I. Introduction
The phrase “asset protection planning” means a variety of things depending on who is asking for protection and the type of professional who hears the question. For example, a financial advisor whose client asks about asset protection will likely want to discuss investment strategy, diversification, “safe” investments, and rates of return, with the aim of protecting a client’s wealth from economic downturns. A life insurance expert may think of various life insurance policies that can protect a family from the impact of an untimely death or annuities that can be used to fund business or ensure estate planning objectives. An estate planning attorney may consider domestic asset protection trusts to protect a client against potential future creditors or ways to reduce the impact of state and federal death taxes.
For elder law attorneys, asset protection typically means ways in which an individual or a couple can protect their assets from the extraordinary cost of care for a chronic illness. For some clients, this means discussing financial planning and setting financial goals, for others it is discussing Medicare Part D plans Medicare supplement plans, for others, this means evaluating health and long-term care insurance. For many, it means considering how to pay for long-term custodial care. These considerations are complex and stressful for all families; however, for blended families, the considerations and stress are compounded. In the blended family context, many of the elder law attorney’s common asset protection planning techniques have the potential to cause disruption and damage to delicate family relationships if not employed with care.
This article discusses common methods of paying for long-term care and how those methods impact blended families. The article then discusses common asset protection strategies in the context of public benefits and considers the implications of these strategies on blended families. Finally, the article offers some suggestions on how to effectively plan for public benefits in the blended family context.
II. Blended Families
Blended families consist of a husband and wife or spouses of the same sex and their children from previous marriages and/or other unions as well as children from their common union. In the United States, more than 50 percent of all families are blended families. Since the majority of American families are blended families, it is logical to conclude that a large percentage of individuals needing long-term custodial care are members of a blended family.
Blended families provide unique and challenging asset protection planning opportunities. Families may be united in some ways but are often divided in others. Before even considering how to pay for long-term care, it is easy to illustrate the complexity of this planning by considering the spouses’ estate plans. The distribution of assets after death often leads to conflict, even in a long-term care planning situation.
Consider the following example. Both husband and wife have been married before and both have children from a previous marriage. The husband and wife are of somewhat modest means, with assets totaling about $400,000, including the value of the home. Both want to create a simple estate plan and agree that, upon the death of the first spouse, the survivor should have complete access and control over all the assets. Thus, they agree that an outright disposition at the death of the first spouse is prudent. Each executes a simple will that leaves assets outright to the other spouse. Each spouse executes a power of attorney naming his or her child as agent. The spouses’ bank accounts are held jointly, but the home remains titled in the husband’s name alone. However, while both parties agree that the survivor should have complete and unfettered access to all assets after the first spouse dies, they disagree as to what they believe should happen to the assets at the death of the second spouse. One spouse wants all the assets to be divided equally among all the children, while the other wants to disinherit one of the other spouse’s children due to the fact that they have very little contact with that one child and want to give a greater amount to a different child due to that child’s willingness to assist them.
Trust planning seems prudent, but the husband and wife do not want to use trusts. In this instance, the goals are the same initially, but past the first layer of the proverbial onion their goals diverge. The attorney may consider sending them to different attorneys because of the conflict of interest. But, since many of the assets are held jointly, any plan requires the attention and approval of both spouses. Therefore, the challenge is to create a plan that meets the goals of both parties while resolving the conflict or reaching a solution that is agreeable to both. In this instance, a compromise must be made. In fact, the planning challenge is somewhat greater when the assets are modest. It typically is easy to find a solution that meets everyone’s needs when there are millions of dollars to divide and trust planning is not unfamiliar to those involved. This becomes much more difficult when there is less wealth to distribute and trust planning is either cost prohibitive or is too complex.
This example is not unusual when working with middle-class blended families. The solution, or at least counseling the clients to reach a solution, is complex, even when the situation is not complicated by chronic illness, a need for long-term care, cognitive impairment, or opinionated children.
Now consider planning with the couple, discussed above, who married late in life and one has a chronic illness, such as dementia, and needs 24-hour-a-day health care. The elder law attorney is aware of the wishes of both parties; however, the child with whom they had little contact (Child P) has now moved into the home and is providing care in the form of personal services such as shopping, cooking, cleaning, assisting with bathing, dressing, transportation, etc. Child P is now also the agent under the general durable power of attorney for the “healthy spouse.” The child with whom they previously had the relationship and who seemed inclined to provide assistance as needed (Child A) seems to be more interested in his or her inheritance than anything. Due to the stress of the situation, the healthy spouse has turned over all household management responsibilities to Child P. Child P and Child A do not know each other well since their parents married when their children are adults. Not only does the couple’s estate planning become challenging but also their long-term care planning.
