The Family Vacation Home

Parents’ intentions to pass them on for multiple generations are often frustrated

By: Robert J. Kurre, Esq.

The vacation home is a much prized but often overlooked asset of the family for estate planning purposes. When the summer months roll in, the vacation home is a destination to be cherished with an opportunity for family members to spend time together in a relaxed atmosphere and grow closer. Sand, sun, surf and fun are some of the many positive memories that resonate among those enjoying vacation or summer homes. Family is what makes these getaways most memorable, and, often, the hope is to have the children, grandchildren and future generations enjoy the home for many years. However, this wish often never comes true.

Due to poor planning or a lack of planning, the home is often enjoyed harmoniously by the family only for a relatively short period of time and becomes the cause of conflict and disharmony among the children when the parents die.

Most parents will simply designate in their Last Will and Testament that they are leaving their family vacation home, upon their death, to their children, in equal shares. This means that the children now directly own the property as tenants in common. If the vacation home is passed down to the children as tenants in common, a myriad of problems can easily arise. Divorce, death, financial restrictions, debt, ownership squabbles, and divergent interests can all create a series of unwanted problems. For example, if one child dies, his or her spouse may inherit a share in the house and then re-marry. The spouse’s new partner, or his or her children from a prior marriage, could end up owning an interest in the house if proper planning is not done. As an additional example, if one of the children cannot afford to contribute to the upkeep of the property, the other children may be forced to commence a lawsuit to resolve the situation. The result can very well be hurt feelings, or even worse, irreparably damaged familial relationships, and a forced sale of the home which does not bring back fair market value. With proper planning, the vacation or summer home can be kept for what it is – a vacation, or pleasurable time away from home, which serves to keep the family close.

To best plan for a vacation or summer home, it is often advisable for the home to be owned by a legal entity established by the individual or individual who originally purchased the home. This will best foster the parents’ intentions for it to be enjoyed for many generations. Many of these entities are established as limited liability companies (“LLC”). The LLC owns the home, its furnishings and accoutrements. The children do not have a direct ownership interest but are instead given a membership interest in the LLC. The LLC’s operating agreement governs the rights and responsibilities of its members and details how various situations will be dealt with to minimize conflicts between family members. For example, if one child decides to no longer contribute to the upkeep of the property (or is financially not in a position to do so), the operating agreement can set forth the consequences, such as, loss of use of the property and, eventually, relinquishment of that child’s membership interest. As a further example, the operating agreement can set forth restrictions on whom interests can be transferred to and how members will be dealt with if they want to sell their interests. The sale could be prohibited to include only the other members. The operating agreement should also deal with issues, such as, use and occupancy among members and any time that will be carved out for rental to non-members.

A properly drafted operating agreement provides the ground rules to foster a harmonious use of the property which is lacking in the tenant in common ownership structure discussed above. These types of arrangements are best established under the guidance of a qualified attorney who concentrates in estate planning.

 

 

Cheap Advice on Essential Documents Can Be Costly

By: Robert J. Kurre, Esq.

Most people realize that every adult should have a Health Care Proxy, Living Will, and Durable Powers of Attorney in order to provide for ongoing decision making without court involvement and to help ensure family harmony. Many people fail to realize, however, that such documents are sophisticated estate planning devices which contain many nuances and address complex and technical points of law. Whether they actually produce the desired results often depends on the source of the document. It has been my experience that individuals who decide not to retain a qualified elder law and estate planning attorney in this regard substantially underestimate the cost of “repairing” a document which does not produce the desired results. The use of pre-printed and inexpensive forms for estate planning documents can lead to an exorbitant cost to overcome their deficiencies and can have a negative effect on the rights of disabled or elderly persons. These deficiencies often are not discovered until a crisis develops.

There are many problem scenarios which can develop following the execution of pre-printed or inexpensive forms. Frequently, the forms are outdated, missing key provisions, and/or not even executed properly. The result is often devastating as such estate planning documents may be useless. Let us examine the case of Mr. Jones as an example. Mr. Jones believes that estate planning documents are commodities which should be obtained at the cheapest possible price. He believes that he may obtain a Durable Power of Attorney from the corner stationery store for a few dollars and that his interests will be fully protected. What Mr. Jones fails to realize is that the form he has obtained may not accomplish its intended purpose. Shortly after executing the form, Mr. Jones suffers a stroke and is incapacitated. He requires long term care. His wife discovers that the cost of his care will be $10,000 a month in a local nursing home. Mrs. Jones cannot afford to pay $10,000 a month for her husband’s care and she determines that she should apply for Medicaid for her husband. In order to qualify for Medicaid, Mr. Jones can only have a few thousand dollars in his name. Accordingly, Mrs. Jones goes to the bank and asks that Mr. Jones’ bank accounts be transferred out of his name. The bank officer asks if Mrs. Jones has been appointed Mr. Jones’ agent and she produces the Durable Power of Attorney form which Mr. Jones purchased at the stationery store. Unfortunately, the bank officer advises Mrs. Jones that the bank will not transfer Mr. Jones account to her because the form was not properly executed and, even if it was properly executed, it does not have appropriate provisions which would allow her to make the contemplated transfer. Mrs. Jones is left with no option but to commence a guardianship proceeding in court. A guardianship proceeding can cost ten to twenty times, or even more, of what the legal fee would have been to have a qualified elder law and estate planning attorney do the proper planning in the first instance.

