August 01, 2018
Planning for Incapacity Using Advance Directives
A power of attorney is a written document by which a principal with capacity designates an agent to act on his or her behalf. The term “principal” is defined as an individual who is eighteen years of age or older, acting for himself or herself, who executes a power of attorney. In this context, “capacity” means the ability to comprehend the nature and consequences of the act of executing and granting, revoking, amending or modifying a power of attorney, any provision in a power of attorney, or the authority of any person to act as agent under a power of attorney. An “agent” means a person granted authority to act as attorney-in-fact for the principal under a power of attorney, including the original agent, any co-agent, or successor agent. In New York State, the power of attorney is codified in Title 15 of the General Obligations Law.
The power of attorney is effective when signed by both the principal and agent. A power of attorney is durable unless it expressly provides that it is terminated by the incapacity of the principal. The agent has a fiduciary relationship with the principal. The fiduciary duties of the agent include the following:
(1) to act according to any instructions from the principal, or where there are no instructions, in the best interest of the principal, and to avoid conflicts of interest;
(2) to keep the principal’s property separate and distinct from any other property owned or controlled by the agent, except for property that is jointly owned by the principal and agent at the time of the execution of the power of attorney, and property that becomes jointly owned after the execution of the power of attorney as the result of the agent’s acquisition of an interest in the principal’s property by reason of the agent’s exercise of authority granted in a statutory gifts rider; and
FREE Estate Planning Training from Lorman
Lorman has over 37 years of professional training experience.
Join us for a special white paper and level up your Estate Planning knowledge!
Spousal Lifetime Access Trust
Presented by Les Raatz and Gregory V. Gadarian
(3) to keep a record of all receipts, disbursements, and transactions entered into by the agent on behalf of the principal, and to make such record and power of attorney available to the principal or to third parties at the request of the principal. The law holds that no third party located or doing business in New York State shall refuse, without reasonable cause, to honor a statutory short form power of attorney properly executed in accordance with the law. A standard statutory short form power of attorney allows the agent to conduct certain personal and financial transactions, as provided in the document.
However, the agent may be limited in conducting certain transactions unless the document is customized with language in the modifications section of the document, and/or a statutory gifts rider is executed. The powers that may be granted by such modifications and/or statutory gifts rider may be critical in permitting the agent to carry out the true intentions of the principal. All existing powers of attorney should be reviewed from time to time to ensure that the appropriate language is included to carry out the principal’s wishes. A properly drafted power of attorney can allow the agent to assist in estate planning, preparing for and paying for long term care, among other important issues. A power of attorney terminates when the principal dies or the principal revokes the power of attorney.
While a power of attorney appoints an agent to make certain personal and financial transactions on behalf of a principal, a health care proxy is a document delegating authority to make health care decisions and is codified in Article 29C of New York State’s Public Health Law. The principal again is the person who executes a health care proxy, while the agent is the person to whom authority is delegated. Under the law, a competent adult eighteen years of age or older may appoint an agent, who must also be eighteen years of age or older, and every adult shall be presumed to be competent unless such person has been adjudged to be incompetent or otherwise adjudged not competent to appoint a health care agent. Only the principal needs to sign the health care proxy to be effective, and it must be signed in the presence of two adult witnesses, both of which must also sign the document.
Subject to any express limitations in the health care proxy, an agent shall have the authority to make any and all health care decisions on the principal’s behalf that the principal could make. The law states that after consultation with appropriate medical personnel, the agent shall make health care decisions in accordance with the principal’s wishes, or if the principal’s wishes are not reasonably known and cannot with reasonable diligence be ascertained, in accordance with the principal’s best interests. Notwithstanding any law to the contrary, the agent shall have the right to receive medical information and medical and clinical records necessary to make informed decisions regarding the principal’s health care. The authority of the agent to act in this context requires a determination of the principal’s lack of capacity to make health care decisions. This authority includes the decision to remove or provide life-sustaining treatment, unless otherwise provided in the document. A health care proxy may be revoked by a competent principal.
A health care proxy is often executed in conjunction with a living will, which allows an individual to leave written instructions explaining health care wishes, especially about end-of-life care. Only the health care proxy allows the individual to appoint an agent. While New York State law does not have a statute governing living wills, the Court of Appeals, has stated that living wills are valid as long as they provide “clear and convincing” evidence of the individual’s wishes. The living will should be executed by the individual in the same manner as the health care proxy, with two witness signatures.
