Planning

By Brittany A. Verga, Esq.

The child caregiver exemption is an important exception to the five year lookback rule in Medicaid planning. For many years, it has allowed children to retain the homes of parents for whom they have provided long-term care. However, the ability to qualify for this exemption is being severely limited.

The New Jersey Appellate Division recently held that Medicaid’s child caregiver exemption is inapplicable when a child’s care for his or her parent is ancillary to Medicaid-funded homecare. Estate of G.B. ex rel. M.B.-M. v. Division of Medical Assistance and Health Services, (N.J. Super. Ct., A.D., No. A-5086-12T1, Sept. 15, 2015).

Under the caregiver exemption, an institutionalized individual may, without penalty, transfer his or her equity interest in a home to a son or daughter: (1) who was residing in the home for a period of at least two years immediately prior to the parent’s institutionalization and (2) who has provided care, thus permitting the parent to remain at home rather than enter an assisted living or nursing home facility. N.J.A.C. 10:71-4.10(d)(4).

In Estate of G.B., the Director of the Division of Medical Assistance and Health Services imposed an asset transfer penalty after an in-home Medicaid recipient, G.B., sold her residence to her caregiver daughter for less than fair market value. At the time, G.B. received thirty (30) hours of in-home caregiver services per week in addition to her daughter’s care. The homecare rendered G.B. the legal equivalent of an institutionalized person. The Director explained that the caregiver exemption permits child caregivers to keep the home because they provide care, which prevents Medicaid from funding long-term care services for at least two years. The Director found that Medicaid assistance, rather than the daughter’s care, was the key factor that allowed G.B. to remain in her home and avoid placement in an institution. Therefore, G.B’s daughter was not entitled to the caregiver exemption. The Appellate Division affirmed the Director’s decision, finding that the record supported the ultimate conclusions of law.

Begley’s Blog welcomes our newest columnist Brittany A. Verga, Esq.  Brittany is an associate in our Trusts and Estate Department as well as Business and Health Care groups.  We look forward to many more contributions like this one.

Pre-nuptial agreements have been around for many years.  Historically, they have rightly been viewed as a creation to provide assurance to individuals about to enter marriage that their assets would be protected in a manner they deemed fit in the event of a divorce.  To some extent, there has often been attention provided to the issue of couples who had children from previous marriages.   Over the past few decades, though, the pre-nuptial agreement has become an ever increasingly important estate planning tool.

Case in point:  Harold and Mildred, both in their mid-70s and widowed, met one another, fell in love and got married.   Both had adult children from their previous marriages.  Except for a small joint checking account to pay household bills, they maintained their assets in their own names and their Wills left their assets to their respective children.  Principled as they were, they swore that they would not make a claim against each other’s estates when either of them would die.

After 15 happy years of marriage, Mildred died.  Although all of their friends knew that Harold would have honored his promise not to make a claim for any of Mildred’s assets, he was now mentally incapacitated.  Harold’s daughter, Madge, felt otherwise.  She was Harold’s agent under a general durable power of attorney which Harold had executed and delivered to her.

Using the power of attorney, she filed an action against Mildred’s estate for what is known as an elective share.  As a Harold and Mildred were happily married, there was no defense to this action.  In short, Harold’s daughter was legally able to claim one-third of Mildred’s estate away from Mildred’s children.

Because of situations like these, it is imperative for couples who marry later in life to consider a pre-nuptial agreement.  A properly drafted pre-nuptial agreement can define what rights, if any, a surviving spouse has against the estate of their deceased husband or wife.  Often, the agreement is drafted so that both spouses will waive any right to the other’s estate.  Such an agreement does not prohibit one spouse from providing for the other economically.  It removes the expectation of any more than what the agreement provides, if anything.

For such agreements to be valid, they need to be properly drafted.  In doing so, they need to meet at least two criteria.  First, there must be full and accurate disclosure of each party’s assets and liabilities.  Second, both sides must be provided with the right to have the agreement reviewed by independent counsel.  If these criteria are met and the agreement is intelligently drafted, couples can enter a marriage in which their estate planning wishes can be respected.

