Medicaid and Estate Planning: Conflicts, Trust

Drafting Issues, Tax Consequences

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THURSDAY, APRIL 8, 2021

Presenting a live 90-minute webinar with interactive Q&A

Brandon Arkin, Attorney, Solkoff Legal P.A., Delray Beach, Fla.

Michael J. Greenberg, Partner, Lamson & Cutner, New York

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FOR LIVE EVENT ONLYProgram Materials

Medicaid and Estate Planning: Conflicts, Trust Drafting Issues, and Tax Consequences

Michael J. Greenberg, Esq.

Lamson & Cutner

mgreenberg@lamson-cutner.com

Licensed to Practice Law in New York, New Jersey, Connecticut, and

Florida

Brandon Arkin, Esq.

Solkoff Legal P.A.

Barkin@solkoff.com

Today’s Topics:• What are the key issues for Medicaid

planning vs. estate planning?

• What factors must be considered in making gifts vs. Medicaid transfers?

• How do you navigate the issues presented by multiple sources of income?

• How can you ensure compliance with other benefits eligibility requirements?

• What mistakes must be avoided in utilizing and drafting certain trusts?

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Estate Planning and Public Benefits Planning Require You to Think Ahead to Protect Your ClientIssues to discuss with your client when preparing their estate plan:

1. Who will be their agent/trustee/surrogate/Personal Representative? Factor in that person's age, relationship to the client, special skills and successors. This is a vital issue and picking the right person(s) can vary depending on the client's goals.

2. Does anyone have Special Needs and are on public benefits or may need public benefits in the future?

3. Is there a concern over a beneficiary's ability to manage money or potential for creditors? If married, any concerns your client has about spouse and/or child(ren)

4. Have they done any gifting or plan to do any gifting?

5. Current asset titling, joint ownership, and pay on death designations.

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We Can’t Predicate the Future and Client’s Often Think Nothing Will Happen to ThemThe most important thing you can do is EDUCATE your client.

It is our job to issue spot and explain to client’s the “what if’s”.

The issues addressed on the prior slide are crucial issues because if the wrong people are chosen, special needs issues are not addressed and the client doesn’t understand titling and gifting issues, it is easy for them to shoot themselves in the foot without realizing it.

Some Examples:

1. Agent is too old, agent is not trustworthy, agent cannot handle the responsibility. This applies to all fiduciary positions.

2. Pro’s & Con’s of Professional Trustee or Trust Protector.

3. Client thinks they can simply leave money to a family member or friend to use for someone with special needs.

4. Client doesn’t understand the consequences of adding a child or another person as a joint owner on their accounts.

5. Client doesn’t understand inheritance laws concerning spouses and stepchildren.

It is our job to think ahead for them and show them the possible complications from improper planning.

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Estate Planning v. Benefit Planning

Estate Planning

1. Limited DPOA

2. Basic Healthcare/Living Will

3. Basic LWT

4. Simple Single or Joint Trust

5. May or May not address Real Property

6. May or May not address Tax Issues

Benefit Planning1. Expansive & Comprehensive DPOA with provisions to allow

the creation and modification of RLT & IT. Address self-dealing issues, authority to prepare and enact the necessary tools for benefit planning. Withhold authority to bind Principal to Arbitration.

2. Robust Healthcare Surrogate/Proxy

3. Trust planning that includes provisions for contingent special needs trust, ABLE accounts, Pooled Special Needs Trust, and authorize Trustee to enter into personal service contract, address self-dealing among other issues.

4. Creation of Irrevocable Trust and/or 3rd Party Special Needs Trust. Discussion of tax issues.

5. Reverse-Pour over Revocable Trust with accompanying Testamentary Special Needs Trust for Spouse. 42 USC 1396p(d)(2)(A)

6. Personal Service Contract

7. Planned Gifting

8. Real Estate Transactions

9. Avoid Estate Recovery

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1. Purpose of Estate Planning

1. Incapacity

2. Probate avoidance

3. Tax mitigation

4. Protection for child from creditors or divorce

5. Protect child from themselves if cant handle money

6. Strings from beyond the grave

7. Want to gift differently than intestate statute, healthcare proxy, insure right person has authority over your affairs, especially when non-family

8. Provide Security knowing your wishes will be honored and ease burden on family in incapacitated or after death

9. Business succession

10.Charitable bequest.

Estate Planning and Medicaid Planning

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1. Purpose of Benefit Planning

1. Protect assets against the cost of long-term care

2. Avoid spousal impoverishment

3. Life time transfer

4. Protect against Medicaid lien and recovery

5. Proper documents in place for loved ones to enact planning.

Estate Planning and Medicaid

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Advance planning v. crisis planning

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1. IT 5 years for Medicaid, 3 years for VA2. Outright gifts and wait 5 years, but remember for VA gifting rules and transfer penalty are different. VA has 3 year

look back but penalty can last 5 years. Penalty divisor is also different. Also remember how to deal with small amounts of money, like create burial account, gift less than one month penalty if you state doesn’t penalize for a partial month. In fl divisor is 9,750 so gifting less than that will result in less than a month penalty and FL doesn’t allow for a partial month benefit. So essentially can give away $9,000 dollars without penalty

3. Personal service contract lock in younger age for longer life expectancy4. Real estate transactions 5. Annuity issues6. IRA, would client want to convert to Roth to avoid child paying taxes after parents death and also reduce IRA value if

in state that counts IRA even if monthly RMD7. Exempt assets purchase or transfer8. Time to buy a bigger or smaller house9. Prepaid burial

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Estate Planning: What can go wrong?

