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Medicaid Takes Aim at Life Estates in New Estate Recovery Regulations
& #160; ; 60; & #160; *By: Anthony J. Enea, Esq.
On April 1, 2011, pursuant to the recommendations of Governor Andrew Cuomo’s Medicaid Redesign Team, Social Services Law Sec. 369 (6) was amended to expand estate recovery subject to the promulgation of regulations by the NYS Department of Health.
On September 8, 2011, Emergency Regulations were promulgated by the NYS Dept. of Health to expand the definition of estate to include any property in which the individual has any legal title or beneficial interest immediately prior to death, including, jointly held real and personal property, retained life estates, the principal and interest of a Revocable Living Trust, Irrevocable trusts to the extent the medicaid recipient was entitled to the distribution of principal and income of the trust, and with respect to trust income only the income that was accrued, but, undistributed as of the recipients date of death; and the remaining payments from an annuity purchased by or with the assets of the medicaid recipient or his or her spouse. NYCRR 360-7.11 (b) amended to add new paragraphs (7) (8) and (9). The Emergency Regulations can be amended by the Department of Health before they expire on December 6, 2011. It is anticipated that any proposed amendments will be issued by November 6, 2011.
On September 26, 2011 the NYS DOH issued Administrative Directive 11ADM-8 . The ADM provides guidance to the local departments of social services on the implementation of the expanded definition of estate for Medicaid recovery purposes.
Pursuant to 11 ADM-8, effective for Medicaid recoveries made on or after September 8, 2011, the definition of "estate" includes assets that pass directly to a survivor or heir through joint tenancy, right of survivorship, life estate or living trust, interests in irrevocable trusts and annuities. One area of ongoing concern for the elder law practioner is whether the Regulations will apply to life estates that were reserved in a deed prior to the issuance of the regulations and the enabling statute. Whether of not Medicaid will be successful in retroactively applying the Regulations to life estates created in a deed remains to be seen, and maybe an issue that ultimately is resolved through litigation. For example, there is a strong argument to be made that the definition of "estate" can’t impair interests that were vested prior to April 1, 2011, such as the remainder interest in real property, which under EPTL 6-4.7, 6-5.1 and 6-5.11 is vested, alienable and not subject to defeasance by the action of the life tenant.
The following is a summary of how pursuant to 11 ADM-8 Medicaid intends to treat various assets owned by the Medicaid recipient for estate recovery purposes.
1. Jointly Owned Bank Accounts
The Medicaid applicant/recipient is presumed to have a 100% interest in any joint bank account. Evidence that the account is in fact the property of more than one person, and the proportionate share each person owns generally needs to be documented in the case record. Pursuant to the Emergency Regulations, the Medicaid recipients interest in the joint account at the time of his or her death is subject to recovery from the person who is named a joint owner of the account. From a practical perspective, it is unlikely that Medicaid will have recovery of any significant amount from a joint account of the Medicaid recipient, as it is unlikely that the recipient will have any bank accounts (resources) in his or her name jointly with another in an amount in excess of the amount he is permitted to have for eligibility purposes, being, $13,800 (also known as the "luxury fund").
The Emergency Regulations provide that the surviving joint owner must be allowed the opportunity to provide documentation of his or her interest in the account through verifiable withdrawals and deposits if the case record does not contain evidence to rebut the presumption of 100% ownership by the Medicaid applicant/recipient.
One type of asset not discussed in the ADM is an IRA owned by the recipient or the recipient’s spouse. Although, Medicaid has had the right to recover against an IRA that did not have a named beneficiary or which named the decedent’s estate as the beneficiary. However, Medicaid in New York has not historically sought recovery from an IRA that named the recipient’s spouse or children as a beneficiary. At the time of this writing, it appears that Medicaid will take the position that IRA’s that have named beneficiaries will also be subject to estate recovery if the recipient, or his or her spouse, had an interest in the IRA. However, during the lifetime of the surviving souse, or a blind, or disabled child of the recipient, there will need to be a deferral of recovery. The issue of recovery from an IRA may very well require litigation to resolve if not voluntarily rectified by Medicaid or a legislative amendment. It should be noted that under New York Law IRA’s (Roth and/or Traditional) are protected from the claim of creditors, pursuant to CPLR §5205 ( c) and EPTL §13-3.2.