Under New York State law, a Do Not Resuscitate (DNR) Order instructs medical professionals not to perform cardiopulmonary resuscitation to restart one’s heart or lungs when the heartbeat or breathing stops. Medical professionals will not initiate emergency procedures such as mouth-to-mouth resuscitation, external chest compressions, electric shock, insertion of tubes to open one’s airway, or injection of medication into one’s heart or open chest. In New York, any adult eighteen years of age or older can get a Hospital or Non-Hospital DNR Order, and these Orders must be issued by a physician. Article 29B of New York State’s Public Health Law controls DNRs. A Hospital DNR Order is issued if someone is in a health care facility such as a hospital, nursing home, or a mental hygiene facility licensed by New York State.
Emergency personnel must honor a Hospital DNR Order during transfer, but if someone is outside one of these facilities, he or she may wish to get a Non-Hospital DNR. The New York State Department of Health has approved a physician order form (DOH- 5003) Medical Orders for Life-Sustaining Treatment (MOLST), which is intended for patients with serious health conditions who: want to avoid or receive any or all life-sustaining treatment; reside in a long-term care facility or require long-term care services; and/or might die within the next year. Typically, a patient, the patient’s health care agent or surrogate, and a health care professional will engage in discussions to define the patient’s goals for care and review possible treatment options. Under New York State law, the MOLST form is the only authorized form in New York State for documenting both Non-Hospital DNR and Do Not Intubate (DNI) Orders. The signed MOLST form should be transported with patients as they travel to different health care settings.
Medicaid Eligibility Rules
Medicaid is a government created health insurance program intended for the financially needy. It is a “means-tested,” federally funded entitlement program, administered by the states and counties, requiring individuals to meet financial and categorical eligibility standards. Medicaid coverage is available for individuals living in an institutional setting (such as a skilled nursing facility) as well as for individuals living at home. An individual may receive Medicaid benefits provided assets and income do not exceed certain threshold amounts as determined by the government. These amounts may differ depending on the type of benefits sought, marital status, and the type of assets owned. To be eligible for Medicaid in New York State, the applicant must be a legal resident of the United States. The applicant must also generally be a resident of the state and county where the application for Medicaid is made. Residency in this context requires a physical presence within the state and the “intent to remain.”
Three parts to a Medicaid application in the institutional setting include one’s medical eligibility, current financial eligibility, and a review of one’s financial history over a set period of time. Medicaid will only issue benefits for skilled nursing home care that is medically necessary, and a PRI/SCREEN (Patient Review Instrument/Screen) is a standardized test administered by a registered nurse providing the applicant with a score to determine medical need for skilled nursing home care. If an individual is admitted to a skilled nursing facility from a hospital, a PRI is often not needed.
The next step in the application process involves a consideration of income eligibility, and it is critical that an applicant’s income does not exceed his or her medical expenses. This will involve a review of the applicant’s gross income and “permissible disregards,” which may include health insurance expenses. In 2014, resource eligibility for a single applicant in New York State cannot exceed $14,550. Assets in excess will result in the denial of one’s application until such threshold is reached. Exempt resources include pre-paid irrevocable burial arrangements, personal property, and some limited life insurance. The evaluation of a married applicant’s resources will be different. While the applicant is allowed to retain $14,550 in resources, the community spouse resource allowance is an additional $74,820 (up to a maximum of $117,240 in some cases). Exempt resources in this context also include pre-paid irrevocable burial arrangements, personal property, and some limited life insurance. In addition, the community spouse’s residence is exempt, with the home equity limit being $814,000 in 2014.
