Permissible transfers to a sibling. The third safe harbor is a transfer of the home to a sibling who has an equity interest in the home and who resided there for at least one year prior to the transferor’s institutionalization. This safe harbor may apply even if the sibling’s ownership interest emanated from the transferor after the institutionalization had occurred. It seems possible that even a negligible or contingent ownership interest, such as a vested remainder subject to divestment, could be treated as an equity interest.

Because of this safe harbor, siblings should consider co-owning and living in a multi-family house, which could qualify as each sibling’s home. Any sibling could then maintain ownership right up to the time a transfer becomes necessary or desirable, as long as the transfer is then made to the non-institutionalized sibling.

Permissible transfers to a caregiving child. The fourth safe harbor is a transfer of the home to a transferor’s child who resided in the home for at least two years prior to the institutionalization and provided care which allowed the parent to remain at home. The child must have lived in the home during this period, and the care must have been of the type that kept the client at home. Because the state is the arbiter of whether the child’s care prevented institutionalization, this transfer option cannot be relied upon fully without a thorough review of the facts of the case. The child would be well-advised to keep detailed records after moving in with the parent, and a prompt change of the child’s voter and automobile registration can later be helpful in proving residency.

Any state Medicaid regulations that may have been promulgated and the state agency’s practice should be carefully analyzed to determine what information the child will be required to prove. In Massachusetts, for example, the residency requirement is two years, but the care requirement can sometimes be less.

Children who move in with their parents frequently have a minimal amount of time, energy and intellectual capital for anything other than caregiving, but they should consult with an elder law attorney soon after they move in to learn what planning options exist in their circumstances, especially if the child is giving up significant employment income. In some situations, a written personal services or life care contract between the parent and the child may be appropriate, despite the income tax issues involved in the receipt of the home for future services.

Other transfers that may be safe
Despite the broad parameters of federal law, state Medicaid agencies are free to interpret the federal law. They are also free to misinterpret the law with impunity if HCFA, which supposedly oversees the implementation of Medicaid law by the states, chooses to look the other way.

Unfortunately, the U.S. Supreme Court recently eliminated the possible alternative of private plaintiffs filing qui tam actions against states in Vermont Agency of Natural Resources v. U.S. ex rel. Stevens.(4) Therefore, the vagaries of state law, state regulations, and state practices and “policy” should always be a major consideration, and may present a fifth safe harbor. One such example is California, where a self-declared intention to return home somehow renders the home exempt from a disqualification period upon a subsequent transfer.

The state can also allow a transferor to become eligible for the Medicaid program if not doing so would “work an undue hardship.” When counseling a client who has been denied Medicaid benefits because of a disqualifying transfer, state regulations should be consulted.

Another safe type of transfer of the home is one in which fair market value is received in return for the home. Depending on state regulations, it may be possible to make a transfer of the home in exchange for a promissory note, private annuity, or self-canceling installment note.(5)

One other provision in the Medicaid law concerning transfers presents an attorney with ethical and practice problems. The provision states that a person shall not be ineligible for Medicaid to the extent that “a satisfactory showing is made to the State (in accordance with any regulations promulgated by the Secretary [of Health and Human Services]) that “the resources were transferred exclusively for a purpose other than to qualify for medical assistance.”

One possible reading of the law would allow any transfer of the home, as a person would “qualify” for Medicaid even if such person owned a home, and the transfer thus would not be necessary to qualify for Medicaid eligibility. Under this reading of the law, if the Medicaid issue was not brought up or thought about by the client or the attorney, this exception in the law could be used. This reading, however, appears to contradict other provisions of the law, which permit only certain transfers, and hence may never get off the ground, as the attorney would probably then be required to testify under oath about what would appear to have been irresponsible counseling or malpractice.

