March 1999 Issue



By Kenneth M. Cohen

Patient Recent court decisions involving the New York State Medicaid laws threaten to impair the ability of seniors to protect their hard-earned assets in the event they require long-term care. Although they are not the type of court cases to make the 11 o'clock news, such decisions could have a subtle yet profound impact on millions of seniors throughout the state.

Under the Medicaid laws in New York State, the spouse of a nursing home patient on Medicaid (the well spouse) is entitled to keep a minimum income and a minimum amount of assets. Specifically, for 1998, a well spouse in New York may keep $2,019 of monthly income and (approximately) $80,760 of assets, excluding the home. The $80,760 is known as the Community Spouse Resource Allowance (CSRA).

If the well spouse wants to keep assets above this amount, a "spousal refusal" document must be filed, in which the well spouse declares that his or her income and assets are unavailable for the cost of the nursing home spouse's care. Without a spousal refusal, Medicaid will consider any assets of the well spouse above the CSRA to be owned by the nursing home spouse and therefore deny Medicaid benefits to the nursing home spouse.

By law, the state must provide Medicaid benefits to the nursing home spouse if the well spouse has executed a spousal refusal. However, the state can still sue the well spouse who has assets above the CSRA to compel further contribution to the cost of the nursing home spouse's care. In fact, over the past two or three years, this is exactly what the state has been doing, and recent court decisions have made it even easier for these lawsuits to proceed. Unfortunately, today's legal climate is very different from what it was only a few short years ago. In those days, it was virtually unheard of for New York State to sue a well spouse, although the state had always reserved the right to do so. Seniors thus could rest assured that their hard-earned assets would be available for their benefit.

Despite the state's newly aggressive pursuit of a well spouse's resources above the CSRA, the law has always allowed the well spouse, under certain circumstances, to keep these so-called excess resources. For example, if the well spouse could show that his or her pension and social security income, combined with the income and dividends generated by the CSRA, did not produce $2,019 in monthly income, then the well spouse was entitled to keep an amount of assets exceeding the $80,760. If, even with the income generated by the increased CSRA, the well spouse's total income still did not reach the $2,019, the shortfall could be made up from the nursing home spouse's income. The examples below show how these rules work.

Example A. Suppose a couple had $300,000 in jointly held liquid assets, yielding $1,200 per month in interest and dividends. In addition, the husband receives Social Security and a pension totaling $1,300 per month and his wife receives Social Security of $819 per month. The husband now requires nursing home care. In the past, to qualify for Medicaid, he would transfer his portion of the couple's assets to his wife, who would then execute a spousal refusal. Thus, the wife's monthly income would then be $2,019, consisting of her $819 in Social Security benefits plus the $1,200 in income and dividends generated by her $300,000 in assets. Under the old approach, though, the wife would now have assets exceeding the CSRA and would be entitled to show that she needed all of the $300,000 to bring her income up to the minimum amount of $2,019.

Example B. To take a slight variation on Example A, suppose the wife's Social Security benefits were $619 instead of $819. In this case, because she now has income of only $1,819, the wife would be allowed to take $200 of her husband's income (which would otherwise go to the nursing home) to bring her up to the $2,019 minimum.

Unfortunately for well spouses, the change in the law caused by a recent decision [ Matter of Golf v. New York State Department of Social Services , 90 NY2d804 (1998)] of New York State's highest court significantly alters the rules governing the amount of assets this couple would be allowed to retain. Essentially the court ruled that, if the well spouse's Social Security and pension income total less than $2,019 per month, the shortfall has to be made up first from the nursing home spouse's income. If after the transfer of the nursing home spouse's income to the well spouse, the well spouse still has income below $2,019, then and only then will the well spouse be permitted to keep assets beyond the CSRA to generate enough income to cover the shortfall.

Thus, applying the new law to the facts of Example A above, the wife would look first to her husband's income to supplement her $819 of monthly income. After supplementing her own income with $1,200 of her husband's income, the wife's income would now be $2,019, the amount the law authorizes her to have. As a result, she can no longer argue that she requires assets exceeding the CSRA of $80,760 to help generate income of $2,019. In this scenario, the wife can keep only $80,760. Suppose, though, that the wife had $619 instead of $819 in Social Security benefits, as in Example B above. Here, even with her husband's $1,300 of income, the wife now has only $1,919 of total income, which is $100 less than her entitlement. According to the new law, the wife would be entitled to keep assets above her CSRA in an amount necessary to generate the extra $100 of monthly income.

It is not difficult to see the precarious financial position well spouses may find themselves in under the state's income-first policy. Assuming, as is likely, that the nursing home spouse dies before the well spouse, the well spouse would lose the income received from the nursing home spouse, very possibly leaving him or her below the $2,019 threshold. Had the well spouse been permitted to retain more than just the CSRA, he or she would not be faced with a reduction of income upon the death of the nursing home spouse.

The Golf case is symptomatic of the recent trend in the law to make it much more difficult for a well spouse to retain assets greater than the relatively modest sum of $80,760. Consequently, to protect assets from the exorbitant cost of nursing home care, it is strongly urged that families engage in Medicaid and estate planning sooner rather than later. Ideally, such planning should take place while both spouses are relatively healthy; for the longer the spouses wait before beginning a wealth preservation program, the greater the chance that these assets will have to be spent on nursing home care.