As parents age and become acutely aware of the potential specter of long term care costs, there is a strong desire to preserve the assets which they have accumulated over the years. The most significant of these assets for many of them is the family home. More often than not, many parents believe that the best solution to this issue is to gift the home to their children.  In the category of “the road to hell is paved with good intentions”, this is often a horrible idea for a host of reasons.  Although the transfer of a home is can be prudent, the manner in which a home is transferred has to be carefully handled.

Specifically,  a number of pitfalls need to be avoided.  They include the following scenarios:

Capital gains taxes

Mom and Dad own a residence which they purchased in 1955 for $15,000.  Over the years, they have put $35,000 of capital improvements into the property.  It is now worth $400,000.  Because Dad has just started to demonstrate the signs of early dementia, the family wants to protect the house in case he has to go to Happy Acres Nursing Home across town.   So after a consult with their friend, Edith, who did some “research on the internet”,  Mom and Dad transfer their home outright to their three children – Manny, Moe and Jack.   Several years down the road, Mom and Dad die.  As the real estate market has increased, the home is now worth $450,000.   However, when filing their personal income taxes the following year, they find out that they have incurred a $400,000 capital gain and that the combined federal and state taxes owed are approximately $80,000.

Nursing Home Costs

Same fact pattern as above.  However, they go see John Doe,  attorney at law, who is the proverbial Jack of all trades.  He transfers the home to the children for them, but retains a life estate for them.   If they die still residing in the home, the capital gains problem from above is avoided.  Five years later, though, Dad has passed away and Mom has to move to Happy Acres because of a stroke.  The children sell the house not wanting to deal with a vacant property.   Because the house has been out of Mom and Dad’s name for so long, the lifetime transfer is subject to capital gains tax as the children don’t use the house as a primary residence.  To add insult to injury, Mom who was on Medicaid, is now ineligible as the State imputes a value of the net proceeds of the home to her.

Creditors

Same pattern as above.  When the house is sold, Jack’s share of the net proceeds goes to a creditor who sued him and obtained a judgment against him.

Student Aid

Same pattern as above.  Moe has a child in college who is receiving needs based financial aid.  Mom and Dad are still  healthy and living in the home.  Moe really doesn’t have any benefit from the home.  Yet he has to disclose it as an asset on his financial need paperwork for his child.  Because of the value of the home, Moe’s child loses her scholarship.

The Solution

The above is just a sample of the issues which arise in transferring a home to children.  One option is to create what is known as a residence trust.  If done correctly, the home is protected from all of the aforementioned issues.   One of the children can be appointed as trustee.  The trustee must be irrevocable.  It can be set up so that Mom and Dad can maintain their income tax rights to the property.  If done properly, it can moreover keep the parents’ exemptions from capital gains tax for a primary residence and obtain a step up in basis upon death.

In all, a house should be protected as it is a sacred asset for many.  Yet it should be done with the proper format and with proper guidance.  If same are obtained, a home can be protected without the above pitfalls.

In July 2012, Michael G. Fox got married, and looked forward to many happy years with his new wife, Evanisa.  Unfortunately, Michael died tragically in a work-related car accident just four months later.  Evanisa assumed that she was entitled to the death benefit from his life insurance policy.

In attempting to file her claim, Evanisa discovered that Michael’s sister, Mary Ellen Scarpone, was named as the beneficiary of the policy back in 1996.  Allegedly, Michael had expressed that he intended to change the beneficiary to his new wife.  Yet he never did so.  As a result, two competing claims were filed by Michael’s wife and sister.

The sister won!  In Fox v. Lincoln Financial Group, the Appellate Divison of the New Jersey Superior Court rejected Evanisa’s argument that there should be a bright line rule which automatically would entitle a spouse to pre-exisitng life insurance.  It further held that the fact of marriage coupled only by a verbal expression of a decedent to change his beneficiary is ineffective to defeat the existing beneficiary status.

This case is significant for two reasons.  First, although no action needs to be taken to remove a spouse as a beneficiary of insurance after divorce, an affirmative writing needs to be made in order to make a spouse a beneficiary of pre-exisitng insuarnce after marriage.   Second, there should be no assumptions about the rights of a spouse after marriage.   There are various statutes and caselaw which provide rights such as the elective share.  However, that is no way to plan.  To avoid any legal or personal angst for one’s survivors, estate plans should automatically be evaluated when entering into marriage.