Some members of the public feel that paying anything more than a nominal fee for estate planning documents is not appropriate as the law firm should be able to simply insert the client’s name and print the document from their computer. The amount of time spent physically preparing the documents, however, is only a small percentage of the time actually spent by a qualified elder law and estate planning attorney on the matter. The bulk of the attorney’s time is spent discussing with the client whether the form is even appropriate given the client’s circumstances, who the agents should be, what powers the agents should be given, the available options with respect to the different kinds of documents and the consequences of signing such documents. Additionally, the attorney’s time is spent reviewing the documents to make sure they accurately express the client’s intentions, supervising the proper execution of the same, and educating the client about how the forms should be safeguarded and how and when they should be used. A qualified elder law and estate planning also spends a considerable amount of time staying attuned to developments in the law to make sure the document being drafted is current, is drafted in the most effective manner possible, and is the document most suited to meet the individual’s needs.

To rely on a pre-printed or inexpensive form for proper elder law and estate planning is a practice fraught with danger. A document is only as good as its source. There are complex issues inherent in estate planning documents which preprinted or inexpensive forms often do not take into account. A qualified elder law and estate planning attorney can explain the nuances of elder law and estate planning documents and make certain that the planning meets your specific needs.

Use Joint Bank Accounts With Caution

By: Robert J. Kurre, Esq.

Many seniors have set up their bank accounts to be joint accounts – that is the account is titled in their name as well as the names of one or more of their children. They often do this for convenience purposes so their children will be able to write checks to pay the senior’s bills. Many seniors have also put their assets into joint bank accounts in order to avoid the probate process (i.e., the process whereby assets pass through a Will which requires that the Will be filed with and approved by the court). There are, however, many considerations which seniors often do not realize which can make the use of joint bank accounts a poor planning technique for elder law and estate planning purposes.

First, by adding a child’s name to the senior’s account, the funds become exposed to any claims that may exist against the child. For example, any of the child’s creditors may be able to reach the money. Second, the senior runs the risk that the joint owner of the account will withdraw money from the account and use it for unintended purposes as each owner of a joint account generally has full access to the funds. Third, the joint ownership of the account does not provide any protection for Medicaid purposes as the account is considered to be 100% the funds of the Medicaid applicant (i.e., the senior) unless documentation can be provided demonstrating that the child actually contributed to the account. Fourth, for estate tax purposes, when a parent and child jointly own a bank account, the funds are considered to be completely part of the taxable estate of the first joint owner to die except to the extent it can be documented that the surviving joint owner deposited funds into the account. Therefore, the funds could be included in the taxable estate of a predeceased child as it may be difficult to document that the account only contained the senior’s money. Fifth, this is a “hotspot” for litigation in that if all of the beneficiaries of the senior are not added to the account’s title as joint owners, there may be an unequal passing of assets to the beneficiaries. The one child whose name is on the joint bank account often argues that the senior intended that he or she would receive extra consideration due to the assistance that child provided.. The other children may argue that the senior wished to treat all the children equally and that the one child who was named as the joint owner should now share the proceeds of the account. To rely on beneficiaries to adjust a senior’s estate plan by re-distributing the proceeds of a joint bank account “fairly” is to risk not only costly litigation but also family disharmony.

There are other techniques which are usually preferable to the use of joint bank accounts for elder law and estate planning purposes. A qualified elder law and estate planning can determine the most appropriate planning technique after a thorough review of your situation.

The Caretaker Child Exception (PART I: How Far Does it Extend?)

By: Robert J. Kurre, J.D.

Your newest client has just entered your office and presented you with the following facts: your client is the 42 year old adopted son of an 85 year old widow who has just entered a nursing home for long term care. The widow owns a building in her name alone which was purchased in December 1999 for cash. The building is worth approximately $500,000 and consists of a store and two apartments. One apartment is occupied by your client and his wife. The other apartment was occupied only by the widow up until the time of her institutionalization. The widow’s only other asset is a bank account with a current balance of $3,000. Her monthly income consists of her social security check of $1,500 and rent of $750 from your client and $1,200 from the store. Your client had lived under the same roof as his mother for his entire life (until she entered the nursing home) with the exception of a six month period starting in June 2000 in which he lived overseas while working on a research project related to his employment. The client advises that this was a short-term job assignment which he undertook with the intention of returning home to live in his apartment in his mother’s building once the assignment was over. He did, in fact, return to live in the apartment in January 2001. Your client has provided some minor assistance to his mother with her activities of daily living over the last five years. During this time period, her health has slowly but steadily deteriorated. Your client and his mother have not always enjoyed a stable relationship. In fact, in 1997 his mother called the police and filed a formal complaint against your client claiming that he had shoved her during an argument. Your client’s paramount concern is whether his mother’s primary asset – the building – will have to be sold to cover the cost of her care at the nursing home thus leaving him and his wife without a place to live.

Your initial reaction is that the widow may be able to transfer the home to your client as an exempt transfer thus not incurring any period of ineligibility for Medicaid nursing home benefits. However, given the facts you are uncertain of the applicability of the exception that may apply to this situation – the exception commonly known as the “caretaker child exception”.

This article will examine the elements of the caretaker child exception in the context of the above facts. It will offer an analysis as to how far this exception to the transfer penalty rules, in connection with Medicaid nursing home benefits, extends. Part II of this article will appear in the next issue of the NYSBA Elder Law Attorney and examine the issues of liens, estate recovery, tax considerations, and the different methods for transferring ownership of a homestead to a caretaker child.

