MEDICAID: TRANSFER OF ASSETS, LIENS AND ESTATE RECOVERY

by

David Goldfarb, Esq. Goldfarb Abrandt Salzman & Kutzin LLP

New York City

559

560

Reprinted from New York Elder Law with permission.

Copyright 2015 Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights reserved.

New York Elder Law (Lexis/Matthew Bender 2015) by David Goldfarb & Joseph Rosenberg

CHAPTER 8 Medicaid: Transfer of Assets, Liens and Estate Recovery*

SYNOPSIS § 8.01 Summary of This Chapter § 8.02 Medicaid Eligibility and Outright Transfers of Assets

[1] Federal and New York Law Governing Transfer of Assets [a] Imposition of a Penalty Period [b] The Look Back Period

[2] Exempt Transfers [a] Homesteads [b] Exempt Transfers of Assets Other Than the Home [c] Transfers for Value or Exclusively for Purpose Other Than to Qualify for Medicaid,

Returned Assets and Undue Hardship Argument [d] Personal Service Contracts

[3] Penalty Period of Ineligibility for Nonexempt Transfers [a] Penalty Period of Ineligibility for Nonexempt Transfers in General [b] Calculating the Penalty Period [c] Effective Date of Penalty Period [d] Partial-Month Penalty [e] Multiple Transfers [f] Penalty Period for Transfer of Income [g] Transfers of Jointly Held Bank Accounts

[4] Transfers Between and By Spouses [a] Transfers Between Spouses Exempt [b] Transfers to Third Parties Prior to Medicaid Application [c] Transfers To Third Parties After Medicaid Application [d] Apportionment of Penalty Period Between Spouses

[5] Managing the Penalty Period: Rule of Halves [6] Failure to Pursue Available Resource Treated as Transfer [7] Transfer of Real Property with Reserved Life Estate [8] Medicaid Planning By Guardians

§ 8.03 Transfers To and From Trusts [1] Trust-Related Transfers [2] Transfers into Exception Trusts for Disabled Persons

*All references in this text to Planning for the Elderly are to Tax, Estate & Financial Planning for the Elderly, by John J. Regan, Rebecca C. Morgan and David M. English (Matthew Bender). References to Forms & Practice are to Tax, Estate & Financial Planning for the Elderly: Forms & Practice, by John J. Regan, Michael Gilfix, Rebecca C. Morgan and David M. English (Matthew Bender).

561

[a] Exception Trusts [b] Individual Payback Trust [c] Pooled Trust [d] Transfer to Trust for Sole Benefit of Disabled Person

[3] Judicial and Government Supervision of Exception Trusts [a] Exception Trusts Closely Supervised [b] Using Income to Fund Supplemental Needs Trusts [c] Family Members as Trustees of Supplemental Needs Trusts

[4] Transfers into Trust-like Device for Disabled Person in State Facility [5] ABLE Act Accounts

§ 8.04 Medicaid Liens [1] Lien Against Property for Benefits Incorrectly Paid [2] Lien Against Real Property of Institutionalized Person

[a] Lien Prohibited if Home Occupied by Certain Relatives [b] Permanent Absence of Institutionalized Person [c] Limits on Enforcement of Lien

[3] Liens Against Personal Injury and Malpractice Causes of Action [4] Effect of Lien on Funding of a Supplemental Needs Trust [5] Lien Prohibited if Beneficiary of Partnership Long-Term Care Policy

§ 8.05 Recoveries Against Estates [1] Strict Limitations on Right of Recovery Against Estates [2] New York Definition of Estate [3] Limitations on Recovery Against Surviving Spouse and Estate of Spouse [4] No Recovery if Survived By Minor, Blind, or Disabled Child [5] Waiver of Recovery if Undue Hardship [6] Scope of Recovery

[a] Value of Services [b] Statutes of Limitations on Medicaid Claims

[7] Creditor’s Claims and Surrogate’s Court Procedure Act .

.

§ 8.01 Summary of This Chapter § 8.02 Medicaid Eligibility and Outright Transfers of Assets. Medicaid eligibility rules impose financial criteria but permit transfers of assets under certain circumstances. Medicaid looks back from 36 months to 60 months (depending on the date of transfer) from date of application for nursing facility services and imposes penalty period of ineligibility based on value of nonexempt transfer. Primary residence may be transferred without penalty to spouse; child who is blind, disabled or under 21; sibling with equity interest; or caretaker adult child. Assets other than residence may be transferred without penalty to or for sole benefit of spouse; to blind or disabled child or trust for sole benefit of that child; or to trust for sole benefit of disabled person under 65. § 8.03 Transfers To and From Trusts. Medicaid looks back 60 months from date of application for nursing facility services and imposes penalty period of ineligibility based on value of nonexempt transfer to trust. Assets other than homestead may be transferred to trust for disabled child or any disabled person under age 65. § 8.04 Medicaid Liens. As required by federal law, New York restricts use of liens and recoveries to recoup Medicaid payments prior to death. Lien may be placed against property of

562

Medicaid recipient prior to death pursuant to court judgment that Medicaid benefits were incorrectly paid, and against real property of person who does not intend to return and who is not reasonably expected to be discharged from medical institution, if no protected relatives reside there. Lien may attach to proceeds of personal injury or malpractice verdict, judgment, award, or settlement. § 8.05 Recoveries Against Estates. Medicaid only has right of recovery against estate of deceased person who received Medicaid services after age 55 if there is no surviving spouse or child who is under 21, blind or disabled. New York has repealed enhanced Medicaid estate recovery. Recovery against estate of spouse of Medicaid recipient may be allowed if spouse had sufficient resources to support Medicaid recipient while Medicaid extended coverage, but failed to provide support.

§ 8.02 Medicaid Eligibility and Outright Transfers of Assets Medicaid eligibility rules impose financial criteria but permit transfers of assets under certain circumstances. Medicaid looks back from 36 months to 60 months (depending on the date of transfer) from date of application for nursing facility services and imposes penalty period of ineligibility based on value of nonexempt transfer. Primary residence may be transferred without penalty to spouse; child who is blind, disabled or under 21; sibling with equity interest; or caretaker adult child. Assets other than residence may be transferred without penalty to or for sole benefit of spouse; to blind or disabled child or trust for sole benefit of that child; or to trust for sole benefit of disabled person under 65.

[1] Federal and New York Law Governing Transfer of Assets

[a] Imposition of a Penalty Period Until 2006, the amendments to the Social Security Act contained in the Omnibus Budget and Reconciliation Act of 1993 (OBRA ‘93)1 provided the framework for New York’s conforming legislation and regulations governing transfers of assets.2 (For a general discussion of Medicaid eligibility and transfers of assets, under both current and prior law, see Planning for the Elderly Chapter 10. See also Forms & Practice Part I.) These laws apply to New York Medicaid applications and recertifications made on or after September 1, 1994 and to transfers made on or after August 11, 1993.3 The Social Security Act was again amended regarding transfers of assets effective February 8, 2006, by the Deficit Reduction Act of 2005 (DRA ‘05) and the Tax Relief and Health Care Act of 2006.4 New York’s rules did not change until enabling legislation was enacted.5 New