In the early years of Saturday Night Live, there was a skit called “The Thing That Wouldn’t Leave.”  It dealt with John Belushi playing a dinner guest that refused to leave his hosts’ home.  A very funny sketch, but one that is often re-enacted without the humor in real life by children who reside with their parents but who do not voluntarily leave after their parents have died.

There are many reasons why children live with their parents.  They range from the noble daughter who leaves the work force to provide care for their aging to parent to the son who never grew up.  When a parent dies, there is often a dispute as to the manner in which a child’s continued stay in the home should be addressed in the administration of the parent’s estate.

The Appellate Division of the New Jersey Superior Court dealt with this issue in The Matter Of The Estate Of Clare M. McCrink, Deceased.  In this case, Clare McCrink died in November 2011.  One of her six children, Elaine McCrink, was the executrix under her Will.  Elaine had been residing in Clare’s home prior to Clare’s death.   The Will stated that the estate should pay the carrying costs of the property (i.e. the real estate taxes, homeowner’s insurance and utilities) until the house was sold.  However, Elaine did not list the house for sale until 2013 and that was only after two of her siblings filed a court action which compelled her to do so in May of that year.

In addition to compelling Elaine to list the house for sale, the Court determined that she should pay the carrying costs for the property as of January 1, 2013.  Although the Will did not state a period of time in which the house should be sold, the Court asserted that it should have been sold in a reasonable period of time.  Specifically, it found that Elaine unreasonably delayed her obligation to sell the home and had not taken the steps to sell the property in the aforementioned reasonable period of time.

In this day and age of an ever-aging population and children returning to the parental home, it is imperative that wills and trusts clearly address how to handle the issues which arise from these arrangements.  In doing so, three core issues should be addressed: (1) Should the child be given any economic consideration – either for or against – for residing in the home?  If they are providing care to their parent, should they get an additional inheritance or the home itself?  If they have failed to launch, should their share be reduced?  (2) If the house is to be sold, how long should the child be able to live in the property before listing the home?  (3)  If the child is given a right to live in the home, how much should he or she contribute?  As to this last factor, there are three schools of thought: (a) charge fair market rent – that often seems to be a windfall for the other family members, (b) charge nothing – that seems to inhibit the child from moving and creates a scenario like in McCrink, and (c) assess the carrying costs.  This option is often the fairest.  However, in employing it, there should be consideration as to when such costs should be paid and for how long the arrangement will last.  In all, situations like the McCrink  case are becoming more common.  To avoid litigation and hard feelings within a family, it makes sense to proactively provide for them in proper legal documents.

Dave and Molly have been married for many years.  They have an estate worth $1.5 million which includes their home, bank and brokerage accounts and life insurance.  They have three adult children: Manny, Moe and Jack.  Manny and Moe are successful businessmen who are financially secure.  Jack, though, was born with Down’s Syndrome and is moderately impaired.  Although he is able to communicate with others and can engage in a number of activities, he is unable to work and will never be able to support himself.  In addition to the love of his family, Jack is supported by Supplemental Security Income (SSI) and Medicaid.

Recognizing Jack’s limitations, Dave and Molly execute a will which sets aside a share for Jack in a trust to pay for “his health, education, maintenance and support.”  In order to ensure that he receives enough to provide for his care, they leave one-half of their estate to him and name him as a one-half beneficiary of their life insurance policy.  When they die, Jack’s SSI and Medicaid are jeopardized as he cannot have more than $2,000 in his name.  The receipt of life insurance proceeds alone gives him more than this amount.  The trust is considered his money, too, as it is for his health, education, maintenance and support.   These terms make the trust a support trust and are counted by the government as his own.

Despite the shoddy planning, Jack’s benefits can be saved.  Over the past few decades, the law has developed to allow for what is known as a reformation.  Reformation allows for a “rewriting” after death of wills and beneficiary designations which were not properly established.

