- Purpose of a MAPT
- Medicaid Eligibility: Generally
- Medicaid Eligibility: Individuals
- Medicaid Eligibility for Married Couples
- Medicaid Eligibility: Transfer of Assets Problems
- Penalty Period: Generally
- Penalty Period: Calculating
- Penalty Period: Start
- Married Couple: Right of Election Problem
- Medicaid Eligibility: Trusts
- Benefits of a MAPT
- Trust Attributes
- Grantor Can Retain Income
- Consequences of Retaining Income
- Planning: Three Requirements Before Grantor Can Retain Income
- Drafting: Options for Income Interest
- If Grantor Reserves Income: Should Opt Out of EPTL 7-1.6
- No Trigger Provision
- Limited Power of Appointment
- -Selecting the Trustee
- -Can the Grantor Be a Trustee?
- If Grantor Retains Income, Trustee Cannot Make Adjustments that Would Jeopardize Medicaid
- Optional: Trust Protector
- Primary Residence in MAPT
- Married Couple: Right of Election Problem
- Resources on MAPTs
Type of trust:
- Lifetime or testamentary? Lifetime.
- Revocable or irrevocable? Irrevocable. But revocation under EPTL 7-1.9 is possible.
- Grantor should not retain life estate in deed.
- Retaining right to reside in the trust is sufficient to obtain STAR Exemption.
- If life estate is retained in the deed and if the property is sold while the grantor is alive, then the grantor will get a portion of the proceeds, which would impact medicaid eligibility.
- Trustee should be empowered to hold unproductive property.
- If Medicaid applicant is married, then the grantor should not retain a right to reside in the property because such a retained right makes the property a testamentary substitute for purposes of the right of election.
- Grantor can be income beneficiary.
- Cannot have a trigger provision that gives the grantor income until the grantor needs Medicaid as such provision is contrary to public policy. EPTL 7-3.1(c).
- Grantor or grantor’s spouse cannot be a principal beneficiary.
- Cannot have a trigger provision that gives the grantor principal until the grantor needs Medicaid as such provision is contrary to public policy. EPTL 7-3.1(c).
- Can Medicaid require a trustee required to invade the principal of a trust for a beneficiary who needs long-term care?
Trust protector is optional.
Purpose of a MAPT
Problem: Paying for Long-Term Care
Advances in science have enabled humans to live longer than before. But scientific advances have not been matched by legal and financial innovations.
As people age, their bodies (and even their brains) can whither. These ailments create a need for long term medical care to help with the activities of daily living: Bathing, dressing, toileting, transferring (getting in and out of a chair), continence, and feeding.
People who need help with the activities of daily living cannot take physical care of themselves. They need costly medical assistance. But the health care system in the United States fails seniors because it places the burden of paying or insuring for long term care on individuals.
Solution 1: Long Term Care Insurance
People can buy long term care insurance to help pay for long term care. But the cost of long term care insurance is very expensive, unless the insurance is purchased early. Also, people with chronic illnesses generally do not qualify for long term insurance.
Solution 2: Pay Out-of-Pocket
People can pay for long term care from their savings. But the cost of such health care is staggering, so only rich people have enough money to pay for long term care out of pocket.
Solution 3: Qualify for Medicaid
Medicaid can cover the costs of long-term care for people who qualify. Medicaid is a jointly financed federal-state health insurance program for people who fall below specified income and resource limits.
The federal government created Medicaid in 1965 in the same legislation that created Medicare. New York State adopted the Medicaid program in 1966. It gave the responsibility of administering the program to the counties. So, to apply for Medicaid, an individual must submit an application to the local Medicaid agency in the county in which the Medicaid recipient resides.
Why Solution 3 Is Most Practical
Qualifying for Medicaid is the most practical solution for most middle class people for several reasons:
- The person needing long-term care cannot pay out-of-pocket:
- They do not have sufficed savings.
- The savings will last for a short period of time.
- The person can pay but they would prefer not to:
- The person prefers to leave the life savings to children or other loved ones than spend them to pay for long term care and end up with the same result: Penniless and on Medicaid.
- The person’s children have an expectation of inheriting something. Joel C. Dobris explains:1
Simply put, the engine that drives the divestment of assets to qualify for Medicaid is the children. They feel entitled to an inheritance that, if denied, they regard as a breach of the social compact, as they read it.
. . .
It seems fair to say the same fund of savings is being called to do several jobs–cushion the nursing home blow, support the community spouse if there is one, and provide an inheritance. There is an obvious conflict, and people are coming up short. So people want as much as assurance as possible that, if someone must go into a nursing home, it is not going to bankrupt the family.
- The person needing long-term care cannot afford to pay for long-term care insurance or does not qualify for it due to pre-existing or other health conditions.
Unfortunately, Medicare does not cover long-term care expenses in a meaningful way. Paying for long-term care is a middle class problem because poor people have Medicaid and wealthy people have sufficient money to pay for everything. So, middle class people have to qualify for Medicaid to have their long-term care expenses covered. The typical middle-class person prefers to pass have a loved one benefit from life savings, rather than spend it on a few months of health-care.