Transfers that cause disqualification periods

Any other type of transfer can temporarily disqualify a Medicaid applicant based on the amount transferred. This disqualification period will be short if the uncompensated value of the home (and other transferred assets) would have covered a short period of nursing home care. States are required to implement the disqualification period by calculating the average monthly cost of private nursing-facility services at the time of application, but HCFA has done little or no monitoring of state activity on this front, and states routinely ignore the literal requirements of federal law.

The disqualification period can extend indefinitely in some circumstances. One trap for the unwary is that filing a Medicaid application too early can result in a long disqualification period, whereas an application that is filed at the correct time can result in the transfer being disregarded. A transfer that falls outside the Medicaid lookback period, which is five years for many trusts and is three years for non-trust transfers, is safe.

The disqualification period begins to run on the date the assets are transferred beyond the reach of the transferor. The sooner any transfer is made, the greater its preservation value. The major risk inherent in the transfer is that the home may have to be sold by the transferees and the proceeds used for the moral obligation of paying for the costs of any care required during the disqualification period. If the transferor is not in failing health, however, it may be possible to avoid this risk by purchasing an LTC insurance policy which covers the disqualification period.

There is no reason that preserving the home need be an all-or-nothing proposition, even in late long-term care planning. Just as a partial amount of funds can sometimes be preserved, so too can a partial interest in a home. For example, a transfer of a home into the joint names of the current owner and another person may be deemed to be a transfer of only one-half of the value of the home. It may also be possible to apply valuation discounts in such a case on subsequent transfers.

A lawyer drafting documents that effectuate a transfer of the client’s home should always remember that it is the client who is supposed to be represented, not the transferred asset. If a transfer causes a Medicaid disqualification period, the drafter should always analyze how to undo the ineligibility or how to finance the private payment of nursing home costs during such time. If a partial cure of ineligibility may not be possible in a particular situation, then the initial plan should include transfers of partial interests or LTC insurance.

Transfers with reserved or retained life estates

If Medicaid concerns are present, one of the most common types of transfers is a deed of the home subject to a reserved life estate. In such a case, IRC Section 2036 will unquestionably apply. For many families, this tax result would be beneficial because the home would be includable in the transferor’s gross estate upon death and would receive an accompanying step-up in basis for capital gains tax purposes under IRC Section 1014. Consequently, any appreciation in the value of the home from the date of its purchase to the date of the transferor’s death would escape capital gains taxation in the hands of the transferees.

If a married couple were to transfer their home and retain a joint life estate, under IRC Section 2036 each spouse should be treated as a 50% owner of the transferred property. Accordingly, a joint transfer may result in minimizing estate or inheritance taxes while allowing the transferees to receive the desired step-up in basis.

Because a life estate could be valued actuarially and treated as an asset of a transferor for purposes of Medicaid eligibility, another option that merits consideration is an unrecorded use and occupancy agreement. Such an agreement may not fully protect the transferor’s right to live in the home, but it should achieve the same estate tax and capital gains tax results as a reserved life estate.

If the transferor makes an outright gift of the home and continues to live there without paying rent, the IRS can treat it—under IRC Section 2036—as includable in the transferor’s gross estate as a life estate retained via agreement.(6) The transferees should always consider taking this position upon a post-death sale. Unfortunately, a departure by the transferor from the home could be deemed a release of that life estate, and under Section 2035 the step-up in basis would be available only if the transferor died within three years of this deemed release.

The transfer of a home subject to a life estate is a disqualifying transfer of the remainder interest for Medicaid purposes. Despite the requirement of a federal gift tax return under Chapter 14 of the Internal Revenue Code reporting the full fair market value of the home as a taxable gift, a discounted gift is deemed made for Medicaid purposes based on actuarial values.(7) For this reason, as well as for the capital gains tax ramifications, a transfer of the home subject to a reserved life estate is often a much better move than is an outright deed.