In essence, the Court has the ability to reform a will, as well as the beneficiary designation of non-probate assets.  The Court may do so under the doctrine of probable intent. In New Jersey, the seminal case for reformation  is IMO Estate of Branigan, 129 NJ 324, 609 A. 2d 431 (1992). In this case, the Supreme Court of New Jersey stated that the doctrine of probable intent permitted the reformation of a will by dividing a single qualified terminal interest property trust into two such trusts, as the alteration did not change any substantive disposition request under the will, and it effectuated the Testator’s desire to achieve maximum estate tax savings. In doing so, it was noted that “in ascertaining subjective intent of testator under the doctrine of probable intent, the Courts will give primary emphasis to Testator’s dominant plan and purpose as they appear from the entirety of the will when read and considered in light of surrounding facts and circumstances; so far as the situation permits, the Court will ascribe to testator those impulses which are common to human nature and will construe the will so as to effectuate those impulses.” Id at 324.

The principle of reformation, set forth in Branigan, applies to other means of post-mortem distribution as well as to wills. Many courts have previously recognized the doctrine of probable intent as to trusts and other non-testamentary instruments. Moreover, in 2005, the State of New Jersey revised its probate laws to accept relevant and significant portions of the Uniform Probate Code. In this instance, N.J.S.A. 3B:1-1 expanded the definition of the “governing instrument” subject to its control. Specifically, it states, “’Governing instrument’ means a deed, will, trust, insurance or annuity policy, account with the designation “pay on death” (POD) or ‘transfer on death’ (TOD), security registered in beneficiary form with the designation “pay on death” (POD) or “transfer on death” (TOD), pension, profit-sharing, retirement or similar benefit plan, instrument creating or exercising a power of appointment or a power of attorney, or a dispositive, appointive, or nominative instrument of any similar type.”

Thus, after the deaths of Dave and Molly, their Wills can be reformed to convert the support trust into a Special Needs Trust which allows for funds to be set aside in a manner which benefits Jack but preserves his government benefits.  The beneficiary designation of their insurance can be changed so that the share allocated to Jack can be transferred into his reformed trust.  By utilizing this doctrine, deficient estate planning can be rectified to preserve the intent of Dave and Molly, and to protect Jack.

Choosing the Right Fiduciary

Arguably, the single most important task for parents who are planning for the care of a child with special needs after their passing is to ensure that they pick the right trustee to manage the trust established on behalf of such child.  The temptation is to make a sentimental choice of a family member or to accept the recommendation of a bank or trust company based solely on the recommendation of an attorney, accountant or financial advisor.  However, the selection of a trustee for a special needs trust must reflect the unique elements and challenges inherent in managing and administering it.  The failure to select the proper fiduciary can lead to disastrous results for the child with special needs.

The core qualification of any proposed trustee for a special needs trust mirror those for other financial based estate planning documents such as an executor under a will or an agent under a general durable power of attorney.  These fiduciaries needs to be trustworthy and have the common sense to properly manage money, as well as to seek professional assistance when necessary for the performance of his, her or its duties.  For the most part, these qualifications will suffice for a will or power of attorney, as the job of the fiduciary is to properly invest assets and make mandated disbursements and distributions.

In order to administer a special needs trust, however, there need be two additional qualifications.  The first is to have a knowledge of the laws effecting needs-based public benefits and the changes which are frequently being made to same.  The second is to be ready, willing and able to have an ongoing and meaningful relationship with the beneficiary so that his or her needs are properly ascertained and met.  Far too often these qualifications are not considered.

One potential trustee is a sibling or other family member.  The thought is that a family member, especially a brother or sister, will do what is right for the beneficiary.  However, there are numerous pitfalls with this choice:

1. The sibling is typically a remainder beneficiary of the trust, which means that he or she will often inherit part or all of what is left from the trust when the child with special needs dies.  This poses at the very least a potential conflict of interest, as the more spent on the beneficiary the less the trustee will receive upon the beneficiary’s death.
2. The sibling and beneficiary do not see eye-to-eye on how the funds should be distributed.
3. The sibling inadvertently gives cash to the beneficiary jeopardizing needs based benefits.
4. The sibling, unaware of the intricacies of this area of law, makes expenditures which disqualify the beneficiary from his or her benefits.
5. The sibling mismanages or steals the funds.
6. The sibling predeceases the beneficiary.