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1. Improper funding/titling 2. Breach of fiduciary duty3. Insufficient authority of agent to act4. Plan not thought through sufficiently

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Benefit Planning: What can go wrong?

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1.Violate look back period2.Screw up benefit eligibility3.Disrupts estate plan4.Confuse gifting for IRS & Gifting for Medicaid5.Mandatory disbursement or certain assets can cause difficulty

with Medicaid eligibility

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Common Drafting Issues

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1. Revocable Living Trust are a countable resource for both Medicaid and VA purposes.

2. If you are preparing an Irrevocable Trust, be sure the Grantor does not retain the ability to revoke or amend the trust. Thisessentially cause the trust to revert back to a revocable living trust.

3. One common clause which is often found in trusts is the ability to terminate the trust once the assets are reduced to a low enough amount. If this provision is in your trust, make sure the Grantor is not a beneficiary and cannot receive any portion of the terminated trust assets.

4. If placing the primary home into IT, the Grantor can remain in the residence and in Florida still receive homestead exemption as long as the Grantor maintains equitable ownership. To avoid the argument that the Grantor is benefiting from the trust, it is common to have a rental/lease agreement executed.

5. Be cautious when drafting provisions regarding mandatory and discretionary disbursements of income and principal.

6. Carefully draft any power of appointments. While powers of appointment can be a useful estate planning tool, when it comes tobenefit planning, if the power of appointment isn’t limited it can cause the trust assets to become a countable resource due thecontrol retained by the Grantor. Typically, a testamentary power of appoint is used since the Grantor cannot benefit from the funds while alive.

7. In some states such as Florida, if the Grantor retains a power of substitution, that power can cause the trust to be a countableresource for both Medicaid and the VA.

8. Generally speaking, if the Grantor retains the ability to control various aspects of the Trust, the trust will be counted as an available resource. Some further examples would be if the Grantor can remove and replace the Trustee, If the Grantor is getting income from the trust, the trustee cannot have the discretion to adjust the source of those distribution between income and principal.

9. HEMS language is not sufficient to prevent the trust funds from being counted as a resource to the beneficiary of the HEMS trust.

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Irrevocable Trust(IT)

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1. Self-settled Irrevocable Trust can be an affective planning tool for Medicaid planning as well as VA non-service-connected pension with aide and attendance benefits.

2. Frequently, these trust will be drafted with provisions to qualify as a Grantor Trust. The choice to seek Grantor Trust status, Non-grantor Trust or an intentional defective grantor trust can have significant tax ramifications. Some of these issue will be addressed in this presentation, but it is always advisable to have the client work with a knowledgeable tax professional regarding the consequences.

3. Typically, it is inadvisable for the Grantor to serve as the Trustee of their Trust. This applies to both Medicaid and VA. Some states will allow the Grantor to serve as Trustee for Medicaid purpose, but federal law is silent on the issue. However, it is still strongly recommended to avoid the Grantor serving as Trustee. For VA this will cause the Trust to count as a resource of the Veteran.

4. One key issue when drafting a IT, is whether or not the Grantor can retain rights to income from the trust. This is an important issue for multiple reasons:

a. It can dictate which assets are used to fund the trust

b. If the client is eligible to file for VA benefits, the trust cannot disburse income to the Grantor. See 28 CFR 3.276(b) and general counsel opinions 73-91 and 72-90. The VA can take the position that the income from the trust violates their rule that the veteran must give up all rights of ownership and control of the trust assets, and therefore it is a resource available to the Veteran/Grantor. The other issue which can occur is VA benefits are determined by the veteran's income and unreimbursed medical expenses. This income can reduce theVeterans VA award.

c. If VA is not a concern, the trust can disburse income to the Grantor. However, if the Grantor is getting ICP Medicaid in SNF, the income will be used to determine patient reasonability. To avoid this, you may consider a provision which allows the trustee to stop income disbursement and/or the ability to replace the income producing asset with non-income producing assets. Depending on your state,Medicaid may consider the termination of income as an uncompensated transfer. So be cautious when addressing this issue.

5. Typically, if the client is eligible for VA benefits, the other use for IT is to own the Veteran’s home. For VA purposes the home is generally an exempt asset if it meets certain criteria. However, if the veteran is getting VA non-service-connected benefits, and wants to sell the house, the sale proceeds could cause the veteran to lose eligibility if the sale puts the veteran over the net worth limit. One way to resolve this is to have the home put into an IT to prevent this issue. If using a Grantor, IT the sale funds can remain in the Trust but if you are using an intentional defective grantor trust, the proceeds must be disbursed to the lifetime beneficiaries.