As many individuals age, often their children make decisions about care (one hopes in conjunction with the older adult). The children become responsible for arranging that care. When the marriage occurs later in life, after the children have left home, coordinating care for both spouses becomes more challenging when one or both spouses have a cognitive impairment and are unable to express their wishes. In this situation, the child or children will have to make decisions without fully realizing or understanding the nature of the parents’ marriage or other family dynamics. Under the best circumstances, the children on both sides of the relationship are united in wanting the best care for each parent and make decisions cooperatively; however, divisions frequently occur when considering how to pay for care. The elder law attorney should consider the impact of the location and the cost of care on the healthy spouse, the unhealthy spouse, and all the children. Care for a chronic illness can be very expensive, well exceeding $100,000 a year in some cases. Who bears this cost? Does this cost affect the ultimate disposition of the estate of one or both spouses? What does a plan for public benefits look like when there are differing family groups?
III. Paying for Long-Term Care
There are several methods of paying for long-term custodial care, whether in a nursing facility, assisted living facility, or at home. Common methods considered for payment of such expenses include using the individual’s (or couple’s) resources to privately pay for care using long-term care insurance, veterans benefits, and Medicaid. In 2015, the average cost of assisted living care nationally in a one-bed single-occupancy room was $43,200 and the median annual cost of nursing home care in a semiprivate room was $80,300. In 2015, the average Social Security payment was $1,272 per month or $15,264 annually. Taking into account average Social Security payment, an individual would still require additional income of $27,936 annually to cover the cost of an assisted living facility and an additional $65,036 annually to pay for a semiprivate room in a nursing facility. In order for an individual to generate $27,936 in income, an individual must have a portfolio of at least $558,720 in investable assets generating at least a 5 percent per year rate of return. In addition, the cost of assisted living increases on average 2.86 percent each year. Therefore, in order to generate enough income to cover the cost of an assisted living facility and to keep up with inflation, that portfolio needs to be earning at least 7.86 percent if care is needed for a considerable period of time. The amount of investable assets needed to cover the annual cost of a semiprivate room in nursing facility increases to $1,300,720, assuming earnings of 5 percent per year, and the average inflation for nursing care is 3.77 percent, which ten requires the rate of return to increase to 8.77 percent per year to keep up with inflation.
A. Private Pay
Needless to say, the average American does not have savings of $1.3 million and no financial advisor is going to guarantee any specific rate of return. Therefore, while the elder law attorney should first consider the ability of an individual to self-insure or privately pay for his or her care, the ability to pay privately for most people is not an option, or at least not a sustainable one. Indeed, elder law attorneys are creative when examining the ability of a client to privately pay, and they often will consider not only the individual’s overall assets but also their investment strategy and the ability to access assets such as life insurance policies through life or viatical settlements. Still, even after reviewing all available assets, most individuals or couples who self-insure are forced to draw from their principal.
For married couples married only once, using savings accumulated over a lifetime seems both fair and natural. Typically, in such marriages, the children involved in making care decisions, and bearing the ultimate cost of that care, are from that one marriage. As a result, any expenditure of principal, thus reducing potential inheritance, rests equally on all beneficiaries. However, in a blended family, what are the consequences of one spouse consuming all of his or her assets to pay for his or her own care? What is the result when one spouse exhausts all of his or her assets but yet still has a care need? How does the expenditure of principal for the care of one spouse affect the other spouse and all the children? These questions and considerations make asset protection planning for blended families especially important and challenging.
An additional consideration in a blended family is the spousal duty of support. This is known as the common law doctrine of necessaries and is based on the common law practice that required a husband to provide necessary things for his wife, including food, clothing, and shelter. This common law doctrine has been codified by statute in many states and has been amended to require both spouses to support each other as opposed to a requirement that only a husband support his wife. The doctrine of necessaries entitles a cause of action in a third party to collect payment from a spouse for the necessary items that the other spouse purchased on credit from the third party. Since the cause of action belongs to the third party, any contract between husband and wife (such as a premarital agreement waiving support) is irrelevant, presumably because the doctrine of necessaries creates a right in the third party where a contracts between spouses are binding only on those spouses. It is a reasonable interpretation of the doctrine of necessaries to include necessary medical and long-term care. Therefore, unlike in a first marriage situation, in which the expenditure of accumulated wealth from a married couple is spread equally among all beneficiaries, the doctrine of necessaries in a blended family may result in the expenditure of assets belonging to the healthy spouse, reducing what is available for his or her descendants.