An alternative to an individual is a corporate trustee.  A corporate trustee may merge with another entity but it will never die.  A corporate trustee can arguably mismanage the trust assets but it will not steal.  However, not all corporate trustees are qualified to be trustees of a special needs trust.  Although most should be able to invest and manage trust assets prudently, there are far too many banks and trust companies who do not understand this area of law, and will make distributions that lead to the loss of public benefits for the beneficiary.

Even worse, the corporate trustee will have no relationship to the beneficiary.  This point was highlighted in 2012 with the decision know as In The Matter of the Accounting by J.P. Morgan Chase, N.A. v. Marie H.  Marie H. died in 2005, leaving behind a net estate of $8,000,000 to be divided equally between her two children, one of whom, Mark, was an adult with profound disabilities.  Inexplicably, his trust was funded with less $1,500,000, rather than approximately $4,000,000.  Despite helping themselves to commissions and fees, the co-trustees, J.P.Morgan and the attorney who drafted the trust, had never visited Mark in the years which followed his mother’s death, nor had they spent a penny of the trust money on him.

In all, the right trustee has to possess all of the qualities mentioned herein.  More often than not, the trustee should be an organization which specializes in these trusts, of which there are a few.  To insure that the funds are properly distributed, the trustee can work with a distribution director, which is a group that handles personal contact with the child with disabilities, and guides distributions to reflect the beneficiary’s needs while preserving his eligibility for benefits.  If family is to be involved, it can be in the role of a trust protector.  A trust protector can monitor the actions of the trustee and remove and replace it when necessary.

A special needs trust can be of great benefit to a child with disabilities.   However, the trust is only as effective as the people or financial institution managing it.  When preparing a special needs trust, remember that the selection of the trustee is of paramount importance and must be undertaken with great care and diligence.

For the Children

Parents who have a child with special needs often undertake estate planning to insure that any inheritance left for that child will be preserved for his or her benefit.  Proper planning will preserve eligibility for needs based government programs such as SSI and Medicaid while allowing the child’s inheritance to flow into a trust that can enhance his or her standard of living.  Yet prudent planning recognizes not only the distribution and management of an inheritance, but also the handling of the personal, medical and financial issues that will arise in the life of that child.

Parents frequently are under the misimpression that they have the legal right to always make decisions on behalf of a child if he or she has disabilities.  Understandably, many rationalize that such a child is always a child, never truly an adult, and thus will always need their oversight and protection.  The law, however, states any individual, regardless of the existence of a disability, is considered emancipated at the age of eighteen (18).  Thus, parents who undertake estate planning for themselves need to undertake the same on behalf of their children.

This planning can come in two forms.  The first is known as a guardianship.  A guardianship is a process where a court declares a child to be mentally incapacitated.  In doing so, the court finds that this child is unable to make personal, financial and medical decisions on his or her own behalf.  The court thereby appoints one or both of the parents to make these decisions on their behalf.  In doing so, it can establish a plenary guardianship, which allows parents to make any and all decisions.  An alternative is a limited guardianship, which allows the child to retain the right to make certain decisions, typically of a nominal nature.

The second form of planning is voluntary estate planning.  Just because a child has disabilities does not mean he or she dos not have the mental capacity to execute his or her own estate planning documents.  If a child knows what she owns and to whom she wants to leave it when she dies, she can execute a Will.  If she knows that she is executing a document which provides authority for her parents, or anyone else of her choice for that matter, to assist her in making medical, personal and financial decisions, she can execute an advance directive (i.e. a living will and health care power of attorney) and a general durable power of attorney.  If this option is viable, it is often preferable as it is far less costly to establish and maintain than a guardianship.  Moreover, it avoids the need to publicly declare a child as mentally incapacitated.

In all, planning is necessary for children with special needs, as well as their parents, as it ensures such children’s well being when they become adults.  Proper counsel can help guide parents in establishing the best possible plan for their, and their child’s, particular circumstances.