Not All Powers of Attorney are Created Equal

When meeting with a client and his or her family, one of the first inquiries I make is to determine whether or not he or she has previously executed a durable general power of attorney (POA) and, if so, what provisions it contains. Since a POA is, like many legal documents, a standardized form created by statute, the natural tendency is to assume that they are all the same and contain identical provisions. This, however, is often an incorrect and dangerous assumption.

A POA is an extremely important document, especially if there are issues regarding one’s health and mental capacity, which allows an individual (the principal) to select an agent to handle his or her financial affairs. Obviously, the agent should be someone you have a great deal of trust and confidence in. For example, a married person will generally appoint his or her spouse as the agent and, if he or she is single, a child or children. More than one person can be appointed, and in many of instances two co-agents may be advisable.

If the POA is “durable” the agent will be able to act even if the principal is subsequently disabled or incapacitated. The actions an agent can undertake, however, are controlled by the explicit terms of the POA — making close examination of the document’s language necessary. For example, the agent’s ability to gift/transfer the assets of the principal to himself and/or others is in New York is only permitted if the POA specifically grants the agent the authority to do so.

It is not at all uncommon for a client to believe that he or she has executed a POA with broad gifting power. However, once the POA is closely examined, it is often revealed that the POA does not allow the agent to make gifts in amounts in excess of $14,000 per person per year.

The above stated limitation on gifting can have dire consequences if the principal becomes disabled/incapacitated and the agent needs to engage in asset protection planning and/or estate tax planning for the principal. The failure to include such broad gifting authority can result in the agent not being able to make the transfers necessary to make the principal eligible for Medicaid (home care and/or nursing home) and/or reduce potential estate tax liability of the principal.

If a sufficiently broad POA is not in existence, and the principal is no longer competent to execute a new POA, it may be necessary to have a guardian appointed by the court for the incapacitated person. This is an expensive and time consuming proceeding that can easily be avoided by signing a durable POA with broad gifting powers before such incapacitation occurs. It is also important to include any other powers deemed prudent beyond the statutory powers found on most POA forms.

For example, a broadly drafted POA could include language that permits the agent to create either a revocable and/or irrevocable trust on behalf of the principal. This is a power that can be of significant value for both estate planning and long-term care planning. The ability of the agent(s) of the POA to do virtually all that the principal could do if he or she were competent can result in many cases the savings of hundreds of thousands of dollars.

In conclusion, I urge you to closely examine the language contained in the POA you have executed to ensure that it is sufficiently broad. Additionally, if you have not executed a POA, I highly recommend you do so before it’s too late.

Do I Need an Attorney When Applying for Medicaid Nursing Home or Medicaid Home Care in New York?

Applying for Medicaid nursing home or home care is an extremely complex process – one with potential complications not often evident at first glance. The rules and regulations relevant to Medicaid eligibility also change frequently and vary by state. Securing the services of a seasoned elder law attorney is imperative to ensure the most favorable outcome.

There are many instances when utilizing an experienced attorney can make a significant difference. For example, the Medicaid applicant’s spouse may need to execute a spousal refusal in order for the applicant to successfully obtain Medicaid (a spousal refusal allows the well spouse to retain resources and income above the levels ordinarily permitted). Once a spousal refusal has been executed, however, the well spouse will be subjected to a potential lawsuit by the Department of Social Services. Knowing one’s legal rights and options in the face of a potential suit is critical.

Additionally, there are legal arguments that can be made with regard to the transfer of assets by the Medicaid applicant that would avoid the implementation of a potentially onerous penalty period. When someone other than an elder law attorney handles the Medicaid nursing home application, however, these opportunities are almost always overlooked.

It’s also important to consider that the application process for Medicaid nursing home or home care is one that typically takes several months as further documentation and explanations are often required. Medicaid officials may require up to five years of financial records and will closely examine every detail. Any unexplained or questionable expenses – even those that are part of routine planning – can disqualify the applicant if not properly handled. In most cases, elder law attorneys are able to complete this process much faster, saving the applicant a significant amount in care expenses. 

