Is my Home Safe for my Family?

Question:
Several years ago, I did some planning with an elder law attorney to protect my assets in the event I needed a nursing home in the future. I transferred my home to my children while keeping my right to live there for my life and put funds in an Irrevocable Trust where I continue to get paid the interest. Now I understand that the state is changing the rules. Where do I stand?

Answer:
The “rule changes” came along with the New York State budget passed in April of this year. Under the old law, if Medicaid helps a person pay for his or her time in a nursing home, when that person dies, the state could attempt to recover what it has paid but only from the recipient’s probate estate. The probate estate only includes those assets which are passed on through a persons will by a court proceeding. That means that those assets mentioned in our reader’s question such as his home which retained life rights (technically called a “life estate”) and funds passing through a trust, would all be exempt from reimbursing the state.

The new law seeks to eliminate these exemptions and allow the state to obtain payments from these formerly exempt assets as well. Under this plan, these assets would no longer be protected for your family.

However, as those of you who have been following my columns may recall, to no one’s surprise, in its rush to pass the first on-time state budget in decades, the legislature gave no details on how this was going to be accomplished but left it up to the Department of Health to fill in the blanks with regulations. Now, finally, we were able to view a draft of the changes which was submitted to the federal government for approval. While anything is possible, I do not believe that the feds will withhold approval or make any substantial changes. There is some good news and some bad news in the proposed regulations.

The bad news first: There is no time limit. From the reading of the proposed regulations, it appears that it doesn’t matter if you deeded your home to your children with a retained life estate two years ago or twenty years ago. It doesn’t appear to matter if you created and funded an Irrevocable Trust yesterday or at the birth of your first child. The only time that is relevant is immediately before your death. If you owned some interests immediately before your death, it can be available for Medicaid payback. In addition, unlike some provisions of the law regarding Medicaid, your motivation for transferring the property or creating the trust is of no apparent relevance either. You could have specifically been attempting to avoid Medicaid reimbursement, gain tax benefits for your family, ease the transfer of death or reduce legal fees for your family, it would not matter. All is equally available for reimbursement.

On the more positive side, what is actually available may be relatively limited. Take the example of one’s interest in his or her home with a retained life estate. The fact is that, as you get older, the value of your life estate in your home is less and less because your life expectance becomes less. A life estate for a 60 year old, by Department of Social Services tables, is worth almost 85% of the value of your home but if you live until the age of 95, your life estate interest is reduced to about 23%. So, as usual, the longer you live, the better it is for your family.

As to the funds in an Irrevocable Trust, they are only available for Medicaid recovery “to the extent that the person was entitled to the distribution of such principal and interest pursuant to the terms of the trust.” Since the vast majority of Irrevocable Trust are set up so that the creator of the trust is entitled to no distribution of principal, this provision seems to have almost no effect in that regard. While many such trust give income to the person, often for life, the regulation states that it applies only to “any income that, as of the date of the person’s death, was required to be but had not been distributed.” This would appear to mean that if there is a monthly payment but the Medicaid recipient died before it was paid, only that amount might be available to the state.

Finally, there are exclusions to Medicaid recovery from an estate when the deceased person has a living spouse or a child who is under 21 years of age or is blind or disabled. Specifically as to a lien on a persons home, there are exclusions when a sibling has resided there for a certain amount of time or a child who cared for the Medicaid recipient lives there.

Although we may not have the final version of the regulations, the drafts are sufficient to give us the parameters of the rules that we can expect to be with us for the foreseeable future. From the point of view of those of us who practice elder law, new techniques will be developed for planning on behalf of our clients. For those of you who already have documents in place, modifications may be called for with the aid of a skilled elder law attorney.