The issue of whether or not guardians can undertake Medicaid planning on behalf of their wards has come to the forefront of New Jersey probate litigation in the past two decades. Commencing in 1995, many of New Jersey’s Superior Courts began to recognize and permit guardians to transfer assets in order to expedite their wards’ eligibility for Medicaid benefits.
Unfortunately, decisions in this area were not uniform, and applications for such relief could be granted or denied by the personal or political feelings of the county probate judge. For several years, no statute or regulation existed to authorize this planning, nor was there any written opinion from the Appellate Division or state Supreme Court to provide direction to the Superior courts. Fortunately, a decisions from the Appellate Division was rendered in 1998 and 2004 which validated this form of estate planning by guardians.
1. Statutory Backdrop
N.J.S.A. 3B:12 establishes that a guardianship is a “protective arrangement.” Derived from Anglo-Norman legal traditions, the court acts under the doctrine of parens patriae over wards in a guardianship setting. While guardianships are nominally established to protect the person and the estate of mentally incapacitated individuals, the primary purpose of the guardianship power has been to prevent persons from becoming public charges or squandering their resources to the detriment of their heirs. Brakel and Rock, The Mentally Disabled and the Law, at 250 (Rev. Ed. 1971); Casasanto, Michael D.; Simon, Mitchell; and Roman, Judith, A Model Code of Ethics for Guardians, New Hampshire, 1989.
Clearly, guardians cannot undertake Medicaid planning without court approval. A guardian may reasonably expand or distribute the ward’s assets for the benefit of the ward, as well as those legally dependent upon the ward, and to pay for the necessary expenses for services by third parties on behalf of the ward without court approval (See N.J.S.A. 3B:12-43, 46, and 47, respectively). Most powers, however, must be conferred by the court, which has the authority to both expand and limit powers to guardians. (N.J.S.A. 3B:12-37, 49 and N.J.S.A. 3B:14-24)
The power to make gifts lies in N.J.S.A. 3B:12-58, which states:
If the estate is ample…, the guardian for the estate of a mental incompetent may apply to the court for authority to make gifts to charity and other objects as the ward might have been expected to make.
On the other hand, statute and case law prohibits self-dealing. Because assets transfers almost always benefit the guardians, there is some legal tension which needs to be resolved. Until recently, most courts declined to accept applications by guardians for Medicaid planning because of this tension and political beliefs that typically focused on the propriety of replacing private funds with public funds to pay for custodial care.
2. Case Law
Prior to 1995, few cases addressed the ability of a guardian to make inter vivos transfers for estate planning purposes. The primary case, which addressed estate planning by guardians, was In re Trott, 118 N.J. Super 436 (Chancery Div. 1972). In Trott, the court recognized that a guardian could make annual gifts in an amount not to exceed the annual limit subject to a gift tax. The court recognized that the guardian could prudently deplete the assets of an estate, to some degree, to minimize or eliminate such assets over the amount of the unified credit. There was no question that the remaining income and assets were more than ample to meet all conceivable needs of the incompetent until his or her death. In this decision, the court noted a line of cases and statutes in other states authorizing planning in such a way to minimize current or prospective state or federal income, estate, and inheritance taxes. Most succinctly, the Court noted that a guardian should be authorized to act as a reasonable and prudent person would act in the management of his or her own estate, unless there is any settled intention of the incompetent, while competent, to the contrary. Id. at 441.
In the 1990s, a number of applications for medicaid planning by guardians were filed. Although there were a variety of successful applications for medicaid planning, numerous petitions were declined in different Superior Courts although the relief requested was substantially identical to the approved applications. Fortunately, the propriety of medicaid planning by guardians was finally recognized in 1998 by the Appellate Division. In the Matter of Manuel Labis, 314 N.J. Super. 140 (App.Div. 1998), the Appellate Division reversed a lower court rejection of a petition to transfer the interest of an institutionalized ward to his spouse in their marital residence. In its reversal, the court noted that medicaid planning is a legitimate form of estate planning and a guardian should have the right to engage in same on behalf of his ward.
In 2004, the authority of a Guardian to undertake Medicaid planning was clarified in the case, In Re Keri, 181 N.J. 50 (2004). Whereas Labis dealt merely with an interspousal transfer, Kerri dealt with a proposed half-a-loaf gift between a mother and child. By ruling that this plan was appropriate, the New Jersey Supreme Court gave approval to the concept of any form of Medicaid planning permitted by the Medicaid Laws.
B. Types of Approved Plans
In New Jersey, Medicaid planning, in the guardianship context, can be broken into four categories of cases: (1) establishment of supplemental needs trusts in personal injury actions,
(2) inter spousal transfers, and (3) gifts to children and other non-spousal beneficiaries.
1. Establishment of Supplemental Needs Trusts
As set forth above, recognition has been given, at the Superior Court level, to place proceeds from personal injury litigation into a supplemental needs trust to preserve eligibility for Medicaid benefits. However, it is imperative for any practitioner to acquaint themselves with the revised trust requirements which were promulgated by the New Jersey Division of Medical Assistance and Health Services over the past two years before undertaking this planning.
2. Spousal Transfers
The federal and state Medicaid regulations recognize the need for protection against spousal impoverishment. To that end, community spouses of institutionalized individuals have been granted a variety of property rights. Without penalty, community spouses may transfer a residence and an automobile in their name, as well as personal effects. They are also entitled to the Community Spouse Resource Allowance (CSRA) and the Minimum Monthly Maintenance Needs Allowance (MMMNA).
Even prior to the breakthrough cases in New York, many Superior Courts authorized guardians to transfer the interest of an institutionalized individual in his or her residence to his or her spouse.
3. Gifting to Non-spousal Beneficiaries
Prior to 2006, the most popular forms of asset transfers to non-spousal beneficiaries were: (a) large asset transfers and (b) “half-a-loaf gifting.” Since 2006, as discussed later, the latter option does not exist.
C. Planning under the DRA
On February 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005 (“DRA”) With the DRA came sweeping changes to Federal Medicaid law, which substantially affects the rights of individuals to preserve their assets in the event they require long-term care. The major changes promulgated by the DRA are:
1. The look back period went from three years to five years.
2. The penalty period for uncompensated transfer (gifts) commences when a person is institutionalized and is otherwise eligible for Medicaid rather than when the gift is made.
3. Equity in the home will be countable if it is over $500,000.00, unless a state decides to increase that amount of $750,000.00.
4. Annuities may be countable if they are irrevocable, non-assignable, actuarially sound and have equal payments with no deferral or balloon payments. In addition, the state must be named as a remainder beneficiary. It must be the primary remainder beneficiary unless there is a spouse or child who is either under 21 or disabled.
In light of the foregoing, Medicaid planning by Guardians has become somewhat limited. Many of the foregoing transfers are still permissible, such as interspousal transfers of a marital residence, transfer of a residence to a care-giver child and transfers to disabled children. However, it doubtful that half-a-loaf gifting may be undertaken. Based on the pure text of the law, it appears that a Court may only be comfortable in allowing gifts between generations when such preserve assets for the entire five year look back period.