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“Decanting” of Trust for Medicaid Patient Challenged

JANUARY 11, 2016 VOLUME 23 NUMBER 2

Jane Murray (not her real name) died in 2003. She had created a number of trusts, including two for the benefit of her daughter Dana. Jane was very worried about Dana’s future, partly because of a long history of drug and alcohol abuse. She included some strong language guiding the trustee about whether and when to make any distributions. She might not have specifically considered long-term medical care, however.

In October, 2013, Dana entered a hospital in Connecticut as a quadriplegic. At the time, the two trusts contained assets of about $1 million, though the money was not actually available to Dana. The trusts were both “spendthrift” trusts, meaning that neither Dana nor her creditors could force any distribution. Both trusts also contained this language:

The trustee shall pay to my daughter or utilize for her benefit so much of the income and principal of her trust as the trustee deems necessary or advisable from time to time for her health, maintenance in reasonable comfort, education and best interests considering all of her resources known to the trustee and her ability to manage and use such funds for her benefits. In exercising its discretion the trustee shall bear in mind that my daughter has suffered severely from alcohol and drug abuse and that I do not want these trust funds to be used to support a drug or alcohol habit or any other activity which may be detrimental to her in the trustee’s sole opinion.

My daughter’s health, happiness and best interests are to be considered foremost in priority over those who will receive the remaining trust funds on her death. Subject to the above considerations the trustee is encouraged to be liberal in its use of the funds for her even to the extent of the full expenditure thereof.

Clearly, Dana’s trusts would be quickly exhausted on her medical care unless she could qualify for Medicaid assistance, and she had inadequate funds from other sources. Could the trustee simply refuse to make distributions for medical care? Would the trust’s assets be counted as available resources for Medicaid eligibility purposes?

In order to address these concerns, the trustee (in Florida) sought to “decant” Dana’s trusts into new trusts with more explicit language about her long-term care costs. Florida law permits such trust modification, and spells out exactly how it can be done, and the trustee followed the law’s directions. The changes were submitted to a court in Florida for approval, and Dana signed a form giving her consent to the decanting.

The two new trusts for Dana’s benefit included language that clearly made the trust assets unavailable for Medicaid eligibility purposes. In that way, the trusts could be preserved to pay for extra or supplemental needs for Dana’s benefit, permitting her to have a better quality of life. The new trusts, and the history of the decanting, were given to the Connecticut Medicaid office for review.

Shortly after the decanting was completed, an attorney for the Connecticut Medicaid office decided that Dana’s trusts were originally “general support trusts”, making them available resources for Medicaid eligibility purposes. To make matters worse, Dana’s consent to the decanting amounted to a transfer of resources for less than fair market value. That would mean that Dana was ineligible for Medicaid assistance with her long-term care needs until 2021.

After an unsuccessful appeal through the Medicaid agency, Dana filed a lawsuit in Connecticut Federal District Court. She asked for a preliminary injunction prohibiting Medicaid from suspending her benefits, and a permanent order finding that the trustee’s decanting should not be counted as a gift by her.

The federal court ruled on the preliminary injunction question last month. It is only a preliminary ruling, and it is only one trial court — and therefore not of much use to establish precedent. It does, however, suggest how courts might view similar actions in other cases.

The judge hearing Dana’s case decided that there was a high likelihood that Dana will prevail when her case finally does come to trial. If the Medicaid agency were to be allowed to suspend her benefits in the meantime, the damage to her would be irreparable. Accordingly, he ordered that Dana will continue to receive Medicaid benefits while her case proceeds.