1The federal provisions for liens, adjustments and recoveries, and transfers of assets are codified at 42 USC § 1396p. Transfers made on or before August 10, 1993 are governed by former law, but will not be discussed here because the applicable penalty period of 30 months has expired. 2SSL § 366(5). New York regulations controlling transfers are found at 18 NYCRR §§ 360-4.4(c), 360-4.5. The Administrative Directive interpreting these statutes and regulations are 96 ADM-8, dated March 29, 1996, and titled “OBRA ‘93 Provisions on Transfers and Trusts,” and 06 OMM/ADM-5 dated July 20, 2006 and titled “Deficit Reduction Act of 2005—Long Term Care Medicaid Eligibility Changes.” 3These effective dates no longer have practical significance because outright transfers made prior to August 11, 1993 were beyond the 36-month “look-back” period on August 10, 1996). 4Chapter 2, Subchapter A, §§ 6011–6016 of the Deficit Reduction Act of 2005 deal with reform of

563

York adopted implementing legislation as part of the 2006 budget process.6 Although Medicaid cannot be more restrictive regarding income and resource eligibility than the federal SSI program (see §§ 6.05[3] and 6.06[3][a], above), this does not apply to transfer of asset determinations where Congress has specifically enacted separate and distinct transfer-of-assets rules for SSI and Medicaid, with different look-back periods.7 The administration of the Medicaid program, including the processing of applications and thus the evaluation of asset transfers, is handled by local Departments of Social Services. Each local department administers a local district which is composed of a single county, except for New York City, which is one district.8 The local departments are reimbursed by the state.9 The New York State Department of Health is the single state agency responsible for the Medicaid program. See § 6.03, above. However, the New York State Office of Temporary Disability and Assistance (OTDA), as successor to the New York State Department of Social Services, continues to have some responsibilities, including the conduct of fair hearings relating to eligibility.10 In this chapter, the local Department of Social Services is referred to interchangeably as the “local Department of Social Services,” the “local department” or the “local agency.” Assets are defined to include both income and resources of the Medicaid applicant or recipient and his spouse, and include property to which a person or his spouse is entitled although not actually received by virtue of action or inaction by:

• the person or his spouse;

• a person, court or administrative agency with authority to act on behalf of the person or his spouse; or

• a person, court or administrative agency acting at the direction or request of the person or his spouse.11

Medicaid asset transfer rules. The court in OneSimpleLoan v. United States Sec’y of Educ., 496 F.3d 197, 198 (2d Cir. 2007) cert. denied, sub nom. OneSimpleLoan v. Spellings, 128 S. Ct. 1220, 170 L. Ed. 2d 60 (2008), upheld dismissal of Constitutional claims against DRA ‘05 finding that a court may not look beyond the version of the bill authenticated by the signatures of the presiding officers of the House of Representatives and Senate. 5See Enomoto v. Toia, 50 N.Y.2d 826, 430 N.Y.S.2d 50, 407 N.E.2d 1346 (1980) aff’g Cheng San Chen v. Toia, 67 A.D.2d 1085, 415 N.Y.S.2d 169 (4th Dep’t 1979) where the court overruled New York’s denial of Medicaid to certain aliens based on a change in federal regulation. 62006 N.Y. Laws 57 and 2006 N.Y. Laws 109. The Department of Health’s interpretation of the DRA is at 06 OMM/ADM-5. 7Matter of Stern v. Daines, 2009 N.Y. Misc. LEXIS 3670 (Sup. Ct. Queens County Nov. 23, 2009). 8SSL § 61. 9SSL § 368-a. 10SSL § 364(1)(a). 1142 USC § 1396p(e)(1); SSL § 366(5)(d)(1)(i); 18 NYCRR § 360-4.4(c)(2)(i)(a). For purposes of transfers of assets, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and

564

In Matter of Conners v. Berlin, the court found that a penalized transfer had occurred when an agent under a power of attorney sold the applicant’s stocks, deposited the proceeds into joint checking accounts, and withdrew the funds for her personal use.12 New York imposes a penalty period of ineligibility for nonexempt transfers made by persons applying for “nursing facility services,” typically a nursing home.13 See § 8.02[2], below, for a discussion of exempt transfers. “Nursing facility services for transfer of asset purposes” are defined as:

• nursing care and health related services provided in a nursing facility (i.e., nursing home or intermediate care facility for the developmentally disabled);

• an alternate level of care in a hospital equivalent to the level of care provided in a nursing facility.14

An “institutionalized individual” is a person residing in one of these facilities.15 A transfer of asset penalty does not apply to care, services, and supplies provided as part of a waivered program under Section 1915(c) of the Social Security Act, including the Long-Term Home Health Care Program (the “Lombardi Program”), the OMRDD Home and Community Based Services Waiver, the Traumatic Brain Injury Waiver, and the Care At Home Program.16 CMS has concluded that the transfer rules do apply to MAGI individuals who meet the definition of “institutionalized individuals.”17 Since MAGI individuals do not include persons disabled or 65 years of age and over, it will be rare cases where MAGI individuals qualify as institutionalized individuals. Comment: Contrast the above with the definition of an “institutionalized spouse” used to determine if the spousal impoverishment rules apply. See § 7.02[2], above.

performs same-sex unions. GIS 08 MA/23 (08/20/08) In 2011, New York legalized same-sex marriages. N.Y. Laws 95 adding DRL § 10-a. See Comment at § 6.05[2]. 12Matter of Conners v. Berlin, 105 A.D.3d 1208, 964 N.Y.S.2d 680 (3d Dep’t 2013). 13SSL § 366(5)(d)(3); 18 NYCRR § 360-4.4(c)(2)(iv)(a). Federal law requires a state plan to impose a transfer of assets penalty for institutionalized individuals, but the state has an option to impose a penalty on non-institutionalized individuals. 42 USC § 1396p(c)(1)(A). 1418 NYCRR § 360-4.4(c)(2)(i)(e); 96 ADM-8. GIS 07 MA/018 (09/24/07) removed home and community based waivered programs and services from the transfer of asset penalties. 1518 NYCRR § 360-4.4(c)(2)(i)(b). The definition of an “institutionalized spouse” for purposes of determining income and resources differs slightly, and requires that the institutionalized spouse “is likely to remain” in a nursing facility or medical institution for at least 30 consecutive days or “is likely to receive” waivered services for at least 30 consecutive days. 18 NYCRR § 360-4.10(a)(7). 16GIS 07 MA/018 (09/24/07). See also the discussion at § 8.02 [3][b], below, on whether applying for a waivered program triggers the running of a penalty period under the DRA. 17 GIS 14 MA/016 (08/05/2014). CMS State Medicaid Director Letter 14-001 (02/21/2014) at http://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-14-001.pdf.

565

There is no penalty period for transfers made by a person who is applying for community-based (noninstitutionalized) Medicaid (e.g., home care, hospital services). Community-based long-term care services include: adult day health care (medical model); limited licensed home care; certified home health agency services; hospice in the community; hospice residence program; personal care services; personal emergency response services; private duty nursing; Consumer Directed Personal Assistance Program (CDAP); Assisted Living Program (ALP); managed long-term care in the community; residential treatment facility; and home and community-based waiver program.18 Therefore, a person could transfer assets and apply for Medicaid community services the beginning of the next month. Transfers also do not affect short-term rehabilitation services. Transfer penalties no longer apply to “waivered programs” such as the Long Term Home Health Care Program (Lombardi Program).19 See § 6.04[5][e], above. Comment: The Medicaid Resource Guide (MRG) lists programs and services which require resource documentation for a look-back period and which programs do not. The Assisted Living Program (ALP) is listed as a community based service not requiring a look-back for resource documentation.20 No penalty period is imposed on transfers made for full and adequate consideration (e.g., sale of an asset for fair market value).21 Under DRA ‘05, the purchase of an annuity is treated as a transfer for less than fair market value, unless the annuity meets the following criteria: (1) it names the State as the first remainder beneficiary for at least the total amount of medical assistance paid on behalf of the institutionalized individual or the second remainder beneficiary after a community spouse or minor or disabled child;22 (2) it is irrevocable and nonassignable; (3) is actuarially sound; (4) it provides for equal payments during the term with no deferral or balloon payment.23 For a sample annuity see Form 8.206, below. The provisions (2) through (4) do not apply to annuitizing certain qualified retirement plans, an IRA or a Roth IRA.24 Caution:

1806 OMM/ADM-5 at 10; GIS 07 MA/018 (09/24/07). 19GIS 07 MA/018 (09/24/07). New York receives waivers to provide these services pursuant to 42 USCS §§ 1396n(c) and (d). The Lombardi program also provides non waivered services such as personal care services. 20MRG at 303.9 (updated February 2005). See also 06 OMM/ADM-5 at 10. 21SSL § 366(5)(d)(3). 2242 USC § 1396p(c)(1)(F); SSL § 366(5)(e)(3)(i). The state statute does not reflect the technical correction in the federal law and still references only “medical assistance paid on behalf of the annuitant” rather than “medical assistance paid on behalf of the institutionalized individual.” 2342 USC § 1396p(c)(1)(G). Actuarially sound will be determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration. SSL § 366(5)(e)(3)(i). Tables are attached to GIS 14 MA/028 (12/04/2014). 2442 USC §§ 1396p(c)(1)(G)(i)(I) and (c)(1)(G)(i)(II); SSL § 366(5)(e)(3)(i).

566

If annuitizing a retirement plan, make sure that it falls under the Internal Revenue Code sections listed in the statute. Even so, the restrictions in (1) above—naming the state as a remainder beneficiary—may apply, if under the plan there are remainder beneficiaries after the annuitant or his spouse.25 New York implementing legislation provides that for nursing facility services an application or recertification shall disclose any interest the individual or community spouse has in an annuity or similar financial instrument and include a statement that the state becomes a remainder beneficiary.26

The transfer of assets under DRA ‘05 includes funds used to purchase a promissory note, loan or mortgage unless the note, loan or mortgage: (1) has a repayment term that is actuarially sound; (2) has equal repayments during the term of the loan, with no deferral or balloon payments; (3) prohibits cancellation upon death of the lender.27 For a sample promissory note see Form 8.208, below. However, a promissory note may not be considered to be for fair market value where there is no reasonable expectation that it will be paid back.28 And a loan not made for fair market value since the payments due were not actuarially sound in violation of 42 USCS § 1396p (c)(1)(I) could still be considered not to be a transfer where the evidence rebutted the presumption that the transfer was motivated by anticipation of a future need to qualify for medical assistance.28.1 See §8.02[2][c], below.

The purchase of a life estate interest in another person’s home is a transfer of assets under DRA ‘05 unless the purchaser resides in the home for at least one year after the purchase.29 There must be objective proof that the applicant/recipient resided at the property for a period of at least one year after the date of such purchase.30 If a home or other asset is sold for less than fair market value, the uncompensated portion

25But see Matter of Entz, Index No. 2009-10454 (Sup. Ct Monroe County March 9, 2010) (court found that there is no requirement that an IRA owned annuity must name the state as a beneficiary). 26SSL § 366-a(10), added by 2006 N.Y. Laws 57 § 50-b. 2742 USC § 1396p(c)(1)(I). Actuarially sound will be determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration. SSL § 366(5)(e)(3)(iii). Tables are attached to GIS 14 MA/028 (12/04/2014). 28Matter of G.F., FH # 5013919Q (Suffolk County, 10/28/2008) (penalty upheld where son gave promissory note that otherwise met the criteria under DRA ‘05 in return for joint interest in homestead, but no payments were ever made, there was no evidence of payment demand, no litigation was commenced, and applicant/recipient entered a nursing home and applied for Medicaid based on hardship due to his inability to receive income from the note). 28.1 Matter of Rivera v Blass, 2015 N.Y. App. Div. LEXIS 2777, 2015 NY Slip Op 02768 (2d Dep't 2015). 2942 USC § 1396p(c)(1)(J); SSL § 366(5)(e)(3)(ii). 30Matter of Albino v. Shah, 111 A.D.3d 1352, 974 N.Y.S.2d 701 (4th Dep’t 2013).

567

of the transfer is used to calculate the penalty period.31 Donations to a Coverdell Education Savings Account (IRC Section 530 Plan) where the contributor is not the beneficiary may be a transfer of assets unless the beneficiary comes under another exemption.32

[b] The Look Back Period When a person transfers assets and then receives or applies for Medicaid-covered nursing facility services, the local Department of Social Services “looks back” at financial transactions made within a certain period of time from the first date on which the person was institutionalized and applied for Medicaid coverage that includes nursing facility services. Under DRA ‘05, the look back is 60 months for any disposal of assets made on or after the date of enactment (February 8, 2006).33 However, the look back period for transfers prior to February 8, 2006, was 36 months and 60 months for trust-related transfers.34 Example: Alice lives in New York City. She transferred assets to her friend, Bob, on January 31, 2014, and applied for Medicaid community services on February 1. The local Department of Social Services notified Alice that she was eligible for noninstitutionalized (community) Medicaid services. On August 1, 2014, Alice moved into a nursing home and applied for Medicaid coverage of the nursing facility services. The local Department of Social Services will look back 60 months from August 1, the date Alice began receiving nursing facility services to determine what transfers were made and whether a penalty period should be imposed. In cases where an applicant is requesting coverage of nursing home care in the three-month retroactive eligibility period, the look-back period is 60 months immediately preceding the month of application. It had been the Department of Health's policy to apply the look-back period 60 months prior to the first month Medicaid coverage was sought, including months in the retroactive eligibility period. However now local agencies are to limit their review of assets to the 60-month period immediately preceding the month of institutionalization and application for Medicaid.35

[2] Exempt Transfers

[a] Homesteads Certain transfers, indicated below, are exempt from imposition of a penalty period of ineligibility and do not have any adverse effect on Medicaid eligibility.36

31SSL § 366(5)(d)(4). 32POMS SI 01130.460. 3342 USC § 1396p(c)(1)(B)(i); SSL § 366(5)(e)(1)(vi). 34SSL § 366(5)(d)(1)(vi); 18 NYCRR § 360-4.4(c)(2)(i)(c); 96 ADM-8, at 12–13. 35 GIS 15 MA/07 (04/09/2015). 3618 NYCRR § 360-4.4(c)(2)(iii). For purposes of transfers of assets, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. GIS 08 MA/23

568

The transfer of a homestead to certain relatives is exempt from penalty. The regulations define a “homestead” as: the primary residence occupied by a medical assistance applicant/recipient and/or members of his/her family. Family members may include the applicant’s/recipient’s spouse, minor children, certified blind or certified disabled children, and other dependent relatives. The homestead includes the home, land and integral parts such as garages and outbuildings. The homestead may be a condominium, cooperative apartment or mobile home. Vacation homes, summer homes or cabins are not considered to be homesteads.37 A person will be eligible for Medicaid including, but not limited to, nursing facility services if the house is transferred to that person’s:

• spouse;

• child who is blind, disabled or under age 21;

• sibling who has an equity interest in the home and who resided in the home for at least one year before the person was institutionalized; or

• child who resided in the home for at least two years before the person was institutionalized and provided care to maintain the person at home (“caretaker child”).38