Consider a situation where husband and wife married later in life, accumulated assets separately, and maintain those assets independently. The husband is then diagnosed with Alzheimer’s disease and is cared for progressively first at home, then in an assisted living facility, then in a memory unit at an assisted living facility, and finally in a nursing facility. Throughout the continuum of care, the husband (through his wife, as his agent, under his general durable power of attorney) uses his separate funds to pay for his care, until those funds are exhausted. The doctrine of necessaries requires the wife to then use her funds to pay for the husband’s care. This is true even if the couple entered into a valid premarital or postmarital agreement. Although spouses can agree to waive their right to support, the actual duty to support cannot be waived. The husband’s children may not have any concerns that their father’s assets were used to pay for his care. However, the wife’s children, in many situations, will have concerns that their mother’s assets were used to pay for their stepfather’s care. Hence, blended families have a heightened need to consider how long-term care expenses will be paid, regardless of the assets of either spouse.
B. Long-Term Care Insurance
An alternative to privately paying for a person’s own care is long-term care insurance. Not all long-term care insurance policies are the same; all have different coverage options and benefits and, as a result, the purchase of long-term care insurance must be carefully considered and policies carefully reviewed. Presumably, in a blended family, both spouses should purchase insurance because the existence of a policy, in effect, eliminates the requirement for either spouse to be responsible for the long-term care expenses of the other. The type of policy and amount of coverage should be tailored to meet the needs of the family. In addition to providing a means to pay for long-term care costs without negatively affecting potential beneficiaries, long-term care insurance gives the insured greater flexibility in choosing care settings and providers.
There are several issues with long-term care insurance which, unfortunately, may make the purchase not feasible. The first being the “turn-down” rate, which is the percentage of people who apply for long-term care coverage but are denied because of pre-existing conditions. Approximately 23 percent of people ages 60 to 69 are denied coverage. The turndown rate before age 60 is lower; however, many people do not consider their long-term care needs prior to the age of 60. Another concern is the ability to pay premiums. Just as with life insurance premiums, age, health, gender, and amount of coverage all affect long-term care insurance premiums. Premiums are often thousands of dollars a year. Therefore, each spouse must have the means to pay the premiums. Due to the doctrine of necessaries, discussed above, if one spouse has more income and assets, that spouse should consider paying the cost of the long-term care insurance for the other spouse. Even though this requires a financial output over time, typically the cost of insurance is significantly less than the cost of care.
In addition to the potential inability to be insured and pay the cost of premiums, the elder law attorney should consider how long-term care insurance affects the payment of long-term care if only one spouse qualifies for this type of insurance. If only one spouse has coverage and the uninsured spouse needs care, the considerations regarding the ability to privately pay and the doctrine of necessaries must still be considered.
C. Medicaid
Because of the lack of feasibility for some people to self-insure or because of the inability to qualify for or pay for long-term care insurance, Medicaid has become an important source of payment for long-term care for many Americans. For blended families concerned about a potentially unequal allocation of long-term care expenses, Medicaid planning becomes even more important so that one spouse does not find himself or herself responsible for the long-term care stay of his or her spouse, thereby depriving his or her heirs of an inheritance.
Although providing detailed information about Medicaid eligibility is not the purpose of this article, a basic understanding of Medicaid eligibility rules is necessary to contemplate planning for a blended family. There are non-financial eligibility requirements such as U.S. Citizenship or legal alien status, a need for long-term care, and state residence among others; however these requirements may be of little consequence. The primary concern in blended families usually is the financial requirements. The basics of income criteria, asset criteria, and uncompensated gifts/transfers will be discussed below.
It is surprising that there are different definitions of income depending on the context in which the term is used. Income can mean taxable income, which is income as finally determined for income tax purposes. Alternately, when considering trust accounting or personal finance, one considers accounting income (sometimes called net income) that incorporates all receipts. For some, income simply means the amount directly deposited into his, her, or their bank account each month. For Medicaid purposes, the state Medicaid policy manual should be consulted to determine what specifically is considered income. However, generally speaking, income is defined as all earned and unearned income the Medicaid applicant receives unless specifically excluded by the policy manual.
When examining and considering income in a Medicaid context, it is the income of the applicant that must be considered. For blended families, the concern over income is not so much the family member’s initial eligibility (although that is important) but what happens after the family member becomes eligible. While income considerations differ slightly between Supplemental Security Income (SSI) states and 209(b) states, the impact on the Medicaid eligibility is substantially the same. In a 209(b) state, the individual’s income is reduced by his or her medical expenses. Therefore, his or her monthly income is reduced by certain allowances (personal needs allowance, health insurance premiums, and the Minimum Monthly Maintenance Needs Allowance [MMMNA]) and the remaining income is assigned to the institution providing care. In SSI states, Medicaid applicants whose income exceeds the allowable income cap is assigned to a Miller Trust. In either case, the income of the applicant is transferred to someone other than the spouse living in the community.