There is also post Medicaid eligibility planning, which is often needed (and which a non-attorney cannot advise upon). The failure to properly make these arguments and to be in a position to get the proper legal representation provided by an experienced elder law attorney can result in tens of thousands of dollars being unnecessarily spent by the applicant and his or her family.

What is the Difference Between a Revocable Living Trust and a Last Will & Testament in New York?

One question I am often asked is the difference between a Last Will & Testament and a Revocable Living Trust. While many simply default to a Last Will as their primary estate planning document, the Revocable Living Trust has been gaining significantly in popularity over the past several years. Here are the basics on both:

Last Will & Testament
A Last Will & Testament is a legal document that allows you to specify how (and to whom) your assets are to be distributed when you pass away. The document also outlines the person(s) who will be responsible to carry out your wishes.

It is important to remember that the Last Will & Testament only controls the assets that are in the name of the decedent alone on the date of his or her death – not assets jointly held by the decedent with another, such as a spouse, or which have named beneficiaries. In New York State, a Last Will & Testament must be admitted into probate by the Surrogate’s Court in the county where the decedent resided. In probate, the Last Will must be proved to be valid, property must be inventoried and appraised, and any debts and taxes must be paid before the decedent’s assets are distributed.

Revocable Living Trust
Created during an individual’s lifetime, a Revocable Living Trust is a written agreement that determines how property titled in the name of the trust is to be managed and distributed while he or she is alive and upon death. The trust’s grantor (or creator) retains the power to freely amend and revoke the trust as well as to reacquire its assets. This means he or she can change the terms of the trust at any time or, if desired, cancel it completely.

In New York, the same person can be both the grantor and sole trustee so long as one or more other person holds a beneficial interest (can be vested or contingent – for the present or future). A lifetime trust will be deemed to be irrevocable, which generally means it cannot be amended or revoked by the grantor, unless it expressly provides that is revocable.

The Revocable Living Trust only controls assets titled in the name of the trust. Upon the death of the grantor, it becomes irrevocable and, unlike a Last Will, does not need to go to probate. The trust’s assets will be available for immediate distribution after the death of the grantor, subject to insuring sufficient assets are available to pay estate taxes and debts. This can result in a significant saving’s to the decedent’s estate.

Finally Some Estate Tax Relief for New Yorkers

Fearing a continued exodus of affluent New Yorkers to states that do not impose a state estate tax, the State of New York has finally enacted significant changes to N.Y. Tax Law Section 952.

The most significant change is the increase in the basic exclusion amount for the imposition of New York estate taxes. Thus, for individuals dying on or after:

  • 4/1/14 and before 4/1/15 – $2,062,500 per person exclusion
  • 4/1/15 and before 4/1/16 – $3,125,000 per person exclusion
  • 4/1/16 and before 4/1/17 – $4,187,500 per person exclusion
  • 4/1/17 and before 1/1/19 – $5,250,000 per person exclusion

Clearly, the significant disparity that existed between the Federal estate and gift tax credit ($5.34 million per person for 2014) and the substantially smaller New York exclusion ($1 million per person) was a significant impetus for the enacted changes. It should be noted that after January 1, 2019, the basic exclusion amount will be indexed for inflation from 2010. This should allow the New York exclusion to be approximately equal to the federal amount.

Unfortunately, while Governor Cuomo and the State Legislature were in favor of increasing the basic exclusion amount, it appears that they believed that if the estate of the resident decedent (deceased individual) exceeded the basic exclusion amount by more than five percent, then the entire taxable estate should be subjected to a New York estate tax. With the top rate remaining at sixteen percent, this can result in significant New York estate taxes – especially during the period prior to the exclusion amount reaching $5.25 million on April 1, 2017.

Also important to note is that while under federal law the surviving spouse can utilize the unused federal exclusion of the decedent spouse ($5.34 million) pursuant to the “portability” provisions, no such “portability” provision exists under New York state law.

While there was discussion of a significant “add back” to the taxable estate for taxable gifts made, its application was significantly limited to a three year look back in the enacted legislation. As it now stands, the New York gross estate of a resident decedent will be increased by the amount of any taxable gift not otherwise included in the decedent’s federal gross estate made during the three year period ending on his or her date of death. This does not include any gift made: (1) when the decedent was not a resident of New York state; (2) before April 1, 2014; or (3) on or after January 1, 2019.

