- Need for Long-Term Care Planning
- Skilled Care v. Custodial Care
- Paying for Long-Term Care
- A Middle Class Problem
- Need for Medicaid
- Medicaid Eligibility Rules
- Unmarried Individual
- Income Limits
- Resource Limits
- Married Individual
- Strategy: Transfer Assets to Meet Resource Limits. Transfer of asset planning is also known as “divestment planning.”
- Exempt Transfers
- Non-exempt Transfers: Medicaid Look Back
- Look Back for Nursing Home Medicaid
- Look Back for Home Care Medicaid
- Two Basic Transfer Options: Direct Transfer & Transfer in Trust. A transfer of assets can be outright (a “direct transfer”) or in trust.
- Direct Transfer
- Types of Direct Transfers
- Direct Transfer with Nothing Retained
- Direct Transfer with Retained Life Estate
- Direct Transfer with Retained Limited Power of Appointment
- Benefits of Direct Transfers
- Downsides of Direct Transfers
- (1) Exposure to creditors (through lawsuits or divorce) of the donee.
- (2) If the donee dies, the new owner will own the property outright and might not honor an unwritten agreement or understanding with the donor.
- (3) The donee receives the property with donor’s tax basis (“carryover basis”).
- (4) If the property that is transferred is a primary residence, the donee must live in the property for 2 years before selling it in order to get the $250,000 capital gains tax exclusion under IRC § 121.
- Transfer in Trust
- A trust with many names.
- Trust Must be Irrevocable
- Cannot Use Revocable Trust. The income and assets of a revocable trust are counted as income and assets that are available to the individual for purposes of Medicaid eligibility. 42 U.S. Code § 1396p(d)(3)(A) (stating, “In the case of a revocable trust— (i) the corpus of the trust shall be considered resources available to the individual, (ii) payments from the trust to or for the benefit of the individual shall be considered income of the individual, and (iii) any other payments from the trust shall be considered assets disposed of by the individual for purposes of subsection (c).).
- Irrevocable Trust Can Work. An irrevocable trust can protect assets from Medicaid if (1) it is properly drafted, and (2) the look-back period has elapsed.
- No Payments Under Any Circumstances Can Be Made to Grantor. An irrevocable trust is properly drafted when “no payment could under any circumstances be made” to the grantor (or the grantor’s spouse ). 42 U.S. Code § 1396p(d)(3)(B) (stating, “In the case of an irrevocable trust— (i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income— (I) to or for the benefit of the individual, shall be considered income of the individual, and (II) for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c); and (ii) any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later, the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of subsection (c), and the value of the trust shall be determined for purposes of such subsection by including the amount of any payments made from such portion of the trust after such date.”).
- Grantor’s Access to Even One Dollar of Principal Makes Entire Principal Available. The statute is misleading when it speaks of a “portion” of the corpus or trust being affected by the grantor’s access because access even to one dollar of the principal makes the entire principal available for purposes of Medicaid eligibility. Vincent J. Russo, Medicaid Trust Drafting Techniques, NYLJ, May 21, 2001 (stating, “if a Trust provided that principal could be paid to the creator, but only for the purpose of a heart transplant, the entire principal of the Trust would be deemed available to the creator. This is so because there is a circumstance under which some principal could be paid. Even though the possibility of invading principal to the full extent of the Trust may be remote, the statute provides that the entire principal will be deemed available. See Department of Health and Human Services Health Care Finance Administration State Medicaid Manual Transmittal No. 64, 3259.6 E.”); Daniel G. Fish, Use of Limited Power of Appointment in Medicaid Trusts, NYLJ, Dec. 8, 2003 (explaining, “If there are any circumstances under which principal can be paid to the applicant, then the entire corpus is to be considered available. If the terms of the trust instrument prohibit the trustees from making payment of principal to the grantor, the principal cannot be considered an available resource. An irrevocable trust which permits the trustees to distribute one dollar of principal to the grantor, makes the entire principal of the trust available and countable by Medicaid. The same rule applies to income distributions from the trust. If any income can be paid to the grantor, all of the income is counted as available.”).