In order to provide some relief and protection for the spouse remaining in the community, Medicaid rules allows for the payment of an MMMNA and allows for payment of excess shelter expenses. The MMMNA is the minimum income needed by the spouse living in the community. If the community spouse’s income is lower than the MMMNA, the institutionalized spouse can contribute some of his or her income to the community spouse to bring the community spouse’s monthly income up to the level of the MMMNA. The excess shelter allowance is the amount above the MMMNA that the institutionalized spouse is allowed to pay toward community spouse expenses such as mortgage, rent, and association fees. Although the contribution of the MMMNA and excess shelter standard from one spouse to another appears to be income redistribution, this may not be of significant concern to many blended families due to the fact that, in the absence of the income contribution, the income would be lost to the facility providing the care. Therefore, the net impact on the institutionalized spouse’s beneficiaries should be viewed as inconsequential.
However, in all too many instances, the family has built its lifestyle around the dual income of both spouses. Thus, the community spouse may find himself or herself in the position of paying for that lifestyle based solely on using the MMMNA, but the MMMNA is not enough to support that lifestyle. This may result in downsizing, the sale of assets, and potential wealth erosion, which ultimately reduce what the beneficiaries of the community spouse inherit. Another potential issue arises when considering how to protect assets. In some circumstances, the asset protection strategy involves converting assets to an income stream that is often paid to the community spouse. In this case, the community spouse’s income increases, which reduces the amount that can be paid to him or her through the MMMNA, causing an overall loss due to the payment of additional income to the facility.
While income redistribution in general may be of some concern, the much larger concern usually is over assets and how assets are distributed. For one spouse to be eligible for Medicaid, the institutionalized spouse must not have countable assets which exceed $2,000 and the community spouse must not have countable assets that exceed the Community Spouse Resource Allowance (CSRA). The CSRA is an amount that is considered sufficient to keep the community spouse from becoming impoverished. Depending on state policy, the CSRA is calculated in one of two ways. The first method is by dividing in half the value of countable assets owned by both spouses as of the first day of the month when either of them were institutionalized for a period of 30 days or more; this could be from the most recent institutionalization or could be some date in the past. There is a maximum of $119,220 and a minimum of $23,544. The other method is simply allowing the community spouse to keep all countable assets up to the maximum of $119,220.
The key issue with respect to Medicaid eligibility, calculation of the CSRA, and blended families is the fact that the assets of both spouses are considered for purposes of Medicaid eligibility. A total of $119,220 in countable assets is the maximum amount that the community spouse is allowed to maintain in his or her name, regardless of who owns which assets. The CSRA is calculated based on the value of the couple’s combined assets, whether held individually or jointly and regardless of the family situation and the intent of the spouses, even if that intent was codified in either a premarital or postmarital agreement.
The issue of counting both spouses’ assets is an interesting one. In many states, spouses may waive support for each other and may waive their rights to their spouse’s assets using a premarital or postmarital agreement. Therefore, it is logical to conclude that a valid and binding agreement in which spouses waive their rights to each other’s assets would exempt those assets from being considered for purposes of Medicaid eligibility. However, Medicaid eligibility rules consider all assets of both spouses and makes no exception for separate property, regardless of whether the spouses identified the property as separate in a premarital or other agreement. This is even more perplexing given that Medicaid considers only the income of the spouse applying for Medicaid.
Given the Medicaid eligibility rules, the difference between the allotment allowed for the institutionalized spouse and the community spouse, and the fact that a premarital or post marital agreement does not protect the assets of either spouse in terms of Medicaid eligibility, how does the elder law attorney advise clients? There are several options which may be considered.
1. Do Not Get Married
If contemplation of long-term care costs is made early, before marriage, then it may be prudent to advise unmarried clients to cohabitate rather than get married. For these couples who cohabitate rather than get married, there is no consideration given to the assets of the community spouse because there is no community spouse. No spousal assets are considered, and no duty of support is imposed, therefore, if either of the couple has a long-term care need, then only his or her assets need to be spent on care. This is true regardless of whether the individuals self-insure or whether they are considering Medicaid qualification. This recommendation is not popular with clients. Many clients wish to get married for religious, moral, or other reasons. Some choose to marry because it entitles them to benefits such as a survivor’s benefit on a pension and health insurance through a spouse’s employer. If the desire to get married is based on qualification for these other benefits, then the elder law attorney advising the clients should carefully weigh and discuss the potential consequences of a long-term care need against the value of the other benefits.
Even when considering asset protection planning for Medicaid eligibility purposes, there are some benefits to marriage. Marriage entitles the community spouse to the MMMNA that he or she would not be entitled to if the couple were simply cohabitating before they needed Medicaid. In addition, the transfer of assets between spouses is not penalized. Therefore, a spouse in need of Medicaid benefits may transfer all of his or her assets to the community spouse. The community spouse can then execute a traditional asset protection plan and can, in many instances, protect the value of much of the couple’s combined resources. Should there be no desired changes on the part of the community spouse, then this is ideal and marriage poses no problem. However, as discussed below, this often is not the case.