The additional advantage of a reserved life estate is that the transferor would be assured of having a home despite anything the transferees might do or in spite of any other occurrence, such as the death, divorce, or bankruptcy of one or more of the transferees. In case the transferor requires a long-term stay in a nursing home, the transferor may wish to limit the life estate to the right of occupancy, so that during that time rental income from the home could be collected by and for the benefit of the transferees. If the life estate is not limited in this way, any rental income would be deemed to be the transferor’s property; it would then have to be spent for the transferor’s care under the spend-down provisions of the Medicaid program, and would therefore effectively be lost.

State law should be reviewed to determine if a life estate can be the subject of partition proceedings, as well as if sale proceeds must be divided based on the actuarial life estate and remainder values. Under Massachusetts law, for example, a petitioner could intervene on behalf of the life tenant and petition the court for a sale so that the income from the invested proceeds could be used for the support of the life tenant.(8) Presumably, any deed creating a life estate could specify such a result upon a sale during the life tenant’s lifetime.

The reserved life estate method vests the remainder interest in the transferees, and the transferor will have no further control over who will eventually inherit the home. Three problems exist with this loss of control. First, if one of the transferees were to predecease the transferor, the remainder share of that transferee in the home would end up passing under the transferee’s will or by intestacy. If, under the will or applicable intestacy laws, the transferee’s share of the home then returns to the transferor, the transferor would then be required to take further action, which would begin the running of another possible period of disqualification from the Medicaid program. This problem can sometimes occur if a transfer is made to children as tenants-in-common, and one of them who has no spouse, no issue and no will predeceases the transferor.

Second, the transferees may simply give away their share, by deed or will, to someone to whom the transferor may not have wished to make any gift. Third, a transferee’s ability to ultimately receive the benefit of the remainder interest may be adversely affected by such person’s bankruptcy, disability, or divorce during the transferor’s lifetime.

Transfers with special powers of appointment

To eliminate such problems inherent in any deed of a remainder interest with a reserved life estate, the transferor may wish to include in the deed the retention of what is known as a “special power of appointment” (SPA). By use of the SPA, each transferee would have a vested remainder subject to divestment. Under the SPA, the transferor would be able to redistribute the remainder interest among a group of identified beneficiaries. Under IRC Section 2038, such an ability to redetermine the transferees would receive the same estate and capital gains tax treatment as under IRC Section 2036, although it does not eliminate the need to file a gift tax return.

The SPA would allow the transferor the opportunity to redetermine who ultimately inherits the home. This flexibility would help eliminate the possibility that once an inheritance had been secured, one or more of the transferees would discontinue helping or visiting the transferor. More importantly, the SPA allows the transferor future flexibility to deal with the possible death, divorce, or bankruptcy of one or more of the transferees.

A meticulous conveyancing lawyer may require proof that the SPA was not exercised by will. In such a case, the transferor’s will may have to be probated, perhaps solely for this reason. This complication can be eliminated by language in the deed which causes a conclusive presumption of non-exercise of the power of appointment by will or codicil if notice of the establishment of probate proceedings is not recorded in the chain of title within a certain time frame after the transferor’s death.

At the time of executing any such deed, the transferor may also wish to execute a durable power of attorney under which one or more of the transferees could later release the transferor’s life estate or SPA. This power of attorney would allow a transferee whom the transferor does not wish to favor financially, but upon whose judgment the transferor relies, to step into the transferor’s shoes and take corrective action if necessary or desirable because of future changes in family circumstances or in federal or state law.

Other transfers

Transfers to irrevocable grantor trusts. All the transfers described so far do not allow the transferor to make full and unquestionable use of the transferor’s $250,000 capital gains exclusion under IRC Section 121. One commentator (9) has proposed that the retention of an SPA in a deed results in the power holder being treated as the owner of the premises for IRC Section 121 purposes, but there is an absence of case law directly on point.