The community spouse may also retain one automobile as an exempt resource. Eligibility for Medicaid benefits for skilled nursing home care is also dependent upon a review of financial records for a specified period of time. The review will include a “look-back” period of 60 months immediately prior to the date of the Medicaid application to determine whether or not any uncompensated transfers of assets have been made by the applicant, and/or the applicant’s spouse. Transfers made during the “look-back” period will result in a period of ineligibility during which the applicant cannot receive Medicaid benefits. This ineligibility period is triggered and begins to run on the later of: (1) the date when (a) the Medicaid applicant:
(i) is resource eligible, (ii) is income eligible, (iii) requires skilled nursing home level of care, and (iv) has filed a Medicaid application and (b) no other period of Medicaid ineligibility is outstanding; or (2) the first day of the month after which assets have been transferred. The ineligibility period itself is determined by dividing the value of the uncompensated transfer by the regional rate of care, as indicated by the New York State Department of Health. For instance, if it is determined that an applicant placed in a skilled nursing facility in Northeastern New York meets the eligibility thresholds for income and resources, and that applicant transferred $100,000 during the 60 months immediately preceding the Medicaid application date, then an ineligibility period of 10.86 months will be imposed. This is determined by dividing $100,000 (the value of the uncompensated transfers) by $9,212 (the Northeastern New York regional rate in 2014). The implication of this is that the applicant will be ineligible to receive Medicaid benefits for 10 months beginning the month that the applicant is deemed “otherwise eligible,” with a partial month penalty in the eleventh month, which is also the anticipated Medicaid “pick-up” month.
Once Medicaid eligibility is established, the county department of social services will work to prepare the income budget. For a single individual, the countable income is determined (i.e., gross income less any deductions), a $50 deduction is issued in the form of income retained by the Medicaid recipient, and the Net Available Monthly Income (NAMI) is paid by the Medicaid recipient toward the cost of care. For a married couple, the applicant recipient also is allowed to retain $50 of income per month. However, the community spouse is allowed to retain $2,931 of income per month, which is referred to as the Minimum Monthly Maintenance Needs Allowance (MMMNA). Health insurance costs are again permissible disregards. If the community spouse has personal income exceeding the threshold, he or she will be asked to contribute a portion (i.e., 25%) of the excess towards the cost of care. In a situation where the community spouse does not have sufficient income to reach the MMMNA threshold, income of the institutionalized spouse may be deemed to the community spouse, until the MMMNA threshold is attained.
Eligibility for community Medicaid for an individual is determined using the same resource threshold levels as in the chronic care setting, while for a married couple the resource threshold is $21,450 in 2014. However, there is no review of transactional history. Practitioners should proceed with caution in advising their clients on becoming eligible for community Medicaid, since future institutional Medicaid eligibility will first require the historical transactional review, which may be impacted by transfers made to initially become eligible for Medicaid while living in the community. The income level for a single individual in 2014 is $809 per month with a $20 disregard, while a married couple’s income level is $1,175 per month with a $20 disregard.
Medicaid Planning Techniques
Typically in the advance planning context, an individual or couple may consider transferring certain assets with the eventual goal of asset protection by utilizing an irrevocable income only trust. This type of trust is established by a grantor (or potentially grantors, in the context of a married couple) naming an independent trustee. This trust can hold many different types of assets, including real estate, brokerage accounts, bank accounts and other investment vehicles. The grantor will retain the right to the income generated by the trust during his or her lifetime. This allows the income generated by the trust assets to be taxed at the individual’s income tax level. Another feature involves the grantor retaining the right to use any real property owned by the trust during his or her lifetime. While the trust owns the property, the grantor is permitted to retain tax exemptions, which is often very advantageous. The grantor can also retain the right to pay all maintenance, tax, insurance and other carrying costs in the context of real property. Assets in the trust enjoy an income tax benefit known as a “step up” in cost basis upon the death of the grantor. Thus, if the assets have appreciated in value over time, the cost basis for tax reporting purposes will change to the appreciated value on the date of death.
This can provide a significant tax benefit to the trust’s ultimate beneficiaries, especially in the context of real property and stock. The grantor will only have access to trust income and will not be permitted to receive trust principal. While the trust can permit distributions of trust principal to a specified class of beneficiaries, the restriction of the grantor’s access to principal is required for the purpose of asset protection. Certain provisions can be included in the trust giving the grantor some additional rights, including a limited power of appointment, the right to substitute property of an equivalent value, the right to change trustees (to someone other than the grantor), among others. If the assets held by an irrevocable income only trust are transferred 60 months prior to a Medicaid application, they will be considered exempt.