There are policy arguments against helping seniors qualify for Medicaid while preserving some of their assets. The arguments are valid, but Medicaid planning is a necessity that is imposed by the health-care system in the United States. Other health-care needs are covered by Medicare, and qualification is simply based on the person’s age. It doesn’t require people to be poor to receive medical care. But Medicare has a gap for long-term care coverage. It shouldn’t. Our government should not discriminate against seniors with health problems that require long-term care. Our government fails our most vulnerable population at exactly the time when they need the most help.
How MAPT Helps with Solution 3
A Medicaid Asset Protection Trust (“MAPT”) is an irrevocable trust that seniors can use to protect their assets and qualify for Medicaid. A MAPT accomplishes its goals by removing assets from the reach of Medicaid.
The name of a MAPT suggests its two main goals: (1) Helping the grantor to qualify for Medicaid, while (2) protecting and preserving some of the grantor’s assets for the grantor’s beneficiaries. Assets that the grantor transfers to a MAPT do not count as a resource for purposes of Medicaid. Further, Medicaid does not have a right of recovery over these assets after the grantor dies.
Many people’s net worth is tied up in their home. A MAPT can help to protect the home.
Medicaid Eligibility: Generally
Can Be Citizen or Resident
To be eligible for Medicaid, the applicant can be a U.S. citizen or a legal U.S. resident.
Medicaid Considers All Available Income and Resources
In determining an applicant’s eligibility for Medicaid benefits, Medicaid “must consider only available income and resources.” 18 NYCRR 360-2.3(c)(1).
The term “available resources” includes:
- “all resources in the control of the applicant/recipient.
- any resources in the control of anyone acting on the applicant’s/recipient’s behalf such as a guardian, conservator, representative or committee.” 18 NYCRR 360-4.4(b)(1).
- “the income and resources of all legally responsible relatives,” such as a spouse. 18 NYCRR 360-2.3(c)(1).
Medicaid Financial Levels provides Medicaid income and resource limits from 2001 - 2020.
Medicaid Eligibility: Individuals
Medicaid Eligibility for Married Couples
Income & Resource Limits
When one spouse goes to a nursing home, Medicaid expects the community spouse to contribute to the care of the sick spouse. The community spouse can only keep up to a resource allowance.
Community Spouse: Income Allowance
Community Spouse: Resource Allowance
Medicaid Eligibility: Transfer of Assets Problems
Penalty Period: Generally
Penalty Period: Calculating
Penalty Period: Start
Married Couple: Right of Election Problem
When the community spouse dies, Medicaid can force the ill spouse to assert a right of election. Depending on the language of the trust, the trust’s assets would be subject to the surviving spouse’s right of election. Consequently, (1) a portion of the exposed assets would then go to the surviving spouse, instead of the intended beneficiaries under the trust, and (2) the surviving spouse becomes ineligible for Medicaid.
96 ADM-8 § (IV)(A)(1):
Assets include all income and resources of the individual and the individual’s spouse. This includes income or resources which the individual or the individual’s spouse is entitled to but does not receive because of any action or inaction by;
. . .
- renouncing an inheritance or refusing to assert one's right of election against an inheritance;
The triggers that make an asset a testamentary substitute are statutory.
EPTL 5-1.1-A(b) provides, in part:
(b) Inter vivos dispositions treated as testamentary substitutes for the purpose of election by surviving spouse.
. . .
(B) The aggregate transfers of property (including the transfer, release or relinquishment of any property interest which, but for such transfer, release or relinquishment, would come within the scope of clause (F)), other than gifts causa mortis and transfers coming within the scope of clauses (G) and (H), to or for the benefit of any person, made after August thirty-first, nineteen hundred ninety-two, and within one year of the death of the decedent, to the extent that the decedent did not receive adequate and full consideration in money or money’s worth for such transfers; provided, however, that any portion of any such transfer that was excludible from taxable gifts pursuant to subsections (b) and (e) of section two thousand five hundred three of the United States Internal Revenue Code, including any amounts excluded as a result of the election by the surviving spouse to treat any such transfer as having been made one half by him or her, shall not be treated as a testamentary substitute.
. . .
(F) Any disposition of property or contractual arrangement made by the decedent, in trust or otherwise, to the extent that the decedent (i) after August thirty-first, nineteen hundred ninety-two, retained for his or her life or for any period not ascertainable without reference to his or her death or for any period which does not in fact end before his or her death the possession or enjoyment of, or the right to income from, the property except to the extent that such disposition or contractual arrangement was for an adequate consideration in money or money’s worth; or (ii) at the date of his or her death retained either alone or in conjunction with any other person who does not have a substantial adverse interest, by the express provisions of the disposing instrument, a power to revoke such disposition or a power to consume, invade or dispose of the principal thereof. The provisions of this subparagraph shall not affect the right of any income beneficiary to the income undistributed or accrued at the date of death nor shall they impair or defeat any right which has vested on or before August thirty-first, nineteen hundred ninety-two.
Trigger 1: Transfer Within One Year of Death
A transfer within one year of death is a testamentary substitute. EPTL 5-1.1-A(b)(1)(B).
EPTL 5-1.1-A(b)(1)(B) deems the following to be a testamentary substitute: “The aggregate transfers of property . . . made . . . within one year of the death of the decedent . . . .”
Trigger 2: Retain Right to Live in House
Retaining the right to live in a house results in the house being deemed a testamentary substitute. EPTL 5-1.1-A(b)(1)(F).