6. For Medicaid purposes, you must assure that the Grantor cannot receive any payment from the trust principal. If the Grantor can benefit from the trust assets, those assets will be a countable resource for Medicaid. See 42 USC 1396p(d)(3)(B)

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▪ Mandatory Distributions to Grantor

▪ Discretionary Distributions to Grantor

▪ Sprinkling Provision

▪ Income Accumulated

▪ Discretionary Distributions to Third Parties

▪ Mandatory Distributions to Third Parties

▪ NOTE: In NY and many other states, the trust cannot provide that

Grantor’s right to receive income is terminated upon Grantor’s need

for long-term care.

Options For Treatment of

Trust Income

Michael J. Greenberg, Esq.4/8/2021

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▪ Income Taxable to Trust(ee)

▪ Income Taxable to Beneficiaries

▪ Income Taxable to Grantor

(IRC Sections 671-677)

▪ Special Power of Appointment (IRC Section 674(a))

▪ Reacquire Corpus by Substituting Property

Taxation of Trust Income

Michael J. Greenberg, Esq.4/8/2021

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▪ Typically want the Trust to be a Grantor Trust for income tax

purposes because

▪ Grantor in lower income tax bracket;

▪ Qualify for IRC Section 121 capital gains tax exclusion; and

▪ Compressed income tax brackets for Trusts (in 2021 highest

marginal income tax rate of 37% is reached for Trust income of

over $13,050)

Taxation of Trust Income

Michael J. Greenberg, Esq.4/8/2021

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▪ Non-taxable: If the transfers funding the Trust were classified as

“completed gifts,”

▪ Taxable: If the transfers funding the Trust were classified as

“incomplete gifts”, the distributions of funds from the Trust are

“gifts.”

Gift Taxation of Distributions

from the Trust

Michael J. Greenberg, Esq.4/8/2021

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▪ Rental Scenarios

▪ Grantor sells his home and moves in with child

▪ Grantor lives in his own two family home which has one unit

rented

▪ Non-Income Producing Assets

▪ Sample Provision: “The Trustee, in its sole and absolute

discretion, may make investments which yield little, or even no,

income”

Strategic Planning For Trust

Income

Michael J. Greenberg, Esq.4/8/2021

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▪ Partial Income Distributions to Grantor

▪ Does the Grantor need all the income being generated on Trust

assets?

▪ Emptying the Trust

▪ Is there a “Back Door Provision” which allows for this?”

Strategic Planning For Trust

Income

Michael J. Greenberg, Esq.4/8/2021

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▪ Exchange of Property – Grantor can reacquire Trust property by

substituting property of equivalent value (See IRC Section 675(4))

Return of Gifts by Trustees

Michael J. Greenberg, Esq.4/8/2021

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Special Needs Trust

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First Party Special Needs Trust 42 U.S.C. 1396p(d)(4)(c)

Requirements:

1. Grantor must be disabled individual, parent, grandparent or guardian

2. Beneficiary must be under 65 & disabled when trust

Established.

*One frequent mistake is being to focused on Medicaid to remember SSI has different transfer

penalty. For SSI any assets added after 65 are subject to transfer penalty, no penalty if under 65 and

seeking Medicaid. I

3. Medicaid payback provision

*Many lawyers prefer to have the payback provision refer to “the State” and not a specific state. There

have been issues where SSA rejected SNT because the language didn’t provide that any state with a

claim would be paid back.

4. Irrevocable and;

5. The beneficiary’s sole benefit

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SNT Drafting issues

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1. VA counts 1st , 3rd party, and testamentary SNT as resource available to the Veteran

2. Veteran can fund an SNT for the Veteran’s disabled child (not spouses child)

3. VA looks at household for net worth so spouse income and assets can disqualify veteran, unlike Medicaid

4. IRS reporting can tip off VA and Medicaid

5. Beneficiary cannot compel or control distributions

6. Trustee has unfettered discretion

7. Authorize trustee to make distributions that may reduce or eliminate public benefits. Putting language that requires the trustee to not disburse due to reduction of benefits can create issues, be cautious of your wording.

8. Authorize trustee to amend trust to comply with current public benefits laws

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1. SSI

2. SSDI

3. VA (Pension, disability and A&A)

4. LTC

5. Holocaust

6. Tax return or stimulus money

7. Income from trust

8. Annuity

9. Divorce, alimony, QDRO Support unconnected

10. IRA

11. Promissory Note

12. Pension

Common Sources of Income

4/8/202126

How to Handle Excessive Income

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QIT (income trust) (miller trust)

Pooled SNT pro’s and con’s

Name on the check rule

Divorce/Court Order

Spousal maintenance

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Pooled SNT 42 U.S.C. 1396p (d) (4) (C)

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Check list for DCF Pooled Trust Approval

Non-profit association that established the pooled trust:

Review: Master Declaration of Trust

Review: Pooled Trust Joinder Agreement

he account in the trust was established by the individual, Individual’s parent; Individual’s guardian; Individual’s grandparent or the Court

the individual’s assets be maintained in a separate account, although the funds are pooled for investment and management?

