New York's Expanded Estate Recovery Rules Complicate Medicaid Planning

New York law has long provided that only a Medicaid recipient’s probate assets (i.e., those titled solely in the name of the Medicaid recipient) were subject to “estate recovery” after a Medicaid recipient’s death.  Other types of dispositions, including popular planning tools such as joint tenancy, “life estate” deeds, and assets held in revocable and irrevocable trusts were excluded from the reach of estate recovery.

Last March, however, the New York State Legislature’s 2011 budget included “expanded” estate recovery rules that will allow the county Departments of Social Services to recover more assets from the estates of deceased Medicaid recipients.  These new rules were made subject to regulations to be promulgated by the New York State Department of Health.  On September 8, 2011 the Department of Health finally promulgated the regulations required by the statute.

Traditionally, the use of a life estate deed for a primary residence has been one of the most popular planning tools used to protect assets from a Medicaid “spend down.”  So long as the deed in which the grantor retained a life interest was executed at least five years prior to a Medicaid application being filed, the entire interest in the residence would be deemed “exempt” from a Medicaid spend down.  This planning tool has long been popular largely because it is easy to quickly implement, and is considered inexpensive compared to other planning strategies such as irrevocable trusts.

 

The new regulations, however, specifically include as assets subject to estate recovery those owned by the decedent “through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, to the extent of the decedent’s interest in the property immediately prior to death” (emphasis added).  The value of the life estate subject to recovery is deemed to be the “actuarial life expectancy of the life tenant” as of the date of death.  For an 80-year-old, for example, that value is deemed under the life estate tables used by Medicaid to be worth 43.6%.  Assume Mrs. Jones, an 80-year-old long-term nursing home resident on Medicaid, executed a life estate deed in 2003 leaving her residence to her children upon her death. Mrs. Jones dies in September 2011, with the fair market value in her home valued at $300,000.  Under the new regulations, 43.6% of the home value – or $130,800 – would have to be repaid to the Department of Social Services, with the children to receive the remainder.

Some may argue that it is good public policy to permit the government to recoup as many assets as possible from the estates of Medicaid recipients.  But what may trouble many people is that the regulations do not provide any “grandfathering” for pre-existing life estate deeds – even those drafted decades ago.   This provision of the new regulations is sure to spark legal challenges, so it is too soon to tell if this particular rule will “stick.”

Fortunately, the irrevocable “Medicaid Trusts” remains an important planning tool that can used to help protect assets if created and funded well before the time long-term care may be needed.  Under the regulations, estate recovery from any irrevocable trust is limited “to the extent that the person was entitled to the distribution of …principal and interest pursuant to the terms of the trust.”  Since a Medicaid Trust will always restrict the grantor from receiving any of the trust principal, the trust assets may pass at the grantor’s death to the trust beneficiaries without risk of estate recovery, even if the grantor received Medicaid benefits during his or her lifetime.  Also, while the issue is not fully resolved, it appears that these trusts will still permit the grantor retain the STAR, veteran’s and other property tax exemptions without exposing the value of the residence to any form of estate recovery.

While long-term care insurance remains the best way to protect your assets in the event you ever need long-term care, the policies can be expensive and not everyone can qualify medically for the insurance.  With the ever-shrinking state and federal budgets putting the squeeze on Medicaid benefits, it is more important than ever that people looking to help protect assets against the high cost of long-term care seek the advice of an experienced elder law attorney to investigate the alternatives.

What Is Wrong With The Banks?

This past week I met with a woman for whom we had done some estate planning in 2008.  At that time her husband was in failing health but was still living at home.  We prepared wills, powers of attorneys and health care documents for each spouse, and educated them on long-term care planning and asset preservation issues. 

In 2010 Mr. Simpson's condition deteriorated to the point that he needed to move into nursing home. Since the Simpson's already met the Medicaid eligibility criteria, Mrs. Simpson was able to file the Medicaid application on her own, and the application was approved. 

Sometime after Mrs. Simpson completed the Medicaid process she stopped into her bank.  Because she was now "on her own,"  the "helpful" person at the bank suggested that Mrs. Simpson add her daughter "Sally's" name to Mrs. Simpson's bank account just in case Mrs. Simpson needed help with her financial affairs.  However, in 2008 Mrs. Simpson had executed a comprehensive financial Power of Attorney that provided another of Mrs. Simpson's children with all the authority needed to assist Mrs. Simpson with her financial affairs.

Why, you might ask, does it matter whether a child is put on the account as a joint owner, or instead only has legal authority to act under a Power of Attorney?  Well, when a child's name is added to a parent's bank account, they immediately acquire an ownership interest in the account assets, including the right to immediately withdraw all the funds in the account.  Just as important, even if the child has no intention of withdrawing the account assets, if the child has judgments against them, the child's creditors can effectively gain control of the assets by "freezing" the jointly owned bank accounts. 

And, that's exactly what happened in Mrs. Simpson's case.  Sally happened to have run up significant credit card debt, and one of her creditor's had obtained judgments against her for non-payment.  As soon as Sally's name was added to her mother's account, Sally's creditor's pounced and were able to have Mrs. Simpson's account frozen.  Only after much effort and aggravation was Mrs. Simpson able to convince Sally's creditor that Sally was on Mrs. Simpson's account for "convenience" purposes only and have the account unfrozen.

I wish I could say that this was an isolated incident, but it happens all too frequently.  It seems that many bank employees have no concept regarding the interplay between creditor's rights and title of ownership, nor do they seem to understand that a durable Power of Attorney provides the named agent with all the legal authority needed to administer a principal's affairs without exposing the principal to the agent's creditors.    

In establishing these joint-tenancy accounts, bank employees are essentially practicing law without a license -- and doing poorly at it.