EPTL 5-1.1-A(b)(1)(F) deems the following to be a testamentary substitute: “Any disposition of property . . . in trust . . . to the extent that the decedent . . . retained for his or her life . . . the possession or enjoyment of . . . the property . . . .”
In Medicaid Asset Protection Trusts: Select Drafting and Post-Execution Issues, Robert J. Kurre states:
Right of Election. The typical Medicaid Asset Protection Trust is a testamentary substitute under E.P.T.L. 5-1.1-A(b)(1)(F) by virtue of . . . the Grantor retaining the right to possess or enjoy the Trust property. Therefore, a Grantor’s retention of the right to use and occupy the Grantor’s residence which is part of the Trust estate makes it a testamentary substitute.
Trigger 3: Retain Income
Retaining the right to income from the trust’s assets makes those assets a testamentary substitute. EPTL 5-1.1-A(b)(1)(F).
EPTL 5-1.1-A(b)(1)(F) deems the following to be a testamentary substitute: “Any disposition of property . . . in trust . . . to the extent that the decedent . . . retained for his or her life . . . the right to income from . . . the property . . . .”
In Medicaid Asset Protection Trusts: Select Drafting and Post-Execution Issues, Robert J. Kurre states:
Right of Election. The typical Medicaid Asset Protection Trust is a testamentary substitute under E.P.T.L. 5-1.1-A(b)(1)(F) by virtue of the Grantor retaining the right to receive the Trust’s income . . . .
Trigger 4: Retain Limited Power of Appointment
Retaining the right to a limited power of appointment makes those assets a testamentary substitute. EPTL 5-1.1-A(b)(1)(F), In re Estate of Reynolds, 87 N.Y.2d 633 (1996).
EPTL 5-1.1-A(b)(1)(F) deems the following to be a testamentary substitute: “Any disposition of property . . . in trust . . . to the extent that the decedent . . . retained for his or her life . . . a power to consume, invade or dispose of the principal . . . .”
In In re Estate of Reynolds, the Court of Appeals held that an inter vivos, irrevocable trust in which the deceased spouse retained a limited power of appointment constitutes a testamentary substitute in violation of the surviving spouse’s right of election. In this case, while she was alive, a spouse created an irrevocable trust with her children from a prior marriage as trustees and remianderpersons, and retained a limited power of appointment to designate remainder beneficiaries at any time prior to the termination of the trust. When the spouse died, she left her entire estate to her children from a previous marriage. The Court of Appeals held that the assets of the inter vivos trust must be included for purposes of computing the surviving spouse’s elective share:
Applying the reasonable and fair interpretation of the statute’s words and purpose to the instant case, we conclude that Dorothy Reynolds’ retained power of appointment, though limited, left her with meaningful control over the trust during her lifetime, in contravention of the statute’s explicit and intended protection. Because the settlor, despite her general relinquishment of title and ownership of the property, was free to designate any person, charity or entity as a beneficiary of the trust except for herself, her spouse or her estate and creditors, she possessed personal power to execute what were essentially testamentary transfers to any number of other specific beneficiaries of her choosing. This was a functional substitute allowing disposal of the entire trust corpus by way of one or a series of specific bequests that constitute a forbidden reserved “power to consume, invade or dispose” (EPTL 5-1.1[b][E]). The power here to designate many beneficiaries or classes is essentially indistinguishable from the power to dispose of the principal of the trust as contemplated by the statute (EPTL 5-1.1 [b][E]; see, Matter of DeVita, 141 AD2d 46, 53).
In Spetz v. N.Y. State Dep’t of Health, 737 N.Y.S.2d 524, 190 Misc. 2d 297 (NY Supreme, Chautauqua County 2002), the New York Supreme Court followed Matter of Reynolds, and stated:
Certainly, when determining whether or not a trust serves the same purpose as a will, the power to name beneficiaries is determinative.
Medicaid Eligibility: Trusts
Revocable trusts cannot be used in Medicaid Planning.
The assets of a revocable trust are considered a resource available to the Medicaid applicant. 42 U.S.C. 1396p(d)(3)(A).
42 U.S.C. 1396p(d)(3)(A) provides:
(A) 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).
Under some circumstances, the assets of an irrevocable trust can be deemed available for purposes of Medicaid eligibility.
The assets of an irrevocable trust are not considered available resources if “no payment could under any circumstances” can be made to the grantor. 42 U.S.C. 1396p(d)(3)(B).
42 U.S.C. 1396p(d)(3)(B) provides:
(B) 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.
Similarly, in New York, 18 NYCRR 360-4.5(b)(1)(ii) provides:
Any portion of the trust principal, and of the income generated from the trust, which can be paid to or for the benefit of the applicant/recipient, under any circumstances, must be considered to be an available resource.
Medicaid has made several attempts to argue for a broad interpretation of “any circumstances”: that would result in an irrevocable trust’s assets being deemed available to the grantor.
|EPTL 7-1.6||lost||Hoelser||Should Opt Out of EPTL 7-1.6|
|EPTL 7-1.9 + limited power of appointment||lost||Verdow, Spetz||EPTL 7-1.9 Is Not an Issue|
|limited power of appointment + right of election||won||Reynolds, Spetz||Optional for Single Individual: Limited Power of Appointment|
|reserve income + right of election||won||???||?|
Revocation Under EPTL 7-1.9 Is Not an Issue
Under EPTL 7-1.9, any trust can be revoked, provided that the beneficiaries consent, in writing, to the revocation. Medicaid has tried to argue that this statute makes the assets of an irrevocable trust available, but it was unsuccessful.
