President Signs S. 1932
The Deficit Reduction Act of 2005
This article reprinted from One On One a publication of the General Practice Section of the New York State Bar Association.
Please note that the penalty rate for calendar year 2006 is $9,132 in New York City. Other penalty rates apply in other counties of New York State. See rates given in other documents of this Web Page.
Jay J. Sangerman, Esq. ©2000
The growth in the elderly population has created new opportunities for the legal practice. Medicaid planning has become an essential ingredient for appropriate estate planning. For the middle class, the absence of a national catastrophic health care system has left people at full exposure to significant loss of their estates. The risk which many people fear is the depletion of assets due to the need for nursing home care. Dementia and Alzheimer's-type syndrome are the diseases most often feared. In New York City, for instance, the better nursing homes cost at least $250 per day or $91,250 per year, and some nursing homes as much as $300 per day. Three years of nursing home care can easily wipe out a moderate estate or significantly reduce an estate of $1,000,000 or more.
With proper advance estate planning, much of an estate can be preserved, passing wealth to the next generation without necessarily depriving the senior generation of its accustomed lifestyle, as well as preserving assets for use by a surviving spouse while preventing the assets from being available for nursing home and home care expenses. The necessity for such Medicaid planning is no different than the necessity for tax planning in a well-reasoned estate plan. Medicaid planning involves the transferring of assets, placing assets into inter vivos trusts and testamentary trusts. This article briefly describes some of the transfer of asset rules and methodology and the use of trusts in Medicaid planning.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA'93) was signed into law, significantly changing various aspects of the federal Medicaid law.1 Key provisions of OBRA '93 include changes in:
1. the period of Medicaid ineligibility;
2. the length of the look_back period;
3. the viability of grantor trusts drafted to remove assets from countability as resources for Medicaid eligibility;
4. the broadened opportunity for trusts for disabled individuals, especially where there is a "windfall" due to a medical malpractice or personal injury award, or a significant inheritance; and
5. mandated _ as well as optional state _ estate recovery provisions
As of this writing, final regulations have not yet been issued, nor has New York State yet issued regulations to conform with the federal rules. Therefore, neither the full impact, nor an understanding of the ambiguities, of OBRA'93 will be known for several months.
Transfer of Assets
Asset preservation planning for catastrophic care generally involves the transfer of assets from the prospective Medicaid Applicant ("MA") and often from the MA's spouse. Until OBRA `93, irrevocable grantor inter vivos trusts, wherein the grantor retained an income interest and no interest in the corpus, were a significant part of Medicaid planning. However, as a result of the recent changes in the law, trusts may not have the security which they had in the past, and it is probably best to avoid the use of grantor trusts in Medicaid planning until final regulations are issued by New York State.
Under prior law, there was a potential maximum 30 month period during which Medicaid would not pay for nursing home or nursing home-type care after the transfer of MA's assets. Under OBRA '93, there is an unlimited penalty period. Furthermore, states have !the option to impose a penalty period for home care, for which previously there had been no penalty period.2 Under OBRA'93, there is a 36-month look_back period from the date of Medicaid application, except "in the case of payments from a trust"3 for which there is a 60-month look_back period. This means that Medicaid looks back, for the designated period of time, at the MA's and MA's spouse's assets is to determine whether uncompensated transfers were made. To determine the period of ineligibility, if any, Medicaid calculates the total, cumulative uncompensated value of all assets transferred by the individual or the individual's spouse on or after the look_back date, divided by the average monthly cost to a private patient in a nursing facility. The result is the period of time during which Medicaid will not pay for nursing home care as of the month the transfer occurred, and, if New York chooses, a penalty period during which Medicaid will not pay for home care. The delay in Medicaid eligibility does not apply to transfers to spouses, minor or disabled children, or to trusts solely for the benefit of disabled individuals under 65.