II. Jointly Owned Securities
Stocks, bonds, mutual funds, etc., which recipient had interest at the time of death are also subject to estate recovery. However, recovery is limited to the decedent/ recipients per capita share of the security or account. If account has four named owners, the Medicaid recipient’s per capita share would be 25%.
III. Jointly Held Real Property
11 ADM-8 provides that regardless of whether the jointly owned real property was considered an unavailable resource for purposes of Medicaid eligibility, or whether a Medicaid lien was placed on the real property or the real property was not subject to treatment as a resource (recipient was not SSI related) recovery shall be pursued against the deceased recipients interest in such real property. The ADM provides that Medicaid shall file a post death lien against the recipient, or recipient spouse’s interest in the real property. The ADM provides that Medicaid shall file a post death lien against the recipient, or recipient spouse’s interest in the real property.
IV. Life Estate Interest
The expansion of the definition of "estate" to include life estates retained in a deed is giving most elder law practitioners the greatest cause for concern. The potential retroactive application to deeds containing life estate made years ago will create significant legal and title issues for the real property upon which a life estate has been reserved. This is especially so since the remainderperson may have conveyed his or her interest in said real property.
11 ADM -8 in relevant part states "A life interest that was created by a recipient or the recipients spouse, in property in which the recipient or spouse held interest at the time the life estate was created, or a life estate interest that was created for the benefit of a recipient or the recipients spouse in property in which the recipient or the spouse held any interest within (5) years prior to the creation of the life estate is subject to recovery. This specific reference in the ADM to an interest held within 5 years prior to creation of life estate was clearly intended to prevent a child from granting the parent a life estate within 5 years of original transfer of the remainder interest by the parent.
11ADM-8 provides a detailed description of how the life estate and remainder interest are to be valued. The life estate interests value is an actuarial computation based on the age of the recipient and the fair market value of the property immediately prior to death. 11 ADM-8 specifically states that the table to be used is IRS Table S, single life factor┐in accordance with the most recent mortality tables, "Table 2000 CM" and interest rates under IRS §7520 (interest rates).
In order to make the requisite calculation, it will be necessary that one first, determine the IRS §7520 interest rate that applies to the month and year of the Medicaid recipient’s death.
Once you have determined the appropriate IRS Section 7520 interest rate, then go to IRS Table S single life factors and scroll down to the appropriate interest rate . The table provides the life estate and remainder interest at the specific interest rate. Once the life estate interest factor is determined then multiply the fair market value of the premises at the time of death by said factor. That figure will be the value of the life estate subject to recovery against the remainderperson.
11 ADM-8 provides that the Social Services District shall file a post death lien on real property in which the deceased recipient had an interest at the time of death. Generally it is believed that utilizing the IRS table is more favorable than the HCFA table previously used as the life estate value is considerably lower than the old HCFA table that was utilized. However, this could be partially a reflection of the low interest rate environment present.
What makes Medicaid’s decision to recover against the recipient’s life estate interest most perplexing, is that the value of the life estate is not counted by Medicaid for eligibility purposes, and that upon the death of the life tenant, his or her life estate is extinguished, thus, any recovery is not against the life tenant, but, the remainder interest in said property. As previously stated, EPTL 6-4.7, 6-5.1 and 6-5.10 specifically provide the remainder person’s interest is vested, alienable and not subject to defeasance. Thus, a legitimate argument can be made that any recovery against the remainderperson is an unconstitutional taking of property.
Additionally, if the original transfer of the remainder interest was an exempt transfer for eligibility purposes such as a transfer to a blind or disabled child. caretaker child or sibling with an equity interest, it is now logically inconsistent to argue that remainderperson is now liable for the amount of Medicaid paid to or for the life tenant by Medicaid.
What Can Be Done for Clients Who Have Reserved Life Estates
The first thing the attorney should consider doing is advising all clients that have reserved a life estate in a deed of the new regulation. It may be difficult to track down just the clients for whom a life estate in a deed was reserved, however, it may be a better approach to advise all clients of the new regulations via a newsletter to that effect.
Depending on facts and circumstances relevant to each particular client, such as the health and well being of the client, the attorney will need to determine whether steps should be taken to extinguish the life estate. For example, one should assess the risk of creating a five year look-back by making a non-exempt transfer of the life estate, and the potential tax consequences (possible loss of step up in basis), loss of other tax exemptions (Star, Veterans, Senior Citizen) resulting from the extinguishment of the life estate.