The caretaker child exception provides that a Medicaid applicant may transfer, without penalty, his or her “homestead” to the applicant’s “child” who “resid[ed]” in the homestead for at least two years “immediately” before the date on which the applicant was institutionalized and who “provided care” to the applicant which permitted the applicant to reside at home rather than in an institution or facility.1

The language of Social Services Law § 366 (5) (d) (3) (i) (D) and the New York State Department of Health Regulation (18 NYCRR § 360-4.4 (c) (2) (iii) (b) (4)) pertaining to the caretaker child exception raises the following issues:

  • What is considered a homestead?
  • Who may qualify as a child?
  • What level of care is necessary to satisfy the requirement of providing care?
  • What if the applicant and the child have lived together the last two years but they changed their residence within this time period?
  • What if the applicant and child have not physically lived together during the entire two year time period?

The Homestead

The property you are trying to preserve in our fact pattern is a hybrid property – it is both residential and commercial in nature. Specifically, it contains two apartments and a store. Can such a property qualify as a “homestead” under the caretaker child exception? In addition, does the fact that your client and his mother live in separate apartments in the building prevent him from qualifying as a caretaker child?

A homestead is defined in the New York State Department of Health regulations as:

the primary residence occupied by a medical assistance applicant/recipient and/or members of his/her family. Family members may include the applicant’s/recipient’s spouse, minor children, certified blind or certified disabled children, and other dependent relatives. The homestead includes the home, land and integral parts such as garages and outbuildings. The homestead may be a condominium, cooperative apartment or mobile home. Vacation homes, summer homes or cabins are not considered to be homesteads.2

The regulations do not differentiate between single family and multi-family dwellings in defining what constitutes a “homestead”. Nor do the regulations specifically address hybrid properties – such as the one in the present fact pattern – which consist of both residential and commercial units. However, the Medicaid Reference Guide does set forth that a homestead may be income producing.3 Furthermore, 18 NYCRR §360-1.4(f) provides that the “homestead” includes the “home, land and integral parts such as garages and outbuildings”, suggesting that anything connected to the primary residence is part of the “homestead”. Accordingly, a “homestead” should include multi-family dwellings provided the applicant uses one of the units as his or her primary residence. Similarly, hybrid properties should be considered homesteads provided any businesses on the property are part of the same building as the applicant’s primary residence.

In our fact pattern, the building should thus qualify as a homestead, as this term is used in connection with the caretaker child exception, since your client’s apartment and the store are each part of the same building that includes the applicant’s apartment. Similarly, the fact that your client and his mother live in separate apartments is irrelevant as the apartments are within the same building.4

Who is a Child?

Your client has advised that he is the adopted son of the applicant. Does an adopted child qualify as a “child” under the caretaker child exception?

Nothing contained in the Social Services Law or New York State Department of Health Regulations or Administrative Directives provides an answer this question, however, inone fair hearing decision, a “child” was strictly interpreted to mean only a biological or adopted child of the applicant.5 The Administrative Law Judge (“ALJ”) determined that a grandchild, niece, nephew, or foster child would not be considered a child as used in the caretaker child exception. Thus, such categories of relatives would not qualify as transferees of a homestead under the caretaker child exception. The ALJ upheld the Agency’s determination that the applicant was ineligible for Medicaid nursing home benefits where the homestead was transferred to a foster child who had lived with the applicant in the homestead for almost sixty years. The ALJ stated: “[w]hile extremely sympathetic to the relationship between the [applicant] and her foster child, the Regulations do not allow the transfer of the household [to a foster child]”.6 The ALJ’s narrow view of who may qualify as a child casts doubt on whether the definition of a “child” can be expanded beyond its common meaning of a biological or adopted child. In our fact pattern, your client should qualify as a “child” under the caretaker child exception provided he can document that he was legally adopted.

What Constitutes Providing Care?

Given the facts presented by your client, has he provided enough assistance to his mother to satisfy the element of providing care under the caretaker child exception? The facts presented indicate that your client has provided some assistance to his mother with her activities of daily living over the last five years. The facts, however, also indicate that he and his mother have had an uneven relationship with at least one physical altercation having occurred between the two of them within the last four years.

The element of providing care ordinarily can be satisfied without difficulty. The pertinent regulation provides that the care provided by the caretaker child must have “permitted [the applicant] to reside at home rather than in an institution or facility”7 and references 18 NYCRR § 311.4(a)(1) for the definition of providing care. 18 NYCRR § 311.4(a)(1) states that the phrase “provid[ing] care” means making arrangements or actively participating in making arrangements for care directly or indirectly, in whole or in part. Similarly, 92 ADM-53 indicates that “provid[ing] care” means care which permitted the applicant to stay at home rather than in an institution and that this can be proven by submitting evidence that the child made arrangements or actively participated in arranging for care, either directly or indirectly, full time or part time. In practice, however, once it is demonstrated that the child is the biological or adopted child of the applicant, the only additional proof that normally is required by the local departments of social services is evidence that the caretaker child lived in the homestead with the applicant for at least two years immediately prior to the date the applicant became institutionalized. Generally, Medicaid presumes that the child “provided care” unless there is evidence to the contrary.8 Examples of proof that should be sufficient to demonstrate that a caretaker child resided in the homestead for at least two years may include a driver’s license, bills, and tax returns bearing the caretaker child’s name along with the homestead address.

Accordingly, the element of “provid[ing] care” would ordinarily be easily satisfied by your client given the presumption that care is provided. However, in this case, the formal complaint filed against your client by his mother could provide a stumbling block to satisfying the element of providing care should such facts come to light.

Change of Residence Within The Two Year Period

In our fact pattern, your client and his mother had lived under the same roof their entire lives. However, the particular homestead where they lived up until the time of her institutionalization was only purchased in December 1999. Thus, two years have not elapsed since the date of purchase of the current homestead and the date the widow entered a nursing home. Is the caretaker child exception available in those situations where an applicant and her child have changed their residence within the two year period immediately preceding institutionalization?