- Discretionary Power to Distribute Principal to Grantor Does Not Help. A trustee’s discretionary power to distribute the trust principal to the grantor causes the trust causes the Medicaid application to be denied. Matter of Flannery v. Zucker, 136 A.D.3d 1385, 24 N.Y.S.3d 832 (4th Dept. 2016); see Daniel G. Fish, Drafting Suggestions for Medicaid Trusts in Light of ‘Flannery v. Zucker’, NYLJ Nov. 18, 2016.
- Must Wait Until Look-Back Period Elapses. A transfer to an irrevocable trust protects assets from Medicaid’s reach only after the look-back period has elapsed. The look-back period is 60 months for nursing home Medicaid, and 30 months for home care Medicaid.
- What Irrevocable Actually Means
- Reasons for Needing to Modify or Revoke an Irrevocable Trust
- (1) Improperly Drafted Trust
- (2) Changed Circumstances
- (2A) Change in Law
- (2B) Change in Beneficiary
- See Ann-Margaret Carrozza, *(Sort of) Irrevocable Trusts; Explore the various ways trusts can later be changed or edited, NYLJ, Sept. 17, 2012 (discussing the “many reasons one may wish to revoke, modify or “edit” an existing irrevocable trust.”).
- Three Tools to Modify or Revoke an Irrevocable Lifetime Trust
- Generally. There are three ways to amend an irrevocable trust: (1) Modification (and even revocation) under EPTL 7-1.9, (2) decanting to a trust with new terms under EPTL 10-6.6, and (3) judicial reformation.
- (1) Modification or Revocation Under EPTL 7-1.9
- Generally. In New York, it is possible to modify or revoke an irrevocable trust under EPTL 7-1.9, provided (1) the trust is drafted properly, and (2) statutory procedures are followed.
- Cannot Rely on EPTL 7-1.9 if Trust Has Explicit Revocation or Amendment Provisions. When an irrevocable trust explicitly states procedures for modification or revocation, those procedures must be followed. So, for example, if a trust states that the trustee’s consent is required for a modification or revocation, then the grantor cannot use the statutory provisions in EPTL 7-1.9 to sidestep these procedures.
- EPTL 7-1.9 Requirements
- Can Agent Under Power of Attorney Modify or Revoke Under EPTL 7-1.9? Yes.
- Minors cannot revoke
- Someone disabled cannot revoke
- If grantor dies, cannot amend or revoke – this is an issue when a trust has two grantors because the trust becomes irrevocable upon the first grantor’s death.
- Drafting: Coordinating a Limited Power of Appointment and EPTL 7-1.9
- Appointees May or May Not Be “Beneficially Interested”
- Takers in Default of Appointment Must Be Selected Carefully
- Testamentary LPOA … O’Toole
- Medicaid can recover from a decedent’s probate estate. Does a testamentary LPOA in an inter vivos trust inadvertently create a Medicaid problem by converting the appointive property to probate assets? No, a testamentary power of appointment does not make the appointive property probate property. An appointee takes title from the donor’s instrument that creates the power, not from the donee’s instrument that exercises the power. The donee acts merely as an agent of the donor. So, a donee takes title from the trust, not from the donor’s will 12 Warren’s Heaton on Surrogate’s Court Practice 200.04 Exercising Powers of Appointment (stating, “Because a donee acts as an agent or conduit of the donor, the donor retains title over appointive property. An appointee therefore receives title from the donor’s instrument creating the power of appointment, not the donee’s instrument executing it. In re Duryea, 250 A.D. 305, 293 N.Y.S. 985 (1st Dep’t 1937), modified on other grounds, 277 N.Y. 310, 14 N.E.2d 369 (1938).”).
- Consequences of Termination
- Tax Consequences of Amending or Revoking Under EPTL 7-1.9
- Option at termination: The tax consequences depend on whether the grantor gets trust assets or beneficiaries get them upon termination.
- If, upon termination, the beneficiaries get the property, then the grantor must survive at least 3 years to get the property out of his estate.
