By Nancy Burner, Esq.

The typical Medicaid trust is a grantor trust for income and estate tax purposes. The grantor trust rules came about after high earners tried to lower their income tax consequence by scattering their income to various trusts over which they maintained control. By spreading their income out, the earners were subject to the lower tax brackets since each trust was considered a separate entity, rather than all the income being taxed to one individual.

Eventually, the IRS caught on to this technique and the grantor trust rules were born. The grantor rules state that if the grantor, that is, the creator of the trust, maintains certain “strings” of control over the trust, such as the right to principal or the right to change the beneficiaries, then all the income from said trusts must be reported on the grantor’s individual tax return.

In addition, the IRS imposed compressed tax rates for trusts. For instance, in 2016 once the income of a trust exceeds $12,500.00, the trust is taxed at the highest tax bracket of 39.6 percent. An individual would have to earn $415,050 to reach that rate. Similarly, a trust can be a grantor trust for estate tax purposes. This would mean that despite the fact that the grantor transferred assets to an irrevocable trust during their life, if they retain certain rights under the terms of the trust, the assets are still includible in their estate for estate tax purposes.

While this combination of new rules from the IRS does not help to lower income or estate tax, it provided for the perfect vehicle for Medicaid planning. Nursing Home Medicaid imposes a penalty for any transfers made within the 5 years prior to the date of the application. If assets are transferred to a trust, the trust must be irrevocable and must provide that the grantor has no right to principal in order for Medicaid to consider the asset unavailable for eligibility purposes. Individuals interested in Medicaid planning were anxious to protect assets but did not want to give up complete control of their assets, nor did they want to incur any negative tax treatment. The grantor trust rules solved those concerns.

While Medicaid does prevent the trust from returning principal to the grantor, the grantor can still receive any income earned in the trust, can retain the right to reside in any real property in the trust and can change the trustee or beneficiaries at any time.

Moreover, because the grantor retains the right to reside in any real property in the trust, the grantor is still entitled to any real property tax exemptions and still receive their $250,000 capital gains exemption if the property is sold.

As mentioned above, if properly drafted, a grantor trust will provide that any income generated within the trust will be reported on the creator’s individual tax return, thus eliminating the possibility of a compressed tax rate.

Additionally, since the assets are still includible in the grantor’s estate when they pass away, there will be a 100 percent step-up in cost basis equal to the fair market value as of the date of their death. This means that if a grantor purchased her home for $30,000.00 in 1980, the property will be re-assessed upon her death to the fair market value. Therefore, when the beneficiaries sell the property there will be no capital gains tax incurred.

Not all trusts are created equal. If you are considering a Medicaid trust, consult with an elder law attorney in your area to learn more.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

By Nancy Burner, Esq.

Each January, the governor of the State of New York puts out a proposed budget from which the legislative and executive branches will base their negotiations to determine a final budget.  The budget is set to be passed by March 31; the date that marks the end of the fiscal year for the state. Just as in years before, our state legislature is in the process of reviewing the proposed budget.

There are several proposals in the budget that, if passed, will have an impact on the Medicaid program as we know it in New York State. Specifically, two in particular will affect married couples in need of care. 

For the 27th year there is a proposal that “spousal refusal” be abolished in the home care Medicaid setting. Spousal refusal is the mechanism by which the spouse of a Medicaid applicant can maintain a Community Spouse Resource Allowance (CSRA) of assets above the Medicaid level as long as the spouse receiving Medicaid maintains assets below the permissible amount of $14,850.00. 

The removal of this provision from our program would not only apply to spouses but to other “legally responsible relatives” including the parents of children in need of the Medicaid program to help pay for the cost of care. The fear of losing the spousal refusal option is that this will force individuals to put a child or spouse in a nursing home in order to maintain enough assets to support themselves or force divorce or separation. 

Compounding the issue of the loss of spousal refusal in the home care setting is the proposal to reduce the CSRA to $23,844.00. Currently, the law in New York states that a spouse can have up to $74,820.00 while the federal maximum is $119,220.00.  Many fear that reducing the CSRA would make it difficult for couples to have a large enough emergency fund, putting them one leaky roof or flooded basement away from impoverishment. 

Oftentimes, the spouse requiring Medicaid may live a long life beyond that of their sick spouse. The loss of these two important parts of our Medicaid program will force the healthy spouse to spend all of their money on the sick spouse and be left without assets to take care of his or her own needs.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.

By Nancy Burner, Esq.

Question: I would like to protect my home by transferring it to my children but am concerned about losing my tax exemption. Is there a way that I can protect my home while still maintaining my exemptions?

Answer: Yes there is. For many of our clients, without the property tax exemptions that they receive, staying in their homes would be a hardship. When faced with the decision of either protecting that home or potentially losing the exemptions, the decision is not an easy one. 