In Spetz v. N.Y. State Dept’s of Health, 737 N.Y.S.2d 524, 190 Misc. 2d 297 (NY Supreme Chautauqua County 2002), the NY Supreme Court, stated:
the speculative possibility of a revocation pursuant to EPTL 7-1.9 does not render the corpus of the trust “potentially available” to the petitioner. . . .
. . .
. . . social services may not treat trust assets as being potentially available to an applicant or spouse where they cannot be reached without consent of the trust beneficiaries. To hold otherwise would eviscerate the federal and state statutes providing, in detail, for the protection of assets through the use of irrevocable trusts, since every trust would be presumed to be revocable under section 7-1.9.
Funding Trust Triggers Transfer of Asset Problems
An unfunded trust is useless. Funding the trust requires a transfer of assets from the grantor to the trustee. This funding process impacts a Medicaid applicant’s eligibility because it triggers Medicaid’s transfer of assets rules.
Benefits of a MAPT
A properly drafted MAPT can help protect the grantor’s assets and still allow the grantor to qualify for Medicaid because the trust’s assets are not counted as an available resource for purposes of Medicaid eligibility.
Like other trusts, a MAPT can have additional benefits:
- allow the grantor to retain some control
- minimize taxes
- avoid the cost and delay of probate
- centralized management of assets by a trustee
- allowing the trustee to implement an investment plan
- continuity in the event the grantor becomes incapacitated (or after the grantor dies if the trust continues for the benefit of others)
MAPT Is Superior to Outright Gift
A MAPT is superior to an outright gift for several reasons:
- Donees get a carry-over basis in outright gifts. So, if they will pay an enormous capital gains tax when they sell assets that have appreciated significantly.
Risks of a MAPT
The risks to a MAPT are (1) estate recovery by Medicaid, and (2) Medicaid reaching the assets of a MAPT by forcing the recipient-surviving spouse to assert the right of election.
Estate Recovery: Unlikely
|Federal:||State chooses||State chooses|
|Estate includes probate assets?||Yes||Yes|
|Estate includes nonprobate assets?||No||Yes|
|Medicaid can recover from irrevocable trust under def?||No||Yes|
|New York’s def of estate:||Yes||No|
|Medicaid can recover from irrevocable trust in NY?||No||n/a|
After the Medicaid recipient dies, there is a risk that Medicaid might recover payments that it made from the assets of a MAPT.
Federal law allows states to choose whether to define an “estate” for purposes of Medicaid recovery narrowly or broadly:
- In the narrow definition, an “estate” includes only probate assets.
- In the broad definition, an “estate” includes any asset in which the decedent had an interest at death. So, it encompasses both probate and non-probate assets. And it can include assets transferred to a trust.
New York State has adopted a “narrow “ definition of “estate” for purposes of Medicaid recovery, SSL 369(6), so Medicaid cannot recover from the assets of a MAPT.
SSL 369(6) defines estate as “all real and personal property and other assets included within the individual’s estate and passing under the terms of a valid will or by intestacy.”
In 2011, the risk of estate recovery seemed to become real in New York when New York adopted an expanded definition of “estate.” But in 2012, this expanded definition was repealed as part of the budget process.
After a Medicaid recipient dies, Medicaid cannot recover from assets transferred to a MAPT because those assets pass outside of the probate estate, and they pass according to the terms of the trust, and not by intestacy.
This said, the MAPT has to be correctly drafted. For example, Medicaid can recover from the assets of a MAPT if the grantor reserves a general power of appointment. Matter of Albasi, 196 Misc. 2d 314, 765 NYS2d 213 (Sur. Ct. Bronx County 2003).
Risk for Married Couple: Right of Election
A risk that is unique to married couples is the right of election. If the community spouse dies first, Medicaid would force the surviving spouse (who is the Medicaid recipient) to assert the right of election.
The following table shows the risk for a married couple:
|Sick & Healthy Spouses||Estate Recovery Problem?||Right of Election Problem?|
|Sick spouse survives||No||Yes if (1) decedent transferred assets within 1 year of death; or decedent retained (2) income, (3) right to live in property, or (4) limited POA|
|Healthy spouse survives||No||No|
MAPT Is Best for Single Individuals
A MAPT is best for an unmarried individual. Although a married spouse can create a MAPT, complexities arise that require very careful drafting.
A MAPT is a lifetime trust.
Must Be Irrevocable
A MAPT must be structured as an irrevocable trust. The assets of a revocable trusts are considered available resources for purposes of Medicaid eligibility. 42 U.S.C. 1396p(d)(3)(A). In contrast, the assets of an irrevocable trust are not considered available resources if “no payment could under any circumstances” can be made to the grantor. 42 U.S.C. 1396p(d)(3)(B), 18 NYCRR 360-4.5(b)(1)(ii).
No Principal to Grantor or Grantor’s Spouse
If either the grantor or the grantor’s spouse can receive the principal, then the trust’s principal is an available resource for purposes of Medicaid. -cite-??? A MAPT protects the trust’s principal from being considered a resource by:
- Prohibiting the trustee from invading the trust’s principal for the grantor or the grantor’s spouse.