Practice Note Establish Sibling’s or Caretaker Child’s Interest. A sibling’s equity interest in the home is broadly construed to include payments for home improvements, mortgage, utilities, and similar expenditures.39 Although this appears to be the general practice, the New York State Medicaid Plan defines an equity interest as the ability to share in the proceeds of the sale of the property as demonstrated by his/her name on the title.40

(08/20/08) In 2011, New York legalized same-sex marriages. 2011 N.Y. Laws 95 adding DRL § 10-a. See Comment at § 6.05[2]. 37

18 NYCRR § 360-1.4(f); For SSI-related applicants/recipients contiguous property is considered part of the exempt homestead. MRG at 276

. See § 8.02[2][b], below. 38SSL § 366(5)(d)(3)(i); 18 NYCRR § 360-4.4(c)(2)(iii)(b). 39“Note: Equity interest must be documented by submission of: cancelled checks or money orders for mortgage payments; a deed reflecting ownership; or other documents verifying expenses for capital improvements. Examples of expenses which would satisfy the equity interest, assuming there was no information to indicate otherwise, include: structural renovations (widening of doorways, installation of ramps, etc.) other than cosmetic (painting, landscaping, kitchen/bath remodeling, etc.)”; 89 ADM-45 at p. 16. 40New York State Medicaid Plan, Attachment 4.17-A; https://www.health.ny.gov/regulations/state_plans/docs/nys_medicaid_plan.pdf at p. 650.

569

A child is presumed to be a “caretaker child” if she lived with the parent while the parent suffered from a chronic illness and can demonstrate that she provided care which allowed the individual to stay home instead of residing in an institution. A son or daughter can establish that he or she provided such care by submitting evidence that he or she made arrangements or actively participated in arranging for care, either directly or indirectly, full-time or part-time.41

[b] Exempt Transfers of Assets Other Than the Home Transfers of assets other than a home are exempt from penalty if: the asset transferred was a disregarded or exempt resource, which for Medicaid applicants or recipients who are 65 or older, blind, or disabled includes:42

• A burial fund; property which is “contiguous” to the homestead;43

• Life insurance policies with an aggregate face value of $1,500 or less;

• Reparation payments; and

• Retroactive SSI and Social Security benefits for nine months after the month received.

For a list of disregarded and exempt resources, see § 6.06[3], above. Transfers of assets (in addition to the homestead and exempt assets) are exempt from penalty if the transfer is to:

• the spouse, or to another for the sole benefit of the spouse (including, but not limited to, transfer to a trust for the sole benefit of the spouse);

• a third party, by the spouse, for the sole benefit of the spouse;

• a blind or disabled child or a trust established for the sole benefit of the child (including, but not necessarily limited to, an OBRA ‘93 supplemental needs trust); or

41New York State Medicaid Plan, Attachment 4.17-A; https://www.health.ny.gov/regulations/state_plans/docs/nys_medicaid_plan.pdf at p. 650. 4218 NYCRR § 360-4.4(c)(iii)(a). 43The regulation defines contiguous property as “[l]and adjoining the homestead and the buildings located on such land. To be considered contiguous, the land must adjoin the plot on which the home is located and must not be separated from it by intervening real property owned by others. Property will be considered to adjoin other property if the only intervening real property is an easement or public right-of-way such as a street, road, or utility line.” 18 NYCRR § 360-4.6(b)(2)(1). Unlike the transfer of a homestead, which may create a penalty period of ineligibility for institutionalized services if the transfer is not exempt under one of the specific homestead transfer exemptions, the transfer of contiguous property appears to be exempt from a penalty period.

570

• a trust established for the sole benefit of a disabled person under the age of 65.44

Caution: These general exemptions on transfers do not also apply to the homestead, but rather, the homestead transfer exemptions are exclusive. For example, a homestead cannot be transferred (as an exempt transfer) to a trust for the sole benefit of a disabled person under the age of 65. 96 ADM-8 lists these exceptions as applying to “assets other than the individual’s home.”45 Comment: Exempt transfers may be entitled to 90 day retroactive effect. For a transfer which occurs prior to the submission of a Medicaid application, there is no regulatory authority precluding the local agency from determining the applicant’s eligibility in accordance with the 3-month retroactive look back period.45.1 When there is a transfer to a disabled child over age 65 who has never been determined to be disabled, a disability determination must be made by the state in order to decide whether the transfer is exempt.46 In Williams v. Weiner,47 the court held that the purchase of a joint and survivor annuity with monthly payments to applicant-recipient for life and then to his wife was not an exempt transfer for the “sole benefit” of the wife. In addition, the annuity payout exceeded the life expectancy of the wife by 5.6 years and thus was not actuarially sound. In order for a transfer to a trust to be considered for the sole benefit of one of the individuals described above it must provide for spending the funds in the trust “on a basis that is actuarially sound over the life expectancy of the individual.”48 If the trust does not so provide then the exemption from the penalty period is void. Also, the remainder interest in the trust must vest in the estate of the beneficiary.49 There is an exception to the two criteria for a sole benefit rule described above for self-settled trusts which contain a “pay-back” provision.50 See § 8.03[1][c]. below. With regard to the “sole benefit” test and S.S.I. recipients see § 4.02[5], below. For a discussion of treatment of trusts as a resource and in particular self-settled exempt

44SSL § 366(5)(d)(3)(ii); 18 NYCRR § 360-4.4(c)(2)(iii)(c). For purposes of transfers of assets, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. GIS 08 MA/23 (08/20/08). In 2011, New York legalized same-sex marriages. 2011 N.Y. Laws 95 adding DRL § 10-a. See Comment at § 6.05[2]. 45Matter of M.C., F.H. # 5462315Z (Amended Decision) (06/15/2011). 45.1 F.H. # 6941856Q, Oneida County (05/06/2015). 46GIS 08 MA/036. 47Williams v. Weiner, 42 A.D.3d 901, 839 N.Y.S.2d 654 (4th Dep’t 2007). 48CMS State Medicaid Manual § 3257(B)(6). 49CMS State Medicaid Manual § 3257(B)(6); see also 96 ADM-8 at 7–8. 50CMS State Medicaid Manual § 3257(B)(6). Note however that some local agencies do not follow the CMS guidance and require the remainder to be paid to the disabled person’s estate in order to comply with the “sole benefit” rule applicable to all SNTs.

571

supplemental needs trusts see § 6.06[3][h], above. For a discussion of the use of third party supplemental needs trusts see § 12.07[1], below.

[c] Transfers for Value or Exclusively for Purpose Other Than to Qualify for Medicaid, Returned Assets and Undue Hardship Argument No penalty period will be imposed if the applicant or recipient demonstrates that the asset was intended to be transferred for fair market value or other valuable consideration, or the transfer was exclusively for a purpose other than to qualify for Medicaid (e.g., to achieve estate and gift tax savings, or to meet educational expenses).51 In Loiacono v Demarzo,52 the court held that given the age and medical condition of the applicant at the time the transfers were made and her failure to proffer sufficient evidence demonstrating that the transfers were made exclusively for reasons other than to qualify for medical assistance that she failed to rebut the presumption that the transfers were motivated by anticipation of a future need to qualify for Medicaid. Likewise in Matter of Corcoran v. Shah52.1 the court held that the applicant must rebut the presumption that the transfers were motivated, at least in part, by a desire to qualify for Medicaid. In Matter of Mallery v. Shah,53 petitioner contended that transfers were made out of friendship and a desire to avoid probate so that her relatives would be unable to challenge the disposition of her estate. However the court found there was substantial evidence to support the fair hearing determination that petitioner failed to rebut the presumption that the transfers were made, at least in part, for the purpose of qualifying for Medicaid benefits. The court also rejected the argument that since petitioner’s agent made the transfers for his own personal gain, they were not in order for petitioner to qualify for Medicaid benefits. In Matter of Capri v. Daines,54 the court upheld the fair hearing decision based on a lack of a history of gift giving, as well as applicant’s advanced age and poor health. In Komanoff Ctr. for Geriatric & Rehabilitative Medicine v. Daines,55 the court found transfers to repay daughters for documented expenses had not been made for fair market value because there was not an expectation of repayment. There was a rational basis for the finding by the agency and the state since there was no contemporaneous written agreement existed providing for the repayment of the past financial assistance.