Even though we will probably not know the final outcome of Dana’s case for months (or perhaps even years), there are some useful lessons to be learned:

  • Inclusion of specific “special needs” language in virtually every trust might make sense. Dana’s mother knew that Dana had problems, but apparently didn’t consider the possibility that Dana might end up in a long-term care setting. A single paragraph expressing her wishes for how the money was to be used in such an event would probably have prevented the current dispute, allowing Dana to easily qualify for Medicaid assistance.
  • Decanting a trust in one state but having an effect in another state, while legally permissible, can lead to confusing results. One problem in Dana’s case was that Connecticut law on the interpretation of the original spendthrift trusts, and the ability to decant the trusts, was different from Florida law. That is not a reason to refrain from using local law, but just a caution that it might make sense to take extra care when multiple states are involved.
  • State law on decanting might require the consent of the beneficiary, or make it easier to complete the process, but it will generally make sense to avoid having beneficiaries consent. Although Dana’s agreement to the decanting was clearly not a “transfer of assets” as the Medicaid agency’s lawyer suggested, it did give him something to raise as an objection.
  • Though interpretations by the Social Security Administration usually are followed by state Medicaid agencies, that is not always the case. In Dana’s case, the Social Security rules clearly provide that her mother’s trusts would not be treated as an available resource. The Medicaid agency here disagreed.

Simonsen v. Bremby, Southern District of Connecticut, December 23, 2015.

The bottom line: trust law and Medicaid eligibility law often have uncomfortable intersections. Slightly different circumstances and different states can lead to big differences in outcomes.

New Tax-Related Numbers for 2015

JANUARY 12, 2015 VOLUME 22 NUMBER 2

Welcome to 2015! Who thought we’d ever make it?

The Internal Revenue Service did, that’s who. They’ve busily updated numbers for the upcoming year; most of the new numbers have actually been known for a couple months. Once you get used to writing “2015” every time, we have some other new numbers for you to memorize.

Estate tax threshold: The federal estate tax kick-in figure rises to $5.43 million for people who die in 2015. Somewhat confusingly, that is an increase from the $5.34 million figure applicable for deaths in 2014, so don’t assume that the new figure is just a transposition typo when you see it next. Of course, married couples now have a total of twice the new figure (or $10.86 million) to pass without federal estate tax — if they both die in 2015, that is.

Keep in mind that some states still impose an estate tax of their own. They might or might not increase the minimum figure with inflation (most don’t), so if you live in one of those states, or own property in one of those states, you also need to think about the state estate tax limit.

Also remember that the federal $5.43 million figure is reduced for taxable gifts you have made in past years. We’ll talk a little about gift taxes next.

Federal gift tax threshold: You don’t have to pay any federal gift tax until taxable gifts reach a lifetime total of $5.43 million — the same figure as the estate tax threshold. But gifts are even more favorably treated, since the first $14,000 you give to each recipient avoids taxation, filing or any other restriction. That $14,000 figure is the same as last year — it did not increase at all for 2015. Why not? Because, though it is indexed for inflation (and will rise in the next couple years) it only goes up in $1,000 increments. This year’s increase was not enough to cross the $1,000 notch.

You may already know that married people can pretty easily double the $14,000 gift figure. But you might not realize that it’s actually a little harder than most people think. If you and your spouse make a joint gift (if, say, the gift is from a joint account), you have nothing to file and no federal tax effect for the first $28,000 received by a given recipient. But if you write the check on your own separate account, you have to file a gift tax return (and your spouse has to sign it) in order to ignore the excess over your $14,000 gift. Confusing? Talk to your lawyer and accountant about the specifics.

This gives us a chance to mention a common misunderstanding, by the way. Again and again we hear clients say that they are limited to the $14,000 figure for gifts. That is incorrect. If our client says “oh, I knew that: I meant that I can’t give away more than $14,000 without paying a tax,” they are still wrong. It can be a little bit complicated to explain, but here’s how gift-giving works:

  1. If you give away more than $14,000 (twice that for a married couple) to a single recipient, you are required to file a gift tax return.
  2. When you do file your gift tax return, you only pay gift taxes on the amount by which your lifetime gifts exceed the $5.43 million figure (for 2015). In other words, if you have never owned more than $5.43 million in assets, you will have a very, very hard time incurring a federal gift tax, no matter what you do. You will also have a very, very hard time incurring a federal estate tax.
  3. If there is a tax on the gift, it is paid by the giver, not the recipient. Gifts are not deductible from your income tax, and they are not income to the recipient. The only federal tax associated with a gift is the federal gift tax, and it only kicks in after millions of dollars of total gifts.
  4. Married? Both the annual ($14,000) figure and the maximum lifetime gift ($5.43 million) figure are probably doubled.