2. Divorce
One strategy to consider is the possibility that the couple divorce prior to either spouse applying for Medicaid benefits. The best asset protection planning scenario is one in which a valid premarital or postmarital agreement exists, thereby dividing property according to the wishes of both spouses. With a freely negotiated premarital or postmarital agreement, it would be difficult for any court to order that the assets of the community spouse be applied toward the support of the institutionalized spouse. However, in the vast majority of cases, there is no premarital or postmarital agreement leaving the division of property to either be agreed upon by the divorcing parties or decided by a court.
It is not often that spouses agree on the division of assets and income. In a recent Nebraska case, a court ordered the husband to pay alimony to help offset his wife’s nursing home bill. The husband appealed this, arguing that the award of alimony reduced his income to below the poverty level. The husband lost the appeal. The judge reviewed the husband’s income and assets and determined that it was appropriate for the husband to contribute to the wife’s nursing home expenses. At the time of the divorce, the wife was 95 and the husband was 94. It should be noted that the divorce does not appear to be related to a desire to qualify for Medicaid or other benefits.
In families without complications where the parties are amicable it is possible that the state Medicaid agency later challenges that division of the assets. In a case from New Jersey, a husband and wife, each represented by independent counsel, entered into a property and settlement agreement in which the community spouse took a larger share of the marital assets than the institutionalized spouse. The institutionalized spouse spent the funds received from the divorce and applied for Medicaid 16 months after the divorce. The New Jersey Division of Medical Assistance and Health Services (DMAHS) applied a transfer penalty based on its unwritten policy that assets should be divided equally in a divorce case. Ultimately, the court decided against DMAHS, arguing that its unwritten policy was the result of administrative rule-making and therefore was invalid.
Another concern that may affect a divorce is the capacity of the parties. Many people who are considering whether they need long-term care suffer from some sort of memory loss or cognitive impairment. State laws vary widely on whether a person who lacks capacity may either petition for or be represented in a divorce hearing. Also, if the decision to divorce is considered by agents or guardians, state law may limit what action may be taken. For example, North Carolina law specifically allows an attorney in fact, general guardian, or guardian ad litem to represent an incompetent spouse in a divorce proceeding, but they are prohibited from bringing an action for divorce on behalf of an incompetent individual. However, Florida law indicates that, with permission from the court, a guardian may initiate a petition for divorce. In addition, presumably an incompetent spouse represented by a fiduciary would be unable to settle for less than what state law presumes to be an equitable distribution (to ensure that the fiduciary does not breach his or her duty). Hence, while a wealthy but incompetent community spouse may benefit from a divorce proceeding, a wealthy institutionalized spouse may not, regardless of the intent of the parties.
3. Use Irrevocable Trusts
If the couple is able to plan in advance, one option is to create separate irrevocable trusts for each spouse, leaving each spouse with a right to income from his or her own trust but no right to the principal. Transferring assets into a trust is an uncompensated transfer, but if the trust is properly drafted, none of the assets in the trust are considered countable for purposes of Medicaid eligibility. In addition to shielding these assets from being counted for purposes of Medicaid eligibility, this allows each spouse to pass his or her own assets to his or her own children or other intended beneficiaries. If one spouse owns the home in which the couple resides, the home may be placed into trust and the other spouse can be given the right to remain in the home for his or her lifetime (as opposed to transferring ownership or partial ownership to the surviving spouse). This eliminates the concern over “eviction” if the spouse who owns the home either needs Medicaid benefits or dies before the other spouse.
However, there are drawbacks to this strategy. The primary drawback is that the principal of the trust cannot be used for either spouse. Thus, although an income-only trust protects assets if a spouse needs long-term care and allows this spouse to pass assets to his or her desired beneficiaries, it denies him or her the ability to use some of his or her own resources. It bears noting that some irrevocable trusts do not allow for distributions of principal to the grantor but do allow distributions to the grantor’s descendants or other desired beneficiaries. Presumably, these beneficiaries are free to use principal in whatever manner they deem appropriate, including for supplementing the needs of the grantor. This protects assets for blended families while allowing each party’s desired beneficiaries to have some control over the assets. However, an elder law practitioner should be cautious that the use of the funds by the beneficiaries for the grantor’s benefit could result in the trust funds being considered an available asset under a step-transaction doctrine or a theory of constructive trust. In addition, as with other irrevocable trusts, there are limitations on what can be changed within the trust. Therefore, if a trust is created and the needs or desires of the individuals change, the individuals are limited to what changes can be made. Even the ability to decant the trust (i.e., to pay the assets over to another trust) has limitations that may not benefit the parents or remainder beneficiaries. An additional consideration is that when an individual creates an irrevocable trust with Medicaid planning in mind, the funding of the trust is an uncompensated transfer, thus potentially leaving both spouses ineligible for Medicaid for a period of up to 5 years under current law. Therefore, while this may be effective planning strategy that addresses both asset protection and the needs of a blended family, for many individuals, time constraints may make this strategy unavailable as a practical matter.