The wording of the caretaker child regulation seems to foreclose the possibility that there is “tacking” or credit given for time periods in which the applicant and the caretaker child lived together in other homes prior to the time they lived together in the homestead which the applicant wishes to transfer to the caretaker child. The regulation makes specific reference to title to the homestead being transferred to a caretaker child who lived with the institutionalized spouse in “such homestead” for at least two years immediately prior to the date the applicant was institutionalized.9 Thus, a literal interpretation of the regulation does not seem to allow for the possibility that the applicant and child may have moved within the two year period immediately preceding institutionalization. Such a move is not uncommon as seniors sometimes purchase smaller, easier to maintain residences as their health begins to fail.

Federal law, however, seems to allow the use of the caretaker child exception even in those cases where the applicant and child have not lived together in the homestead being transferred for the requisite two year time period as long as they have lived together during the entire two year period preceding institutionalization. 42 U.S.C. § 1396p (c)(2)(A)(iv) provides, in relevant part, that the home may be transferred, without penalty, to a child of a Medicaid applicant “who was residing in such individual’s home for a period of at least two years immediately before the date the individual becomes an institutionalized individual, and who…provided care to such individual which permitted such individual to reside at home rather than in …. an institution or facility”. (Emphasis added). Thus, the federal statute seems to allow the applicant to take advantage of the caretaker child exception where he or she has lived together with the child in any abode for the requisite two year period.

Accordingly, the state regulation seems to provide a narrower standard than the federal statute since it requires the applicant and the child to have lived together in the homestead (which the applicant now seeks to transfer to the caretaker child) for the entire two year time period immediately preceding institutionalization. The federal statute merely requires that the applicant and child must have lived together in the same home(not necessarily the homestead being transferred) for the entire two year period immediately preceding institutionalization in order for an exempt transfer to take place. Thus, this aspect of the state regulation which seems in conflict with federal law may be ripe for challenge under the doctrine of federal supremacy. Accordingly, the caretaker child exception should still be available in those situations where the child and applicant have lived together in different residences as long as they have lived together for the entire two year period immediately preceding institutionalization.

Time Spent Apart During Two Year Period

Your client and his mother have not physically lived together during the entire two year period immediately preceding her institutionalization. He lived overseas while on a work assignment from June 2000 through December 2000. Did this time that your client and his mother spend living in different places prevent him from qualifying as a caretaker child?

The state regulation10 and the federal statute11 each provide that the caretaker child must have “resid[ed]” with the applicant for at least the two year period “immediately” preceding the date the individual becomes an institutionalized individual in order for the transfer to be approved as exempt. The presence of the word “immediately” preceding the phrase “before the date the individual became an institutionalized individual” seems to mandate that the applicant and child must have lived together continuously for the entire two year period preceding the applicant’s institutionalization. However, a definition of “residing” is not spelled out under the state regulation or federal statute. Thus, it is unclear whether a transfer of the homestead to a child would constitute an exempt transfer where the child has not physically lived with the institutionalized person in the homestead for the entire two year period immediately prior to institutionalization, however, the child maintained his or her legal domicile at the same residence as the applicant throughout that time period.

Your client should, in the opinion of the author, still meet the requirement of having lived in the homestead with the applicant during the requisite two year period as he indicated to you that his intent was to maintain his domicile at his mother’s residence during his absence from such residence due to his work assignment. If, however, your client had taken steps to change his domicile to the overseas location where he was working and such steps resulted in a lack of documentation evidencing his domicile at the same address as his mother, it would become very difficult to satisfy this element of the caretaker child exception.

Conclusion

The caretaker child exception is a valuable tool in the practitioner’s arsenal of planning strategies to preserve the family home. It can be readily utilized in those situations where a biological or adopted child has maintained his or her domicile in the applicant’s residence for the entire two year period immediately preceding the applicant’s institutionalization. By understanding its purview, the practitioner can best serve the client. Part II of this article (to appear in the next issue of the NYSBA Elder Law Attorney), will consider the issues of liens, estate recovery, tax considerations, and the different methods for transferring ownership of a homestead to a caretaker child.

 

1 Social Services Law § 366 (5) (d) (3) (i) (D); 18 NYCRR § 360-4.4 (c) (2) (iii) (b) (4).
2 18 NYCRR § 360-1.4 (f).
3 Medicaid Reference Guide (August 1999) at page 273.
4 If the mother did not transfer the building to your client and she executed a Statement of Intent to Return Home making the homestead an exempt asset (i.e., not counting towards her countable resource limit of $3,750 in 2001) for purposes of qualifying for Medicaid, it should be noted that the rent from the building would not be considered exempt. Accordingly, if title to the property remains in the name of the applicant, the net rent from the property (i.e., after deducting insurance, maintenance, and taxes) will be budgeted as part of the applicant’s Net Available Monthly Income with all income over $50 per month being paid to the nursing home. As set forth in Part II of this article, if the homestead is not transferred to your client, there is an additional risk of the imposition of a lien on the building.
5 In re Appeal of A.W., Fair Hearing #3171515N (November 4, 1999).
6 Id.
7 18 NYCRR § 360-4.4 (c) (2) (iii) (b) (4).
8 Medicaid Reference Guide (August 1999) at page 355.
9 18 NYCRR § 360-4.4 (c) (2) (iii) (b) (4)
10 Id.
11 42 U.S.C. § 1396p (c) (2) (A) (iv)

 

 

The Caretaker Child Exception (PART II: Tax , Lien, and Estate Recovery Issues)

By: Robert J. Kurre, J.D.