Does the trust account contain the assets and/or income of only the disabled individual?

Was the account established solely for the benefit of the disabled individual?

Are both the trust and the document establishing the individual’s account irrevocable?

Will the state receive all of the funds not retained by the trust and remaining in the trust at the time of the

Individual’s death (up to the amount of Medicaid benefits paid on behalf of the individual)?

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QIT 42 U.S.C. 1396p (d) (4) (B)

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Composed solely of Medicaid recipient's income

Beneficiary can be any ageAnyone can create it

Pay Back provision for Medicaid

Funds can be used for:

1. Monthly income allowance for community spouse2. Family Allowance3. Patient Liability4. Recurring medical expenses not covered by Medicaid5. Personal Needs Allowance

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Is an Irrevocable Trust really Irrevocable?

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Since we don’t have a crystal ball and we wont know when or if our client will need public benefits. There may be times when the IT is no longer needed or needs to be changed.

This will typically fall into one of two categories:

1. Judicial Modification

2. Non-judicial Modification

The ability to amend an Irrevocable Trust can stem from provisions in the Trust itself (but remember provisions in which the Grantor retains the ability to control the Trust will often cause the trust to become a countable resource), Decanting and statutory authority.

The topic of Irrevocable Trust modification can easily be its own seminar, but it is important to be aware of how this process works in your state incase the unexpected occurs.

If the client needs Medicaid earlier than expected, in some states the Trustee can disburse the trust funds to the lifetime beneficiary and then the lifetime beneficiary returns the funds to the Grantor. Since the use of an IT is a planned gift, some jurisdictions will allow the return of the funds to cure the gift.

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Outright Gift v. Irrevocable Trust

Outright Gift

1. The farther in advance gift is given the easier to overcome presumption

2. Easy to do

3. No protection from creditors, divorce etc…

4. If using planned gifting, it is advisable the funds gifted should be held aside for the required time period, incase they need to be returned to cure a transfer penalty. Once gifted, the recipient has no duty to hold the funds for clients benefit and can do whatever they want as the funds now belong to them.

Irrevocable Trust

1. Step-up in Basis at death

2. Avoid Gift Tax

3. Capital Gains Exclusion for Primary Residence

4. Insure Estate Planning Goals

5. Retain Testamentary Limited Power of Appoint

6. Protection for Beneficiary (Creditors, Divorce, Substance Abuse)

7. Contingent SNT should a beneficiary become disabled

8. Trust Protector

9. Financial Aid Preservation (IT not asset for parent of college student)

10. Prevent Estate Recovery

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Recap on Public Benefit Eligibility VA

o VA Pension Net Worth Limit =Supposed to be tied to Medicaid Community Spouse Resource Allowance ($128,640) but it’s a bit higher and includes income and assets of a spouse ($129,094) (2020) 38 CFR 3.274

o VA adds annualized income to assetso VA deducts Unreimbursed Medical Expenses(Result is referred to as income for veteran affairs

purpose or IVAP) (Allowable Medical Expenses 38 CFR 3.278)o 3-year look-back period

+ However, if you incur a penalty due to asset transfer you can incur a 5-year penalty (Lesson here is if you are going to file do the math! If either your client has made uncurable transfers or you are doing planned gifting, make sure to run the numbers and that the penalty period will not exceed 3 years. Otherwise, you could cost the client 2 years of benefits!)

+ Gifts made prior to October 18, 2018 are not countedo Penalty period is determined by using the amount of covered assets divided by the current penalty

divisor

o Penalty divisor = The monthly benefit for a veteran with a dependent and with A&A. It is the current annual rate on the effective date of the claim. ($2,266) (2020)

o One rule to note is joint account ownership. The VA will treat each account owner as having a proportional share. There is an issue if you simply add someone to the account, that you can incur a transfer penalty.

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Recap on Public Benefit Eligibility Medicaid1. Medicaid financial eligibility can vary by state and by program

2. Some states have an income limit, and some do not

3. Medicaid financial eligibility rules have different requirements for an individual, an individual with a non-applying community spouse, or if both spouse are seeking benefits.

4. The rules for allowable resources can vary, for example :

Community Spouse Resources: Minimum Resource Standard: 25,728.00 Maximum Resource Standard 128,640.00

Home Equity Limits: Minimum: 595,000.00 Maximum: 893,000.00

5. Treatment of assets can vary as well, such as an IRA and other retirement accounts. Some states exclude the value of an IRA if the applicant is getting fixed periodic payments. Whereas, some states count the full asset as an available resource.

6. Medicaid will count the full value of a joint account as an asset to the claimant.

7. You must understand your state Medicaid rules. While some tools work nationwide such as an Irrevocable Trust, others such as a personal service contract do not. For purposes of this presentation, I will be using Florida Medicaid rules.