51SSL § 366(5)(e)(4)(iii). 52Loiacono v Demarzo, 72 A.D.3d 969, 898 N.Y.S.2d 513 (2d Dep’t 2010). In a later proceeding the court allowed the nursing home to proceed against the applicant’s son individually and as representative of her estate. Brookhaven Health Care Ctr. v. Loiacono, 2013 N.Y. Misc. LEXIS 5875 (Sup. Ct. Suffolk County Dec. 9, 2013). 52.1 Matter of Corcoran v. Shah, 118 A.D.3d 1473, 988 N.Y.S.2d 806 (4th Dep't 2014). 53Matter of Mallery v. Shah, 93 A.D.3d 936, 939 N.Y.S.2d 626 (3d Dep’t 2012). 54Matter of Capri v. Daines, 90 A.D.3d 1530, 935 N.Y.S.2d 761 (4th Dep’t 2011). See also Matter of Donvito v. Shah, 108 A.D.3d 1196, 969 N.Y.S.2d 693 (4th Dep’t 2013) (petitioner did not establish that applicant was not motivated, at least in part, by a desire to qualify for Medicaid and applicant did not have a consistent history of giving money to relatives) and Matter of Corcoran v. Shah, 118 A.D.3d 1473, 988 N.Y.S.2d 806 (4th Dep’t 2014). 55Matter of Komanoff Ctr. for Geriatric & Rehabilitative Medicine v. Daines, 85 A.D.3d 1183, 926 N.Y.S.2d 629 (2d Dep’t 2011).

572

In Matter of Safran v Shah,56 the court found that, when the transfers were made, the applicant was living independently and it was several years before she required nursing home care. Furthermore the transfers were made out of appreciation for her family, and still left her with enough resources to maintain herself for years. If it were not for an unexpected loss of resources through theft, the applicant would not have needed to apply for Medicaid. Therefore, the court found that the applicant met her burden of rebutting the presumption that the transfers were motivated by the anticipation of a future need to qualify for medical assistance.

In Matter of Rivera v Blass56.1 the Appellate Division Second Department found that a loan not made for fair market value since the payments due were not actuarially sound in violation of 42 USCS § 1396p(c)(1)(I) could still be considered not to be a transfer where the evidence rebutted the presumption that the transfer was motivated by anticipation of a future need to qualify for medical assistance. See §8.02[1][a], above.

A transfer by an agent under a power of attorney who may have breached her fiduciary duty to the applicant and engaged in self-dealing does not rise to the level of the “exclusive purpose” exception.57 In Matter of Mildred A,58 the court allowed a guardian to continue a pattern of gifting where there was demonstrated a history of concerned support for the incapacitated person’s two daughters’ financial well-being and she had regularly paid their living expenses finding that this long-term behavior showed a motive for gifting unrelated to Medicaid eligibility. No penalty period will be imposed on transferred assets that have been returned (but a penalty period will be imposed based on the value of the transferred assets that have not been returned).59 In Matter of Peterson v Daines,60 the court concluded that uncompensated transfers were not cured by the subsequent return of a different interest (joint tenancy) in a different property. Caution: If funds from a trust are distributed to a beneficiary under a trust provision, and subsequently returned to the grantor, some local agencies do not consider this a return of transferred assets since the return is not from the person or entity who received the gift. Caution: The Appellate Division, Second Department has upheld a narrow view of the

56Matter of Safran v. Shah, 119 A.D.3d 590, 990 N.Y.S.2d 47 (2d Dep’t 2014). 56.1 Matter of Rivera v Blass, 2015 N.Y. App. Div. LEXIS 2777, 2015 NY Slip Op 02768 (2d Dep't 2015). 57Matter of Conners v. Berlin, 105 A.D.3d 1208, 964 N.Y.S.2d 680 (3d Dep’t 2013). Nor does it create an undue hardship exemption. See also Matter of Absolut Care of Three Rivers v. Shah, 101 A.D.3d 1327, 955 N.Y.S.2d 706 (3d Dep’t 2012). 58Matter of Mildred A, 21 Misc. 3d 1123(A), 873 N.Y.S.2d 511 (Sup. Ct. Nassau County 2008). 59SSL § 366(5)(d)(3)(iii); 18 NYCRR § 360-4.4(c)(2)(iii)(d). 96 ADM-8 (3/29/1996) at 23–24. 60Matter of Peterson v Daines, 77 A.D.3d 1391, 909 N.Y.S.2d 611 (4th Dep’t 2010).

573

language regarding the return of a gift allowing only direct return of funds or payments for medical expenses, such as nursing home bills.61 However, funds used by a fiduciary, such as an agent under a power of attorney, may be used to show that the transfer was not uncompensated.62 No penalty period will be imposed on transferred assets if denial of eligibility would create an undue hardship on the applicant or recipient.63 An undue hardship argument may be made only if the institutionalized person is otherwise eligible for Medicaid, is unable to obtain appropriate medical care without Medicaid, and is unsuccessful, despite making a best efforts attempt, in having the assets returned or sold for fair market value.64 See § 8.02[3], below. DRA ‘05 requires the state to provide a hardship waiver when application of the transfer rules would deprive the individual of medical care such as to endanger health or life or deprive the individual of food, clothing shelter or other necessities. The state must provide as part of the process, notice, a timely determination and an appeal. The state must provide for the nursing facility to file the hardship waiver with the consent of the individual or his representatives.65 It is not necessary for a facility to commence an eviction proceeding to demonstrate that the applicant was not able to obtain appropriate medical care and thus qualify for an undue hardship exception. It is sufficient to prove that the applicant is insolvent and unable to recover transferred assets, and that no nursing facility which could provide the applicant with the necessary level of care would accept her.66

[d] Personal Service Contracts Funds paid to a care provider, including a friend or relative, may be considered “a transfer for fair market value or other valuable consideration” if the compensation is reasonable and in accord with the fair market value of the services. The parties should take into consideration in arriving at this compensation the cost in the community of the services to be provided including the average compensation for court-appointed guardians, geriatric care managers, and for providers of personal needs services. The parties should considered the average number of hours for each type of service to be provided. Consider which services will be provided and which

61Matter of Weiss v Suffolk County Dept. of Social Servs., 121 A.D.3d 703, 993 N.Y.S.2d 368 (2d Dep't 2014). 96 ADM-8 (3/29/1996) at 23–24 states: “For purposes of these rules, transferred assets shall be considered to be returned if the person to whom they were transferred: uses them to pay for nursing facility services for the MA applicant/recipient; or provides the MA applicant/recipient with an equivalent amount of cash or other liquid assets.” 62Matter of J.P., FH # 6042610J (Nassau County 05/23/2012). 63SSL § 366(5)(d)(3)(iv). 6418 NYCRR § 360-4.4(c)(2)(iii)(e). In the Matter of the Appeal of Paul H., F. H. # 5097753Z (Albany County 6/10/2011) the State found no hardship where an agent under a power of attorney had transferred funds and the applicant remained in the nursing facility until he died. 65The additional criteria for the hardship waiver in DRA ‘05 are part of the enactment, but not codified. The provisions referring to the nursing facility are at 42 USC § 1396p(c)(2)(D). New York provision is at SSL § 366(5)(e)(4)(iv); 06 OMM/ADM-5 at 19–21. 66Matter of Tarrytown Hall Care Ctr. v. McGuire, 116 A.D.3d 871, 984 N.Y.S.2d 93 (2d Dep’t 2014).