It is also important to determine whether it is possible to make exempt transfers of the life estate, for example, spouse, blind and/or disabled child, caretaker child or sibling with equity interest. The attorney should also investigate whether the execution of a deed of correction to correct the original transfer that reserved the life estate. The ability to utilize a correction deed may depend on when the original deed with the life estate was executed. A real property attorney and/or title company should be consulted.
The attorney should also consider the sale of life estate to remainderperson with life tenant receiving an actuarially sound promissory note in return. Again, this option may depend on whether the life tenant is in a nursing home or not. The health of the life tenant will also be an important factor. Perhaps, one of the most viable options to consider if the five (5) year look back is not problematic is the transfer of the life estate to an Irrevocable Income Only Trust. Again, the creation of the five year look back period may be a significant factor.
Finally, the attorney may wish to consider the life tenant leasing his or her life estate to the remainderperson. There exists the possibility that under the common law doctrine of merger that the life estate when leased to another is extinguished.
One issue with conflicting opinions that is not addressed in the Regulations or ADM 11-8 is who bears the cost of closing on a sale of real property that is subject to a life estate. In re Wolfe, 2010 NY Slip Op 31180, the Supreme Court of Nassau Court held that there shall be no allocation for closing costs to the life tenant. One month later in Matter of Richard O.M. 2010 NY Slip Op 20190, the Supreme Court of Nassau County, Justice Asarch, decided the closing costs should be paid from the life tenant’s share of the proceeds. The life tenant was in a Nursing Home receiving Medicaid.
V. Interest in a Trust
The ADM provides that any interest that the Medicaid recipient had in a living trust at the time of death shall be included in the estate for recovery purposes. The Trust document must be reviewed to determine whether the decedent had any interest that would be considered available at the time of death.
VI. Revocable Living Trust
11 ADM-8 provides that if a Revocable Living Trust is created by the Medicaid recipient or the recipients spouse, the entire value of the principal and accumulated interest of the trust is considered an available resource at the time of death, and is to be included in the definition of estate for recovery purposes. There is no change as to prior law with respect to a Revocable Living Trust.
VII. Irrevocable Income Only Trust /Medicaid Asset Protection Trust
ADM 11-8 provides that Irrevocable Trusts funded in whole or in part with the assets of the Medicaid recipient or the recipients spouse, wherein any principal and accumulated interest was required to be paid to or for the benefit of the Medicaid Recipient pursuant to the terms of the trust, is included in the decedent’s estate for Medicaid recovery purposes (emphasis added). If the medicaid recipient is entitled to receive trust income, then any income that as of the date of the recipients death was required to be distributed but had not yet been distributed is included in the decedent’s estate for recovery purposes. The discretionary payment of income is not considered income required to be distributed. Medicaid will only be able to recover against the accrued and undistributed income in the trust on the recipients date of death.
Although most Grantors prefer that the payment of income to them to be mandatory, it is worth reviewing with them the option of the payment of trust income to them being discretionary. For example, the trust can provide that income be paid to a class of persons consisting of the Grantor, his children and their issue.
A. Factors to Consider When Drafting an Irrevocable Income Only Trust
The importance of drafting a trust document that is as flexible as possible without allowing for the possibility that the principal of the trust and perhaps even the income of the Trust will be subject to estate recovery is of significantly greater importance in light of the new regulations and, any other possible changes to the Medicaid program. While this at first blush appears to be relatively simple and straightforward, it requires the consideration of many factors such as estate taxes, gift taxes, capital gains taxes, other tax exemptions such as STAR, senior citizens, veterans, etc.
B. Provisions That Will Help Create Flexibility in an Irrevocable Trust
(I) Grant the Trustee(s) the authority to invade principal of the Trust for persons other than the Grantor. For example, if have two (2) children as Co-Trustees, give each Trustee the power to invade for each other and their issue. In doing so, you should avoid allowing the Trustee to invade principal for him or herself as it will be considered a general power of appointment.
(b) Reserve to the Grantor a Limited/Special Power of Appointment so that he or she can appoint the principal of the trust either in his or her Last Will and Testament, or during his lifetime (inter-vivos-trust), to for example, a limited class of persons for such as: children, grandchildren, and siblings. The Limited/Special Power of Appointment will allow the Grantor to appoint the trust principal and/or income, either in his or her Last Will or another Trust, to a different child or beneficiary with perhaps greater flexibility, and more favorable terms in the event of changes in the law . It also makes the transfer of assets to the trust an incomplete gift for gift tax purposes.