Stating that EPTL 7-1.6 does not apply to the trust. EPTL 7-1.6 allows a court to apply the principal of a trust to an income beneficiary. The trust creator can opt out of this statute in the trust instrument. See Should Opt Out of EPTL 7-1.6, (below).
- Why is retaining right to live in the property ok? -???
Must Prohibit Trustee From Distributing Principal to Grantor
A MAPT must prohibit the trustee from reaching the principal of the trust to benefit the grantor or the grantor’s spouse.
Here is a sample clause:
No distribution from principal shall be made to or on behalf of the grantor under any circumstance.
RESEARCH QUESTION 3/31/2021:
- If the grantor is married, should this clause also state “the grantor or the grantor’s spouse”? ???
This clause makes it clear that the grantor is not a beneficiary of the trust’s principal. The trustee cannot make any distributions to the grantor – neither mandatory nor discretionary.
The trustees should not be given discretion to distribute the principal to the grantor. In Flannery v. Zucker, the grantor created an irrevocable trust, named the children as co-trustees, and gave the trustees “the authority to distribute so much of the principal to [petitioner that they,] in their sole discretion, deem advisable to provide for [petitioner’s] health, maintenance and welfare.” Even the children, as co-trustees, refused to make distributions of the principal to the grantor, the Appellate Division Fourth Department upheld New York State Department of Health’s denial of Medicaid coverage.
Grantor Can Retain Income
Consequences of Retaining Income
Consequence 1: Income Tax While Grantor Is Alive
- Income tax while grantor is alive: Grantor trust
Consequence 2: Medicaid Eligibility
The Medicaid consequence of reserving income is that Medicaid deems the income as available to the grantor (even if the trustee exercises discretion to withhold distributions of income).
Retaining the income in a MAPT creates a right of election problem if the community spouse dies first. ==create link to rol problem==
Consequence 3: Property Tax Exemption
(No Gift Tax Consequence) ==???==
==[5/31/2021 - I don’t think retaining income controls the gift tax consequence. I think retaining a power of appointment affects the gift tax. I need to confirm this.]==
Consequence 4: Estate Tax
The estate tax consequence of retaining an income interest is that the entire trust assets are included in the grantor’s gross estate. IRC § 2036.
Consequence 5: Income Tax upon Grantor’s Death
Upon the grantor’s death, the beneficiaries receive the trust’s assets with a stepped-up basis. IRC § 1014(a), (b)(9).
Retaining Income Does Not Make Trust a “GRIT”
An IOLT is not a Grantor Retained Income Trust (GRIT). Both trusts are irrevocable, and in both the grantor retains an income interest. But in an IOLT the grantor retains the income interest for the grantor’s life; whereas, in a GRIT, the grantor retains the income interest for a term of years.
Planning: Three Requirements Before Grantor Can Retain Income
There are three requirements before the grantor can retain income: (1) The amount of income does not cause a period of ineligibility, (2) the grantor is single, and (3) the grantor does not have a taxable estate.
- Grantor is single: optional
- Grantor is married: don’t retain
- Grantor has taxable estate: don’t retain
Requirement 1: Income Does Not Cause Medicaid Ineligibility
The grantor can retain the income if the income will not cause ineligibility for the grantor.
Requirement 2: Grantor is Single
When the grantor is not married, the grantor can reserve an income interest. The trustee’s distributions of income can be mandatory or discretionary. When the grantor is married, the grantor should not reserve an income interest because Medicaid will force the surviving spouse to assert the right of election. An irrevocable trust where the grantor reserves an income interest is considered a testamentary substitute for purposes of the right of election. EPTL 5-1.1-A(b)(1)(F).
Requirement 3: Grantor Does Not Have Taxable Estate
Because retaining income causes the trust’s assets to be included in the grantor’s gross estate for purposes of the federal estate tax, a person with a taxable estate should not retain the income interest.
Drafting: Options for Income Interest
If Grantor Reserves Income: Should Opt Out of EPTL 7-1.6
The grantor should opt of EPTL 7-1.6, which provides that the court may order the payment of principal to an income beneficiary if a need can be demonstrated and the beneficiaries give consent.
In Matter of Hoelzer v. Blum, 93 A.D.2d 605 (2d Dept 1983), the Appellate Division, Second Department, held that a court cannot use EPTL 7-1.6 to convert the trust corpus into an “available resource” of a Medicaid applicant for eligibility purposes.
Although Medicaid is unlikely to prevail by claiming that the assets of a trust are available due to EPTL 7-1.6, the best practice for drafting a MAPT is to opt out of EPTL 7-1.6 by including a clause such as the following:
The grantor directs that the provisions of Estates, Powers and Trusts Law 7-1.6, or any successor statute thereto, shall not be available to require any invasion of principal by the trustee or any court.
No Trigger Provision
A trust cannot provide income or principal to the grantor until the grantor applies for Medicaid because EPTL 7-3.1(c) makes such intervivos “trigger” trust provisions contrary to public policy. So, even though the trust is irrevocable, the trust’s assets will be an available resource.
Limited Power of Appointment
-Optional for Single Individual: Limited Power of Appointment
When the grantor is not married, the grantor can reserve a limited appointment that allows the grantor to appoint beneficiaries other than the grantor, the grantor’s spouse, the grantor’s creditors, or the grantor’s estate and its creditors.