574

services the care provider will merely arrange to provide (such as home attendant services) with the recipient’s funds. Retain the basis for the compensation calculation in case the Medicaid agency challenges the contract as an uncompensated transfer of assets. The local Medicaid agency is more likely to treat the funds as a compensated transfer if the payments were done for services provided on a weekly or monthly basis. However, a lump sum payment for an actuarially sound lifetime contract based on the life expectancy of the person receiving the care, may also be considered “for fair market value or other valuable consideration.” The parties should take into consideration in arriving at this lump sum compensation the age and life expectancy of the care recipient. However, a personal service contract that does not provide for the return of any lump sum payment if the care provider becomes unable to fulfill her duties under the contract, or if the applicant/recipient dies before her calculated life expectancy, will be treated as a transfer of assets for less than fair market value.67 Also, no credit is allowed for services that are provided as part of the Medicaid nursing home rate.68 The district will evaluate services based on credible documentation, such as a log book. Credit is given for services actually provided, based on the fair market value of the services performed.69 For a sample Personal Services Care Contract see Form 8.207, below. In Delaware County Department of Social Services v. Pontonero,70 a niece and attorney-in-fact for an applicant/recipient claimed the transfer of a mortgage to herself six months before applicant/recipient entered a nursing home was not a transfer of assets, but for in consideration of the past care and housing that she had provided to the applicant/recipient and her husband. In allowing the local agency to reopen the Medicaid acceptance the court found that there were questions of fact as to whether the mortgage transfer effectuated by the niece was fraudulent. In Matter of Barbato v. New York State Dep’t of Health,71 the court found Personal Service Contracts to be transfers for less than fair market value because (1) where services were to be provided “as needed” there is no basis to determine the fair value of the services; (2) the absence of a refund provision if the applicant/recipient fails to meet her life expectancy renders the services not for fair market value; and (3) services provided by caregivers that are duplicative of services afforded by a nursing facility in which the applicant/recipient resides are non-compensable. However the court did allow calculation of the fair market value of the non-duplicative services which were performed. Matter of Stern v. Daines72 followed Barbato, and remanded the case to the local agency solely for the purpose of re-evaluating the value of any

67GIS 07 MA/019 (9/24/07). Matter of Gitter v. State of New York Dept. of Health, 2009 N.Y. Misc. LEXIS 6345 (Sup. Ct. New York County Feb. 5, 2009) (court found the interpretation in the GIS to be reasonable and SSI POMS are not dispositive since separate transfer-of-assets rules were enacted for the Medicaid program). 68GIS 07 MA/019 (9/24/07); Matter of M.G., F.H. # 473952M, (Oneida County, 5/3/2007); Matter of Basil E, F.H. # 4832282L (Albany County 11/12/2007). 69GIS 07 MA/019 (9/24/07). 70Delaware County Dept. of Social Servs. v. Pontonero, 31 A.D.3d 999, 820 N.Y.S.2d 151 (3d Dep’t 2006). 71Matter of Barbato v. New York State Dep’t of Health, 65 A.D.3d 821, 884 N.Y.S.2d 525 (4th Dep’t 2009) 72Matter of Stern v. Daines, 2009 N.Y. Misc. LEXIS 3670 (Sup. Ct. Queens County Nov. 23, 2009).

575

services actually received from the date of the Personal Services until the Medicaid eligibility determination. Likewise in Matter of Kerner v Monroe County Dept. of Human Servs.,73 the court remanded for an opportunity to identify with reasonable specificity the services rendered and the number of hours spent rendering those services, as well as the fair market value of those services. However in Matter of Scott v. Zucker73.1 the court did not allow a remand because petitioner was advised by the local agency that he needed to submit specific proof with respect to the services, but had provided none. In Matter of Cutolo v Daines73.2 the court relied on the presumption in 96 ADM-8 (03/29/1996) that services provided by the children of a Medicaid applicant are intended to be without compensation. Matter of Swartz v. New York State Dept. of Health74 involved a dispute between an applicant’s estate and the local agency regarding the value of services provided under a personal care contract before the applicant entered a nursing home. The Appellate Division held that the agency could disallowed credit for services rendered during nighttime where there was just a general plan of care and no detailed contemporaneously-prepared records documenting the services allegedly provided each night and that the agency could use the U.S. Department of Labor mean hourly wage rate for a personal home healthcare aide in this state rather than the rate provided in the contract.

Practice Note As an Alternative, Have Relatives Consider Paying for Medical or Nursing Home Care and Taking an Income Tax Deduction. A relative can include medical expenses he paid for his dependent. Deductions are limited to the extent the expenses exceed 7.5% of adjusted gross income of the taxpayer and for alternative minimum tax only to the extent they exceed 10% of adjusted gross income. The person must have been a dependent either at the time the medical services were provided or at the time the relative paid the expenses. A person generally qualifies as a dependent for purposes of the medical expense deduction if the person was a qualifying child or a qualifying relative including a father, mother, grandmother, grandfather, aunt, or uncle and for whom he provided over half of the support. See IRC Section 213 and Internal Revenue Service Publication 502. To the extent these expenses are paid with funds recently received from the dependent relative, this might be considered a step transaction and disallowed.

73Matter of Kerner v. Monroe County Dept. of Human Servs., 75 A.D.3d 1085, 1087, 904 N.Y.S.2d 616 (3d Dep’t 2010) 73.1 Matter of Scott v. Zucker, 2015 N.Y. App. Div. LEXIS 4868, 2015 NY Slip Op 05028 (4th Dep't 2015). 73.2 Matter of Cutolo v Daines, 2009 N.Y. Misc. LEXIS 6824, 2009 NY Slip Op 33352(U) (Sup. Ct. New York County 2009). 74Matter of Swartz v. New York State Dept. of Health, 96 A.D.3d 1209, 946 N.Y.S.2d 698 (3d Dep’t 2012).