Finally, when creating an irrevocable trust for one or more spouses in a blended family, the practitioner should consider the elective share. The elective share is an amount to which a surviving spouse is entitled under state law from the deceased spouse’s estate, regardless of whether the deceased spouse provided for the surviving spouse in the estate plan. If a spouse contributed all of his or her assets to an irrevocable trust that passes to his or her children (instead of the spouse) upon his or her death, the spouse may not have satisfied the state elective share. An argument may be made that the deceased spouse divested himself or herself of assets when creating the trust; therefore, no estate from which to force an elective share exists. However, in many states, the elective share is more than simply probate assets and the definition of the augmented estate may include assets in an irrevocable trust.
4. Spend Down and/or Transfer Assets
a. Spend Down Both Spouses’ Assets
One option to secure Medicaid eligibility is to have the institutional spouse spend all of his or her assets on his or her own care, then have the community spouse spend all of his or her assets down to the $119,220 level on the care of the institutionalized spouse. This is neither likely to be the preference of either spouse nor equitable to the community spouse’s potential heirs if the community spouse has more than $119,220 in countable assets. This may also be inequitable to the heirs of the institutional spouse, because there are ways in which assets can be protected and passed to those he or she wishes to benefit. Therefore, the elder law attorney must examine alternatives to simply spending the assets of both spouses.
b. Transfer All Assets to Community Spouse
Another method to protect assets of both spouses for Medicaid purposes is to transfer all assets (regardless of how the assets are titled) into the name of the community spouse. The community spouse may then execute a traditional asset protection plan, which may involve utilizing so-called safe harbor provisions. Countable assets can be converted into noncountable assets, or assets may be converted into an income stream. Both actions remove assets from consideration for Medicaid eligibility purposes. Income generated from the conversion can be used to help the community spouse. This very traditional plan saves the assets of both the community spouse and the institutional spouse. However, should the institutional spouse die before the community spouse (which is often the case), then it is the estate plan of the community spouse which will control the ultimate disposition of the assets of both spouses. If the community spouse’s estate plan is the same as that of the institutionalized spouse, no problems are presented. However, in blended families, this is not always the case.
Clients need to be made aware of potential problems, and the practitioner must be prepared to make suggestions. If all assets have been passed to the community spouse and the community spouse’s will (or device passing property upon death such as a trust or a beneficiary designation) controls the ultimate disposition, the elder law attorney must disclose to the institutionalized spouse that the community spouse could change his or her will to disinherit those whom the institutional spouse intended to benefit. Many clients facing this situation make promises that they will not do this, and their intent is genuine. However, as time passes after the death of the institutionalized spouse, the relationship between the community spouse and the children of the institutional spouse can easily disintegrate whether due to conflict or a simple lack of commonality. It is also possible that the community spouse will remarry and wish to provide for his or her new spouse. It is prudent for the elder law attorney to not only advise clients of this possible course of events but also offer solutions.
Some practitioners may recommend a will contract that would, in theory, protect the interests of the institutional spouse and his or her beneficiaries. Will contracts take one of two forms, they are either contracts not to revoke a will or contracts to make a will in a certain manner. Assuming that the practitioner is recommending the estate plan simultaneously with the asset protection plan, a contract not to revoke a will is most relevant. According to the Uniform Probate Code (UPC), a will contract “may be established only by i) provisions of a will stating material provisions of the contract, ii) an express reference in a will to a contract and extrinsic evidence proving the terms of the contract, or iii) a writing signed by the decedent evidencing the contract. The execution of a joint will or mutual wills does not create a presumption of a contract not to revoke the will or wills.” Therefore, according to the UPC, a contract not to revoke a will is valid and enforceable assuming that the conditions are met. However, great caution must be taken when recommending a will contract because it is often an invitation for litigation if the will executed by the surviving community spouse is changed at a later date. To successfully establish that a contract not to revoke a will exists, the terms of the contract must be proved by clear and convincing evidence. As one may imagine, providing clear and convincing evidence becomes challenging, especially as time passes. It is not uncommon for one spouse (the community spouse typically) to outlive the institutional spouse by many years. What one draftsperson of a will considers clear and convincing may not be so clear and convincing decades later as the will is read by an attorney or judge who was not privy to the facts at the outset.
