The federal government passed a law in 1993 (2) which contained a mandate that each state must have a Medicaid law containing an estate recovery provision, but left to the states the choice of either limited or expanded recovery. In 1994, New York accepted this mandate and chose to limit estate recovery to the probate or intestate estate of a Medicaid recipient. (3) Recently, New York expanded estate recovery beyond the probate and intestate estate to “any other property in which the individual has any legal title or interest at the time of death, including jointly held property, retained life estates, and interests in trusts, to the extent of such interests.” (4) Is this the end of Medicaid planning as we know it?
The answer is we don’t know anything for sure right now. What we do know is that while the law has passed with an effective date of April 1, 2011, the law will not be implemented until regulations are adopted by the Commissioner of the New York State Department of Health. (5) The Elder Law Sections of our state and county bar associations, the New York NAELA (6) chapter, and many other interest groups advocating for the rights of people with disabilities and the elderly, are hard at work to help shape these regulations, which may be forthcoming within weeks or possibly years. When finally promulgated, which I expect to be sooner rather than later, such regulations will hopefully clear the way to our understanding of the law and permit the continued use of some planning techniques. For now, we have more questions than answers. If a person has already undertaken Medicaid planning, they should do nothing until such regulations are issued.
Let’s break down the new law a little further. First, the new law targets all property in which the Medicaid recipient had a legal title or interest at the time of death. It appears that the reference to “legal title” focuses the law on what is owned at the time of death. Frankly, this seems fair and straightforward. The question we ponder now is whether the term “legal interest” is a concept that goes beyond title or ownership. Is the mere right to income from an asset a “legal interest” subjecting the underlying asset to estate recovery? If the answer is yes, does the answer change if there is no right to income but rather only the right to mere possession of the asset? What about a retained power in a trust document, such as a power of appointment to change trustees or beneficiaries? In other words, to what extent are certain rights and powers going to be considered a legal interest subjecting the whole or part of any asset to estate recovery? Also, does it matter whether the right or power was retained in a transfer or created by a third party? We do not know the answers to these questions.
What is clear is that business as usual is now over in New York. In the past, estate recovery was simply something that we did not have to worry about. We all knew that each county was hanging out in its Surrogate’s Court and matching its records against all estates that passed through its doors. Therefore, all we had to do to escape estate recovery was to stay out of Surrogate’s Court, that is, to simply avoid probate. Avoiding probate was accomplished easily by having a beneficiary on an account , or by creating joint accounts (7) with right of survivorship, life estates, or revocable and irrevocable trusts. These techniques are all now in question as the new law specifically mentions joint ownership, life estates and trusts. We just do not know as to what extent their usefulness is lost.
Let us turn our attention now to jointly held property. As a practical matter, property owned jointly with the Medicaid applicant would be small, as such property would be available to pay for care, rendering the joint owner ineligible for Medicaid. However, this would not be true for any amounts equal to or less than the personal exemption of $13,800. Therefore, the new law would permit recovery from such exempt accounts. I believe that this will certainly be fair game within the new forthcoming regulations.
In addition, recovery is also permitted from the estate of the surviving spouse, in amounts that can far exceed the personal exemption of $13, 800 allowed the Medicaid recipient. This could involve hundreds of thousands of dollars jointly held between the surviving spouse and the children. Again, I believe that this will be fair game within the new forthcoming regulations. This will prompt spouses to transfer assets out of their names prior to death to avoid estate recovery, a decision which may not be in their best interest or even good public policy. Of course the ethical consideration would depend on the circumstances of each case.
The new law also targets life estates. A common, although often ill-advised, plan is to protect real estate by transferring it to family with the grantor retaining a life estate. Such real estate would not be considered a countable asset for Medicaid eligibility purposes, subject to a five year look back. The new law potentially makes these life estate plans vulnerable to estate recovery as well. At this point, we do not know the extent of this estate recovery. Would the recovery be allowed against the entire property, or perhaps only a fraction equal to the value of the life estate interest at the age of the life tenant at the time of her death? An argument can also be technically made that the value of a life estate at the time of someone’s death is zero. Indeed, the new estate recovery statute references the value of the interest at the time of death, not the moment prior to death, so litigation may be necessary to define the extent of the statute’s reach. New Jersey, a state which has had such expanded estate recovery for years, chose to recognize the technical problems with such a statute and elected to not apply the law to life estates.
In any event, it is also interesting to note that the law does not distinguish between life estates created by a Medicaid recipient and life estates created by third parties. For example, suppose that upon a father’s death, he creates a life estate in the family home for his daughter with disabilities, which then passes to the grandchildren on her death. If such daughter needs Medicaid, will New York have a right of recovery against the home? I would think not, but the potential exists.