In New York, for instance, for every $5,584 ($7,720 for 1999) transferred, there is a penalty of one month during which Medicaid will not pay for nursing home care. For instance, Mr. Z, a New York resident who has an estate of $100,000 and transfers the full $100,000, will incur a penalty period of approximately 17 months. If Mr. Z does not enter a nursing home until the conclusion of 17 months, he will have preserved $100,000 for the next generation while being Medicaid eligible for the cost of nursing home care. But, if Mr. Z needs nursing home care during any of that 17-month penalty period, he will be ineligible for receipt of Medicaid benefits. Mr. Z's only recourse will be either not to go into a nursing home or to have a third party (if the jurisdiction permits) guarantee nursing home payment during the penalty period. Properly advised, if Mr. Z knew that he would enter a nursing home shortly after the transfer, he would have transferred only $40,000, retaining $60,000 to pay during the penalty period. In New York, the $40,000 would create a penalty period of only seven months, instead of 17. The $60,000 will pay during the seven month penalty period at a cost of $7,500 per month. In the latter example, Mr. Z was able to transfer $40,000 to the next generation. In the first example, with the transfer of $100,000, Mr. Z , who entered a nursing home immediately after the transfer, eventually would lose his entire estate of $100,000 and perhaps more! It is possible that Mr. Z's family would have to pay the nursing home the full monthly cost of $7,500 for 17 months, at a cost to his family of $127,500, a net loss of at least $27,500 due to improper planning.
In developing a plan for Mr. Z, the careful planner will take into account Mr. Z's income, including social security, .pension and income from retained assets. If Mr. Z has Social Security of $750 and a pension of $1,250, the net cost of the nursing home is not $7,500 per month, but $5,500. This means that Mr. Z could have transferred $50,378 and would have retained sufficient funds for nursing home costs. The formula for the above is the following:
Amount to transfer: Liquid assets
1 + (cost of nursing home less income)
Placing numbers into the above formula will give us the following for Mr. Z:
$100,000 = $50,378 is the amount
1 + ($7,500 less ($750 + $1,250)) to be transferred ($5,584)
The $50,378 will create a penalty period of 9.02 months. In New York, only whole months are counted and the time period begins from the first day of the month in which the transfer is made. Therefore, if Mr. Z made his transfer on the last day of the month, the penalty period would run for 9 months from the first day of the month of transfer. The $49,622 which Mr. Z retained will be sufficient to pay for 9 months of nursing home care. But the planning for Mr. Z has only just begun. Assume that Mr. Z is 85 years old, has an Alzheimer's-type dementia believed to be a consequence of a series of mini-strokes and has emphysema. Mr. Z has two children. Mr. Z is sufficiently competent to tell you that he wishes to pass his estate to his two sons. Mr. Z also has IRAs valued at $100,000. Mr. Z's non-IRA assets consist of 80% of low cost basis securities. Mr. Z's sons have told you that the doctors do not know whether Mr. Z will survive the year.
What is the Medicaid plan for Mr. Z? Merely transferring assets without appropriate tax planning potentially would create catastrophic financial results for Mr. Z and his sons. Should Mr. Z transfer the low-cost securities to his sons, causing his estate to lose a potential step-up in basis upon Mr. Zs death? Instead, should Mr. Z sell his securities and then transfer cash to his children? By transferring cash rather than securities, will the amount transferred be less for calculation of the Medicaid penalty period and ultimately more to his sons? Can the income tax consequences from the securities be offset by a deduction for the cost of nursing home care? Should Mr. Z not transfer assets, but instead regularly withdraw funds from his IRAs to pay for his nursing homecare? Or should Mr. Z withdraw IRA funds and then transfer them to his sons? Can the income tax consequences from the withdrawal of IRA assets be offset by a deduction for the cost of nursing home care? Would your answer be the same if Mr. Z were married to a 65 year old in excellent health? (Much of the planning is the same for a married couple). How would your plan change if Mr. Z owned a residence with a low-tax basis against which Medicaid could recoup its expenses after the death of the latter of the Medicaid recipient or his or her spouse? Should Mr. Z transfer his low-basis assets into a trust, retaining an "interest," e.g., limited power of appointment, so that the assets will have a "step-up in basis" upon death (which may be a "secure" trust under OBRA'93).