Certain asset transfers can be made by a Medicaid applicant which do not trigger a Medicaid ineligibility period. An asset other than a homestead may be transferred to the applicant’s spouse or another for the sole benefit of the applicant’s spouse, from the applicant’s spouse to another for the sole benefit of the applicant’s spouse, to a certified blind or certified disabled child, or to a trust established solely for the benefit of an individual under 65 years of age who is disabled. The applicant or spouse may transfer a homestead, without penalty, to his or her spouse, a child under the age of 21, a certified blind or disabled child of any age, a sibling who has an equity interest in the home and has resided in the home for at least one year immediately prior to the applicant’s most recent institutionalization, or to an adult child who resided in the applicant’s home for at least two years immediately prior to the applicant’s most recent institutionalization and who provided care to the applicant which permitted the applicant to reside at home rather than in a medical facility.
After the institutionalized spouse has been residing in a skilled nursing home for thirty days and is receiving Medicaid, any non-exempt transfer of assets made by the community spouse will only affect his or her eligibility for Medicaid and not the eligibility of the institutionalized spouse.
If the applicant transfers resources, there is a rebuttable presumption that the resources were transferred for the purpose of establishing or maintaining Medicaid coverage for skilled nursing home services. The presumption is rebutted only if the applicant provides convincing evidence that the resources were transferred only for a purpose other than to become or remain eligible for Medicaid. The rebuttal should include the purpose of transferring the resource; attempts, if any, to dispose of the resource at fair market value; reason for accepting less than fair market value for the resource; means or plans for self-support after the transfer; the relationship, if any, to the person to whom the resource was transferred; and the belief that he or she received fair market value, if applicable. If the applicant is unable to present evidence that he or she intended to dispose of the asset for the fair market value, or that the asset was transferred exclusively for a purpose other than to qualify for Medicaid, the case is evaluated to determine if the restriction of Medicaid coverage would cause the applicant “undue hardship.” To establish undue hardship, it must be shown that: the applicant is otherwise eligible for Medicaid; the applicant or the applicant’s spouse are unable to have transferred assets returned despite their efforts to do so; and the denial of care would endanger the applicant’s health or life. Practically speaking, undue hardship is difficult to establish.
Long-Term Care Insurance
Given the cost and need for long term care services, insurance is increasingly becoming a significant part of planning for long term care. When evaluating a policy, there are a number of features and options that should be explored. Certain provisions like the daily benefit (or monthly benefit in some cases), benefit period, inflation rider, and elimination period are core features of long-term care insurance policies. Riders such as shared care provisions, spousal premium waivers, and return of premium are also options for consideration. The cost of longterm care insurance will depend on the features selected, in additional to one’s age and health.
Certain tax benefits may also available to those who purchase these policies. To access policy benefits, the insured’s physician must certify that he or she requires assistance or supervision in performing two out of six activities of daily living (i.e, eating, toileting, transferring, bathing, dressing, and continence), or is diagnosed with a severe cognitive impairment. Benefits are most commonly received as reimbursement, wherein the insurance company invoices the care provider directly or the insured pays charges out of pocket and the insurance company reimburses the insured up to the policy limits. Care providers typically need to be licensed or certified. In some cases, benefits are paid directly to the insured once per month up to the policy limits, regardless of the cost of care. In these cases, care providers can be licensed or non-licensed, including family members. Depending on the policy terms, benefits can be used for home health care, assisted living, adult day facilities, continuing care retirement centers, skilled nursing homes, and hospice care.
The New York State Partnership for Long-Term Care is a Department of Health program combining private long-term care insurance and Medicaid Extended Coverage. This program allows people to protect their assets, depending on the policy purchased, if long-term care needs extend beyond the period covered by the Partnership policy. Certain policy provisions are required for the policy to be classified as such. Insurance companies can offer either Total Asset Protection or Dollar for Dollar policies in New York. An insured can keep an unlimited amount of assets and be eligible to receive Medicaid Extended Coverage after the minimum policy durations have been satisfied under a Total Asset Protection policy. After the policy minimum duration is satisfied under a Dollar for Dollar policy, the insured is eligible for Medicaid Extended Coverage and can retain an amount of non-exempt assets equal to the amount paid out for care under the policy. While an insured is able to protect assets under the Partnership program, the Medicaid income rules continue to apply.