With the limited amount of tax savings at stake, clients would likely be unwilling to finance litigation on this issue, or even seek a private letter ruling. Accordingly, if there is a possibility that the transferor may wish to move in the future, the lawyer should consider placing the home in an irrevocable grantor trust to increase the possibility of using the IRC Section 121 exclusion.(10)

If IRC Section 121 is a concern, the better planning choice would be an irrevocable trust that intentionally triggers the grantor trust provisions of the Internal Revenue Code. Because capital gains may be allocable to principal under state law, care should be taken to ensure that the trust is not deemed a grantor trust as to income only. A power over principal should be considered, such as a power to make distributions of principal to charity and/or issue. Administrative powers—such as borrowing without adequate security or the power to replace the home with assets of equivalent value—could also be considered, but could be misinterpreted by the state Medicaid agency, whose personnel often do not have the same level of trust training and sophistication as do IRS auditors.

One other way to preserve the home while doing estate and gift tax planning would be to transfer the home to a qualified personal residence trust (QPRT). Practitioners should not, however, recommend a QPRT with a very long term without taking into account the possibility that the client may leave the home to live with a relative or to reside in a nursing home. In such situations, the annuity provisions of the QPRT which would take effect would, in many cases, necessitate a sale of the home and cause the expenditure of much of the proceeds.

Additional transfer issues

The legal authority of someone other than the homeowner to make a transfer of the home is always an important issue to be addressed. In the absence of a durable power of attorney which contains explicit gift-giving provisions, a state court procedure may be available to obtain authority for a particular type of transfer.

Prior to any transfer, the governmental benefits other than Medicaid or homestead exemptions that the client may already be receiving or hoping to receive should be reviewed. Moreover, the lawyer should ascertain whether the transferor has retained a full insurable interest in the home. If not, the homeowner’s insurance policy and any other similar policy should be amended to ensure that the proper person or entity is named in the policy.

Upon any completed gift, a federal gift tax return must be filed on or before April 15th of the calendar year following the gift. Even when it seems clear that no completed gift has been made—such as when the transferor retains an SPA in a trust or deed—the taxpayer is usually required to file a gift tax return, and civil and criminal penalties could be imposed by the IRS if such a return is not filed.


What Is the Excess Shelter Allowance When Filing a MassHealth Application?

by: Brian E. Barreira, Esq.

When applying for MassHealth, the at-home spouse, known as the community spouse, is allowed to keep all of the community spouse’s own income, no matter how much that is.  If the community spouse’s own income is below $1,838, the community spouse is allowed to divert income from the institutionalized spouse to get up to the $1,838 requirement of the current law.  (Note:  the $1,838 minimum monthly maintenance needs allowance —MMMNA— will increase to $1,891 on July 1, 2012, and remain at that higher figure through June 30, 2013.)

The $1,838 in income currently allowed for the community spouse can be increased if the community spouse’s housing expenses are high.  That increase is known as the Excess Shelter Allowance.   If the community spouse’s housing expenses are more than 30% of the MMMNA, (i.e., 30% of $1838, which comes to $551), then the additional income needed is referred to as the Excess Shelter Allowance, and ends up being an additional income allowance for the community spouse.  For some spouses, the increased income allowance can mean an increase in the community spouse resource allowance, which is the total amount of assets that the at-home spouse is allowed to keep.

In Medicaid Planning, Some Trusts Can Put Elderly Persons in a Worse Position Than If They Had Taken No Action At All

by: Brian E. Barreira, Esq.

In trust law, there is no such thing as “one-size-fits-all.”  Trusts must be designed to meet the particular concerns of the person whose assets will be placed there.  Two of the major non-tax concerns of many elderly persons in Massachusetts are probate avoidance and Medicaid (known in Massachusetts as MassHealth).  It is important to note that probate avoidance is not the same as MassHealth planning, and if assets can be given back to or taken back by the original owner, the assets of a trust are not protected for MassHealth purposes if a nursing home stay becomes necessary.