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Recap on Public Benefit Eligibility SSDI

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It is important to understand the difference between SSDI & SSI

SSDI is governed by Title II of the Social Security Act 42 U.S.C. 423

This is an entitlement program and is not a needs based or asset based program like SSI & Medicaid. Entitlement is based on the following:

1. Disabled,

2. “Fully insured”, and

3. “disability insured.”

A person is considered “fully insured” if they have at least one quarter of coverage for each calendar year after they turn 21 the year before they become disabled.

A person is “disability insured ”if the person has worked 20 of the last 40 quarters preceding the onset of disability. A special rule covers individuals under 31 years old.

SSDI allows disabled older individuals to avoid the permanent benefit reduction they would potentially face for retiring before their full retirement age.

If found eligible for SSDI, the individual will get Medicare 24 months after the onset of the disability. There is also a 5 monthwaiting period which practitioners often forget when advising clients.

Having SSDI does not bar an individual from also getting SSI and Medicaid. If the individuals SSDI payment is equal to or less than the monthly SSI income limit and they meet the resource criteria, they can be eligible for both programs.

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Recap on Public Benefit Eligibility SSI

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Unlike SSDI, SSI (Supplemental Security Income) is a means-tested program which provides financial assistance to people who are at least 65 years old, blind, or meet the Social Security standard of disability.

Unlike SSDI, SSI does not require work history to be eligible. In the majority of states, anyone receiving SSI is automatically eligible for Medicaid as long as they are getting at least one dollar of SSI.

SSI and SSDI use the same requirement to determine disability. For an adult age 18 to 64, SSA defines disability as the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairmentwhich can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

The combined effect of a person’s impairments must be severe enough to prevent the individual from doing his or her previous work, or to engage in any other kind of substantial gainful work.

Financial Eligibility

Income

To be eligible for SSI, an individual cannot have more available countable income than the SSI payment level applicable to the individual’s living arrangement. Income is counted on a monthly basis, and the current month’s income is used to calculate the SSI benefit two months later. The current max SSI payment for an individual is $794.

Income is defined as anything received in cash or in kind that can be used to meet an individual’s needs for food and shelter.

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SSI Resources

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Resources of an SSI recipient may not exceed $2,000 for an individual or $3,000 for an eligible couple.. A resource is defined as cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for his or her support and maintenance and nonliquid resources are generally counted on the basis of the equity an individual has in the resource, Resources are counted only once a month on the first day of the month.

The Primary resources exclusions are:

1. the home in which the SSI recipient resides and all contiguous land, regardless of value;

2. one automobile regardless of value;

3. personal or household goods; either set-aside burial funds of up to $1,500, or life insurance with up to $1,500 face value;

4. a burial plot regardless of value;

5. jointly owned property where the sale would cause undue hardship to the co-owner because of loss of housing;

6. past-due Social Security and SSI payments, which are excluded from resources for nine months; and

7. Earned Income Tax Credit and Child Tax Credit, which are excluded from resources for nine months.

Transfer of resources penalty

An SSI applicant or recipient who transfers resources to another person for less than fair market value could become ineligible for SSI benefits for up to 36 months.

Exceptions to the transfer penalty include:

1. if the resource is returned, there is no period of ineligibility, even for the period prior to the return of the resource;

2. if the individual provides convincing evidence that the transfer was exclusively for another purpose, to overcome the presumption that the transfer was for the purpose of obtaining SSI;

3. if the resource transferred would have been excludable in the month of transfer, such as a home that the individual was residing in at the time of the transfer;

4. if not receiving the SSI benefit would result in loss of food or shelter, and the individual’s total available funds do not exceed the applicable monthly payment rate for the individual’s living arrangement; or

5. if the transferred amount, when combined with other resources, is less than the $2,000 ($3,000 for a couple) resource limit.

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SSI

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Exceptions to the Resource Transfer Penalty

There are exceptions to the imposition of the resource transfer penalty some exceptions include:

1. Undue Hardship applies where failure to receive SSI would result in loss of food or shelter, and the individual’s total available funds do not exceed the applicable monthly payment rate for the individual’s living arrangement.

2. Non-Home Transfers to Certain Family Members. The transfer penalty does not apply if a non-home resource was transferred to a spouse or to a child of any age who is blind or disabled.

3. Cure the Transfer. If the resource is returned, the transfer penalty will not be imposed, even for the period prior to the return of the resource. However, the individual will likely be ineligible for being over the resource limit.

4. Transfers for a Purpose Other Than to Obtain SSI. Like Medicaid the presumption is a transfer was made for the purpose of obtaining SSI but that can be overcome only by convincing evidence that the transfer was exclusively for another purpose.

5. Transfer of a Resource that Would Have Been Excludable in the Month of the Transfer. This is also similar toMedicaid. SSI Exclusion also allows for transfer of the home as long as the individual was residing there at the time of transfer, and the property is transferred to certain family members.

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Interrelation of Public BenefitsSSDI, SSI, and VA Benefits

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The VA has need based (non-service connected benefits) and non-need based (service connected benefits)

If an individual is receiving service connected or non-service connected benefits, they can qualify for SSDI.