A recent development in this market includes the use of linked benefit policies, which are permanent life insurance policies (whole or universal life) with long-term care rider or acceleration of death benefits for long-term care. These policies can be funded with a single premium or ongoing annual premium.
Personal Service Agreements
A personal service agreement, also known as a caregiver agreement, is a formal written agreement between two or more parties in which one or more of those parties agree to provide personal and/or managerial services in exchange for compensation by the party receiving those services. Historically, it has been the view that services provided by family caregivers are uncompensated and provided for love and affection alone. However, an individual can rebut this presumption that value was received with tangible evidence that services were performed and that services were received or agreed to be received in the future. To rebut this presumption, a properly executed personal service agreement, along with a detailed log of services actually provided, are critical components to having the transactions viewed as fully compensated transfer of assets for full market value. A person will not be ineligible for Medicaid as a result of a transfer of assets if a satisfactory showing is made that the individual intended to dispose of the asset at fair market value or for other valuable consideration, and that the asset was transferred exclusively for a purpose other than to qualify for Medicaid.
The Social Security Administration’s Program Operations Manual System (POMS) provides guidance on determining fair market value. Fair market value is defined as the “current market value” (CMV) of a resource at the time the resource is transferred. The CMV of a resource is the going price for which it can be reasonably expected to sell on the open market in the geographic area involved. Compensation for a resource may include “in-kind support and maintenance or services to be provided to the individual because of the transfer.” The transferor may actually receive the compensation before, at, or after the actual time of transfer.
GIS 07 MA/019 states that for Medicaid eligibility purposes, a determination must be made as to whether the applicant received or will receive fair market value for the resources transferred to the caregiver. If a determination cannot be made that the applicant will receive fair market value for the resources transferred, the resources are subject to a transfer penalty. A major debate in the use of personal service agreements involves the lump sum payment for future services, including services for the life of the senior. The practitioner will need to evaluate the viability of lump sum payments in this context, given that such an arrangement poses a much higher degree of risk and scrutiny than “pay as you go” for services rendered. The POMS state that lump sum payments for services will be considered for fair market value as long as the compensation is reasonable when compared to the going rate for such services and the term during which the services are rendered does not exceed the individual’s life expectancy. GIS 07 MA/019 is more restrictive than the POMS, holding that a personal service agreement that does not provide for the return of any pre-paid monies if the caregiver becomes unable to fulfill his or her duties under the contract, or if the applicant/recipient dies before his or her calculated life expectancy, must be treated as a transfer of assets for less than fair market value. If there are no legally enforceable provisions, there is no guarantee that fair market value will be received for the prepaid funds.
A determination cannot be made that fair market value will be received in the form of services provided through the contract term in a personal service agreement stipulating that services will be delivered on an “as needed” basis. A transfer of assets penalty must be calculated for an otherwise eligible individual in this context. However, when doing an assessment, if it is determined that the funding of a personal services agreement is an uncompensated transfer, the department of social services must give the applicant credit for the value of any services actually received from the time the agreement was signed and funded through the date of the Medicaid eligibility determination. No credit is given for services that are provided as part of the Medicaid nursing home rate. To assess services furnished, the department of social services must be provided with credible documentation (i.e., a log with the dates and hours of services already provided). Any amount subtracted must be commensurate with a reasonable wage scale, based on the fair market value for the job performed and the qualifications of the caregiver. For assistance in evaluating job duties and pay rates, social service districts may refer to the Department of Labor, Bureau of Statistics, Occupational Outlook Handbook, as may be amended from time to time.
Consideration must be given to establishing rates for services such as geriatric care management, personal care/home health aides, and bookkeeping. The pay scale for services under the personal service agreement may provide different rates of compensation for varying types of duties performed. The practitioner should specify the current market value of the services to be provided, and set forth the range of costs for each service in the local area. One must be able to document the open market price for each service identified, if requested upon demand.
Prior to drafting the personal service agreement, the practitioner and client should discuss the following: all available planning options, especially in light of the negative treatment toward personal service agreements in the skilled nursing facility setting; the current health of the senior and the reasonable expectations for the future in that regard; services already being provided and expectations going forward; the value of expected compensation, especially in regard to the senior’s available resources; an extensive consideration as to whether the compensation will be provided in lump sum versus on an ongoing basis; the scrutiny involved in a Medicaid eligibility determination as well as the possibility of a future fair hearing.