Despite the obstacles New York State is placing in the way of well spouses being able to benefit from their hard-earned assets, strategies continue to exist to protect a great deal, if not all, of these assets. These strategies in general terms may include, but are not limited to--

* outright transfers of assets

* transfers into an irrevocable trust

* purchases of annuities

* expenditures for major home repairs

* prepayment of burial expenses.

Of course, Medicaid planning can only be done after a thorough review of the individual's circumstances; each situation must be evaluated on its own facts. What may be appropriate for one person may be inappropriate for the next. *

Kenneth M. Cohen is an attorney in New York specializing in elder care.


By William Bregman, CFP, CPA/PFS

N ew York State has established a program that allows parents, grandparents, and others to set up a tuition savings account to pay for qualified higher education expenses for a college-bound student. The first $5,000 contributed each year ($10,000 for a husband and wife) will be deductible for New York State income tax purposes, and none of the investment earnings, if used for qualified expenses, will be taxed by New York State. Federal tax on earnings is deferred until the student actually uses money to pay for college costs; it is then taxed in the same manner as an annuity. There is a lifetime limit of $100,000 that can be contributed by all account owners to any one beneficiary.

Each account may have only one designated beneficiary, chosen by the account owner when the account is set up. Each parent may open a separate account for each child; however, both parents may not open a joint account. The minimum contribution is $250; it is lowered to as little as $25 if the account owner agrees to make periodic contributions through automatic deductions from a bank account or through payroll deductions. The program is managed by TIAA under an agreement that runs through June 30, 2003.

As required by New York State and Federal law, investment decisions may not be made by the account owners or designated beneficiaries. Contributions will be invested by TIAA in a special portfolio based upon the birthday of the beneficiary. The fund will be allocated between a growth equity fund, bond fund, and money market fund. The fund will be weighted between and among market equities and debt instruments depending on the relative age of the beneficiary. Portfolios will be rebalanced on a regular basis. TIAA will receive a fee of 65 basis points based on daily net assets of each fund under management.

In order to make a qualified withdrawal, the account must have been opened at least 36 months. Qualifying withdrawals may be used to pay for qualifying higher education expenses such as tuition, fees, texts, supplies, and equipment. Also included is an amount for room and board for those attending at least half time. Under proposed Federal regulations, the cost of room and board cannot exceed $1,500 per academic year for those living at home or $3,000 per academic year for all others.

A qualifying institute of higher learning includes any college or university, and certain vocational schools. Graduate level and professional degree programs also qualify. The program is not limited to funding expenses at New York schools. Withdrawals may also be made on account of death or disability, or for the scholarship of the designated beneficiary. These withdrawals will not be subject to penalty, but are includable in the owner's New York State taxable income. A portion of the account's earnings are includable in Federal taxable income using the annuity rules. Non-qualified withdrawals are subject to a penalty, which is currently 10% of the portion of the withdrawal due to the funds earnings, and income taxation as outlined previously.

The account owner may designate herself as the designated beneficiary or another person such as a child or grandchild. The account owner may replace the designated beneficiary with a substitute designated beneficiary. The replacement rollover will not be included in the gross income of the distributee if made within 60 days.

The replacement person must be a member of the family. This group includes a son or daughter, or a descendant of either; a stepson or stepdaughter, a brother, sister, stepbrother, or stepsister; the father or mother, or an ancestor of either; a stepfather or stepmother; a son or daughter of a brother or sister; a brother or sister of the father or mother; a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law; or the spouse of the designated beneficiary. A child includes a legally adopted child, and a brother or sister includes a brother or sister by half-blood. For example, if after the first child is done with school there is a balance left in the account, another child or any of the above relations can be named as the substitute beneficiary.

Transfers to another state's qualified tuition program are also permitted.

Federal income tax treatment of the trust, contributions, and withdrawals is governed by IRC section 529 as amended by the Taxpayer Relief Act of 1997. Undistributed earnings from the trust, with the exception of unrelated business taxable income, are exempt from Federal tax. Education expenses provided to a beneficiary are included in the beneficiary's gross income under the annuity rules of IRC section 72 to the extent that such amounts exceed the contributions made on behalf of the beneficiary. Amounts distributed to a plan contributor, for instance a refund to parents, will be included in the contributor's gross income to the extent that the amount exceeds the contribution made by that person.

To the extent that a distribution is used to pay for qualified expenses, the distributee will be able to claim the HOPE or lifetime learning credit under new IRC section 29A.

Under IRC section 529, a contribution to a qualified state tuition program is treated as a completed gift of a present interest. Distributions will not be treated as taxable gifts unless the new beneficiary is in a generation younger than the previous beneficiary. If the donor's contribution exceeds the annual $10,000 gift tax amount ($20,000 if gift-splitting with spouse), the donor may elect to take the excess into account ratably over five years. No portion of a contribution is generally included in the estate of a donor, unless the donor dies during the five-year period in which excess contributions are ratably being taken into account.

The New York State program appears to be ideal for most middle income taxpayers. It is very simple to set up. All it requires is a telephone call to TIAA. It has a low minimum investment and a reasonable fee structure. The more affluent may, however, want to think twice before going ahead with this program. They may already have annual gifting programs in place utilizing the gift tax annual exclusion, such as the use of a life insurance trust. Finally, they may financially be able to pay the costs currently and directly to the institution of higher learning. Such direct payments are exempt by statute from the gift tax. *

Milton Miller, CPA

William Bregman, CPA/PFS

Contributing Editors:
Alan J. Straus, CPA

David R. Marcus, CPA
Paneth, Haber & Zimmerman LLP

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