It is also prudent to consider what happens when the circumstances change simply due to the passage of time. Circumstances change for various reasons, even simple ones, not only because a relationship deteriorates or the community spouse wants to disinherit the children of the institutional spouse. Consider the blended family example presented at the beginning of this article. In that situation, the relationship with Child P changed from the time the initial asset protection plan was drafted. In this case, a change in the community spouse’s estate plan may be prudent based on the wishes of the community spouse and the intent of the institutionalized spouse. Indeed, if the institutionalized spouse were able to communicate, he or she may agree with the change. However, if a will contract exists, the community spouse is unable to change his or her will in accordance with the situation that presented itself later. The facts in this situation appear to be those that would likely invite litigation because Child A now seems to be more interested in his or her inheritance than in helping the parents.
It also bears noting that a will contract does not prevent the individual from making transfers during his or her lifetime. If all assets are transferred to the community spouse and both the institutionalized spouse and community spouse execute reciprocal wills with enforceable contracts not to revoke the wills, the institutionalized spouse may be confident in his or her estate plan. However, if the community spouse later changes his or her mind about the ultimate disposition of the estate, he or she can simply make lifetime transfers to his or her intended beneficiaries, thus rendering the reciprocal will practically useless. Another potential method to avoid assets passing through the will is for the community spouse to use payable-on-death or transfer-on-death designations in order to pass assets to his or her intended beneficiaries without technically violating the contract not to revoke the reciprocal will.
In addition to these pitfalls, a contract to make a will does not address what happens if the community spouse later needs care. The community spouse may choose to take steps to protect his or her assets and still qualify for Medicaid benefits, or the community spouse may simply spend all the assets on his or her own care. There is nothing prohibiting him or her from spending all the funds, some of which originated with the deceased institutionalized spouse. However, this was neither likely the intent of the institutionalized spouse nor what he or she intended when transferring assets to the community spouse.
Another issue related to providing for a surviving spouse who may be receiving or who may need Medicaid benefits is the elective share. As noted above, the elective share is the amount of a decedent’s estate to which the surviving spouse is entitled under the law of almost all noncommunity property states, regardless of whether the decedent’s estate plan provided for the surviving spouse. An elective share may be waived using a valid premarital agreement. However, in the absence of such an agreement, an elective share is a benefit to which the surviving spouse is entitled. Jurisdictions differ as to whether the spouse must exercise the election or whether the election may be done by an agent under a general durable power of attorney, guardian, or conservator.
The elective share is crucial because a person who applies for Medicaid is also required to apply for all benefits to which he or she may be entitled. If a Medicaid applicant or current recipient is disinherited by his or her spouse, he or she is entitled to make an election against the deceased spouse’s estate for an amount equal to the elective share. Failure to make such an election may be considered a transfer of assets for less than fair market value. Therefore, even if two spouses do not intend to provide for each other in their estate plans, it is unwise to ignore elective share rights.
In some states, the creation of a trust for the benefit of a spouse is enough to satisfy the elective share. In those states, a testamentary special needs trust may accomplish the goal of satisfying the elective share while allowing the predeceased spouse to ultimately control who receives the assets at the death of the second spouse. In states where a trust (or at least a special needs trust) does not satisfy the elective share, an alternative must be considered for those who have failed to execute a premarital agreement. One thing to note is that elective share rights apply to separate non community property states only.
c. Use Spend-Down Transfer Approach
One strategy for preserving the assets of both spouses while accomplishing the estate planning goals of both is to use the spend-down transfer approach. This involves transferring all assets into the name of the community spouse. But instead of having the community spouse utilize legal safe harbor provisions to preserve assets, this approach involves having the community spouse use a traditional will-based approach to ensure that the institutionalized spouse’s assets pass to his or her intended beneficiaries. This approach includes a post–Medicaid eligibility transfer of assets.
After the institutionalized spouse becomes eligible for Medicaid, the assets of the community spouse are not examined. Thus, the institutionalized spouse may make uncompensated transfers to the community spouse without affecting the institutionalized spouse’s Medicaid eligibility. After eligibility for Medicaid is established, the community spouse may transfer the pro rata share of remaining assets to the institutionalized spouse’s intended beneficiaries. Another option, one that some practitioners prefer, is to transfer the same pro rata share of assets to an irrevocable trust. The terms of the irrevocable trust may enable the community spouse to retain an income interest for his or her lifetime and then provide for the assets to pass to the institutionalized spouse’s intended beneficiaries. This plan benefits the community spouse and ensures that assets pass as intended upon the death of the community spouse. The only obvious drawback to this plan is the fact that if the community spouse needs care within five years, the transfers are penalized.