While this “add back” regarding taxable gifts may succeed in generating additional estate tax revenue, it could also result in New Yorkers seeking non-resident status if they wish to avoid the estate tax and are interested in sheltering assets from the cost of long term care.

Clearly, the aforementioned changes to the New York estate tax are welcomed. However, whether in the long run they will have the intended effect of preventing New Yorkers from moving to tax friendlier states is something only time will tell. It is definitely a step in the right direction.

The ABCs of SNTs (Special Needs Trusts) – Part 2

Special Needs Trusts, also known as Supplemental Needs Trusts (SNT), play an important role in the planning for a disabled individual. Continuing from my last post, here are a few additional SNT options:

Pooled Self-Settled SNT
A pooled self-settled SNT is managed by a non-profit association. Although funds are pooled into the trust, a separate account is established for each individual beneficiary. Beneficiaries can be of any age. If he or she is over 65 years old, however, there is a penalty period for assets transferred to the pooled trust for Medicaid nursing home benefits. These trusts are usually utilized where there is no family member to act as a trustee or when the beneficiary is over age 65.

Depending on the terms of the pooled trust, the disabled person may be able to provide how the remaining balance of the account is to be distributed upon his or her death. This would, however, be subject to a payback to Medicaid. If the balance on death is retained by the pooled trust, then Medicaid is not entitled to a payback of the benefits paid.

Pooled income-only trusts play an important role when the disabled beneficiary has a fixed income that exceeds the monthly amount permitted by the Community/Home Care Medicaid program since contributing one’s excess income is permissible. The trust will pay the disabled beneficiary’s household expenses such as mortgage, rent and taxes. The pooled trust, in many cases, allows the beneficiary to remain eligible for Medicaid home care. 

Sole Benefits Trust
This special type of SNT has been increasing in popularity. Generally speaking, a sole benefits trust (SBT) is administered the same as a third party SNT to preserve the beneficiary’s eligibility for Medicaid or SSI. The third party parent funding the trust may also do so without incurring a transfer penalty for the purposes of his or her own eligibility for Medicaid and SSI.

 A SBT can be funded with a lump sum or annuity, but must be fully funded before the beneficiary reaches the age of 21. In the situation where the beneficiary’s ability to qualify for Medicaid or SSI is not a concern, the SBT can often be administered to provide for his or her general health, education, welfare, support, maintenance and comfort. When Medicaid or SSI eligibility is a concern for the beneficiary and the third party funding the trust, neither party (nor their spouses) may act as a trustee.

For anyone with a disabled child or grandchild, a properly drafted SNT can provide a level of comfort knowing that a significant step has been taken to ensure his or her future care and wellbeing. Start the discussion early and take action to secure the best type of SNT for your circumstances.

The ABCs of SNTs (Special Needs Trusts) – Part 1

Millions of baby boomers are coming of age. It has been well documented, particularly in recent years, that these individuals will soon have a significant impact upon our medical and long-term care infrastructure. Often overlooked, however, is the fact that baby boomers are also parents and caregivers to millions of non-elderly disabled children. How will the parents’ aging impact the care and wellbeing of their children?

It appears little has been done to educate the aging baby boomers as to what steps should be taken to provide for the future care of their disabled children. Special Needs Trusts (SNT), also known as Supplemental Needs Trusts, play an important role in the planning for a disabled child. They are generally considered to be the legal centerpiece of a plan for a disabled person.

The purpose of a SNT is to provide for the preservation of funds that are permitted to be available to a disabled person without affecting his or her eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). Depending on the benefits the disabled person is receiving, a SNT can be utilized for food, clothing, electronics, cell phone and other necessities.

The following gives a brief overview of two common types of SNTs – the third party SNT and the self-settled SNT:

Third Party SNT
A third party SNT is a trust created and funded by someone other than the disabled beneficiary (generally a parent, grandparent or sibling). The source of funds for a third party SNT should never be from the disabled person. Any individual can fund this type of trust without affecting the beneficiary’s entitlement to government benefits. The funding of a third party SNT by a parent also has Medicaid planning benefits for the grantor since the transfer is considered an exempt transfer. Thus no period of ineligibility is created. A third party SNT does not require payback to the government for benefits paid upon the death of the disabled person. 