There are thresholds of resources and income for the Medicaid recipient and his or her spouse. Such requirements include New York State residency, being categorically needy, e.g., eligible for receiving Supplemental Security Income, and medically needy, e.g., net income and resources do not meet the cost of necessary medical care services available under the Medical Assistance Program as determined in accordance with 18 NYCRR § 360_4. At present, the resource allowance for an individual is $3;150 and the income allowance for nursing home is $50 or for home care is $525 per month plus an additional senior citizen allotment of $20 per month. The spouse of a nursing home resident is permitted to retain a resource of $70,740 and an income of $1,769 per month. However, the spouse living in the community can elect to refuse to support the spouse ("Spousal Refusal") in the nursing home, but must be aware that the local Social Services district can initiate an action against the refusing spouse.4
Mr. Z's wife, being younger, may wish to perform her own Medicaid planning. Prior to OBRA '93, her plan might have been to create an irrevocable trust with income to herself for life and no invasion of principal. The unavailable corpus would have contained the amount she wished to preserve for her two sons and leaving the remainder of her assets which are outside of the trust for her use and potentially at risk in the even of catastrophic care. Mr. and Mrs. Z may consider testamentary trusts drafted so as to make the corpus unavailable should the beneficiary be otherwise eligible for government benefits, e.g., Medicaid benefits covering the cost of nursing home care or home care.
Remember that appropriate Medicaid planning involves proper tax planning. It is strongly urged that when doing Medicaid planning, the attorney consult with the client's general practice attorney, if a different attorney is performing the Medicaid planning. Often, in a proper relationship, the attorney performing the Medicaid Planning will become a consultant to the client's general practitioner for the overall planning. Additionally, it is strongly recommended that when the client has significant IRAs, pensions and/or low basis assets that the attorney consult with the client's certified public accountant, financial planner and other professionals and, especially, if the client does not have a CPA, recommend that the client engage a CPA for the Medicaid planning process.
I. Grantor Trusts
OBRA '93 causes the use of an irrevocable inter vivos grantor trust to be a questionable planning tool. Under OBRA'93, an individual is considered to have established a trust if the individual's assets were used to form all or a portion of the trust and if the trust were established, other than by will, by the individual; the individual's spouse; one with legal authority, including a court, to act on behalf of the individual, or the individual's spouse; or one with legal authority, including a court, acting at the direction of the individual, or the individual's spouse. OBRA '93 makes clear that the trust rules apply irrespective of the purpose for which the trust was established. In the case of irrevocable grantor trusts, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made are considered resources available to the individual, and payments from that portion of the corpus or income to or for the benefit of the individual, are considered income of the individual, and any other portions of the trust are considered assets disposed of by the individual. The date for determination of penalty is the later of the date of the establishment of the trust or the date on which payment to the individual was foreclosed.
There is no penalty period for ineligibility when assets are transferred to: 1. a trust solely for the benefit of a child who is blind or permanently and totally disabled; 2. a trust established solely for the benefit of an individual under 65 years of age who is disabled as defined in 42 U.S.C. § 1382(c); or 3. a trust containing the assets of an individual under age 65 who is disabled and which is established for the individual by a parent, grandparent, legal guardian or court IF the State receives the remainder of the trust up to the amount of Medicaid assistance paid.
Furthermore, the Medicaid grantor trust rules do not apply to (i) this prior trust, nor to (ii) a trust containing the assets of an individual who is disabled, where the trust is established and managed by a nonprofit association where the trust funds are pooled, the account is established solely for the benefit of the disabled individual by the parent, grandparent or legal guardian of such individual, or by the court, and, upon the individual's death, the remainder stays in the trust or is paid to the state up to the Medicaid assistance paid. However, the transfer of the individual's assets into such a trust appears to create a penalty period for Medicaid eligibility.