A grantor who is married should not reserve a limited power of appointment because Medicaid will force the surviving spouse to assert the right of election. An irrevocable trust where the grantor reserves a limited power of appointment is considered a testamentary substitute for purposes of the right of election. In re Estate of Reynolds, 87 N.Y.2d 633 (1996); Spetz v. N.Y. State Dept’s of Health, 737 N.Y.S.2d 524, 190 Misc. 2d 297 (NY Supreme Chautauqua County 2002) (stating, “Certainly, when determining whether or not a trust serves the same purpose as a will, the power to name beneficiaries is determinative.”).
-Gift Tax Consequences
Reserving a limited power of appointment makes the gift an incomplete gift for purposes of the federal gift tax. It also gives the grantor some control over the beneficiaries.
-Estate Tax Consequences
Here is a sample clause:
The grantor reserves a limited power of appointment exercisable by last will and testament specifically making reference to this paragraph, limited to a class of beneficiaries consisting of the grantor’s issue.
-Selecting the Trustee
Typically, the grantor’s children or close relative are named as the trustee.
-Can the Grantor Be a Trustee?
If Grantor Retains Income, Trustee Cannot Make Adjustments that Would Jeopardize Medicaid
EPTL 11-2.3(b)(5)(C)(viii) prevents the trustee of an irrevocable lifetime trust which provides income to be paid for life to the grantor from making any adjustment between income and principal that would cause any public benefit program (such as Medicaid) to consider the adjusted principal or income to be an available resource.
Discussion of the Statute
EPTL 11-2.3(b)(5)(C)(viii) applies only if the grantor reserves the right to income. If a MAPT does not reserve income to the grantor, then the trust would not be protected under this statute. But in this case, losing the protection of the statute shouldn’t matter because the grantor would receive neither income nor principal.
Enea recommends renouncing the statute’s application to the trust “to foreclose any argument that the trustee failed to make an appropriate adjustment between principal and income and violated the Prudent Investor Act, it may be safer to renounce the statute’s application to the trust.”
Drafting: Three Options
So, when drafting a MAPT, you have three options respecting the trustee’s power to allocate: (1) Use a standard clause, (2) Use a clause that mirrors the statute’s language, or (3) renounce the application of the statute.
Drafting Option 1: Standard Clause
A standard clause reads like this:
Powers of the Trustee
. . .
To determine to what extent receipts should be deemed income or principal, whether or to what extent expenditures should be charged against principal or income, and what other adjustments should be made between principal and income.
Would this clause receive the protection in EPTL 11-2.3(b)(5)(C)(viii)? Probably.
Does this clause opt out of the protection of the statute? Maybe. EPTL 11-2.3(b)(5)(D) states, “An adjustment otherwise prohibited by items (b)(5)(C)(i) through (viii) may be made if the terms of the trust, by express reference to this section, provide otherwise.” Arguably, there is no express reference to the section, so the clause doesn’t opt out.
Recommendation: Although it is probably safe to use the standard clause, if you want the protections of the statute and do not want to opt of the statute, it would be better to remove any doubt and mirror the language of the statute as in Drafting Option 2.
Drafting Option 2 (Recommended): Mirror Statutory Language
You can draft a clause that mirrors the statute’s language:
9. To allocate in the Trustee’s sole discretion, in whole or in part, to principal or income, all receipts and disbursements for which no express provision is made hereunder, which allocation shall fully protect the Trustee with respect to any action taken or payment made in reliance thereon. Notwithstanding the above, in no event shall the Trustee adjust between income and principal if such adjustment would cause any public benefit program to consider the adjusted principal or income to be an available resource or available income or if such adjustment would otherwise supplant any governmental benefit that any beneficiary is entitled to receive.
Must Prohibit Trustee from Distributing Principal to Grantor
The trustee cannot distribute the principal to the grantor or the grantor’s spouse. See the discussion above.
Optional: Trust Protector
A trust protector is someone who has power over the trust other than the trustee (or a grantor who has retained some powers).
Using a trust protector can have several benefits:
- There is someone to watch over the trustee.
- Flexibility: The trust protector can deal with changed circumstances. ???
Here is a sample clause from Gruer:
My Trust Protector may remove any Trustee of a trust created under this agreement. If the office of Trustee of a trust is vacant and no successor Trustee is designated, my Trust Protector may appoint an individual or a corporate fiduciary to serve as Trustee.
A Trust Protector may not appoint itself as a Trustee and a Trust Protector may not simultaneously serve as both Trust Protector and Trustee. Moreover, the Trust Protector may not appoint the Settlor as Trustee. Under no circumstances shall the Settlor serve as Trustee hereunder.
My Trust Protector may, at any time, change the governing law of the trust, remove all or any part of the property or the situs of administration of the trust from one jurisdiction to another, or both. My Trust Protector may elect, by filing an instrument with the trust records, that the trust will thereafter be construed, regulated and governed as to administration by the laws of the new jurisdiction. If necessary, or if deemed advisable by my Trust Protector, my Trust Protector may appoint an Independent Trustee to serve as trustee in the new situs.
??? Should you transfer an annuity or a retirement account to a MAPT? Which assets shouldn’t be transferred to a MAPT?
??? Can an agent under a power of attorney create a MAPT?