(ii) Draft the Trust so that the Trust can be revoked or amended pursuant to the provisions of EPTL 7-1.9. Under EPTL 7-1.9 , an Irrevocable Trust can be amended or revoked upon the written consent of the Grantor/Creator and the trust beneficiaries. If the Trust specifically names beneficiaries all of whom are adults, and none of whom are under a disability, the trust can be amended or revoked upon the written consent of the Grantor and all trust beneficiaries.
However, if the Trust provides that upon the death of a beneficiary, his or her share passes to his or her issue or others, then, in that event the consent of the living contingent beneficiaries is required. A parent can not consent for his or her minor or disabled children, as virtual representation is not permitted. Thus, the Court’s approval will be required. To avoid this problem, some possible solutions are (a) Provide that upon a beneficiary’s death his or her share passes to his or her "heirs" or "next of kin." EPTL 7-1.9 specifically provides that undefined contingent beneficiaries do not have a beneficial interest in the trust, and thus, their consent is not required. However, such an approach may be contrary to the preference of the Grantor to include specific named contingent beneficiaries; or (b) reserve a limited power of appointment to the Grantor. The limited power of appointment can then be exercised in a way to comply with EPTL 7-1.9, and be able to amend/ revoke the Trust without Court approval.
(iii) Consider drafting the Trust so that you can decant the trust under the provisions of EPTL §10-6.6(b), the "Decanting Statute". On August 17, 2011, Governor Andrew Cuomo signed a bill liberalizing New York’s Decanting Statute. The ability to decant allows the Trustee of an irrevocable trust to appoint the assets of an existing trust to a new trust with greater flexibility and more favorable terms. Under prior law, the Trustee needed absolute discretion to be able to decant. Thus, any limitation on Trustee’s power to invade principal, such as an ascertainable standard (health, education, maintenance and support) precluded decanting. The controlling factor was Trustee’s power to invade principal for any purpose.
Pursuant to the liberalized "Decanting Statute", the Trustee needs unmodified discretion to distribute principal, not unlimited discretion. Words such as best interest, comfort, welfare are not construed as limitations or modifications to the Trustee’s right to distribute principal. The new statute is even more permissive if the Trustee has unlimited discretion to invade principal of the trust. In that event the current and remainder beneficiaries of the appointed trust need not be the same. A trustee whose discretion is not unlimited has less flexibility, he or she may appoint principal to a new trust only if the current and remainder beneficiaries of the appointed trust are the same as in the invaded trust.
(iv) Consider appointing a Trust Protector in the Irrevocable Trust. The Trust Protector is a person or entity given sole and absolute discretion to modify, amend or revoke the trust without the consent of grantors, the trustees or any beneficiary. A Trust Protector can also appoint and remove Trustees. The powers given to the Trust Protector can be as limited or as broad or desired. It should be remembered there is no law recognizing a Trust Protector in New York, and that it is uncertain whether the Trust Protector will be considered a fiduciary. Whether or not the Trust Protector is a fiduciary will depend on the powers granted to him or her. It can be stated in the Trust that he or she is not a fiduciary. The trust should contain a provision that the Trust Protector shall not have the power to alter, change or amend the trust in a manner as to allow for return of any portion of the trust property to the Grantors, their creditors, their estates or the creditors of their estates.
(v) Finally, some consideration should be given to having the income and principal of the Irrevocable Income Only Trust upon the death of the first spouse pouring over into a Testamentary Trust for the benefit of the surviving spouse, with said testamentary trust being a Third Party SNT for the benefit of the surviving spouse.
Under the expanded definition of estate, the designated beneficiary of an annuity is not entitled to the funds if there is an outstanding Medicaid debt. The remaining balance or income distributions from an annuity purchased by or with assets of the decedent or the decedent’s spouse is included in the medicaid recipient’s estate, and is subject to recovery, unless the rules regarding deferral of recovery are applicable. If Medicaid applicant/recipient made a spousal exempt transfer of assets, and the spouse utilized the funds to purchase an annuity, upon the death of the Medicaid recipient, the income and principal of the spouse’s annuity will be subject to recovery.
IX. Life Insurance
Life insurance policies are generally not property of the estate. However, if the beneficiary of the policy is the "estate" or if there are no surviving beneficiaries, the payout is recoverable as part of the deceased Medicaid recipient’s estate. So long as the life insurance policy has a named beneficiaries there should be no recovery.