If the person is on SSDI any VA payment will not affect their benefit. However, if they are getting SSI all income is counted to determine eligibility. For Medicaid purposes. The Aide & Attendance portion of a VA pension is not countable income.

The VA Non-Service connected Pension benefit requires the reporting of income as well. This can cause issues with SSI as the VA award is typically above the SSI benefit.

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Allowable Transfers

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1. Transfers between spouses

2. Transfer to Blind or Disabled Child

3. Transfer to Trust for a disabled individual under 65 years old

4. Pooled SNT if under 65 years old. In Florida, you can use pooled SNT for applicant over 65 years old

5. Self-settled SNT if under 65 years old and trust provides for Medicaid repayment

6. In addition to the above, the applicant's home can be transferred to a child under 21 years old; child who has lived in the house for 2 years prior to the applicant moving to a nursing home and the child provided care to keep the applicant out of the nursing home during that time (A recent case provided that the child doesn’t have to give up job and care for parent 24/7, the child can hire aides for the time at work.); Sibling with an equity interest in the home and who has lived there for one at least one yea prior to applicant moving into the nursing home.

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Difference between VA & Medicaid Penalty Start Date

+ The VA penalty period: Is a period of non-entitlement due to the transfer of a covered asset(s)during the 3-year look-back period(38 CFR 3.276)

+ The penalty period cannot exceed 5 years

+ Begins on the first day of the month following the date of the last transfer, and

+ is calculated by dividing the total covered asset amount by the monthly penalty rate and rounding down. The resulting whole number is the number of months VA will not pay pension.

+ Keep in mind it applies to the transfer of “covered asset” and not necessarily the full amount transferred. A covered asset is an asset that is the amount over the net worth limit that if it had not been transferred the claimant would have exceed the net worth limit.

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Difference between VA & Medicaid Penalty Start Date

+ The Medicaid penalty period and penalty divisor also vary by state. In all states the look back period is 5 years (60 months) except for California which is 2.5 years (30 months).

+ Typically the penalty divisor is linked to the cost of one month of a nursing home, some states use the daily cost. In Florida, the penalty divisor is $9,485 (as of 5/2020)

+ Medicaid also has a larger variety of exceptions and exclusions such as allowable transfers between spouse. For Medicaid, the non-applying spouse can keep a community resource allowance which does not count against the applicant spouse’s asset limit. VA uses the same net worth test regardless of whether the claimant is single or married.

+ Key differences between VA and Medicaid

o Medicaid look back period is from the date of application, unlike VA which is from the date of the last transfer.

oThe Medicaid transfer penalty applies to the full value of unpermitted transfers, unlike VA which applies only to the amount of covered assets over the net worth test

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VA How To Cure The Transfer Penalty

1. Curing the penalty period:

a. Penalty period recalculations. VA will not recalculate a penalty period under this section unless—

(i) The original calculation is shown to be erroneous; or(ii) VA receives evidence showing that some or all covered assets were returned to the claimant before the date of claim or within 60 days after the date of VA's notice to the claimant of VA's decision concerning the penalty period. If covered assets are returned to the claimant, VA will recalculate or eliminate the penalty period. For this exception to apply, VA must receive the evidence not later than 90 days after the date of VA's notice to the claimant of VA's decision concerning the penalty period. Once covered assets are returned, a claimant may reduce net worth at the time of transfer under the provisions of §3.274(f)Entitlement upon ending of penalty period. VA will consider that the claimant, if otherwise qualified, is entitled to benefits effective the last day of the last month of the penalty period, with a payment date as of the first day of the following month in accordance with §3.31.

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Planning Tools That Work For Both Programs

+ Irrevocable Trust and Planned Gifting

o It is important to have a back up plan should the client need benefits before the look back period ends

+ Allowable Spenddowns

o Key is fair market valueo Make sure if you spenddown you don’t buy something that is a countable asset, such as a rare and

expensive painting as the VA will count that towards net worth limit

+ Purchase a new home or home improvements

o VA and Medicaid rules differ on home ownership exclusion. VA has no equity cap where Medicaid does. VA also limits the amount of acreage the property can be on.

+ Use of a family caretaker agreement or personal service contract

o This works differently for both programs and in your state may not work for Medicaid

+ Trust for a Disabled Child

o The rules for VA and Medicaid vary on the definition of a disabled child.

+ Half-loaf

o Essentially running the numbers and planning to incur a transfer penalty while retaining enough money to care your costs until the penalty expires.

+ Reverse Mortgage and Home Equity Line of Credit

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Irrevocable Trust and Planned Gifting

+ Advanced Planning using Irrevocable Trust/Planned Gifting

o 3 years for VA (no income to Vet) (38 CFR 3.276)o 5 years for Medicaido Be cautious of amount transferred for VA. If you don’t do the math and need to apply

before 3 years, you could create a 5-year penalty period. o Remember the programs calculate the lookback period differently. VA from the date of

the last transfer and Medicaid from the date of applicationo If there is a chance the exempt home may be sold, you may want to evaluate

transferring it to an irrevocable trust, so the sale proceeds do not need to be sheltered. Check with your state if there are homestead issues or other concerns.

o If using planned gifting, it is advisable the funds gifted should be held aside for the required time period, incase they need to be returned to cure a transfer penalty. Once gifted, the recipient has no duty to hold the funds for clients benefit and can do whatever they want as the funds now belong to them.