Part I of this article (which appeared in the Summer 2001 issue of the NYSBA Elder Law Attorney) examined the elements of the caretaker child exception and offered an analysis as to how far this exception to the transfer penalty rules extends. Part I focused on the circumstances under which title to a Medicaid applicant’s homestead can be transferred, without the imposition of a penalty period, to a caretaker child and concluded that such an exempt transfer can take place provided a biological or adopted child of the applicant has maintained his or her domicile in the applicant’s primary residence for the entire two year period immediately preceding the institutionalization of the applicant. This part of the article will examine the tax, lien and estate recovery considerations associated with each of the methods commonly used for transferring ownership of a homestead to a caretaker child (i.e., by outright transfer or by transfer subject to a retained life estate) as well as the tax, lien and estate recovery issues associated with the failure of an applicant to transfer the homestead’s title to a caretaker child during the applicant’s lifetime. All references to a “caretaker child” in this part of the article will presume that the child of the applicant has qualified as a “caretaker child” under applicable law.1

Outright Transfer Of A Homestead To A Caretaker Child

A Medicaid applicant may make an outright transfer of his or homestead to a caretaker child without incurring a penalty period. The applicant would transfer his/her entire ownership interest in the homestead to the caretaker child without reserving, in the deed, the right to occupy the premises.

There are two potential problems associated with transferring title to the homestead to the caretaker child in this manner. First, if the applicant receives the benefit of any real property tax exemptions (i.e., Veteran’s, Senior Citizen’s, or STAR), such benefits will be lost as the applicant no longer would have an ownership interest in the property. Second, by transferring the homestead to a caretaker child in this manner, the caretaker child will acquire the applicant’s cost basis in the property (i.e., “carryover basis”)2 which could result in a significant capital gains tax liability of the caretaker child upon the sale of the property by the caretaker child. For example, assume the applicant purchased the property thirty years ago for $30,000 and the property now has a fair market value of $300,000. The caretaker child would acquire a cost basis of $30,000 in the property (assume for the purpose of this example that no improvements were made to the property which would increase the basis) and would have a very significant capital gains tax liability if the caretaker child received proceeds from the sale of the homestead equal to $300,000. This problem may be overcome if the caretaker child maintains his or her primary residence in the homestead for at least the next two years before selling the property. Internal Revenue Code (“IRC”) Section 121 provides an exclusion from gross income for the sale of a principal residence if the property was owned and used by the taxpayer as the taxpayer’s principal residence for two of the five years preceding the date of the sale. The amount of the gain excluded is $250,000 for a taxpayer filing individually and $500,000 for taxpayers filing jointly.

There is an important timing issue to be considered whenever a transfer of a homestead to a caretaker child is being contemplated. Medicaid law does not extend exempt status to a homestead which remains titled in the name of the Medicaid applicant where a caretaker child continues to live in the homestead following the applicant’s institutionalization. If an individual becomes institutionalized, the homestead will only be exempt if it is occupied by the applicant; the applicant’s spouse; or the applicant’s minor, blind or disabled child3; or if the applicant executes a statement of intent to return home4. Thus, if the applicant becomes institutionalized without having a spouse who will continue to live in the homestead and the applicant has not executed a statement of intent to return home, the home will remain exempt only if the caretaker child also qualifies as minor, blind, or disabled child. Furthermore, Medicaid law allows a lien to be placed by the department of social services (“DSS”) on a homestead titled in the name of a Medicaid applicant even if a caretaker child continues to live in the homestead following the applicant’s institutionalization. A lien cannot be placed on a homestead only if the homestead is occupied by the applicant’s spouse; the applicant’s minor, blind or disabled child; or a sibling of the applicant who has resided in the homestead for at least one year immediately before the applicant’s institutionalization and who has an equity interest in the homestead.5 Thus, by not actually transferring title to the homestead to a caretaker child prior to requesting Medicaid eligibility, the homestead may a) become an available resource for eligibility purposes, and b) be subject to a lien (assuming there is no spouse or sibling who meets the statutory requirements) if the caretaker child does not also qualify as a minor, blind, or disabled child. The lien, however, must be removed if the applicant returns to live in the homestead.6 Although DSS has the right to place a lien on a homestead titled in the name of a Medicaid applicant and occupied by a caretaker child, it is prohibited from enforcing the lien as long as the caretaker child lives in the homestead.7

Accordingly, transfer of the title to the homestead from an applicant to a caretaker child should ordinarily be completed prior to attempting to establishing the eligibility of the applicant since the homestead may count as an available resource if not transferred. Once the homestead is transferred from the applicant to the caretaker child, it will not be an available resource for Medicaid eligibility purposes. In addition, the pre-eligibility transfer of the homestead to the caretaker child will foreclose the possibility of DSS imposing a lien on the property as the applicant will no longer be the owner. The caretaker child, as the new owner, is not legally responsible for the cost of the institutionalized parent’s medical expenses. Under this scenario, no estate recovery is possible against the homestead for the same reasons.

In those situations where the homestead is highly appreciated and the caretaker child has no intention of living in the homestead for at least the next two years, an outright transfer of the homestead may not be desirable due to the capital gains tax exposure to the caretaker child. Instead, the applicant’s transfer of the homestead’s title to the caretaker child with the applicant retaining a life estate may be more prudent.