X. Recoveries and Prohibitions on Recoveries
OBRA 93 mandated that states pursue a recovery from the estate of a deceased Medicaid recipient who was age 55 or older when he or she received Medicaid benefits or who regardless of age was permanently institutionalized. OBRA 93 also provided the states with the option to expand estate recoveries to include assets that pass outside the probate estate, and which the decedent had an interest in prior to death.
XI. Estate Recovery for Medicaid Correctly Paid
Upon notice of the death of the Medicaid recipient or the surviving spouse of the recipient, the local department of DSS shall issue a written notice of claim to the fiduciary of the decedent’s estate, if applicable, or the person in possession of the property or assets in which decedent had any legal title or interest at time of death.
XII. Notice of Claim Form
Written notice of Medicaid’s claim shall include (a) the basis of the claim; (b) specify the amount determined to be owed to medicaid; ©) specify the criteria for deferral or waiver; (d) indicate Medicaid may have a lien against real property; (e) instruct fiduciary to inform heirs and beneficiaries of claim.
XIII. Prohibition of Recovery
(a) The lifetime of a surviving spouse;
(b) Any period in which the recipient has a surviving child under the age of 21 or a blind or certified disabled child; (This prohibition applies to all assets covered by the expanded definition of estate, including assets that pass directly upon the decedents’s death to individuals other than a surviving spouse or minor, blind or disabled child).
(c) As to the home of a deceased medicaid recipient, recovery is prohibited during the period when one of the following relatives is residing in the home:
1. Surviving Spouse;
2. Sibling with an equity interest; and
3. Caretaker child.
If the prohibited period ends, for example, the spouse dies, or the minor child reaches age 21 or with respect to the recipient’s home, the sibling or adult child no longer resides in the home or the home is sold, recovery can then be pursued by Medicaid.
XIV. Hardship Exception
11 ADM-8 provides that recovery of Medicaid correctly paid will be pursued against all or a portion of the estate if it will result in undue hardship for example, recipient has an interest in a family farm or family business and income produced by it are the only assets. Undue hardship is not considered to exist based on the inability of the beneficiaries to maintain a pre-existing lifestyle or when the alleged hardship is the result of Medicaid or estate planning methods involving the divestiture of assets.
Deferral of recovery may also be considered on real property subject to a post death lien if (a) undue hardship has not been found to exist; (b) heir or survivor has lawfully and continuously resided in the real property commencing prior to death of the recipient, and is unwilling to sell the real property; (c) Medicaid’s claim can’t be paid in full unless the property is liquidated; (d) heir or survivor is able to demonstrate inability to obtain financing to pay the estate claim; (e) agreement with medicaid and the dependent, heir or survivor where medicaid holds lien and heir, etc. agrees to pay the amount of claim pursuant to reasonable payment schedule and interest.
XV. Post Death Lien on Real Property
Pursuant to §369(6) of the Social Services Law, a post death lien may be placed on real property that passes outside the probate estate to a joint owner, heir, dependent, or survivor to secure their obligation to pay the medicaid estate claim up to the value of the property received.
Such a lien should not be imposed if recovery from the estate is prohibited. A post death lien should be imposed against real property as soon as practical after the individual’s death to put mortgage lenders and prospective purchases on notice of the medicaid program’s claim against the property. The District in addition to post death lien may consider a voluntary repayment. Medicaid is a preferred creditor of the estate.
In conclusion, there remains a great deal of uncertainty as to how the new Regulations will be implemented, especially as to "life estates" and IRA’s. Clearly, the playing field continues to change as the Medicaid program becomes an increasing burden and strain on Federal and State budgets. This constant flux in the rules may be the new normal.
Enea, Esq. is the managing member of the firm
of Enea, Scanlan & Sirignano, LLP of White Plains, New York. His office is centrally located in White
Plains and he has an office in Somers, New York.
Mr. Enea is the
Chair of the Elder Law Section of the New
York State Bar Association.
Mr. Enea is a Past President and a Founding Member of the
New York Chapter of the National Academy of Elder Law Attorneys (NAELA). He is also a member of the Council of
Advanced Practitioners of NAELA.
Mr. Enea focuses his practice on Elder Law, Wills Trusts
and Estates, Business Succession Planning, Partnership and Corporate Matters.
He can be reached at (914) 948-1500.