Revocable Trusts

Although the assets of just about any revocable trust will avoid probate, the assets of these trusts are never preserved for Medicaid purposes if a nursing home stay eventually becomes necessary and a MassHealth (i.e., Medicaid) application is filed.  All of the assets of a revocable trust are deemed countable, which in MassHealth jargon means the assets must be spent for the care of the nursing home resident.

The home of a MassHealth applicant is usually considered noncountable, but if it is in a revocable trust, in Massachusetts it is treated the same as any other asset.  The home of a MassHealth applicant that is in a revocable trust must be sold and the proceeds spent on the care of the nursing home resident.  Any exemptions that the home might have received, such as for the MassHealth applicant’s spouse and certain children or siblings, is lost by having the home in a revocable trust.

Many elderly persons go to free living trust seminars, and are “sold” the benefits of probate avoidance. In my opinion, what goes on at those seminars (and the free hour with the lawyer afterwards) is nothing more than a sale.  The sale is often a reddish binder that contains documents that include a revocable trust. In my recent experience, both spouses are co-Trustees of each other’s revocable trusts. The problem is that if one of them becomes mentally incapacitated, we’re stuck with 2 trusts that each have an incompetent co-Trustee, and have to go through extensive steps to get the incompetent Trustee removed from the position.  In my experience, the married couple was not informed during the “sale” process about what would happen if one of the spouses eventually needed nursing home care.

The bottom line is that revocable “living” trusts are easy sales to be made to elderly persons by inept, one-size-fits-all planners or online document banks, but often do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.

Irrevocable Trusts

Although the assets of just about any irrevocable trust will avoid probate, the assets of these trusts are often not preserved for MassHealth purposes in Massachusetts if a nursing home stay eventually becomes necessary and a MassHealth application is filed.

Since April 1, 1990, MassHealth regulations have provided that if a Trustee of an irrevocable trust can give assets back to the original owner, and if a MassHealth application is filed by or on behalf of the original owner, the assets of the trust are deemed available to the nursing home resident, and render the elderly person ineligible for MassHealth. This law applies retroactively to irrevocable trusts created before the Massachusetts regulation was adopted. The impact of this law on irrevocable trusts means that many older irrevocable trusts do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.

Fixing Bad Trusts

In attempting to fix any MassHealth problem caused by a trust, a transfer of the assets causes a 5-year MassHealth lookback period unless the transfer of the assets goes back to the original owner.  It can be fairly simple to fix the problem if a revocable trust is the cause of MassHealth ineligibility, since the original owner can revoke the trust and get the assets placed back into his/her name, but if the original owner is mentally incapacitated at that time, revoking the trust might not be so easy.

It is often difficult to fix the problem if an irrevocable trust is the cause of MassHealth ineligibility. The MassHealth problem caused by any irrevocable trust is completely dependent on the provisions of the trust, and the method of fixing the problem varies from trust to trust. Usually the elderly person is not the sole Trustee, and neither the Trustee nor the elderly person has the power to get the assets placed back into the elderly person’s name. In many cases, a Massachusetts Probate Court proceeding known as a trust reformation is needed, and in other cases, a Probate Court petition to terminate the trust due to frustration of purpose is the better procedural move.

Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?

by: Brian E. Barreira, Esq.

It may come as a surprise to some people, but you can be held personally responsible for your spouse’s bills if they are for payment of necessaries.  In the case of East Longmeadow Management Systems v. Wilson, the nursing home resident’s wife, Judith Wilson, was successfully sued for $45,243.24 in unpaid nursing home bills of her husband, Robert Wilson.  This case serves as a stern warning to older married persons that they need to obtain legal advice from an elder law attorney when their spouse enters a nursing home.  If she had done so, all of her husband’s nursing home bills could have been covered.