Transfer Of A Homestead To A Caretaker Child Subject To A Retained Life Estate

A Medicaid applicant may convey a homestead to a caretaker child and retain a life estate for himself/herself without incurring a penalty period. By retaining a life estate in the homestead, the Medicaid applicant retains the right to remain in the homestead for life.

The retention of a life estate by the applicant may be more desirable than making an outright transfer of the homestead to a caretaker child for several reasons. First, significant tax advantages may exist by transferring a homestead to a caretaker child subject to the retention of an unrestricted life estate (i.e., the life tenant maintains the right to receive rental income). An applicant’s property tax exemptions (STAR, Senior Citizen’s or Veteran’s) will be preserved when a life estate is retained by the applicant provided the deed is properly drafted.8 A restricted life estate (i.e., the life tenant gives up the right to receive rental income) may, however, adversely affect the tenant’s continuing eligibility for property tax exemptions. Additionally, significant capital gains tax advantages may be present as the holder of the remainder interest will receive a 100% step-up in the basis of the homestead upon the death of the life tenant.9 The step-up in basis is an income tax concept, whereby the basis of the property acquired from a decedent is its fair market value at the time of the decedent’s death. Any capital gains taxes due following the subsequent sale of the homestead will be minimized.

A lien cannot be placed on the life estate interest of a Medicaid applicant.10 Thus, if the homestead is transferred to a caretaker child and the applicant retains a life estate in the homestead, DSS cannot, under any circumstances, place a lien on the life estate interest of the Medicaid applicant. The institutionalization of the life tenant would not subject the homestead to the risk of the imposition of a lien. Moreover, a lien could not be imposed against the caretaker child’s remainder interest in the homestead since a child is not legally responsible for the cost of a parent’s medical expenses.

No estate recovery is possible against the applicant’s life estate interest in the homestead as it is extinguished upon the death of the life tenant and the homestead passes as a non-probate asset (i.e., by operation of law) to the remaindermen. Under New York law, estate recovery is presently only possible against a Medicaid recipient’s probate estate.11 Similarly, no estate recovery is possible against the caretaker child’s remainder interest in the homestead since a child is not legally responsible for the cost of a parent’s medical expenses.

Transfer of title to the homestead from an applicant to a caretaker child subject to the retention of a life estate in favor of the applicant ordinarily should be completed prior to attempting to establishing the eligibility of the applicant since the homestead may count as an available resource if not transferred. A life estate interest of an applicant, however, is not considered a countable resource.12 The pre-eligibility transfer of the homestead, subject to the applicant’s life estate, to the caretaker child will also foreclose the possibility of DSS imposing a lien on the homestead as the applicant’s life estate interest, as discussed above, cannot be liened and the caretaker child’s remainder interest in the homestead cannot be liened since a child is not deemed to be legally responsible for the cost of an institutionalized parent’s medical expenses.

The practitioner should be cautious, however, in transferring the homestead of a Medicaid applicant subject to a retained life estate since there are potential disadvantages. If the homestead is sold for any reason during the lifetime of the Medicaid applicant, a portion of the proceeds equal to the value of the life estate will belong to the life tenant. If the life tenant is receiving Medicaid benefits, the funds received by the life tenant will adversely affect the life tenant’s continuing Medicaid eligibility. Additionally, the life tenant would need the consent of the remaindermen to sell the property (and vice versa). Lastly, the transfer of the homestead subject to a retained life estate may adversely affect the ability of the life tenant to maximize the $250,000 ($500,000 for married couples) exclusion on the gain from the sale of the homestead. For these reasons, where there is a distinct possibility that the homestead may be sold during the life tenant’s lifetime, it may be advisable to make an outright transfer of title to the caretaker child.

Failure To Transfer Title During Applicant’s Lifetime

What if a Medicaid applicant retains the entire ownership interest in the homestead and does not transfer title to the caretaker child by either of the above-discussed methods during his/her lifetime (i.e., by outright transfer or by deed subject to a retained life estate) but instead the homestead only passes to the caretaker child through the applicant’s Will or through intestacy?

As already discussed, a homestead will no longer be exempt if is not occupied by the applicant; the applicant’s spouse, minor, blind or disabled child; or if the applicant does not execute a statement of intent to return. Even if the applicant executes a statement of intent to return home making the home an exempt asset, DSS can place a lien on a homestead occupied by a caretaker child to recover the Medicaid benefits paid to the individual for nursing home care or its equivalent. Accordingly, as discussed above, transferring the homestead out of the institutionalized person’s name to a caretaker child should be completed prior to attempting to establish the applicant’s eligibility. But what if title to the homestead is kept in the applicant’s name because the applicant (i) resides in a nursing home becoming eligible for Medicaid institutional benefits by executing a statement of intent to return home (making the homestead an exempt resource), or (ii) continues to reside at home (making the homestead an exempt resource) and receives Medicaid home care benefits?

If title to the homestead remains in the name of the applicant and only passes to the caretaker child through the applicant’s Will, or through intestacy, the applicant will continue to benefit from any STAR, Veteran’s or Senior Citizen’s tax exemptions because the applicant is still the owner of the property. Additionally, the caretaker child would receive a 100% step-up in basis in the homestead upon the death of the applicant if the homestead passes by Will or through intestacy to the caretaker child.13

However, DSS may place a lien against the homestead (even where the applicant executes a writing declaring his or her intent to return home) if it determines the individual to be permanently absent from the homestead even if a caretaker child lives in the homestead. The lien must, however, be removed if the individual returns home.14 Thus, by maintaining title to the homestead in the applicant’s name, the risk of the imposition of a lien on the homestead exists which would enable DSS to recover for Medicaid benefits paid to the individual for nursing home care or its equivalent. Although, DSS has the right to place a lien on the homestead under these circumstances, it is prohibited from enforcing the lien as long as a caretaker child lives in the homestead.15 If the applicant is living in the homestead and receiving Medicaid home care benefits, no lien can be imposed on the homestead.

