Medicaid Planning by New Jersey Guardians

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 decision from the Appellate Division was rendered in 1998 which validated this form of estate planning by guardians.

A. Background
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. Early Cases

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 1993, this doctrine was successfully extended by Gary Mazart, Esq., in an unreported opinion from Essex County, In re William J. Borrows, a/k/a Jeff Borrows (Docket No.: 12,336-4). In this case, the ward was involved in an accident and sustained personal injuries. His parents, who became his guardians, commenced litigation to recover damages for those injuries and that lawsuit was settled for the sum of $120,000. After payment of counsel fees and costs, the guardian successfully obtained court approval to have the net settlement proceeds placed in a supplemental needs trust which would preserve the ward’s eligibility for Medicaid benefits. Although transfers to third parties were not made in this case, this opinion clearly recognized that a guardian could undertake Medicaid planning on behalf of a ward.

3. Breakthrough Cases

Starting in 1994, the court system began to recognize the ability of a guardian to transfer assets to third parties, such as spouses and children, in order to expedite the eligibility of a ward for Medicaid benefits. The seminal Medicaid planning case was In re Klapper, (reported in the New York Law Journal on August 9, 1994 on page 26). In Klapper, the guardian/son of an incompetent obtained authorization to transfer some of the ward’s assets to his own family so that she could become eligible for Medicaid sooner and so that she could also continue her practice of supporting his family. The court found that, while competent, Mrs. Klapperdid provide almost $1,600.00 per month to her son’s family in addition to other substantial gifts. The New York Mental Hygiene Law Section 81.21 authorizes the making of gifts, although this statute did not explicitly discuss making gifts of all or a major portion of a ward’s assets for Medicaid planning purposes. The court noted that this was a case of first impression on this “novel” issue, and in deciding this case, the court noted provisions of the Mental Hygiene Law (Section 81.21(e)) which authorized the guardian to convey or release contingent and expected interests in property and to renounce or disclaim any interest by testate or intestate succession or by inter vivos transfer. The court noted these provisions were instructive since they enunciated the concept that the guardian does not need to accept the “spend down” of assets, but may release them.

The New York court authorized the above mentioned transfers, finding that, although there would be a period of ineligibility for Medicaid, the amount of assets remaining could be calculated so that they would be sufficient to pay for her care during the period of Medicaid disqualification. The court also noted that the proposed disposition would be made to the donees in a pattern consistent with Mrs. Klapper’s Will.

The Klapper case was expanded in the Matter of Beller, published in the New York Law Journal on August 1, 1994. In this case, Mrs. Beller’s son sought authorization to transfer a substantial portion of his mother’s assets to himself and to his three sisters for the purpose of Medicaid planning. The significance of this case was that there was no showing of previous gifts. Nevertheless, the court found that the plan was consistent with Mrs. Beller’s testamentary plan. The court noted that Mrs. Beller, if competent:

would not reasonably choose to “spend down” almost all of her assets in payments to the nursing home before applying for Medicaid when the law provides a manner for her to preserve a portion of her estate for the benefit of her son and the issue of her other son. The court finds that a competent, reasonable individual in the position of Dorothea Beller-Maltzman would be likely, under these circumstances to transfer part of her assets to her son and the issue of her other son.

The above mentioned holding was affirmed In The Matter of Cooper, 618 N.Y.S.2d 449,1162 Misc.2d 840, 1994 WL614331. In Cooper, the court noted:

While one may choose to debate whether the authority of one to engage in Medicaid planning is sound public, social or fiscal policy, less open to debate is the conclusion that the codified rules and policies to which Justice Leone referred to In the Matter of Klapper, Supra, authorized, if not encouraged, such Medicaid planning.

The statutes referred to are the New York state’s rights authorizing transfers by guardians through court approval and statutes setting forth a determination of the Medicaid penalty.