Even though Robert had no assets and even though Judith had not signed any contract or agreement accepting financial responsibility for his nursing home bills, she was successfully sued because she did not file for and obtain MassHealth (i.e. Medicaid) benefits for him on a timely basis.  On a motion for summary judgment, the Court found that under Massachusetts General Laws, Chapter 209, Section 1, she was liable as his wife for the full cost of necessaries furnished to Robert during his life.

This case highlights why anybody concerned about the costs of nursing home care should be sure to obtain legal advice about MassHealth.  If Judith had obtained legal advice from a Certified Elder Law Attorney promptly after Robert entered a nursing home, she would have learned how to apply for MassHealth for him on a timely basis.  MassHealth coverage could have been applied for as long as three months after his health insurance had stopped paying for his care.

For some basic information about the at-home spouse’s ability to retain assets under MassHealth (i.e., Medicaid) law, see

Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home

by: Brian E. Barreira, Esq.

When one spouse enters a nursing home and may be applying for MassHealth, the spouse who remains at home or in assisted living often has some important choices to make with an unbiased legal advisor.

One of the biggest mistakes that many spouses make when the other spouse enters a nursing home is not getting legal advice from an elder law attorney about Medicaid, known in Massachusetts as “MassHealth.” The “free” information that many community spouses (which under MassHealth law  means any spouse who is not in a nursing home) often rely on can turn out to be quite costly to them.

There are different layers in MassHealth law, and many persons only seem to know about the bottom layer, so let’s go over that one first. Under 2010 law, just about everything other than the home and car are totaled, and the community spouse supposedly can keep only the first $109,560 under 2011 law.

Unfortunately, this lower layer is where the knowledge of many persons ends, and two other upper layers of the law effectively override the lower layer. One upper layer is that the community spouse can enter into certain types of annuity agreements with the spenddown (that is, excess) assets.

Before even thinking about using the annuity layer, however, the community spouse should keep three things in mind: (A) not every annuity will work; (B) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased until the institutionalized spouse’s nursing home stay has already occurred; and most importantly (C) many community spouses can keep everything without needing an annuity, and are better off without an annuity, due to the other upper layer of MassHealth law that protects income for the community spouse.

At present, the community spouse has the absolute right to an income of at least 1,821.25 per month. (Further, if shelter expenses exceed 30% of this figure, or $514.00, or if a disabled child lives at home, the community spouse is often entitled to keep much more than $1,821.25 per month.) If the Social Security and pension payable in the name of the community spouse is less than the $1821.25 figure, as is often the situation when the husband enters the nursing home, at the end of the MassHealth application process the community spouse is allowed to keep some or all of the institutionalized spouse’s income.

If the needs of the community spouse are greater than $2,739 per month, a higher amount of income can sometimes be preserved for the community spouse via the fair hearing appeal process, where the need to keep the other assets has to be proved to maintain the financial ability to remain in the community.  A common situation where need can be fairly easily proved is where the community spouse is living in an assisted living facility and needs to be there due to frailty, medical condition of other special needs.   Once the need to be in assisted living is established, the appeal is primarily about numbers and prevailing interest rates, so the community spouse need not go to the hearing, and the elder law attorney can often handle it alone.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

When spenddown and appeal options are determined by an elder law attorney as potentially unsuccessful, the community spouse can often purchase certain types of immediate annuities, which are almost always the last resort due to the manner in which the institutionalized spouse’s income is treated for MassHealth purposes.

Maintaining the maximum retroactivity of the original MassHealth application is vital to preserve assets for the community spouse and to ensure that the nursing home will be paid by MassHealth, so the MassHealth fair hearing appeal process should never be overlooked if any type of notice of denial is ever received along the way.

Why don’t more persons know about the appeal and annuity options? Perhaps because the high-level state bureaucrats who run MassHealth do not want everyone taking advantage of these options, and have seen to it that their legal department keeps the official information about spousal rights and annuities as vague or hidden as is legally possible.  Perhaps because many nursing homes offer “free help” with the MassHealth application, yet do not give the family complete information about possible appeals and annuities, so that the community spouse feels relieved at receiving help yet unaware that some important alternatives are not being explored.