An additional exposure in connection with the homestead whose title is not transferred out of the applicant’s name is the risk of recovery against that individual’s estate. DSS may assert a claim against the estate of a deceased Medicaid recipient who is not survived by a spouse or a minor, disabled, or blind child.16 Accordingly, unless the applicant’s spouse is alive or the caretaker child also qualifies as a minor, blind, or disabled child, Medicaid may assert a claim against a homestead that passes by Will (or through intestacy) to the extent of Medicaid benefits paid when the decedent was age fifty five or older.17 This right of recovery is further limited, however, as DSS can only recover from the estate of an applicant for benefits paid within ten years of the individual’s death.18

Conclusion

By understanding the tax, lien and estate recovery ramifications of the different methods commonly used to transfer a Medicaid applicant’s ownership interest in a homestead to a caretaker child, the practitioner can best serve the client. In order to qualify for Medicaid nursing home benefits and avoid the imposition of a lien on the homestead, a Medicaid applicant ordinarily should transfer title to the homestead to a caretaker child prior to seeking to establish eligibility. The practitioner should analyze and weigh the following factors to determine the more appropriate method of transferring title to the homestead to the caretaker child (i.e. by outright transfer or by deed subject to a retained life estate): the likelihood that the homestead will be sold during the applicant’s lifetime; the possible loss of property tax exemptions; and, if there is a low cost basis in the property, the likelihood that the caretaker child will continue to use the homestead as his or her primary residence for at least the next two years. An outright transfer of the homestead to the caretaker child is generally advisable where there is a distinct possibility that the homestead may be sold during the applicant’s lifetime and, if there is a low cost basis in the property, the caretaker child is likely to continue residing in the homestead for at least the next two years. Transferring the homestead subject to a retained life estate is generally advisable where the homestead is unlikely to be sold during the applicant’s lifetime, and, if there is a low cost basis in the property, the caretaker child is unlikely to live in the homestead for at least the next two years. The loss of property tax exemptions is usually not a dispositive factor in determining which method of transferring title is preferred since its economic value is usually minimal when compared to the economic consequences associated with the other factors. Nonetheless, a case-by- case analysis of each factor should be completed.

The practitioner should also understand and educate the client about the consequences of not making a lifetime transfer of the homestead’s title to a caretaker child. The consequences include difficulty in establishing Medicaid eligibility, the risk of a lien being placed on the homestead, and the risk that Medicaid may assert a claim for recovery of benefits paid against the homestead as part of estate of the Medicaid recipient.

 

1 Social Services Law § 366 (5)(d)(3)(i)(D); 18 NYCRR § 360-4.4 (c) (2) (iii) (b) (4).
2 IRC § 1015.
3 Social Services Law § 366 (2)(a)(1); 18 NYCRR § 360-4.7(a)(1).
4 Anna W. v. Bane, 863 F. Supp. 125 (W.D.N.Y. 1993).
5 Social Services Law § 369 (2)(a)(ii); 18 NYCRR § 360–7.11(a)(3)(ii).
6 Social Services Law §369 (2)(a)(ii); 18 NYCRR § 360–7.11 (a)(3)(i).
7 Social Services Law §369 (2)(b)(iii)(B); 18 NYCRR § 360-7.11 (b)(3)(ii).
8 Real Property Tax Law § 467 (10); 3 Opinion NYS Attorney General 45 (1973).
9 IRC § 1014 (b). Note, however, that under the Economic Growth and Tax Relief Reconciliation Act of 2001, modified carryover basis rules apply with respect to property acquired from an individual who dies between January 1, 2010 and December 31, 2010. The new rules do provide certain exceptions which allow the executor of a decedent’s estate to “step-up” the basis of assets owned by the decedent and acquired by the beneficiaries at death, up to an aggregate of $1.3 million. In addition, the basis of property transferred by a decedent to a surviving spouse can be increased by an additional $3 million (see IRC § 1022).
10 96 ADM-8 at page 21.
11 Social Services Law § 369 (6).
12 96 ADM-8 at page 21.
13 IRC § 1014 (b). Note, however, that under the Economic Growth and Tax Relief Reconciliation Act of 2001, modified carryover basis rules apply with respect to property acquired from an individual who dies between January 1, 2010 and December 31, 2010. The new rules do provide certain exceptions which allow the executor of a decedent’s estate to “step-up” the basis of assets owned by the decedent and acquired by the beneficiaries at death, up to an aggregate of $1.3 million. In addition, the basis of property transferred by a decedent to a surviving spouse can be increased by an additional $3 million (see IRC § 1022).
14 Social Services Law § 369 (2)(a)(ii); 18 NYCRR § 360-7.11 (a)(3)(i).
15 Social Services Law § 369 (2)(b)(iii)(B); 18 NYCRR § 360-7.11 (b)(3)(ii).
16 Social Services Law § 369 (2)(b)(ii); 18 NYCRR §360-7.11 (b)(2).
17 Social Services Law §369 (2)(b)(i)(B); 18 NYCRR §360-7.11 (b)(1)(i). Note, however, that the New York State regulation has not yet been updated to reflect the reduction in age from 65 to 55 as the age after which benefits are subject to recovery.
18 Social Services Law § 104 (1).

 

Estate Planning Is More Than Tax Planning

By: Robert J. Kurre, Esq.

