94-Year-Old Ordered to Pay Alimony to Offset Ex-Spouse's Nursing Home Costs

A recent Nebraska case illustrates how difficult it can be to predict the outcome of aggressive last-minute planning.  In what is possibly a divorce for purposes of Medicaid protection, the domestic relations court ordered a 94-year-old to pay alimony to his 95-year old spouse in order to offset her nursing home costs, despite the fact that doing so dropped his available income below the federal poverty guideline.  The case was appealed to the Nebraska Supreme Court.  The highest court determined that a 94-year-old husband must pay alimony to his 95-year-old ex-wife in order to help offset her nursing home costs, even if doing so puts his income below the poverty level. Binder v. Binder (Neb., No. S-14-783, June 26, 2015).

Laura and Glen Binder married in 1982. It was a second marriage for both of them and they had no children together. Mr. Binder owned farmland and operated a fertilizer business. Ms. Binder did not work outside the home. In 2012, Ms. Binder moved into a nursing home. Her income did not cover the cost of care, so Mr. Binder contributed the remaining amount.

Mr. Binder filed for divorce from Ms. Binder when he was 94 years old and she was 95 years old. The court dissolved the marriage and awarded Ms. Binder alimony in order to offset her nursing home costs. Mr. Binder appealed, arguing that the amount of alimony was  an abuse of discretion because it drove his income below the poverty level in violation of state child support guidelines.

The Nebraska Supreme Court affirmed the lower court's decision, holding that the state child support law did not apply because the Binders did not have any minor children. The court concluded that the alimony award is not unreasonable because Mr. Binder has the power to dispose of farmland for his support.

To read another case regarding the unexpected consequences of alimony awards (Alimony Obligation May Require Involuntary VA Admission), go here.

Don't Let Institutions Plan for You: Medicaid-Eligible Nursing Home Resident Stuck With Costs of Private-Pay Room

An Illinois case illustrates why seniors, their families, and caregivers simply cannot entrust their best interests to institutions. An Illinois appeals court rules that Medicaid does not cover a Medicaid-eligible nursing home resident who was in a private-pay room ,and that the nursing home was not required to move her to a Medicaid-certified bed earlier than it did, meaning that the resident could be discharged from the nursing home for nonpayment. Slepicka v. State (Ill. Ct. App., 4th Dist., No. 12MR743, July 7, 2015).

Mary Slepicka entered a nursing home as a Medicare patient. When her Medicare nursing home coverage ran out in April 2011, she became a private-pay resident.  At the time Ms. Slepicka signed the private-pay contract, money from the sale of her house was her main asset. The nursing home did not place Ms. Slepicka in a Medicaid-certified bed until March 2012. After visiting a financial planner, Ms. Slepicka put the assets from the sale of her house in an annuity and applied for Medicaid. The state granted her benefits retroactive to June 2011.

The nursing home claimed it could not bill Medicaid for the days Ms. Slepicka was not in a Medicaid-certified bed, so it billed Ms. Slepicka. Ms. Slepicka did not pay the nursing home (the case description does  make clear whether Ms. Slipicka could pay, given the fact that she purchased and ostensibly irrevocably annuitized the proceeds from the sale of her home), and the nursing home served Ms. Slepicka with a notice of discharge. Ms. Slepicka appealed the discharge, arguing that she could not be charged for the days Medicaid covered. The nursing home argued it did not put Ms. Slepicka in a Medicaid-certified bed right away because it believed she had assets that she needed to spend down. The trial court granted the nursing home summary judgment, and Ms. Slepicka appealed.

The Illinois Court of Appeals affirmed, holding that Medicaid is not required to cover expenses incurred by private-pay residents even if the resident is eligible for Medicaid, and that the nursing home was not required to move Ms. Slepicka into a Medicaid-certified bed. According to the court, "just because a resident is financially eligible for Medicaid, it does not necessarily follow that Medicaid will cover every expense the resident incurs during the period of eligibility, regardless of where the resident incurs the expense." In addition, the court holds that the nursing home did not know that Ms. Slepicka would qualify for Medicaid as soon as she did, so it was not required to move her into a Medicaid-certified bed any sooner.