Prior to OBRA'93, New York established certain trust "trigger provisions," which still appear to be applicable under the new law.
For a trust established on or after April 2, 1992, in determining the maximum amount of income and principal that a trustee can distribute to a Medicaid applicant or Medicaid recipient under the terms of the trust, any trust provisions which limit the trustee's discretion to make such distributions and which are "triggered" by a need for medical care or an application for Medicaid are void. Therefore, according to the Department of Social Services,
[i]f a trust is set up to be irrevocable while the creator is living at home, any trust provision making the trust irrevocable if and when the creator enters a nursing home is void, and the entire principal of the trust is therefore available to the [Medicaid Recipient] for purposes of determining [Medicaid] eligibility for nursing home care. Any income generated by the trust including any interest accrued is budgeted as unearned income.5
Similarly, a trust provision established on or after April 2, 1992 would be void if it requires the termination of the trust principal or income should the assets be deemed an available resource to Medicaid and the trust assets be distributed to someone other than the trust beneficiary or the beneficiary's spouse. The Estates, Powers and Trusts Law (EPTL) provides:
A provision in any trust [created on or after April 2, 1992], other than a testamentary trust, which provides directly or indirectly for the suspension, termination or diversion of the principal, income or beneficial interest of either the creator or the creator's spouse in the event that the creator or creator's spouse should apply for medical assistance or require medical, hospital or nursing care or long term custodial, nursing or medical care shall be void as against the public policy of the state of New York, without regard to the irrevocability of the trust or the purpose for which the trust was created.6
II. Third Party Trusts
A. Testamentary Trusts
It is axiomatic under New York law that the intention of the testator is to be upheld. Therefore, a properly drafted testamentary trust should include the following:
i. the intent of the testator is that trust corpus and income be preserved for someone other than the beneficiary on Medicaid;
ii. the trustee is prohibited from paying for extraordinary medical expenses, including home care and nursing home care when government funds are otherwise available; and
iii. EPTL § 7_1.6 does not apply.
Unlike a grantor trust, a third party trust, other than a trust for the benefit of the spouse, can be drafted so that the corpus and income are unavailable for Medicaid. Such trust is commonly known as an "Escher Trust" after the leading case Matter of Escher,7 In Escher, the Trust beneficiary was a longtime resident at the Rockland Psychiatric Center. New York State sought an order directing the trustee to invade the trust corpus to cover the beneficiary's cost of care. The relevant language in the testamentary trust was:
In addition my said executors and trustees are authorized in the exercise of their discretion to pay out of the principal of said fund such sum or sums as may be necessary to provide for the payment of any and all expenses necessary for the maintenance and support of my said daughter Marie Escher by reason of any illness, accident, or other emergency, and such withdrawal shall be entirely within the discretion of my said trustees and the survivor and successor trustees, and said withdrawals and disbursements made for the benefit of my said daughter Marie Escher shall not be subject to objection in any proceeding by or on her behalf.8
In holding that the trust assets were an unavailable resource, the Court stated that "[i]n the absence of a governing statutory mandate, questions relative to invasion of the corpus of a trust must be controlled by a determination of the intent of the creator of the trust"9
Escher-type trusts are not considered available assets for purposes of computing the income beneficiary's eligibility for Supplemental Security Income (SSI) and Medicaid
benefits so long as the beneficiary does not have the "right, authority or power to liquidate the property or his or her share of the property. . .,"10 and, for purposes of Medicaid, the creator of the trust is someone other than the beneficiary or his or her spouse.11 See also In re Edna Ross,12 wherein the beneficiary of a testamentary trust was in an intermediary care facility. The testator directed the trustee to expend the income for "clothing, comforts and luxuries for my son . . . as long as he shall live." The principal was to be used as "necessary for illness or other emergency effecting such child." The testator added that "commitment to or residence in a state school, hospital hostel or other facility . . . shall not be considered such illness or other emergency, and my trustee shall have no authority to invade principal for payment of living expenses or other routine costs for residence in such a facility."13 Although use of "principal" was not at issue before the court, the court commented that the principal is insulated from the state's claim for the cost of the care given to the son. The court found that the will was unambiguous and that the testator meant that income was only to be applied for "clothing, comforts and luxuries." Therefore, the testator did not intend the income to be used for the cost of care in an intermediate care facility.