Another option is to treat each party as separate for planning purposes. Therefore, unlike in previous examples, no assets are transferred to the community spouse. While the CSRA amount is calculated pursuant to state law and the institutionalized spouse’s assets still are governed by the $2,000 limit, the practitioner can advise the community spouse to spend down to the CSRA limit by utilizing whatever strategy is deemed appropriate. For example, the community spouse could purchase an irrevocable preneed burial arrangement or a Medicaid-compliant annuity, after which the institutionalized spouse executes his or her own separate asset protection strategy to reduce his or her countable assets to the $2,000 limit. Or the institutionalized spouse could purchase an irrevocable preneed burial arrangement and adopt a gift and return strategy (i.e., a reverse half-a-loaf plan). If the strategy for either spouse involves asset transfers, he or she may individually determine who should be the recipient of the transferred assets.
Although this method may result in fewer of the couple’s assets being protected, the assets of the institutionalized spouse and the community spouse are largely kept separate, thereby allowing for each half of the marital partnership to pass their assets to whom he or she wishes at his or her death. This may reduce the likelihood of tension among members of a blended family.
d. Spousal Refusal
Spousal refusal refers to the act of a spouse refusing to support his or her spouse or to provide information regarding his or her assets for purposes of determining the spouse’s Medicaid eligibility. In states where spousal refusal is a viable strategy, this allows each spouse to segregate his or her assets and plan for Medicaid benefits in the manner that best suits him or her. Thus, an institutionalized spouse may freely plan using whatever strategy is best for him or her. This may involve transferring assets to the community spouse without penalty or using a strategy separate from the community spouse. While spousal refusal may initially seem to be a perfect solution for blended families, it is not without risks. In theory, the state department of social services could file a lawsuit against the surviving spouse to recoup the deceased spouse’s nursing care costs based on the state duty of support law. Even though this seems extreme and unlikely, this is a possibility as state budgets become more restrictive and Medicaid demand increases. For example, in February 2015, New York Governor Andrew Cuomo proposed a budget that included provisions ending spousal refusal.
Although spousal refusal is a strategy that may allow blended families to plan for the use, protection, and ultimate disposition of assets separately, it is does not consider what could happen in the future. Estate planning issues may still need to be addressed, and if the community spouse predeceases the institutionalized spouse, spousal refusal will not protect the institutionalized spouse from the potential elective share problem.
e. Implement Transfer Penalty Exceptions
The above discussion of Medicaid and asset protection planning does not discuss asset transfers in detail. However, it does mention potential penalties for transferring assets into an irrevocable trust. Under current law, if either spouse transfers assets for less than fair market value within five years of applying for Medicaid, the transfers are penalized, and current policy imposes penalties regardless of which spouse made the transfers. However, a number of transfer penalty exceptions exist, including asset transfers to an adult disabled child, a caretaker child, and a trust for the sole benefit of a person with a disability.
If the client has a situation in which one of these transfer exceptions exist, it provides an opportunity to protect assets to pass on to a future generation and will aid in obtaining Medicaid eligibility. However, these exceptions are fraught with peril for blended families and should be carefully considered before they are implemented.
Consider an asset transfer to a caretaker child. The caretaker child transfer penalty exception allows the transfer of a home to a child who lived in the home for 2 years before the Medicaid applicant entered a long-term care facility and whose caretaking was necessary to postpone the applicant’s entrance into a long-term care facility. If such a transfer is possible, a family may wish to transfer the home into the name of the parent, then transfer ownership from the parent to the caretaker child. This preserves the home for the caretaker child, but what about the other children or individuals whom the spouses wish to benefit at their death? Even though the caretaker child may proclaim his or her intent to carry out his or her family’s and stepfamily’s wishes, this may not occur, thereby potentially depriving some family members of an inheritance and leaving bitter feelings among children and stepchildren.
It is also wise to consider the other spouse. Because this exception is the caretaker child transfer penalty exception (not the caretaker stepchild transfer penalty exception), the home must be transferred from the name of the parent and transferred into the name of the caretaker child, not the caretaker stepchild. Once the property is in the caretaker child’s name, the child’s stepparent (likely the spouse who remains in the community) no longer has an ownership interest in the property. What if the relationship between the caretaker child and the stepparent degrades? This strategy may seem to be an ideal way to protect the value of real property, but it may result in the stepparent being without a place to reside.
IV. Conclusion
Blended family situations are incredibly complex, and no two blended families are alike. This makes asset protection planning for blended families interesting and challenging. No challenge seems to be more difficult than determining how a blended family will pay for long-term care. If the elder law attorney can advise clients early enough, preventive measures, such as the purchase of long-term care insurance, can alleviate later problems. Many blended families, however, are considerably past the early planning stages and are approaching — or are in — a crisis. An attorney who assists a blended family either approaching or in a crisis must remain vigilant and consider not only the protection of assets but also the protection of family relationships.
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