Bottom line: only people who are both very wealthy and very generous need to worry about actually paying a gift tax. The real worry is about incurring the cost of filing a gift tax return — and that doesn’t kick in until that $14,000/$28,000 figure is reached.

Income tax rates: The basic chart of federal income tax rates is the same as in 2014, but with new figures for the bracket changes. In other words, in 2014 a married couple filing a joint return paid the lowest tax rate (10%) on the first $18,150 of taxable income. For 2015 that first-step threshold increases to $18,450 (a $300 increase). And the top bracket (39.6%) kicks in at a combined income of $464,850 this year, rather than the 2014 figure of $457,600.

Personal exemption and standard deduction: These two separate figures add up to an important principle for low-income taxpayers: if you don’t earn more than the combination of these two figures, you can’t be liable for any federal income tax. The personal exemption reduces your income before we even get to looking at your deductions. The standard deduction is the minimum amount that everyone gets to deduct from income before figuring out their tax liability, even if they don’t itemize deductions.

Both figures increase for 2015, but the increases are small. The personal exemption (you may get more than one, depending on marital status, age and other factors) will increase by a mere $50, to $4,000. For a married couple filing jointly, the standard deduction goes up by another $200. What does that mean for real taxpayers? If you are married filing jointly, and have just two exemptions available (and no dependent children), you don’t have to file at all unless your income exceeds $20,600 ($23,100 if you are both 65 or older).

One other “change” to mention: Last year a special tax opportunity expired. In 2013, if you had to take a minimum distribution from your IRA or 401(k), you could instead direct it to your favorite charity and avoid having to pay tax on it at all. Why was that valuable? Because even if you received the income and then gave it to charity, your charitable deduction wouldn’t cover every dollar of the gift. With this special authority, you really could avoid income tax on the distribution.

But wait! At the eleventh hour (actually, the twelfth hour) Congress brought back the 2013 deduction for 2014 — but not for 2015. So this change helps people who assumed that it would be extended, but doesn’t help anyone who tries to do the same thing in 2015. Unless, of course, Congress re-extends the authority later this year.

Forgot to Make New Year’s Resolutions? We Can Help

JANUARY 5, 2015 VOLUME 22 NUMBER 1

First we’d like to apologize for not getting this to you last week. We know how hard you were working to prepare some good New Year’s Resolutions. You wanted some that you could actually count on satisfying, that would really be beneficial, and that would make you sound like a mature, responsible adult. We have some; feel free to adopt them now, and assure friends and family that you actually signed them before New Year’s Eve.

Time for “the conversation”

Have you talked about end-of-life treatment issues with your family yet? No? This would be a good time to do that. Any time would be a good time to do that.

We have previously suggested Thanksgiving as a possible day to plan on “the conversation.” That suggestion still holds — but really, any day (holiday or not) would be a good day.

You say you don’t need to broach this unpleasant topic, because your family knows what you want? You’re wrong. They don’t, unless you tell them. They might guess, but they will be guessing. Their guesses will probably be more conservative than your actual wishes unless you give them permission — by telling them what you want.

In fact, you can go further than giving them permission. You can (and should) give them instructions. Tell them what you want, and put it in writing. Sign a living will, a health care power of attorney, or both (“both” is the best approach here).

It’s actually not even enough to sign the advance directives — you still have to have “the conversation.” Why? Because you’re not only telling the person you designated as your agent, you’re also telling the rest of the family. You are telling them what you want, that you’ve really thought about it, and that you really did mean to name your agent as agent. You’re heading off family disputes and possible disharmony. Did we mention that if your family doesn’t know for sure what you want, the result is likely to be more aggressive treatment than what you’d probably choose?