Self-Settled SNT or First Party SNT
Self-settled trusts are either funded with a disabled beneficiary’s own funds or funds to which he or she is entitled (such as personal injury award or inheritance). In order for the disabled beneficiary to establish and fund a self-settled SNT, he or she must be disabled and under the age of 65. Upon the death of the disabled beneficiary, all remaining trust principal and accumulated income must be paid back to Medicaid as reimbursement for all benefits paid during his or her lifetime. Any funds left over may be paid to the named beneficiary of the trust.

A second post will outline two additional options, the pooled self-settled SNT (managed by a non-profit association) and the sole benefits trust (a special type of SNT that has been gaining in popularity). 

Factors to Consider When Transferring a Residence for Elder Law Planning Purposes

The decision to transfer one’s residence is often an integral part in asset protection and wealth preservation planning. This is especially true if there is concern that long term care costs (nursing home and/or home care) may dissipate his or her life savings in the future.

Every potential transfer of one’s home raises issues regarding estate and gift taxes, capital gains taxes, as well as Medicaid eligibility. While the following provides insight regarding the various types of transfers available (and their consequences), a thorough review of all options should be made with an experienced elder law attorney prior to making a final selection.

Outright Transfer of the Residence without the Reservation of a Life Estate
Perhaps the least desirable option, the transferee of the property will, in this scenario, receive the transferor’s original cost basis in the property (original purchase price plus the amount of any capital improvements made). The outright transfer is also a completed gift that is subject to gift taxes.

For Medicaid eligibility purposes, the outright transfer of the residence would be subject to a 60-month look back period. This means the transferor and his or her spouse would be disqualified for nursing home Medicaid (not Medicaid homecare) for five years.

From a tax perspective, the use of an outright transfer of the residence results in the transferor losing the Internal Revenue Code principal residence exclusion for capital gains (income tax) purposes ($250,000 for a single person or $500,000 for a married couple). With the federal capital gains tax rate with the Medicare surtax being approximately 24%, the income tax impact could be substantial. Any veteran’s, STAR, and/or senior citizen’s exemptions would also be lost.

Transfer of the Residence with the Reservation of a Life Estate
If the transfer of the residence were made within an existing Medicaid look back period (60 months), the period of ineligibility would not commence until the applicant was receiving institutional care in a nursing home. Thus, a transfer of real property by deed with a retained life estate (the right to the use and possession) will also require that the transferor not apply for nursing home Medicaid within the five-year look back period.

This scenario does permit the transferee to receive a full step up in his or her cost basis in the premises to its fair market value on the transferor’s date of death since the residence is includible in the deceased’s gross taxable estate.

The most significant problem resulting from this type of transfer occurs if the premises are sold during the lifetime of the transferor. In such a case, the transferee will be subject to a capital gains tax on the sale with respect to the value of the remainder interest being sold (difference between transferor’s original cost basis, including capital improvements, and the sale price). In addition, the life tenant is entitled to a portion of the proceeds of the sale based on the value of his or her life estate. This portion may be significant and will be considered an available resource for Medicaid eligibility purposes.

Transfer to a Medicaid Asset Protection Trust (AKA: Irrevocable Income Only Trust)
The use of the Medicaid Asset Protection Trust (MAP) is often the most logical option purely from a Medicaid planning perspective. While the period of ineligibility will effectively be five years, a properly drafted MAP trust will allow the residence to be sold during the lifetime of the transferor with little or no capital gains tax consequences. The transferee can utilize the transferor’s personal residence exclusion ($250,000 if single or $500,000 if married).

Additionally, the transfer can be structured to allow the transferee to receive the premises with a stepped up cost basis upon the death of the transferor. It should be noted that the transfer of the residence to the MAP trust is a taxable gift of a future interest with no annual exclusion available. Full value of premises reported on gift tax return.

While the tax advantages and continued flexibility of the MAP trust make it an ideal option in many cases, it is still critical to examine and weigh all of the aforementioned options before proceeding with a transfer of real property. In a matter of such importance, making an informed choice is essential.