The personal service agreement should state the type, frequency and duration of services to be provided. Avoid “as needed” language in the skilled nursing facility setting. Services in the community may be “as needed,” but provide expectations for services, stating that frequency and scope may be affected by changing care needs. Everything must be substantiated by logs detailing dates, duration and nature of services actually provided. One should consider a term authorizing reimbursement of expenses, and potentially mileage reimbursement in compliance with the prevailing rate established by the Comptroller of the State of New York and the Internal Revenue Service. If there are multiple caregivers, the roles of each should be clearly defined and the log should detail services provided by each caregiver. The personal service agreement should be signed and dated by all parties. Payments to the caregiver represent taxable income and must be reports on annual income tax returns filed by the caregiver. It is recommended that the senior and caregiver seek professional services from an accountant and/or payroll services.
Crisis Planning with Promissory Notes
A gift-note plan is a crisis planning technique allowing a client to engage in asset protection planning while financing long term care expenses. In comparison with other planning techniques, the gift-note plan is a short-term planning strategy. An individual must be in need of institutional level of care for this plan to be utilized. The context is critical, since implementation of a gift-note plan will require the penalty period to be triggered. A promissory note is an “unconditional promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or designated person.” To implement a gift-note plan, the practitioner must draft a Deficit Reduction Act (DRA) compliant promissory note to evidence the loan made by the applicant/recipient, which will be repaid with interest over a specified period of time. The DRA modified the rules governing the purchase of promissory notes, loans and mortgages. The DRA amended Social Security Act Section 1917(c)(1) by adding new rules governing the purchase of these investments (see Section 6016(c) of the DRA). New York State adopted these rules (see 06 OMM/ADM-5). Under the DRA, funds used to purchase a promissory note, loan or mortgage are considered to be a transfer of assets unless all of the following criteria are met:
(1) the repayment term is actuarially sound;
(2) the payments are made in equal amounts during the term of the loan, with no deferral of payments and no balloon payments; and
(3) the promissory note, loan or mortgage prohibits the cancellation of the balance upon the death of the lender.
A promissory note complying with the DRA criteria will be considered a bona fide transaction, and the purchase of such an asset will not be classified as a transfer of assets. Given the clear language of the DRA, the drafting practitioner will want to ensure that these criteria are met on the face of the note. It is advisable to consider including language stating that the note is non-negotiable, non-assignable, and otherwise non-transferrable by the promisee. This defeats the argument that the note could be considered a negotiable instrument, and thus an available resource to the applicant/recipient, by means of potential resale of the investment to a third party. The practitioner, in this context, may also consider the exclusion of otherwise standard note terms, including: acceleration language in the event of default, increase in interest rate upon default, authorizing the collection of attorneys fees in the event of default, and other terms that would make the note attractive to a third party. Proper attention will also need to be given to the appropriate interest rate, which makes the note a viable investment.
Prior to implementing a gift-note plan, a significant amount of critical information is needed, including: the Medicare cut-off date, a comprehensive understanding of the individual’s assets and income, a historical review of prior transactions, the private cost of care, outstanding liabilities, the need for retained assets, the liquidity of assets, the regional penalty period divisor, and the cost basis/tax considerations for liquidated and transferred assets.
The gift-note plan will first assess the need for any spend-down items, prior to implementation. Also, in preparing for the anticipated Medicaid application filing, it is important to determine if any resources were transferred for less than fair market value during the relevant “look-back” period. If so, accommodations should be made in the plan to address the transfers. Then, resources will essentially be divided into three parts: the retained portion, the gift portion, and the loan portion (which is documented by the promissory note). Due care is needed to ensure that retained assets do not exceed the applicable resource threshold. The individual’s income, including the new monthly loan payment, must not exceed medical expenses. Once the plan is implemented, the Medicaid application should be filed to establish an “otherwise eligible” determination. Note payments should be made during the term of the plan, and a structured plan should be followed with clear expectations as to the term and eventual Medicaid “pick-up” date. The individual will private pay for skilled nursing home care expenses during the ineligibility period, with a combination of note income, and the individual’s other standard income (i.e., Social Security, pension, etc.). There should also be an understanding of the ultimate goals of the plan, including the assets being protected and how those assets are to be held in the future.