Here’s a radical thought: during the conversation you might also want to listen. You might be surprised to find out that some of your family members have strong feelings themselves. They might be persuasive, or at least give you more to think about.

One anecdote from our cases: some years ago, we dealt with the family of a woman who had signed advance directives. She had named her Arizona daughter as agent. She had expressly instructed that she be kept at home, even if her doctors thought she should be hospitalized or institutionalized. She made it explicitly clear that her entire savings should be exhausted, if necessary, in keeping her at home.

When she lost her capacity to discuss her preferences or reason with visitors, a long-estranged daughter arrived from out of town. She insisted that the local daughter must have persuaded Mom to sign the documents, hoping to be able to stay in Mom’s house as long as possible. She claimed that Mom would never have signed the documents if she had been in her right mind at the time.

The result? A non-family member was appointed as guardian temporarily, while an investigation was undertaken. The guardian, worried about possible liability, moved Mom to the nursing home — where she died a few weeks later, before the final court hearing.

Though Mom signed all the documents she should have, and made her wishes clear, the result was exactly what she did not want. What could she have done differently? If she had talked with (or at least written to) her estranged daughter, would the outcome have been different? Possibly — it seems like the most likely possibility. The lesson? Have the conversation, and include even those family members who will not be in charge of the decisions.

Update your estate plan

This would be a good time to pull out your old will and trust, review them, and schedule an appointment with your attorney. Has the law changed since you signed your will? Perhaps. But more importantly, has your life situation changed? Do your children (now in their 30s, or 40s) really need to have a guardian named, as they did when you signed your will twenty-five years ago? Have you moved, or changed your assets significantly? Are you the rare parent who correctly predicted each of your children’s future capabilities, needs and proclivities?

Once again, “my family knows what I would want” just won’t cut it. Believe us — we see lots of families in litigation over things that might seem trivial. Don’t think it will happen with your family, since everyone gets along so well? We hope that’s correct, but it has not been our experience.

Since you signed your will and trust, have you put one child on as joint owner of your bank account (to take care of things if “something happens”)? Have any of your children gotten divorced, or married, or had children? Do you still want the child who lived close to you fifteen years ago to be your executor and trustee, even though you’ve moved across the country to be near a different child? Have you signed an Arizona beneficiary deed after hearing a presentation, or listening to a friend? All of those things affect, and need to be taken care of in, your estate plan.

Another anecdote from our cases: last year we dealt with the estate of a fellow who moved to Arizona from another state. He had a trust and a will there, and he put his new Tucson home in the trust’s name. Apparently, though, he decided that his trust was now invalid, since he had moved from the other state to Arizona. So he made no changes.

Meanwhile, he got married. One of his children (named in his trust as a beneficiary) had become estranged. He tore up his will (it was invalid anyway, he thought). The result? His new wife ended up with his entire estate, as he apparently intended — but only after payment of several thousands of dollars of court costs and legal fees, and an opportunity for his estranged child to object (she didn’t, thankfully). Meanwhile, if he had talked with a lawyer before he died, he could have spent perhaps 1/10 of what it ultimately cost to take care of his estate.

Insurance update

Do you have enough (or too much) life insurance? How about long-term care insurance? Shouldn’t you talk with someone about your insurance status, and see what needs to be changed?

Long-term care expenses, particularly, have changed a lot in the last few years. Long-term care insurance is a maturing market, which means that older policies need to be revisited — and people who have not gotten around to looking into the policies should set aside some time to do so. Soon.

We don’t give insurance advice directly (except to advise people that they need to get more information). We recommend you talk with a trusted agent, and make sure they have your entire insurance picture. Right after you make that appointment to update your estate plan.

Need more ideas?

Not all of your New Year’s resolutions need to be about legal issues. Two years ago we gave you some other ideas, and we offer them up for your consideration again this time. You’re welcome.

©2017 Fleming & Curti, PLC