Sadly, the likely consequence of this case is that Ms. Slepicka's family will be forced to pay for the additional nursing home costs, and for the legal expenses of attempting to protecting her residency in the nursing home.  

One wonders whether underlying the court's decision is an effort by the court to move the State of Illinois to common law filial responsibility since the state does not have a filial responsibility statute.  Future cases may make clear the court's objective, if such an objective exists.    

For the full text of this decision, go here.

Understanding "Third Party" Special Needs Trusts

There are three types of special needs trusts: first-party special needs trusts, third-party special needs trusts, and pooled trusts.  All three are designed to manage resources for a person with special needs so that the beneficiary can still qualify for public benefits like Supplemental Security Income (SSI) and Medicaid.  While first-party special needs trusts and pooled trusts hold funds that belong to the person with special needs, third-party special needs trusts, as the name implies, are funded with assets that never belonged to the trust beneficiary, and they provide several advantages over the other two types of trusts.

Third-party special needs trusts are set up by a donor – the person who contributes the funds to the trust.  A typical donor is a parent, grand-parent, or sibling of the special needs beneficiary.  These trusts are typically designed as part of the donor's estate plan to receive gifts that can help a family member with special needs while the donor is still living and to manage an inheritance for the person with special needs when the donor dies.  Third-party special needs trusts can be the beneficiaries of life insurance policies, can own real estate or investments and can even receive benefits from retirement accounts (although this process is very complicated and not typically recommended unless there aren't other assets available to fund the beneficiary's inheritance).  There is no limit to the size of the trust fund and the funds can be used for almost anything a beneficiary needs to supplement her government benefits.  Upon the beneficiary's death, the assets in a third-party special needs trust can pass to the donor's other relatives as the donor directs.

One of the key advantages of a third-party special needs trust is the ability of the donor to direct the assets available upon the beneficiaries death without risk of resource recovery-the right of the state to recover assets to pay the state back for benefits paid during the beneficiary's life.  Because the funds in the trust never belonged to the beneficiary, the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon her death, unlike with a first-party or pooled trust.  This allows a careful donor to benefit her family member with special needs while potentially saving funds for other people who don't have the same needs.

Whereas first-party special needs trusts can only be established by the beneficiary's parent, grandparent, guardian or a court, anyone other than the beneficiary can set up a third-party special needs trust.  First-party trusts must be established for the benefit of someone who is younger than 65, but third-party trusts don't have age limits.  In some states, first-party trusts must be monitored by a court, but third-party trusts almost never have to go through this same process, especially while the donor is still alive.  In addition, while the donor is living, funds in the trust usually generate income tax for the donor, not for the beneficiary, avoiding the complication of having to file income tax returns for an otherwise non-taxable beneficiary and then explain them to the Social Security Administration.

Although a third-party special needs trust has many advantages, it is not always a viable option for families of people with special needs.  One of the major drawbacks of a third-party trust is its absolute inability to hold funds belonging to the person with special needs.  So if the trust beneficiary receives an inheritance that wasn't directed into the special needs trust to begin with or if she settles a personal injury case, the funds have to be placed in either a first-party trust or a pooled trust, since even one dollar of a beneficiary's own money could taint an entire third-party trust.  But even with these restrictions, most people trying to help a family member with special needs are going to at least need to strongly consider drafting a third-party special needs trust.  Your attorney can help you understand how these important trusts fit into your other estate planning goals.

Medicaid Applicant with Private Care Agreement Assessed Transfer Penalty Because Rate Was Too High

Private Care Agreements must be drafted carefully, and the compensation rates provided within must conform to the law.  An example of what can happen when they are not, comes in from New Jersey, where an appeals court ruled that the state properly disregarded a Medicaid applicant's care agreement and assessed a transfer penalty because the rate charged under the agreement was too high and the applicant did not provide enough details about the services provided in order to calculate their value. E.A. v. Division of Medical Assistance and Health Services (N.J. Super. Ct., App. Div., No. A-2669-13T3, July 20, 2015).