The good news is that you can get the asset protection you desire while still maintaining your tax exemptions.  One way to achieve this is with an irrevocable trust, oftentimes referred to as a Medicaid protection trust. These trusts enable our clients to maintain a certain level of control and beneficial ownership over their home while garnering the same potential asset protection that they would achieve through an outright transfer.   

The way this works is that you as the owner of the property would create a trust; you are the grantor, sometimes referred to as the settlor. You would name a third party (anyone other than your spouse) to act as trustee, and the trust would also provide for distribution at the time of your death to your named beneficiaries. Oftentimes, the trustee and the beneficiaries are one and the same.

Once you transfer the home (or any other nonretirement assets) into the trust, the “clock” begins to run for the purpose of asset protection in the context of Medicaid planning. As you may know, in New York State, we currently have a five-year look back when applying for Chronic Care Medicaid, which means that once assets have been transferred into a properly drafted irrevocable trust and five years has passed, they are no longer countable resources when applying for Medicaid. 

The trust is considered a grantor trust for tax purposes, meaning that the grantor is still considered the owner for tax purposes. Because the grantor retains certain rights with respect to lifetime use of the properties in the trust, the grantor is permitted to maintain any tax benefits associated with ownership of the property, including the Enhanced STAR benefit, veteran’s benefit and any capital gains exemptions they would otherwise be eligible to receive.   

Contrast that with a decision to transfer the property outright to your children for the purpose of protecting the asset, which would result in a total loss of all preferential tax treatment. 

Transferring your home or any nonretirement assets into an irrevocable trust offers flexibility in planning, maintenance in any current tax exemptions and complete asset protection. To determine if an irrevocable trust is appropriate, you should consult an elder law expert in your area.

Nancy Burner, Esq. has practiced elder law and estate planning for over 25 years.

By Nancy Burner, Esq.

The New York State estate tax exclusion amount will be increasing again as of April 1, 2016, to $4,187,500. This is an increase from the $3,125,000 exclusion amount that has been in effect since April 1, 2015. As of Jan. 1, 2016, the federal estate tax exclusion is $5,450,000.

The New York State estate tax exclusion will increase again on April 1, 2017, to $5,250,000. This exclusion amount will remain in effect until Dec. 31, 2018. On Jan. 1, 2019, the basic exclusion amount will be indexed for inflation annually and will be equal to the federal exclusion amount. The New York State and federal exclusion amount is estimated to be $5,900,000 in 2019.

An item still of particular concern to many is the “cliff” language contained in the law. If the estate is valued between 100 and 105 percent of the exclusion amount, the amount over the exclusion will be taxed. As of April 1, 2016, the 105 percent amount is $4,396,875. However, once an estate exceeds the exclusion amount by more than 5 percent, not just the amount in excess of the exclusion amount is taxed, but, rather, the entire estate is subject to estate tax.

Practically, this means that taxable estates greater than 105 percent of the exclusion amount receive no benefit from the exclusion amounts shown above and will pay the same tax that would have been paid under the prior estate tax law.

New York repealed its gift tax in 2000.  This meant that as a New York resident, if you made lifetime gifts to friends or family members, the gift was not taxed or included in your New York gross estate for purposes of calculating your estate tax. With the estate tax law as enacted in 2014, there is a limited three-year look-back period for gifts made between April 1, 2014, and Jan. 1, 2019. This means that if a New York resident dies within three years of making a taxable gift, the value of the gift will be included in the decedent’s estate for purposes of computing the New York estate tax. 

The following gifts are excluded from the three-year look-back: (1) gifts made when the decedent was not a New York resident; (2) gifts made by a New York resident before April 1, 2014; (3) gifts made by a New York resident on or after Jan. 1, 2019; and (4) gifts that are otherwise includible in the decedent’s estate under another provision of the federal estate tax law (that is, such gifts aren’t taxed twice).

For federal gift tax purposes, in 2016, you can still make annual gifts of $14,000 per person without having to report these gifts on a gift tax return. These $14,000 gifts are also not included for New York State estate tax purposes.

The New York State estate tax law does not contain a portability provision like in the federal estate tax law. Portability is a provision in the federal estate tax law that allows the unused estate tax exemption of a married taxpayer to carry over to his or her surviving spouse. Without portability, the manner in which a married couple holds title to their assets may continue to have a significant effect on the amount of New York State estate tax ultimately payable upon the survivors’ death.

This New York estate tax law is working to close, and eventually eliminate, the gap between the New York and federal estate tax exclusion amounts. For the next three years, however, as the exclusion amount increases and the three-year look-back for taxable gifts applies, tax planning will still be complex. That being said, it is important for anyone considering whether to make changes to their estate plans or gifting strategies to see an estate planning attorney specializing in these matters.

Nancy Burner, Esq. has practiced elder law and estate planning for 25 years.

By Nancy Burner, Esq.

The Question: I am considering applying for Community Medicaid for my mom in order to cover the cost of home health aides. I heard that Community Medicaid might pay for certain supplies my mom could use in her home. Is that true?

