A diagnosis of Alzheimer’s disease practically guarantees that, someday in the future, the person will need extensive and expensive long-term care. Faced with this inevitability, people transfer their homes and other assets to access the needs-based Medicaid program rather than lose their home and modest assets. Transferring a home with a retained life estate or to an irrevocable trust are common planning techniques. While these plans ensure eligibility for Medicaid after a five-year lookback, it is possible that a new law will subject these assets to estate recovery.

The federal government passed the Omnibus Budget Reconciliation Act of 1993 (OBRA-93), which contained a mandate that each state must have a Medicaid law which contains an estate recovery provision, but left to the states the choice of either limited or expanded recovery. In 1994, New York accepted this mandate and chose to limit estate recovery to the probate or intestate estate. Recently, New York expanded estate recovery beyond the probate and intestate estate to “any other property in which the individual has any legal title or interest at the time of death, including jointly held property, retained life estates, and interests in trusts, to the extent of such interests.” Is this the end of Medicaid planning as we know it?
 
The answer is, we don’t know anything for sure right now. What we do know is that, while the law has passed with an effective date of April 1, 2011, the law will not be implemented until regulations are adopted by the Commissioner of the New York State Department of Health. When these are finally issued, which I expect to be sooner than later, such regulations will hopefully clear the way to our understanding of the law and permit the continued use of some planning techniques. For now, we have more questions than answers.

Let’s break down the new law a little further. First, the new law targets all property which the Medicaid recipient had a legal title or interest at the time of death. It appears that the reference to “legal title” focuses the law on what is owned at the time of death. Frankly, this seems fair and straightforward. The question we ponder now is whether the term “legal interest” is a concept that goes beyond title or ownership. Is the mere right to income from an asset a legal interest subjecting the underlying asset to estate recovery? If the answer is yes, does the answer change if there is no right to income but rather the lesser right to mere possession of the asset? What about a retained power in a trust document, such as a power of appointment to change trustees or beneficiaries? In other words, to what extent are certain rights and powers going to be considered a legal interest subjecting the whole or part of any asset to estate recovery?
 
Of greatest concern to our Alzheimer’s families is that the new law specifically targets life estates and trusts. A common, although often ill-advised, plan is to protect real estate by transferring it to the family with a retained life estate. Such real estate would not be considered a countable asset for Medicaid eligibility purposes, subject to a five-year lookback. The new law potentially makes these life estate plans vulnerable to estate recovery. At this point, we do not know the extent of this estate recovery. Would the recovery be allowed against the entire property or perhaps only a fraction equal to the value of the life estate interest at the age of the life tenant at the time of her death? An argument can also be technically made that the value of a life estate at the time of someone’s death is zero. Indeed, the new estate recovery statute references the value of the interest at the time of death, not the moment prior to death, so litigation may be necessary to define the extent of the statute’s reach. New Jersey, a state which has had such expanded estate recovery for years, chose to recognize the technical problems with such a statute and elected not to apply the law to life estates.

The law also specifically targets “interests in trusts.” Recovery now from revocable trusts seems to be a given because of the full control retained by the settlor. However, it is with irrevocable trusts that suspense exists. Irrevocable trusts have been the most effective planning tool for people trying to protect their assets because it facilitates a full transfer of the assets for Medicaid purposes while allowing the settlor to retain certain rights and powers and tax-favorable outcomes. A typical trust could include the right to retain the income or possession of a transferred asset, or the power to change trustees, change beneficiaries or block the sale of an asset. These extra rights and powers give people the confidence to transfer their assets, which might not be there if they were transferring their assets directly to their children. 
 
Furthermore, retaining the right to the use and occupancy of a personal residence held in an irrevocable trust allows us to keep all the property tax exemptions, including the STAR, Enhanced STAR, senior and veterans’ exemptions. The right to occupancy alone is insufficient to keep these exemptions; the right to “use” is essential and “use” includes the concept of income. Therefore, to retain these property tax exemptions on a principal residence, one must retain the right to the income from such residence, even though such income rarely exists.  However, the new law may be interpreted to mean that estate recovery may be had against any asset in which the settlor retained a right to income. By the way, this is the New Jersey experience with estate recovery. Therefore, if the estate recovery law goes this far, a choice will have to be made whether or not to lose the property tax exemptions.  Many working and middle-class families may not be able to afford such a loss.

Alarmingly, there is no grandfathering of life estates or irrevocable trusts created prior to the new law, unless the regulations so provide. As such, people who may have created life estates or irrevocable trusts twenty years ago may still see their homes and other assets fall to estate recovery in the future. 

So how does one plan today prior to the issuance of regulations? First, stay away from life estates. Life estates are usually a bad idea anyway because of the negative tax and Medicaid consequences that follow a sale of the property during life. Irrevocable trusts still remain the best planning technique for now, but care must be made to retain the least amount of rights and powers possible. Some clients will insist on retaining certain rights and powers, opting to attempt to eliminate them at some time in the future, such as when the new law comes down, or when they apply for Medicaid, or at least prior to their death. Remember, the law seeks estate recovery to the extent of the interest at the time of death.
 
In conclusion, we have a new estate recovery law in New York but we do not know how it will be implemented. Personally, I think this could be a good law if it is narrowly tailored. We are in difficult economic times and simply avoiding probate makes it too easy to skirt reasonable estate recovery laws, even though New York’s budget predicted minimal savings. However, if the law is pushed to eliminate the use of life estates and irrevocable trusts, then this law goes too far. People who engage in Medicaid planning are generally working and middle-class people who are trying to save their home and modest amounts of assets. If time-honored planning techniques are taken away, people will turn to more drastic measures such as (i) outright transfers with the consequent complete loss of control, (ii) divorce or (iii) moving out of New York. Hopefully, New York State’s Health Commissioner will issue these regulations with temperance.