Must be Funded
A common misconception that people have is that a trust is effective when it is signed and notarized. In addition to being signed and notarized, a trust must be funded. This means the grantor must transfer assets to the trust. Without this transfer of assets, the trust is a mere legal document that has no effect over any assets.
Trusts can be funded while the grantor is alive or upon the grantor’s death in a will. A MAPT is a lifetime trust because it is created and funded while the grantor is alive.
- 4/7/2021 - Review different ways of funding different assets.
Funding Starts Loockback Period
Funding May Complete Gift
Primary Residence in MAPT
House Can Be Part of MAPT
Grantor Should NOT Retain Life Estate in Deed
When transferring real property to a MAPT, the grantor should not retain a life estate because there is no upside to doing so, and is only a potential downside. Here is the summary:
- Some lawyers retain a life estate by default, but this practice seems to be based on an old rule that no longer applies.
- Some lawyers recommend retaining a life estate so the grantor keeps getting a property tax exemption, but the law is clear that the grantor does not have to retain a life estate to get the property tax exemption.
- The problem with retaining a life estate in a deed is if the house is sold while the transferor is alive: The transferor gets a portion of the proceeds.
Concern #1: “Standard Practice”
Some lawyers point out that their colleagues “usually” fund MAPTs by having the grantor retain a life estate in the deed. They believe that they should recommend this practice because “that’s the way that other lawyers do it.”
There is a historic reason why lawyers used to recommend retaining a life estate in the deed, but because the law changed, that reason no longer applies.
At one time, reserving a life estate in a deed had an advantage for Medicaid purposes: It reduced the ineligibility period. But this is no longer the case because the DRA changed the commencement time of the period of ineligibility.
In Basics of Medicaid Eligibility,2 Anthony J. Enea gives the history of the advantage:
Under prior law and from purely a Medicaid planning perspective relevant to the length of the ineligibility period created by a non-exempt transfer, this option had some important advantages. Because the retained life estate was give a value by Medicaid, which is subtracted from the overall fair market value of the premises at the time of transfer, the period of ineligibility for Medicaid could, depending on the age of the transferor, be significantly reduced. It was possible to create a period of ineligibility for Medicaid that was often less than 36 months. This was a distinct advantage over the use of a deed without the reservation of a life estate, and a transfer to an Irrevocable Income Only Trust, wherein no reduction in the value of the fair market value of the assets transferred was permitted, for purposes of calculating the period of ineligibility. However, the DRA has significantly reduced the effectiveness of this option. Although technically the period of ineligibility created by a deed with a reservation of a life estate would not be longer than 36 months; pursuant to the DRA, if the transfer was made within the look back period (60 months), the period of ineligibility would not commence until the applicant was receiving institutional care in a nursing home, and was otherwise eligible for Medicaid, but for the transfer made (has no more than $14,550). Thus, under the DRA a transfer of real property by deed with a retained life estate will also require that the transferor not apply for Medicaid within the look back period to avoid an onerous period of ineligibility.
<!– Full section from 2014 Enea:
(b) Transfer of the Residence with the Reservation of a Life Estate. Under prior law and from purely a Medicaid planning perspective relevant to the length of the ineligibility period created by a non-exempt transfer, this option had some important advantages. Because the retained life estate was given a value by Medicaid, which is subtracted from the overall fair market value of the premises at the time of transfer, the period of ineligibility for Medicaid could, depending on the age of the transferor, be significantly reduced. It was possible to create a period of ineligibility for Medicaid that was often less than 36 months. This was a distinct advantage over the use of a deed without the reservation of a life estate, and a transfer to an Irrevocable Income Only Trust, wherein no reduction in the value of the fair market value of the assets transferred was permitted, for purposes of calculating the period of ineligibility. However, the DRA has significantly reduced the effectiveness of this option. Although technically the period of ineligibility created by a deed with a reservation of a life estate would not be longer than 36 months; pursuant to the DRA, if the transfer was made within the look back period (60 months), the period of ineligibility would not commence until the applicant was receiving institutional care in a nursing home, and was otherwise eligible for Medicaid, but for the transfer made (has no more than $14,550). Thus, under the DRA a transfer of real property by deed with a retained life estate will also require that the transferor not apply for Medicaid within the look back period to avoid an onerous period of ineligibility.
Pursuant to §2036(a) of the IRC, the transfer of a residence with a retained life estate permits the transferee of the residence to receive a full step up in his or her cost basis in the premises upon the death of the transferor, to its fair market value on the transferor’s date of death. This occurs because the residence is includible in the gross taxable estate of the transferor upon his or her demise. This, of course, presumes the existence of an estate tax upon the death of the transferor. A “life estate”, pursuant to §2036(a) of the IRC, is the possession or enjoyment of, or a right to the income from the property or the right either alone or in conjunction with another to designate the persons who shall posses or enjoy the property or income thereof.
The most significant problem in utilizing a deed with the reservation of a life estate results if the premises are sold during the lifetime of the transferor. A sale during the transferor’s lifetime will result in (a) a loss of the step up in cost basis, thus, subjecting the transferee to a capital gains tax on the sale with respect to the value of the remainder interest being sold (difference between transferor’s original cost basis, including capital improvements, and the sale price), and (b) the life tenant pursuant to Medicaid rules is entitled to a portion of the proceeds of sale based on the value of his or her life estate. This portion of the proceeds could be significant and will be considered an available resource for Medicaid eligibility purposes, thus, impacting the transferor’s eligibility for Medicaid or being an asset against which Medicaid may have a lien. The existence of the possibility that the premises may be sold prior to the death of the transferor(s) poses a significant detrimental risk that needs to be explored in great detail with the client.