- (2) Decanting under EPTL 10-6.6
- EPTL 10-6.6 allows the trustee of certain irrevocable trusts to modify the trust without approval from the grantor, beneficiaries, or the court.
- 2011: NY expanded decanting under EPTL 10-6.6.
- If a trustee is a beneficiary, then you cannot decant the trust. Ann-Margaret Carrozza, *(Sort of) Irrevocable Trusts; Explore the various ways trusts can later be changed or edited, NYLJ, Sept. 17, 2012 (“The statute excludes trustees with a present or future beneficial interest in the trust from being able to decant. This prohibition renders decanting relief unavailable to countless trusts that name the settlor’s child or other loved one as both a trustee and ultimate remainder beneficiary.”).
- Most clients want a family member/beneficiary to be trustee, so decanting is out of the question.
- Resources on Decanting Under EPTL 10-6.6
- William Schwartz, Modifying Irrevocable Trusts: Proceed, But With Caution, NYLJ, Sept. 16, 2013.
- (3) Reformation with Approval of Court
- See Ann-Margaret Carrozza, (Sort of) Irrevocable Trusts; Explore the various ways trusts can later be changed or edited, NYLJ, Sept. 17, 2012 (discussing changing trusts under EPTL 7-1.9, under EPTL 10-6.6, and through judicial reformation).
- Two Drafting Strategies. Someone drafting an irrevocable trust might want to make the trust easier or harder to amend or revoke. Ann-Margaret Carrozza, (Sort of) Irrevocable Trusts; Explore the various ways trusts can later be changed or edited, NYLJ, Sept. 17, 2012 (“Trust settlors and drafters who do not wish for trust terms to be later amended need to create documents that are both unambiguous and flexible. This will reduce the likelihood of a need to interpret and/or modify trust terms later.”).
- Grantor
- The grantor is the person who creates the trust. The grantor is also called the “settlor,” “creator,” or “trustor.” EPTL 1-2.2 Creator (defining creator as “a person who makes a disposition of property.”); SCPA 103(23) Definitions (defining grantor as “[t]he creator of a lifetime trust.”); Peter J. Strauss, To Have and Have Not: Trusts After, NYLJ, July 24, 1990 (“In the trust context, the property is initially transferred by the trustor, grantor, settlor or whatever term you prefer to use.”).
- If Married Couple, One or Two Trusts? There are three options:
- (1) One trust, two grantors.
- (+) One trust is affordable in terms of creation cost and administration expense.
- (-) Cannot use EPTL 7-1.9 upon 1st grantor’s death, so you should not recommend one trust:
- If one of the grantors is much older than the older.
- If both grantors are very old.
- If one of the grantors has a terminal illness.
- (2) One trust, one grantor: Spousal transfer from one spouse to the other.
- (+) Spousal transfers are exempt for purposes of Medicaid eligibility.
- (+) One trust is affordable in terms of creation cost and administration expense.
- (-) More deeds =
- more expensive to fund the trust
- can be prohibitive if we’re transferring to many assets that require deeds
- (3) Two trusts, two grantors.
- (-) More expensive to create and to administer two trusts.
- Grantor Can Retain Some Interests
- (1) Grantor Can Retain Income Interest
- Tax Consequences of Grantor Retaining Income
- Gift Tax
- Estate Tax
- Income Tax while Grantor is Alive
- Income Tax Upon Grantor’s Death
- Medicaid Consequences
- Asset Protection Consequences
- (2) Grantor Can Retain Right to Reside in Primary Residence. A MAPT should give the grantor the right to reside until in the primary residence until the grantor’s death.
- Grantor Can Retain Limited Power of Appointment
- Right to Change Trustee to Someone Other than Grantor (or Spouse)
- Right to Substitute Assets
- Res
- Cooperative Apartment (COOP)
- A cooperative apartment can be an investment property or a primary residence.
- Get Board Approval for Transfer to Trust. Make sure that the COOP board will allow ownership by a trust. If the COOP allows trust ownership, then, typically, the attorney for the coop will review the trust, and the grantor and trustees must sign COOP-specific documents that are prepared by the COOP’s attorney at the grnator’s cost.