Under the terms of an Escher-type trust, the trustee can have discretion to distribute income and/or principal to the extent determined by the trustee and as governed by the trust instrument. Such trust is protected from claims by the Department of Social Services (Medicaid). Similarly, a beneficiary of such trust can be eligible for SSI even though the trustee has discretion to pay for the beneficiary's needs and desires, so long as such payment is "in-kind" and not the giving of funds directly to the beneficiary. However, payment for food, shelter and clothing could reduce the beneficiary's SSI benefits by one-third.14
It is paramount that in drafting any trust intended to insulate the principal from Medicaid reimbursement, the draftperson include a provision that EPTL 7_1.6, which gives the courts the right to invade trusts which contain no provisions to invade principal for needy income beneficiaries, shall not apply. See Tutino v. Perales,15 where the court held that the Department of Social Services of the State of New York could require an assignment to the Commissioner of the income beneficiary's rights to compel invasion as a condition of granting Medicaid. See also In re Surut,16 which involved an application by the income beneficiary of a 1923 testamentary trust requesting the court to permit the trustees to invade principal to pay for her nursing home expenses. The trustee opposed the application on the ground that it defeated the intention of the testator and that the consent of the beneficiary was coerced by the Department of Social Services of Nassau County. The court stated that
[t]he law is now well settled that when a trustee is authorized by the governing instrument to invade principal for the income beneficiary's maintenance or emergency needs, the court will not compel the trustee to exercise such discretion to pay expenses which would otherwise be paid by governmental funds.17
Significantly, the court stated:
The principle stated in Matter of Escher [ ] that where the governing instrument gives the trustee discretion to invade principal for the benefit of the income beneficiary the court will not direct the trustee to exercise such discretion to pay the beneficiary's nursing home expenses, is equally if not more, applicable where the will does not grant any invasion power at all to the trustee.18
Similarly, in In re Estate of Sabra Ross,19 the court refused to invade the principal of the trust where the testamentary instrument stated "it is not my intention to provide support for my said sister, but rather to give her supplemental help."20
B. Inter vivos Trusts
Although Escher pertained to a testamentary trust, the law appears to apply equally to a third party trust which is not created by a spouse. Such trusts are used for both the elderly and the disabled. To clarify the law, the New York State legislature directed the Office of Mental Health, in consultation with the Office of Mental Retardation and Developmental Disabilities, the Department of Social Services, the Department of Banking and the Department of Insurance, to prepare a report on Special Needs Trusts, which proposed enabling legislation for the State of New York. Under the legislation which passed this summer, New York State law specifically provides for a Supplemental Needs Trust.21 Under the legislation, the EPTL includes proposed language for such a trust.
Estate Recovery Provisions
Under both OBRA'93 and New York State law, there are estate recovery provisions for Medicaid payments. Under the federal law, states must recover the Medicaid costs of nursing home care and other long-term care services (and, at the option of the state, any items or services under the state plan) from the estates of Medicaid recipients who were 55 years of age or older when the individual received the medical assistance. The term "estate" includes all real and personal property and other assets included in the individual's estate, as determined under state probate law. "Estate," at the option of the state, may also include "any other real or personal property and any other assets in which the individual had any interest at the time of death (to the extent of such interest), including such assets conveyed to a survivor, heir, or assign or the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement." States must, however, establish procedures for waiving recovery in undue hardship cases.