576

[3] Penalty Period of Ineligibility for Nonexempt Transfers

[a] Penalty Period of Ineligibility for Nonexempt Transfers in General A penalty period of ineligibility will be imposed on transfers that are not exempt (see § 8.02[2], above, regarding exempt transfers). For applicability of transfer penalties to nursing facility services, or alternate level of care see § 8.02[1], above. A person may transfer assets and immediately apply and be found eligible for community based Medical assistance (i.e. other than nursing facility services). If the person subsequently applies for nursing facility services, the number of months in the penalty period of ineligibility is determined by dividing the value of the assets transferred by the statutory average cost of a nursing home in the appropriate geographical region. The method of calculating the penalty is discussed in § 8.02[3][b], below. New York allows a return or partial return of assets in order to reduce the amount of the transfer.75 See § 8.02[2][c], above. The return may be in the form of a return of an equivalent amount of cash or payment to the nursing home. However in Matter of Peterson v. Daines,76 the Appellate Division found that in uncompensated transfer was not cured by subsequently making the applicant/recipient a joint tenant on a different property than was originally transferred. Comment: Clients who receive Supplemental Security Income (SSI) are subject to a separate SSI penalty period of ineligibility for certain transfers of assets made on or after December 14, 1999. See § 4.02[5], above. In addition to the penalty period of ineligibility for certain transfers of assets, under Section 4734 of the Balanced Budget Act of 199777 it is a crime for a paid advisor to knowingly and willfully counsel or assist a person to transfer assets if the transfer results in a period of ineligibility for Medicaid. This “gag rule” on paid advisors has been assailed from its inception as an impermissible limitation on speech in violation of the First Amendment. Attorney General Janet Reno stated that the law was unconstitutional and that she would not enforce it in a March 11, 1998 letter to Congress. The New York State Bar Association won a permanent injunction against the enforcement of the law in a final judgment issued on September 14, 1998, by Chief U.S. District Judge Thomas J. McAvoy in the Northern District of New York.78 Transfers made while retaining assets reasonably calculated to cover the cost of care until a person becomes eligible for Medicaid cannot be considered a fraudulent conveyance to defraud creditors. In Grace Plaza of Great Neck v. Heitzler,79 the court stated: “Under these circumstances, Mrs. Witt’s decision to make gifts to her family while retaining assets reasonably calculated to cover the cost of her care until she became eligible to receive Medicaid assistance cannot be considered acts of intentional fraud against future creditors.” Contrast Leonard Nursing

7596 ADM-8 at p.23. 76Matter of Peterson v. Daines, 77 A.D.3d 1391, 909 N.Y.S.2d 611(4th Dep’t 2010). 77Codified at 42 USC § 1320a-7b(a)(6) (effective August 5, 1997). 78New York St. Bar Ass’n v. Reno, 97-CV-1760 (N.D.N.Y. 1998). For a transcript of the Sept. 14, 1998 hearing and decision, see http://www.seniorlaw.com/mcavoy.htm. 79Grace Plaza of Great Neck v. Heitzler, 2 A.D.3d 780, 770 N.Y.S.2d 421 (2d Dep’t 2003).

577

Home v. Kay,80 where the court found that an attorney-in-fact’s transfer of all of a nursing home resident’s funds, which rendered her ineligible for Medicaid, would subject the fiduciary to liability to the nursing home.

Practice Note Discuss Asset Transfer Rules with Clients. New York attorneys have a professional responsibility to discuss Medicaid rules governing the legal transfer of assets with clients engaged in estate planning. An attorney should explain a matter fully including relevant considerations and legal alternatives in order to permit the client to make an informed decision.81 An attorney has a duty to seek the objectives of the client through reasonably available means permitted by law.82

[b] Calculating the Penalty Period Because no penalty period is imposed for exempt transfers or no penalty applied unless Medicaid coverage is sought for institutionalized services, a threshold issue is whether a penalty period applies to a particular transfer. Assuming that a penalty period results from a transfer, the formula for calculating the penalty period is deceptively simple: divide the total amount of assets transferred for less than fair market value by the average monthly private pay rate of a nursing home in the area where the client is receiving nursing facility services.83 The New York State Department of Health sets the average monthly private pay rate of nursing homes by region.84 The current rates are as follows:85 Region 2015 Rate Central86 $8,768 Long Island87 $12,390 New York City88 $11,843

80Leonard Nursing Home v. Kay, 2003 N.Y. Misc. LEXIS 201 (Sup. Ct. Saratoga County 2003). 81Rules of Professional Conduct 1.4(b). 82Rules of Professional Conduct 1.1(c) (1). 83SSL § 366(5)(d)(4); 18 NYCRR § 360-4.4(c)(2)(iv)(a). 8418 NYCRR § 360-4.4(c)(2)(iv)(a). 85The 2015 rates were issued in General Information System Message (GIS) 15 MA/01 effective January 1, 2015. Note that the rate in effect at the time of the application should be used, not the rate at the time the assets were transferred. Contact the Department of Health Office of Medicaid Management at (518) 474-8216 (upstate) or (212) 268-6855. GIS messages and ADM’s are available online at http://www.health.state.ny.us/health_care/medicaid/publications/index.htm. 86The Central Region includes the counties of Broome, Cayuga, Chenango, Cortland, Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence, Tioga and Tompkins. 87The Long Island Region includes Nassau and Suffolk Counties. 88New York City includes Bronx, Kings (Brooklyn), New York (Manhattan), Queens and Richmond (Staten Island) counties.

578

Northern Metropolitan89 $11,455 Northeastern90 $9,414 Rochester91 $10,660 Western92 $9,442 An application for Medicaid is made where the person resides. See § 6.04[3], above. If a Medicaid applicant who formerly resided outside of New York enters a nursing facility, the application is made where the facility is located. The location of the nursing facility where the person is receiving Medicaid services determines the applicable regional rate. Comment: To calculate the penalty period, the rate in effect at the time of the application should be used, not the rate at the time the assets were transferred. Example: George lives in New York City. In January 2013, he transfers $236,860, but does not apply for Medicaid until he enters a nursing home on December 1, 2015. His period of ineligibility will be calculated as follows:

Total amount of transfer: $236,860 Divided by average rate (N.Y.C.) $11,843

Months of penalty period: 20 months.

[c] Effective Date of Penalty Period Caution: DRA ‘05 creates two distinct effective dates, one for the transfer of assets made before the date of enactment of DRA ‘05 (February 8, 2006), and one for transfer of assets made on or after the enactment of DRA ‘05.93 The penalty period for transfers made before February 8, 2006, begins on the first day of the month following the date on which the transfer occurred. Federal law apparently gives the states an option to begin counting from either the month during which the transfer occurred or the

89The Northern Metropolitan Region includes the counties of Dutchess, Orange, Putnam, Rockland, Sullivan, Ulster, and Westchester. 90The Northeastern Region includes the counties of Albany, Clinton, Columbia, Delaware, Essex, Franklin, Fulton, Greene, Hamilton, Montgomery, Otsego, Rensselaer, Saratoga, Schenectady, Schoharie, Warren, and Washington. 91The Rochester Region includes Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, and Yates counties. 92The Western Region includes Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, and Wyoming counties. 9342 USC §§ 1396p(c)(1)(D)(i) and (c)(1)(D)(ii).

579

following month.94 New York law is identical to the federal law and states that “[t]he period of ineligibility shall begin with the first day of the first month during or after which assets have been transferred for less than fair market value, and which does not occur in any other period of ineligibility.”95 New York’s policy for transfers made before February 8, 2006 is to begin calculating the penalty period on the first day of the month following the date of the transfer.96 This policy was upheld by the New York Court of Appeals in Brown v. Wing.97 The result is that penalty periods are calculated beginning on the first day of the month immediately following the date of the transfer. The examples in this chapter for transfers before February 8, 2006, are calculated accordingly. Transfers made before February 8, 2006 should no longer be in the pre DRA ‘05 36 month lookback period, unless the transfers were made to or from a trust where the pre DRA ‘05 lookback was 60 months.98 Under DRA ‘05, the penalty period for transfers made on or after February 08, 2006, begins the first day of the first month during or after which assets have been transferred, or the date on which the individual is eligible for Medicaid and would otherwise be receiving institutional care based on an approved application but for the application of the penalty period, whichever is later, and which does not occur in any other period of ineligibility.99 Comment: Whether the DRA ‘05 rules apply and when the penalty period commences may depend on when the transfer was made. To make a “valid inter vivos gift” there must exist the intent by the donor to make a present transfer; actual or constructive delivery to the donee; and acceptance by the donee.100