Lastly, the law specifically targets “interests in trusts”. Recovery now from revocable trusts seems to be a given because of the full control retained by the Settlor. However, it is with irrevocable trusts that suspense exists. Irrevocable trusts have been the most effective planning tool for people trying to protect their assets because it facilitates a full transfer of the assets for Medicaid purposes while allowing the Settlor to retain certain rights and powers and tax favorable outcomes. A typical trust could include the right to retain the income or possession of a transferred asset, or the power to change trustees, change beneficiaries or block the sale of an asset. These extra rights and powers give people the confidence to transfer their assets which might not be there if they were transferring their assets directly to their children. In addition, these rights and powers provide powerful tax benefits, including triggering the Grantor Trust Rules. The Grantor Trust Rules allow us to control (i) who will be taxed on trust income and (ii) who, if any one, will be entitled to deductions, exemptions and exclusions, such as the $250,000 capital gain exclusion on the sale of a principal residence. (8)
Furthermore, retaining the right to the use and occupancy of a personal residence held in an irrevocable trust allows us to keep all the property tax exemptions, including the STAR, Enhanced STAR, Senior and Veterans exemptions. The right to occupancy alone is insufficient to keep these exemptions; the right to “use” is essential and “use”includes the concept of income. Therefore, to retain these property tax exemptions on a principal residence, one must retain the right to the income from such residence, even though such income rarely exists. However, the new law may be interpreted to mean that estate recovery may be had against any asset in which the Settlor retained a right to income. This is the New Jersey experience with estate recovery. Therefore, if the estate recovery law goes this far, a choice will have to be made whether or not to lose the property tax exemptions. Many working and middle class families may not be able to afford such a loss.
Alarmingly, there is no grand fathering of life estates or irrevocable trusts created prior to the new law, unless the regulations will so provide. As such, people who may have created life estates or irrevocable trusts twenty years ago may still see their homes and other assets fall to estate recovery in the future.
So how does one plan today prior to the issuance of regulations? First, stay away from life estates. Life estates are usually a bad idea anyway because of the negative tax and Medicaid consequences that follow a sale of the property during life. (9) Irrevocable trusts still remain the best planning technique for now, but care must be taken to retain the least amount of rights and powers possible. Some clients will insist on retaining certain rights and powers, opting to attempt to eliminate them at some time in the future, such as when the new law comes down, or when they apply for Medicaid, or at least prior to their death. Remember, the law seeks estate recovery to the extent of the interest at the time of death.
One last technical point about the new law is that it also provides that New York can collect against an asset in the hands of the beneficiary. This makes sense, otherwise the law would have no teeth. Therefore, upon the death of the owner, joint owner, life tenant or trust Settlor, estate recovery will be made against an asset in the hands of the person or persons who next own the asset, but only from such asset and only to the extent that the Medicaid recipient held legal title or interest in such asset.
In conclusion, we have a new estate recovery law in New York but we do not know how it will be implemented. Personally, I think this could be a good law if narrowly tailored. We are in difficult economic times and simply avoiding probate makes it too easy to skirt reasonable estate recovery laws. However, if the law is pushed to eliminate the use of life estates and irrevocable trusts, then this law goes too far. People who engage in Medicaid planning are generally working and middle class people who are trying to save their home and modest amounts of assets. If time honored planning techniques are taken away, people will turn to more drastic measures such as (i) outright transfers with the consequent complete loss of control, (ii) divorce or (iii) moving out of New York. Also, there is an inherent unfairness to the law if applied retroactively. Hopefully, the Commissioner of the Department of Health will issue regulations with temperance.
1. Certified Elder Law Attorney by the National Elder Law Foundation (NELF). NELF is not affiliated with any governmental authority. Certification is not a requirement for the practice of law in the State of New York and does not necessarily indicate greater competence than other attorneys experienced in this field of law.”
2. “OBRA 93”
3. See Subdivision 6 of section 369 of the Social Services Law, as added by Chapter 170 of the laws of 1994.
4. See Section 53 of Part H of Bill Number S2809.
5. Since we have an effective date of April 1, 2011, it would appear that once we have regulations, the law will be implemented retroactive to April 1, 2011; however, it is possible that the regulations will be prospective in nature.
6. National Academy of Elder Law Attorneys
7. This will include, but may not be limited to in-trust-for bank accounts at banks, TOD or POD accounts, life insurance and annuity accounts with named beneficiaries and may even include IRAs and other retirement accounts with designated beneficiaries (although unlikely due to creditor protection laws for retirement accounts).
8. See IRS Code Section 121.
9. Sale of property with a retained life estate subjects the life estate portion to Medicaid lien recovery or the need to retransfer the property with a new look back. The remainder value will be subject to capital gains.