The Answer: Yes. The Community-Based (Homecare) Medicaid program can assist families in paying for the cost of home health aides as well as other programs, supplies and equipment.  Once approved for Community Medicaid, the individual may be enrolled in a Managed Long Term Care Company (MLTC).  The MLTC will be in charge of coordinating the recipient’s health care needs including, but not limited to, a home health care aide.

The MLTC will determine the amount of hours per day and days per week that the individual is entitled to have a home health care aide. The determination is based upon the needs of the individual. The home health care aide can assist with all activities of daily living, including but not limited to bathing, grooming, toileting, ambulating, meal preparation, laundry and light housekeeping. 

The MLTC will also cover adult day care health programs that offer a place for seniors to go during the day and then return home at night. There are two different options: Medical Model and Social Model. Medical Model will provide meals, rehabilitation, monitoring of health conditions and assist with personal hygiene. Social Model will provide meals, stimulation and senior activities. Some programs will offer transportation to and from the facility.  The entire cost of the program, including transportation, will be covered by Community Medicaid. 

Another service covered by the MLTC is transportation to and from nonemergency medical appointments.  The individual can schedule pick-up at his or her home to any doctor’s office with prior notice. The MLTC will also have a network of providers that will accept Medicaid to cover audiology, dentistry, podiatry, optometry and physical/occupational/speech therapy.

The individual may also be entitled to medical supplies such as diapers, pull-ups, Chux, a wheelchair, walker, hospital bed and portable ramp, depending on the individual’s need. These supplies can be ordered with a prescription from the primary physician. These supplies will be delivered to the home of the Medicaid recipient at no cost.

Finally, certain MLTC providers also offer additional coverage that could be used to pay for premiums, deductibles and other co-pays for medical and prescription drugs. This additional coverage could eliminate the need for supplemental health insurance. It is important to speak with the specific MLTC to find out about what they specifically offer to enrollees.   

The Community-Based Medicaid Program is an invaluable program for many seniors who wish to age at home but are unable to do so without some level of care and certain supplies the cost of which would be otherwise too expensive to sustain on their own. In order to get specific eligibility requirements, please see a local elder law expert in your area.

Nancy Burner, Esq. has practiced elder law and estate planning for over 25 years.

By Nancy Burner, Esq.

As the federal and New York State estate tax exemptions continue to increase over time, clients are less concerned with the tax consequences of their estates and more concerned with protecting the beneficiaries from outside invaders, like divorcing spouses, creditors and long term care expenses.

As a result, the wills and trusts we draft today are geared toward protecting those heirs. It may be time to review your estate plan in view of the changes in the estate tax laws and the general evolution of trust law itself.

A major shift is in how we transfer assets to beneficiaries. Many clients in the past would create trusts that distributed assets to children at specific time intervals, i.e. upon turning the age of 25, 30, and 35. While this is still an option, it does not provide the maximum level of protection for the beneficiary.

By creating trusts that we refer to as “descendants’ trusts,” the beneficiary can have creditor protection, protection from divorcing spouses, Medicaid protection and protection against estate taxes when the assets are passed on to the beneficiary’s heirs.

This trust can be drafted with different options. The beneficiary can be their own trustee, co-trustee at a stated age and then their own trustee at a later age, or have a co-trustee indefinitely. The beneficiary can be entitled to the income of the trust and can distribute principal to themselves for health, education, maintenance and support. If the beneficiary needs principal for any other reason, they can appoint a friendly, independent trustee to authorize principal distributions. The trust can state where the assets will go on the death of the beneficiary without the beneficiary having discretion over the disposition at their own death.

Alternatively, the beneficiary can have a “limited power of appointment,” which allows them to designate where the trust assets will go upon their death. The limited power of appointment will state that the beneficiary can designate in a will, trust or separate instrument, the group of people that the assets can be given to upon their death.

For example, a father creates a trust and states that upon his death the assets are put into two descendants’ trusts, one for each of his children. The trust can state that each child has the power to appoint the assets to their spouses, descendants, and/or charities. In certain circumstances, a larger group of persons may be designated as the group to which the assets can be appointed.

Another change clients are making in their estate plans relates to the trust structure when leaving assets to a spouse. When the estate tax exemption for New York State was $1 million, a typical middle class couple on Long Island could easily have a taxable estate because of the high value of their home.

For these people, it was extremely important to create a credit shelter or bypass trusts to save estate taxes at the death of the second spouse. Luckily, with the increasing exemption at $3,125,000 in 2015 and $4,187,500 in 2016, this is less of a concern, but many clients have documents from before 2014 that may be obsolete.

Furthermore, the will or trust can add “trigger” supplemental needs trusts that can protect the beneficiary if he or she needs long term care. With many of my clients living well into their 90s, their children may be in their 60s and 70s when the parent dies. The may have done their own asset protection planning only to inherit more assets from a parent that are not protected. By creating descendants’ trusts in their documents, this problem can easily be solved.

Nancy Burner, Esq. has practiced elder law and estate planning for 25 years.