- Primary Residence
- Should Grantor Retain Life Estate in Deed? There are two perspectives. I know some attorneys who draft a life estate every time, but I a grantor should retain a life estate unless there is a benefit.
- The case against retaining a life estate:
- Retaining a life estate makes things less flexible. If the primary residence needs to be sold, the life tenant gets a portion of the proceeds and this will disqualify the life tenant from Medicaid eligibility.
- Nothing is gained by retaining a life estate: NY property tax exemptions allow the primary residence to be held in trust.
- The case for retaining a life estate:
- Vincent J. Russo, Medicaid Trust Drafting Techniques, NYLJ, May 21, 2001: “Seniors will often transfer the residence with a retained life estate in order to obtain a reduced transfer penalty due to the value of the retained life estate.[See Department of Health and Human Services Health Care Finance Administration State Medicaid Manual Transmittal No. 64.] No such reduction is provided for under Medicaid law when the transfer is to an irrevocable trust. Planning Tip: The best of both worlds may be obtained by transferring the residence to the irrevocable trust while retaining a life estate. This technique is very useful if the individual may sell his or her residence in the future if Medicaid is not needed, while creating the shortest possible Medicaid transfer penalty period in case Medicaid is required.” I do not follow Russo’s reasoning: How is retaining a life estate “useful if the individual may sell his or residence in the future if Medicaid is not needed”? Is it because the grantor will get a portion of the sale proceeds that are equal to the value of the life estate?
- The grantor retains the right to reside in the property.
- Grantor Pays Real Estate Taxes.
- Trustee
- Choosing the Trustee(s)
- Should the Grantor (or Grantor’s Spouse) be a Trustee?
- Can a principal beneficiary be a trustee?
- Should you have more than one trustee?
- If more than one trustee:
- Act jointly or independently?
- Option: Act independently up to a specified dollar limit, for example $5,000.
- If a trustee is a beneficiary, then you cannot decant the trust under EPTL 10-6.6. Ann-Margaret Carrozza, (Sort of) Irrevocable Trusts; Explore the various ways trusts can later be changed or edited, NYLJ, Sept. 17, 2012 (“The statute excludes trustees with a present or future beneficial interest in the trust from being able to decant. This prohibition renders decanting relief unavailable to countless trusts that name the settlor’s child or other loved one as both a trustee and ultimate remainder beneficiary.”).
- Trustee Powers
- I remember there were powers that trustee shouldn’t have???
- Trust Protector
- Beneficiaries
- Traps When Choosing Beneficiaries
- Minor = can’t revoke under EPTL 7-1.9
- Under disability = can’t revoke under EPTL 7-1.9
- Grantor / income = income is countable for Medicaid eligibility
- Grantor / principal = not a Medicaid trust
- Beneficiary who is trustee = cannot decant under EPTl 10-6.6
- If grantor is married and …
- if beneficiary is not wife = right of election issues (and if community spouse dies first, Medicaid might force the Medicaid recipient to assert the right of election)
- if spouse receives income = income is countable for Medicaid eligibility
- if spouse receives principal = not Medicaid trust
- EPTL 7-1.6
- Aaron L. Danzig, Are Medicaid Trusts Trustworthy, NYLJ, March 6, 1990 (recommending that Medicaid trusts should “expressly provide in the instrument that the Settlor is waiving or renouncing his or her rights under Section 7-1.6 of the EPTL, and explicitly directing that it not apply.”); Peter J. Strauss, To Have and Have Not: Trusts After, NYLJ, July 24, 1990 (“I agree with Aaron Danzig . . . that a trust can be drafted to preclude the applicability of EPTL 7-1.6.”).
- Power of Attorney
- Agent can exercise principal’s power to appoint. Cite???
- What language must the POA have to give the agent this power?
- Springing?
- Health Care Proxy
- Purpose
- Can only name one agent.
- Medicaid Lien
- Medicaid Recovery