The court also noted that, under the Doctrine of Substituted Judgement, the guardian, through the court, could take such financial actions as the incapacitated person would have done if he or she had the capacity to act. Id.at 501. As the court stated:
In order to effectuate this policy, an incapacitated person should be permitted to have the same options available to him or her with respect to transfers of his or her property that are available to competent individuals. To deny a guardian the authority (where the requirements of the Mental Hygiene Law Section 81.21 are otherwise met) to make such transfers of the incapacitated person’s assets will result in denying that person the opportunity which is available to all competent persons of this State that require long term nursing home care and who have assets they desire to give to their families, simply because he or she is incapacitated and is unable from a cognitive standpoint to make such transfers by himself or herself. Such a result would be a direct contravention of the express intention of Article 81. Therefore, the court finds that Medicaid planning is a proper objective for a proposed disposition of an incapacitated person’s property. Id at 502.

In essence, Klapper opened the door to transfers to third parties, Beller expanded the authority by foregoing a requirement of previous gifting, and Cooper noted the court’s proper role of determining whether the ward would undertake this planning if competent, rather than debating the propriety of Medicaid planning.

B. New Jersey Development
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, (3) gifts to children and other non-spousal beneficiaries, and (4) miscellaneous Medicaid transfers.

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.

Authorization for a guardian to protect other rights of the community spouse was granted in Atlantic County in the case, In re Winfred H. Zepfel (Docket No.: 85711, decided May 26, 1995). This case occurred prior to New Jersey’s abolishment of the Miller Trust in 1995. In this matter, the institutionalized spouse received Social Security and pension in excess of the state’s income cap. To protect the community spouse, the court allowed the guardians to execute a Miller Trust on behalf of the ward and transfer life insurance policies and other assets of the ward into the name of the community spouse, as well as the interest in the marital residence. This decision enabled the community spouse to maximize his CSRA. More importantly, by executing the Miller Trust, the institutionalized spouse was immediately eligible for Medicaid, which, in turn, granted the benefit of extra income, through the MMMNA, to the community 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.

Prior to 1995, New Jersey courts universally prohibited guardians from making asset transfers to non-spousal beneficiaries. Lacking any written authority, practitioners, who attempted to receive court authority for such transfers, were rebutted with the argument that it was bad public policy to deplete private assets so that public funds could pay for institutional care. Within one year after the New York trilogy of cases, a flurry of applications for Medicaid planning were approved in New Jersey courts.

Perhaps, the breakthrough case in New Jersey was In the Matter of Edna M. Key (Docket No.: 5344, decided May 5, 1995). In this Cumberland County case, the guardian successfully persuaded the court to allow gifts of up to 55% of the total value of the ward’s property. In his application, the guardian demonstrated that the remaining assets, as well as the income of the ward, would pay for the ward’s nursing home care during the period of ineligibility created by the asset transfers. Most importantly, the Honorable William L. Forester, J.S.C., recognized, in his Order, that “making gifts for Medicaid planning purposes is a legitimate step to be taken by the guardian in this matter.”

The next breakthrough occurred In the Matter of Albert M. Wallace (Docket No.: CP-063-95, June 16, 1995). In this Camden County case, the Honorable John B. Mariano, J.S.C., allowed, with broader language, asset transfers for Medicaid planning. In this case, the ward owned assets in excess of $400,000. The significance of the court’s decision was two-fold: (a) it placed no restrictions on the type, method, or amount of transfers, and (b) it recognized that there should be no need for a guardian, who undertakes Medicaid planning, to return to court for approval to transfer the ward’s real property.

4. Miscellaneous Medicaid Transfers
In addition to the aforementioned cases, a variety of techniques exist to protect or expedite eligibility for Medicaid benefits. In Bergen County, the guardian successfully persuaded the court to allow the transfer of a ward’s residence, without Medicaid penalty, to her “caregiver” son (In the Matter of Evlyn Stutcki, decided August 18, 1995). Similarly, in Burlington County, a house was deeded without transfer penalty, to a “caregiver” brother (In the Matter of Alvin J. Hellmig, Jr., decided March 22, 1996). Other cases have created authority for the transfer of life estates and even gifting to non-relatives.

D. The Labis and Kerri Decisions

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.

E. 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 is 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.

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