If for tax planning purposes it is prudent to make the gift an “incomplete gift” for gift tax purposes, the reservation of a limited power of appointment to the Grantor should be considered.
It should be remembered that §2702 of the IRC values the transfer of the remainder interest to a family member at its full value without any discount for the life estate retained. Retention of a life estate falls within one of the exceptions of §2702.
If the transfer does not fall within §2702 of the IRC, or if one of the available exceptions applies (e.g. treated as a transfer in trust to or for the benefit of), calculation of the life estate is performed pursuant to IRC §7520, and the tables for the month in issue need to be consulted to determine the correct tax value of the remainder interest.
Pursuant to IRC §2702 if the homestead is transferred to a non-family member, the use of a traditional life estate will result in a completed gift of the remainder interest. It should also be remembered that the gift of a future interest (remainder or reversionary interest) is not subject to the annual exclusion of $14,000 per donee for the year 2014. –>
Concern #2: Loss of Property Tax Exemption
As discussed in the text section, the fear of losing the property tax exemption is misplaced.
Property Tax Exemptions: Still Available
The alternative veterans, school tax relief (STAR), and senior citizens exemptions are still available when a grantor transfers real property to the trust and continues to live in it. RTPL §§ 425(3)(c), 458(7), 458-a(5), 467(10); 10 Op.Counsel SBRPS No. 25; 11 Op. Counsel SBRPS No. 44.
Under RPTL 425(3)(c), the beneficiaries are deemed to be the property owners for purposes of the STAR exemption. Under RPTL 425(7)(d), such beneficiary is entered on the assessment roll as the owner.
Trustee’s Discretion to Sell Doesn’t Impact Property Tax Exemptions
11 Op. Counsel SBRPS No. 44 held that the following clause in a trust does not affect property tax exemptions:
If the Settlor ceases to use such property as a residence (permanently or seasonally) the Trustees may, in the exercise of their absolute discretion, either continue to hold such property as an investment or sell such property.
No Lien if Spouse Lives at Home
Married Couple: Right of Election Problem
Right of election problem occurs if community spouse dies first.
Bad for Medicaid planning if surviving spouse has:
- No will:
- No right of election problem as surviving spouse will get under rules of intestacy.
- If issue: $50,000 and 1/2 of the assets are subject to Medicaid.
- If no issue: All of the assets are subject to Medicaid.
- I love you will:
- No right of election problem as surviving spouse gets all assets.
- All of assets are subject to Medicaid. – An “I love you will” is detrimental to Medicaid planning. When the community spouse dies, all of the assets go to the surviving spouse, so all of the assets are subject to Medicaid. The surviving spouse will be disqualified from Medicaid and must spend down all of these assets.
- Revocable trust estate plan:
- Presumably, the community spouse made ==a spousal waiver .. .??? explain this ….==
- Possible right of election problem.
- If the surviving spouse is a beneficiary of RLT, then assets are exposed to Medicaid.
- If the surviving spouse isn’t a beneficiary of RLT, then right of election problem.
- Spouses can legally divorce before doing Medicaid planning.
- Community spouse has a will leaving assets to surviving spouse up to right of election amount = Only this amount is exposed to Medicaid. Other assets are protected.
- Community spouse can create a supplemental needs trust for the surviving spouse. ==??? I’m not sure if this works in NY. In New York, can the community spouse meet the right of election standard by creating a special needs trust for the institutionalized spouse?==
- Is this scenario practical? Married couple can transfer everything to irrevocable trust with children as beneficiaries and retain no interests or powers. (They would pay the trust “rent” to live in their house. They can use their social security check.)
- Downside: Seniors would lose property tax exemption.
- I’m not sure this even helps avoid the right of election problem because it isn’t a transfer for fair market value. … I’ll double check. … I know retaining income, right to live, other enjoyment or powers triggers the right of election. …. I’m not sure what happens if nothing is retained. ==Does the right of election have a “look-back”? If a lifetime transfer to an irrevocable transfer is a complete gift to an irrevocable trust without any retained interests, is it still a testamentary substitute? Logically, if a spouse transfers assets to a trust 10 years prior, then asset shouldn’t be considered a testamentary substitute.==
==What rights retained in an irrevocable trust trigger the right of election?==
Resources on MAPTs
Billie M. Castle, Income-Only Trusts: A Win-Win-Win Option in Estate Planning, Marquette Elder’s Advisor, Vol. 3, Iss. 1, Article 8, 2001.
Bernard A. Krooks & Michael Gilfix, The High Cost of Aging, Trusts & Estates, January 2012.
Joel C. Dobris, Medicaid Asset Planning by the Elderly: A Policy View of Expectations, Entitlement and Inheritance, Real Property, Probate and Trust Journal Vol. 24, No. 1 (Spring 1989), pp. 1-32 at p. 8 (footnotes omitted). ↩
Anthony J. Enea, Basics of Medicaid Eligibility, New York State Bar Association: Intermediate Elder Law Update, 2014. ↩