Last-Minute Medicaid Planning in Massachusetts

by: Brian E. Barreira, Esq.

Even After a Nursing Home Stay Has Begun, Some Asset Protection Planning Can Still Be Done

Lookback and Disqualification Periods

Many persons, including some who are rendering advice about Medicaid law, seem to misunderstand the Medicaid lookback period. The lookback period is not the same as the disqualification period. When a Medicaid application is filed, the state Medicaid agency looks back five (5) years for gifts made and trusts established on or after February 8, 2006. Based on whatever the state Medicaid agency finds in the lookback period, a disqualification period can be imposed.

A thorough understanding of the interaction between the lookback and disqualification periods is needed before deciding whether a gift can be made, or whether the filing of a Medicaid application should be delayed.

Last-Minute MassHealth (i.e., Medicaid) Planning for Married Couples

The community spouse (A) can keep all assets automatically in some cases; (B) can spenddown excess assets in some cases; and (C) can keep all assets in many other cases through a fair hearing process. All protected assets must be transferred into the community spouse’s name, and the 5-year lookback period does not apply to this allowable transfer of assets.

When all else is determined by an elder law attorney as potentially unsuccessful, the community spouse can purchase an immediate annuity, which is similar to buying a short-term pension.  There is no current regulation requiring that the annuity extend for the community spouse’s life expectancy or that the institutionalized spouse be the post-death beneficiary.

To allow extra items to be bought for the institutionalized spouse without causing the loss of MassHealth benefits that an outright inheritance would cause, after the gifts are made to the community spouse, the community spouse should often execute a will containing a testamentary trust for the institutionalized spouse’s benefit.

Last-Minute MassHealth (i.e., Medicaid) Planning for an Unmarried Person

Long-term care insurance protects the home from a MassHealth estate recovery claim for long-term care (but not community care) benefits if questions on the application are answered correctly.

Partial gifts of real estate and other assets can still be advisable, even after a nursing home stay has begun, if sufficient assets are retained to pay for the disqualification period caused by the gifts, or the remainder of the lookback period.

For a person whose realistic life expectancy is far less than average, an immediate annuity may, even under the 2006 law, be a way to minimize nursing home payments and preserve funds for the eventual post-death beneficiary of the annuity.

Five Issues in Massachusetts Medicaid Planning

by: Brian E. Barreira, Esq.

Most Living Trusts Sold at Seminars Don’t Work for MassHealth Purposes

Often overlooked in the estate tax planning process is that a funded trust that avoids probate is often considered available by MassHealth (i.e., Medicaid) to pay for the surviving spouse’s nursing home care. Thus, funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if probate avoidance had not been accomplished.

Testamentary Trusts
There is one type of trust that spouses can establish for each other that meets the criteria established under both federal law and Massachusetts regulations for being considered unavailable to a MassHealth applicant: a discretionary testamentary trust. Under a federal Medicaid law that has been in effect since 1985, an unfunded trust that was funded by the deceased spouse’s will is not considered available for payment of the nursing home care of the surviving spouse to the extent that distributions are discretionary.

Irrevocable Trusts Also Allow Capital Gains Tax Planning

Irrevocable trusts are subject to a 5-year lookback period, and can sometimes place an elderly person in a worse position when applying for MassHealth than other types of gifts. Since an irrevocable trust is effective only if its principal cannot be distributed to the person who established it, attempting to preserve the use of the principal to pay for home care or assisted living is not possible. An irrevocable trust can be drafted, however, to allow principal distributions from the trust to others who can opt to pay for the home care or assisted living. If the irrevocable trust triggers the grantor trust rules as to the trust principal, such as by the reservation of a special power of appointment, the grantor can maintain use of the $250,000.00 capital gains exclusion upon a sale by the trust.