Not long before OBRA'93 was enacted, there was an amendment to New York Social Services Law § 369 authorizing Medicaid to recover the amount of Medicaid benefits paid on behalf of the grantor or the grantor's spouse from the grantor's or the grantor's beneficial interest in a trust (other than a testamentary trust). Under the Governor's proposed budget bill in 1992, there were far more extensive estate recovery provisions, similar to the state optional provisions in OBRA '93.
Under OBRA '93, Medicaid planning remains a viable option within an individual's estate plan. Additionally, OKRA '93 even creates broadened opportunities for planning for the elderly and disabled. Because of the changes presently occurring, the planner must carefully watch for the final federal regulations and interpretations of OBRA `93 and the New York State provisions written pursuant to OBRA'93.
A final caution: Always check current Medicaid laws. In this economic and political environment, there are a plethora of proposed changes to the Medicaid programs.
At the time this article is being printed, the full effect of OBRA'93 is still unknown. As noted in this article, Medicaid laws and procedures regularly change and the. practitioner who does Medicaid planning must keep current on the changes. The federal Medicaid rules are codified in 42 U.S.C. §7396. The New York State regulations are codified in 18 N.Y.C.R.R. § 360.
Under prior taw, one could transfer assets and be eligible for homecare the following month.
The text is ambiguous as to what the word 'from' is intended to mean, or whether it Is a mistake. The House/Senate Conference Report unambiguously states that 'the look_back period with respect to trusts i[s] 60 months.' Therefore, it may be that when assets are placed into a trust, there is a longer look_back period and not merely when assets are distributed or 'sprayed' from a trust.
See 18 NYCRR § 360_3 for Medicaid eligibility requirements.
Department of Social Services, 92 ADM-45, November 4, 1992.
N.Y. EPTL § 7_3.1 (c) (McKinney 1992 and Supp. 1993); See also 18 NYCRR § 360_4.5(d).
94 Misc. 2d 952 (Surr. Ct., Bronx Go. 1978), aff’d, 75 A.D.2d 531 (1st Dept. 1980), afford, 52 N.Y.2d 1006 (1981).
94 Misc. 2d at 955_56.
Id. at 961 (emphasis added).
20 C.F.R. 416.1201(a)(1).
42 U.S.C. § 1396a(k); 18 NYCRR §§ 360_4.4 and 4.5.
153 Misc. 2d 120, 580 N.Y.S.2d 839 (Surr. Ct., Nassau Co. 1992) (J. Radigan),
153 Misc. 2d at 122.
See POMS 00830 and 00835.
153 A.D.2d 181, 550 N.Y.S.2d 21 (2d Dept. 1990).
141 Misc. 2d 1005, 535 N.Y.S.2d 922 (Surr. Ct., N.Y. Co. 1988) (J. Roth).
535 N.Y.S.2d at 922.
Id. at 923-24.
96 Misc. 2d 463, 409 N.Y.S.2d 201 (Surr. Ct., Yates Co. 1978).
96 Misc. 2d at 468.
See Mental Hygiene Law § 43.03, Social Services Law § 104 and EPTL § 7.
Jay Sangerman is an Eider Law attorney in private practice in New York City. He is a past chair of the NYSBA Elder Law Section's Committee on Elder Law Practice and Ethics and serves as a member of The Association, of the Bar of the City of New York's Committee on Aging. Mr. Sangerman is an Assistant Adjunct Profession in the NYU Professional Studies Program.
Reprinted with permission from: One On One" (Summer/Fall 1993) Vol. 14, No. 2, published by the New York State Bar Association, One Elk Street, Albany, New York 12207.
JAY J. SANGERMAN, ESQ.
Jay J. Sangerman, PLLC
171 East 84th Street, Suite 21B
New York, New York 10028
212-439-0056 - facsimile
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