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Personal Service Contract/ Family Caregiver Agreement

+ To meet the VA Requirements the contract must contain the following information:

o Evidence that the fair market value for services is being rendered (rate paid by claimant is the typical rate for services)

o Person who will perform the services is located in geographic proximity to the claimant

o The Contract can be liquidated or transferred, and

o services to be rendered are outlined in sufficient detail, and

o The signatures of both parties

+When using agreement for VA you typically will make payments on a monthly or yearly basis as the VA determines the award amount based on projected income and UME for a year.

+Be cautious in using this tool. Make sure to maintain payment and service records.

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Personal Service Contract/ Family Caregiver Agreement+ To meet the Medicaid Requirements the contract must contain the following information:

o Compensation in the form of support and/or maintenance or services is based on:

1. the FMV,

2. the support or services at the time of asset transfer, and

3. the frequency/duration of the support or service.

o In order for compensation to be considered, a statement and any related documentation must be obtained from the person(s) to whom the property was transferred to establish the FMV of the support and/or maintenance provided if:

1. the intent is for a specified period, the actual length of time the support or service is provided is used;

2. services are to be performed on an "as needed" basis, or for an interim period, the statement must include the

individual's expectation as to the frequency of the services and the basis for that expectation; and

3. the support or services are to be provided for the life of the individual, using the life expectancy tables

o To establish the value of support and maintenance for the individual's life, use the following formula:

Multiply the yearly fair market value (FMV) of the support and/or maintenance times the life expectancy factor corresponding to the individual's age (as of the last birthday) at the time the asset was transferred.

o Contact with an outside source in the same locality will usually be necessary to determine value. The case record must:

1. state how the value was determined; and

2. include a copy of the agreement or a statement from the person receiving the transferred asset showing the type, frequency, and duration of the support or services.

o In Medicaid Planning you can pay for services on a monthly basis, however, this tool is usually used for lump sum transfers. It can be difficult to use the same agreement for both benefits. You should consider having one version you use for VA and another for Medicaid. An example of this would be using VA PSC to create UME and pay caregiver until the client is below the net worth amount and then you can use a Medicaid PSC for a lump sum transfer, as there is no longer a gifting or transfer issue for VA once client is below the net worth amount.

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Trust for Disabled Child

+ The VA permits a transfer to a trust for a child of the veteran who has been rated by the VA as incapable of self-support under 38 CFR § 3.356.64

+ Requires that the child is determined by the VA to have meet the requirements by age 18.

+ There must be “no circumstance under which distributions from the trust can be used to benefit the veteran, the veteran’s spouse, or the veteran’s surviving spouse.”

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Trust for Disabled Child

+ Medicaid also allows transfer to a trust for a disabled child. There are also more lenient rules for transfers to a disabled child but as long as you draft the trust to fit into both rules, it is a good planning tool to provide care for a disabled child. (Depending on your State, you may need a Medicaid payback provision like a d4a)

+ Transfers to the individual's disabled child established solely for the benefit of the individual's disabled child. The child must meet the definition of disability used by the SSI Program.

+ Disability must be determined according to standard procedures. That is, if the person receives Social Security disability or SSI benefits, then the child is considered disabled for Medicaid purposes. If not, the District Medical Review Team (DMRT) must make an independent determination to evaluate if the individual meets the disability criteria.

+ The trust must be for the “Sole Benefit” of the disabled child. The trust must provide that:

o 1. no individual or entity except the individual’s disabled child, can benefit from the assets or income transferred in any way either at the time of the transfer or at any time in the future; and

o 2. Use of the funds involved for the benefit of the disabled child is actuarially sound based on the life expectancy of the child involved; that is, the child must be able to receive fair compensation or return of the benefit of the transferred asset during the child’s lifetime.

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Half-a- Loaf

+ Half-a-loaf planning was popular in Medicaid planning pre-DRA 2005. The VA assesses the penalty as of the first of the month following the transfer

+ Half-a-loaf planning involves transferring assets and holding back enough assets to cover the cost of care until the penalty period ends

+ Since the transfer period starts following the last transfer there is no need to reduce assets just to get the penalty period running like with Medicaid. Medicaid requires you to file for benefits to get a determination of the transfer penalty. This process is easier than the reverse half-a-loaf tool used for Medicaid planning.

+ Both Programs provide for cures and partial cures

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Half-a-Loaf+ Step 1: Calculate monthly income for VA purposes (IVAP):

o First: Total the gross income for the veteran, spouse, and dependent child (if applicable).

o Second: Total all allowable medical expenses and subtract from these expenses 5 percent of the applicable (MAPR).

o Third: Subtract the medical expenses less 5 percent MAPR from gross income. This is your IVAP.