Long-Term Care Insurance Policies Can Preserve the Home

If a person ever received any type of MassHealth benefits, a post-death estate recovery claim for reimbursement can be made against the person’s probate estate. Under current MassHealth regulations, a 2-year, $125.00 per day long-term care insurance policy can exempt the home from post-death estate recovery for MassHealth long-term care (but not community care) benefits. This regulation replaced the prior requirement of $50.00 per day, which was grandfathered for individual long-term care insurance policies issued before March 15, 1999.

Immediate Annuities As a Last-Minute Option for the At-Home Spouse

The purchase of an immediate annuity can place a community spouse in a worse financial position than going through the MassHealth appeal process. In cases where the MassHealth appeal process would not preserve all assets, an immediate annuity can help, but the MassHealth appeal process is financially preferable because it can preserve not only all assets but also some or all of the institutionalized spouse’s income for the benefit of the community spouse. The payout period of the annuity cannot exceed MassHealth’s determination of the life expectancy of the community spouse. Under the immediate annuity route, however, MassHealth eligibility is not effective until the date the annuity is irrevocably purchased, so it is important that a qualified elder law attorney make a determination of which is the better route as early in the planning process as possible.

Fitting Medicaid Issues and Long-Term Care Insurance into Estate and Gift Tax Planning

by: Brian E. Barreira, Esq.

Proper estate planning should not ignore long-term care issues, such as the following:

(1)  Any gifts or other transfers for less than full value, including $13,000.00 gifts and other annual exclusion gifts, are considered to be disqualifying transfers for Medicaid purposes.

(2)  The average current cost of a semi-private room in a Massachusetts nursing home is now roughly $300-320 per day, which amounts to $9,000-9,600.00 per month or $108,000-115,000 per year. Persons with Alzheimer’s disease who can no longer remain at home run the risk of an extended nursing home stay, reputedly averaging 8-9 years. With a potential long-term care cost of roughly $864,000-1,035,000, how can intelligent estate and gift tax planning be done without factoring long-term care insurance into the process? It is difficult for an estate planner to recommend making large gifts if the remaining assets will possibly be insufficient to meet the client’s foreseeable needs.

(3)  Often overlooked in the estate and gift tax planning process is how a revocable trust established by a now-deceased spouse is viewed if the surviving spouse applies for Medicaid. A funded trust that avoided probate is often considered completely available for the surviving spouse’s care, so funding a revocable trust for the sole purpose of avoiding probate can place a surviving spouse in a worse position than if probate avoidance had not been accomplished.

(4)  There is one type of trust that spouses can establish for each other that meets the criteria established under both federal law and Massachusetts regulations for being considered unavailable to a Medicaid applicant: a discretionary testamentary trust. Under a peculiar federal Medicaid law, an unfunded trust that was funded by the deceased spouse’s Last Will and Testament is not considered available for payment of the nursing home care of the surviving spouse to the extent that distributions are discretionary. In essence, a bypass or credit shelter trust can be established under the decedent’s Last Will and Testament that has only the surviving spouse as a beneficiary, with no required distributions of income or principal. The surviving spouse should not be given a general power of appointment over the trust or any other power to make withdrawals.

Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Stays Unchanged through June 30, 2011

by: Brian E. Barreira, Esq.

When one spouse is living in a nursing home and the other spouse is living anywhere else, the spouse who is not living in the nursing home (known under Medicaid and MassHealth law as the “community spouse”) is allowed by Medicaid or MassHealth to keep some or all of the nursing home resident’s income through an income allowance known as the Minimum Monthly Maintenance Needs Allowance (MMMNA).  Every July 1st, this figure is supposed to change based on federal poverty level guidelines, but the U.S. Department of Health and Human Services did not revise the guidelines this year, so the MMMNA will remain $1,821 through June 30, 2011.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,739 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,739 of the married couple’s total income.  All of these figures remain unchanged through June 30, 2011.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.