E.A. lived with her daughter, B.C., from 2004 until 2012. In 2006, they entered into a care agreement in which E.A. agreed to pay B.C. a monthly fee for care. The fee was based on the amount charged by a private home health care company. B.C. occasionally made larger withdrawals than the contract called for and did not keep records of the services provided. In 2012, E.A. entered a nursing home and applied for Medicaid. The state ignored the care agreement and found that B.C. had transferred a total of $244,510 to B.C. and imposed a 936-day penalty period.

E.A. appealed, arguing that the state should not have disregarded the care agreement and that the state did not calculate the worth of B.C.'s services. After a hearing, the administrative law judge ruled the penalty period was appropriate, and E.A. appealed to court.

The New Jersey Superior Court, Appellate Division, affirms the state's decision, holding that the state properly disregarded the care agreement. According to the court, B.C. and E.A. did not comply with the agreement when B.C. made additional withdrawals, and B.C. was not entitled to the rate charged by the private home health agency because she did not provide the same full-time services as the agency. In addition, the court rules that E.A. did not provide enough details of the types of services actually provided under the care agreement for the state to calculate the value of her services.

For the full text of the decision, go here.

IRS issues Proposed Regs for ABLE Accounts

The IRS has issued proposed regulations implementing Sec. 529A, which authorizes states to offer specially designed tax-favored accounts for the disabled (ABLE accounts). Sec. 529A was added by the Achieving a Better Life Experience (ABLE) Act of 2014, which was part of the Tax Increase Prevention Act of 2014.

ABLE accounts were created in recognition of “the special financial burdens borne by families raising children with disabilities and the fact that increased financial needs generally continue throughout the disabled person’s lifetime” (preamble, p. 5). Contributions made to an individual’s ABLE account can be used to meet the individual’s qualified disability expenses.

One account is permitted to be set up per eligible individual and total annual contributions are restricted to the amount excluded under Sec. 2503(b) for gift tax purposes ($14,000 for 2015, but inflation adjusted). Amounts contributed in excess of those limitations must be returned to the contributors on a last-in, first-out basis by the due date of the beneficiary’s tax return (including extensions) for the year in which the contributions were made and are subject to a 6% excise tax if they are not returned.

Sec. 529A allows a state (or agency or instrumentality) to create a qualified ABLE program under which a separate ABLE account may be established for a disabled individual who is the designated beneficiary and owner of that account. Contributions to that account are subject to both an annual and a cumulative limit, and, when made by a person other than the designated beneficiary, are treated as nontaxable gifts to the designated beneficiary.

Distributions made from an ABLE account for qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income, but the earnings portion of distributions from the account in excess of the qualified disability expenses is includible in the designated beneficiary’s gross income. An ABLE account may be used for the long-term or short-term needs of the beneficiary. One of the most important provisions of these accounts is that they are generally not counted when determining the disabled person’s qualification for needs-based federal programs.

To qualify, the program must be established and maintained by a state or a state’s agency or instrumentality; permit the establishment of an ABLE account only for a designated beneficiary who is a resident of that state, or of a state contracting with that state; permit an ABLE account to be established only for a designated beneficiary who is an eligible individual; limit a designated beneficiary to only one ABLE account, wherever located; permit contributions to an ABLE account established to meet the qualified disability expenses of the account’s designated beneficiary; limit the nature and amount of contributions that can be made to an ABLE account; require a separate accounting of each designated beneficiary’s account; limit the designated beneficiary to no more than two opportunities in any calendar year to provide investment direction; and prohibit pledging an interest in an ABLE account as security for a loan.

Because eligible individuals often will not be able to set up their own accounts, the rules allow a person with power of attorney or the beneficiary’s parent or guardian to set up the account. Each account must be for an eligible individual, which means the individual is entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act and the blindness or disability occurred before the date on which the individual turned 26, or the individual obtains a disability certification meeting requirements specified in the regulations.

To ease the administrative burdens and in recognition that some people may move in or out of disabled status, in years in which an eligible individual is no longer eligible, the plan cannot accept additional contributions and will not be deemed to make a distribution, but the account can remain open. The rules also are flexible in the requirements for annual recertifications of disability.

For more, go here.