+ Step 2: Calculate excess resources:

o First: Subtract the IVAP from the current VA net worth limit to determine the amount your client is over the limit.

o Second: If using any spenddowns or other tools, subtract that amount from the amount you are over the net worth limit.

+ Step 3: Calculate the burn rate:

o First calculate the total monthly budget going forward, including medical and non-medical expenses.

o Second: Add the VA’s Monthly Penalty Rate to the budget and subtract gross income. This is the amount being spent monthly, called your burn rate.

+ Step 4: Calculate the length of the plan:

o The length of the plan is how long it will take for the client to become eligible for VA Pension. You determine this by dividing the excess resources by the burn rate. If the result is more than 36 months, do not use this planning as you will incur a penalty period longer than 3 years. If that is the case its easier to just gift the funds or use an irrevocable trust.

+ Step 5: . Make the gift,:

o By following the prior steps you now know how long it will be for the client to become eligible.

o Now determine how much needs to be gifted. The gift amount is calculated by using this formulae, Plan length X Penalty Divisor

o If planning for Medicaid as well, once your assets are below the net worth amount, you can gift the remaining assets to start the clock for the Medicaid 5-year look back period planning options for Medicaid which don’t work for the VA when the client is above the net worth limit.

+ Step 6: Wait and Apply:

o Once the gift is made, wait until you are approaching the eligibility date (depending on how long it is taking to get VA application approved in your area, you may want to apply sooner as VA processing can take awhile) from the calculated eligibility date and file the application.

o The VA will set the penalty period running from the first of the month following the date of transfer. When the penalty expires, the benefits will begin.

+ Once you have enacted this plan DO NOT allow your client to make additional gifts this will restart the penalty period for all transfers as of the first of the month after the subsequent transfer.

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Convertibility of AssetsJoint Tenancy

+ One Planning tool that can work with both Medicaid and VA is assets owned with another person which cannot be liquidated without their consent. If the client cannot readily convert the asset into cash it can be excluded. The VA will not penalize a claimant if the value of the property has decreased since they bought it or if it has become unsellable because of something out of the clients control, like a hazardous waste spill has rendered the property worthless.

+ A popular Medicaid planning tool in Florida is a joint tenancy transaction where the client purchases an interest in property owned by their child as joint tenants with right of survivorship for fair market value. The child signs a statement that they refuse to sell the property. Medicaid does not count the value of the property since the client cannot readily liquidate the proper or sell it without the consent of the other joint owner. Some other states will require the client put up their share for sale, but since no one wants to buy a part interest in a property, it is usually not a concern.

+ The VA rule provides:

o A factor to consider in making a net worth determination is whether or not the property can readily be converted into cash at no substantial sacrifice. This means that a claim should not be denied for excessive net worth if the claimant cannot convert assets into significant cash assets because of temporary market conditions or other reasons.

o However, if property can be converted into significant cash assets, it is immaterial that the property was worth more in the past or might be worth more in the future. The sole question to consider is how much money the claimant would receive if the property were sold at this time.

+ The VA will want evidence supporting these issues.

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Can We Have Our Cake and Eat It Too?

+ Much like many questions asked to a lawyer, the answer is it depends.

o If you are doing long-range planning where a Medicaid application is not anticipated withing the next 5 years this opens your options as you can consider Irrevocable Trusts, planned gifting, allowable spenddowns and by obtaining VA benefits to help the client to pay for their care while you wait out the 2 years left in the Medicaid look back period.

o If your client is anticipating needing benefits within the next 2-3 years, your options are limited as you using an Irrevocable Trust or Planned gifting may no longer be an option

o If the client is in crisis and they need benefits ASAP or within the next year, you may not be able to obtain both benefits, or it may not make economical sense to try and obtain both benefits. In this case dual planning would typically be based off spenddowns, home improvement, purchase of exempt assets such as a car, or medical equipment.

o The difficulty will also vary by your state Medicaid programs and requirements. One issue we have in Florida, is home and community-based benefits require being put on priority list and can take a couple months or over a year to be called off the list and file for Medicaid benefits. Whereas, in Virginia, there is no wait for home-based benefits. In Florida, there is no waitlist for a nursing home. While the VA doesn’t have a waitlist, the time it takes to get an approval varies greatly.

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Michael J. Greenberg, Esq.

Licensed to Practice Law in New

York, New Jersey, Connecticut, and

Florida

Lamson & Cutner

9 E 40th St

New York, New York 10016

mgreenberg@lamson-cutner.com

212-447-8690

Questions?

Michael J. Greenberg, Esq.4/8/2021

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Questions? Comments?

Thank you for participating in todays webinar!

I am always happy to answer any follow up questions. If you are new to the practice of Elder Law or thinking of transitioning, I always enjoy sharing my love and enthusiasm for Elder Law with others, and want all attorneys to enjoy their practice as much as I do!

Feel free to e-mail me at barkin@solkoff.com of call 561-733-4242

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