There are many reasons to engage in estate planning which have absolutely nothing to do with estate tax planning. Estate tax planning is just one of many important considerations in estate planning. Here are some examples of non-tax reasons why estate planning is necessary:

  •  If you wish to choose who will benefit from your estate upon your death rather than defaulting to the government’s plan to distribute your assets, a good estate plan includes a Last Will and Testament.
  • If you are making gifts during your lifetime to some of your beneficiaries or you are making gifts to all of them in unequal amounts, a good estate plan contains equalization provisions if you would like your beneficiaries to be treated the same upon your death.
  • If you do not want your family to have to file a court proceeding to become your guardian
  • If you become incapacitated and you do not want your family potentially fighting in court over who should be your guardian, a good estate plan will address appointing agents you choose to make medical and financial decisions for you if you are no longer able to do so yourself.
  •  If you are concerned about losing your assets to the costs of a nursing home or other long-term care in the future, a good estate plan implements a plan (e.g., long-term care insurance or Medicaid planning) to protect your assets from the substantial risk that such expensive care may become necessary.
  • If you have minor children, a good estate plan appoints standby and permanent guardians for your children, makes sure your life insurance is properly owned (i.e., not owned by the insured) to avoid being taxed in your estate, and makes sure your children do not have control of the money until they are mature enough to properly handle it.
  •  If you own a business, a good estate plan includes a plan for the management of your business and a succession plan for when you are no longer involved in the business.
  • If you are a doctor, lawyer or other professional, a good estate plan protects your personal assets from professional liability claims.
  • If you own real property in more than one state, a good estate plan provides that your estate will not have to go through multiple court proceedings in different jurisdictions.
  •  If you have beneficiaries who are spendthrifts, special needs persons, substance abusers, or may become unmotivated upon receiving an inheritance from you, a good estate plan makes sure their inheritances are in the form of a carefully crafted trust rather than an outright gift.
  • If you have beneficiaries who already have substantial assets, a good estate plan allows them to have access to their inheritance while not causing their own estates to potentially become subject to increased estate taxes due to the inheritance received from you.
  • If you are concerned that your beneficiaries may divorce sometime after they receive assets from your estate, a good estate plan includes planning so their inheritance are not subject to divorce claims and will stay within your blood line.

As you can see, there are many aspects of estate planning which have nothing to do with taxes. The above are examples, not an exhaustive list, of some of the very important, non-tax reasons why estate planning is necessary. The estate tax law has not affected the need for these issues to be addressed in a proper estate plan.

When Should I Update My Estate Plan?

By: Robert J. Kurre, Esq.

An estate plan is dynamic in nature. A plan that was proper a few years ago (or maybe even yesterday) may no longer be appropriate. Many people assume that once they complete an estate plan, they need not do more. Unfortunately, I have seen many individuals who have outdated estate plans suffer significant financial loss. I recommend that an estate plan be revisited at least once every three years; however, an estate plan should be reviewed more frequently when changes in the law or your life circumstances dictate such a review.

Please keep in mind that no one will take a greater interest in updating your estate plan and protecting your estate from court costs, taxes and long-term care expenses than you will. For this reason, a prudent individual should be proactive in updating his or her estate plan. Let us examine some circumstances that may necessitate addressing your estate plan.

Life circumstances often dictate that an estate plan be revisited. For example, if a new marriage (or divorce) is contemplated, action is necessary to ensure that the marital partner is being treated as desired. In addition to addressing a pre-nuptial agreement (or separation agreement) and updating your Will, beneficiary designation forms for retirement accounts and life insurance policies as well as agent designations under a Health Care Proxy and Durable Power of Attorney should be re-examined. Similarly, if a child or grandchild is born, appropriate provisions should be made to ensure the child’s future by nominating a guardian as well as providing for the management of any funds which may be inherited by the minor. Additionally, if a beneficiary becomes disabled, is diagnosed with a serious illness or is suffering from deteriorating health, an estate plan should be updated to protect the disabled beneficiary’s eligibility for government benefits and make certain that ongoing decision making is in place without court involvement.

Many people are unaware of an extremely important provision which should be added to every Will – a “trigger trust”. A “trigger trust” provision in a Will can potentially protect a family’s life savings. It provides that in the event a beneficiary becomes disabled, the funds earmarked for that beneficiary will be put into a supplemental needs trust for the benefit of the disabled beneficiary. Our office drafts every Will with a “trigger trust” provision. Unfortunately, most people (and many attorneys) are not familiar with this protective measure and do not have it included as part of their estate plan. The result can be devastating as the funds inherited by the disabled beneficiary can be lost to the exorbitant costs of care for a disabled beneficiary. With the “trigger trust”, eligibility for government benefits can be maintained and the trust funds used to supplement government benefits and enhance the quality of life of the disabled beneficiary.

Changes in the law can also necessitate changes to an estate plan. For example, in June 2001, President Bush signed a new law which dramatically changed the estate tax law. As a result, the Federal and New York State estate tax thresholds are no longer at the same level. Married couples who executed their Wills prior to this change in the law may be in for a rude awakening in that New York State may be due estate taxes of tens of thousands of dollars upon the death of the first spouse due to the outdated estate tax planning provisions in their Wills. This problem can be remedied by updated Wills containing appropriate provisions.

I have given just a few examples of changes in life circumstances and the law which can lead to the necessity of updating an estate plan. To not remain diligent in updating your estate plan is to risk adverse financial consequences. A qualified elder law and estate planning attorney can analyze whether your elder law and estate planning documents currently meet the challenge of protecting your assets to the maximum extent allowed by law.