Practice Note Explain to Clients the Difference Between the Effective Dates of Transfer Penalty Periods. For transfers made prior to February 8, 2006, the penalty will begin on the first of the month after the transfer. It may expire before, during or after the Medicaid applicant/recipient enters a nursing home. Penalties for transfers made after February 8, 2006, don’t begin to run until the applicant/recipient is in a nursing home, has exhausted all non exempt resources, and is

9442 USC § 1396p(c)(1)(D). 9518 NYCRR § 360-4.4(c)(2)(iv)(b). 9696 ADM-8, at 15. 97Brown v. Wing, 93 N.Y.2d 517, 693 N.Y.S.2d 475, 715 N.E.2d 479 (1999). 98In Matter of Abrams, 31 Misc. 3d 830, 921 N.Y.S.2d 485 (Sup. Ct. Kings County 2011), the court held the deeding of a house prior to Feb. 8, 2006, pursuant to a guardianship court order to hold the house for the benefit of the incapacitated person, did not constitute a transfer prior to DRA’ 05, but rather that the 5 year look back would apply. 9942 USC § 1396p(c)(1)(D)(ii); SSL § 366(5)(e)(5); Baker v Mahon, 72 A.D.3d 811, 899 N.Y.S.2d 287 (2d Dep’t 2010). 100Gruen v. Gruen, 68 N.Y.2d 48, 53, 505 N.Y.S.2d 849, 496 N.E.2d 869 (1986); The court in Palleschi v. Daines, Index No. CA2008-003533 (Sup. Court Oneida County 2009) applied the Gruen test in determining if DRA ‘05 transfer rules applied.

580

“otherwise” Medicaid eligible. In other words, if a transfer has been made within the DRA ‘05 five year look back, the applicant who has made a transfer will under usual circumstances face a penalty based on that transfer once she has exhausted non-transferred funds. A transfer of asset penalty does not apply to waivered service, such as the Long Term Home Health Program (LTHHCP), and therefore will not commence the running of a penalty period.101 The penalty period includes transfers made in another social services district (i.e., county).102 Once the local department notifies the applicant in writing of eligibility for medical assistance, the application cannot be withdrawn and the penalty period is triggered.103

Practice Note File an Initial Application to Trigger the Running of a Penalty Period and a Second Application to Commence Medicaid. Applying for institutional Medicaid where there has been a post February 8, 2006, transfer within the look back period will involve two applications. The first application will establish income and resource eligibility, in other words that the individual is otherwise eligible for Medicaid. The Applicant will receive a “Notice of Decision on Your Application Limited Coverage (Transfer of Assets Penalty)” or a “Notice of Decision on Your Request for Coverage of Nursing Facility Services Limited Coverage (Transfer of Assets Penalty),” depending on whether it is a new application or a request to upgrade to institutional care coverage. If the applicant requests a hardship waiver for the transfer, she will receive a “Notice of Decision on Your Request for Undue Hardship (Transfer of Asset Penalty).” The notices will document the uncompensated transfer, the regional penalty rate and the period for which coverage will be limited (that is, not include institutional care). After the running of the penalty period, a second application may have to be submitted to establish eligibility for institutional care. Local agencies have indicated that this second application will not require duplication of all documentation, but only an update of resource and income information. For details of the application process and copies of the notices of decision see 06 OMM/ADM-5. Once a penalty period has been established for an otherwise eligible individual, the penalty period continues to run regardless of whether the individual continues to receive nursing facility services or remains eligible for Medicaid.104

Practice Note

101GIS 07 MA 018 (09/24/07); see also New York State Dep’t of Health response to Home Casre Association, “Questions Regarding Effect of Medicaid Eligibility Changes On Long Term Home Health Program (LTHHCP)” (2/12/07). 10296 ADM-8, at 17. 10396 ADM-8, at 17. 10406 OMM/ADM-5.

581

Apply for Institutional Medicaid to Trigger Commencement a Penalty Period When an Applicant Plans to Return Home. When a disqualifying transfer has been made, it may be advantageous to apply for institutional Medicaid and receive a denial based on the transfer. If the applicant returns home, the penalty period will continue to run. The applicant may be able to receive Medicaid home care services which are not affected by the transfer. Later (after the penalty period) the applicant will be able to receive institutional serves. Caution: Because there is no limit on the potential length of a penalty period, it could exceed the 36-month or 60-month look-back period if the value of the assets transferred is large enough. If the application is filed within the 36-month or the 60-month look-back period, a sufficiently large transfer will cause a penalty period in excess of 36 months or 60 months merely because the application was filed prematurely. To avoid this, the Medicaid application in such cases should only be filed after the 36-month or 60-month look-back period expires so that no penalty may be imposed on the transfer.

[d] Partial-Month Penalty Prior to DRA ‘05, if the uncompensated value of the transfer is less than the regional monthly rate, or would result in a partial-month penalty, the amount causing the partial monthly penalty is considered to be Net Available Monthly Income (NAMI) for institutionalized persons.105 For transfers made after the enactment of DRA ‘05, a state shall not round down, or otherwise disregard any fractional period of ineligibility.106 Caution: Many local agencies appear to still be using the pre DRA methodology for calculating the partial month penalty, that is including the excess after dividing by the penalty rate in the first month of eligibility’s NAMI.

[e] Multiple Transfers Multiple transfers that create overlapping penalty periods are combined to calculate the penalty period. Any transfers made in a month during which a prior penalty period is in effect or expires are included in the aggregate sum.107 New York uses a consecutive methodology which imposes one period of ineligibility, calculated by dividing the aggregate amount of assets transferred by the average nursing home rate in the region.108 As with a single transfer, for transfers made prior to February 8, 2006, the starting date for the penalty period is the first day of

10596 ADM-8, at 16. 10642 USC § 1396p(c)(1)(E)(iv). 10796 ADM-8, at 15. 10818 NYCRR § 360-4.4(c)(2)(iv); Goff v. New York State Dep’t of Social Servs., 222 A.D.2d 83, 645 N.Y.S.2d 564 (3d Dep’t 1996).

582

the month after the month in which the transfer occurred.109 Multiple transfers made prior to February 8, 2006, that do not result in overlapping penalty periods are treated separately, each creating its own penalty period.110 Under DRA ‘05, for transfers made on or after February 8, 2006, states may treat the total value of all transfers as one transfer.111 Therefore the differentiation between overlapping transfers and non-overlapping transfers will have no effect on post DRA ‘05 transfers. All transfers within the lookback period will be added together and the penalty period will begin on the “otherwise eligible” date. Caution: Over 65 disabled persons putting income into a pooled trust on or after February 8, 2006, may be accumulating a penalty period for later nursing home care under DRA ‘05 unless the funds are expended for their benefit.112 See § 8.03[2], below.

[f] Penalty Period for Transfer of Income If a person who is over age 65, blind, or disabled transfers income during the month it is received, the value of the transfer is calculated after applying the SSI income disregards.113 Regarding exempt transfers of income to a supplemental needs trust see § 8.03[2][a], below. If the income is not transferred until after the month in which it is received, it is considered a resource and the value of the transfer is calculated after deducting the Medicaid resource exemptions.114 The SSI rules are discussed in detail in Chapter 6, above. A transfer of a “stream of income” (e.g., an annuity) is treated as a transfer of an asset, and the amount transferred is the total income expected to be received during the person’s lifetime.115

Practice Note Use Annuities in Situations Where an Income Stream May Be More Beneficial than Holding a Non-Exempt Resource. The purchase of a single premium immediate annuity with a guarantee pay-out period based on the purchaser’s life expectancy, will convert resources into

10996 ADM-8, at 15. See § 8.02[3][b], above. 11096 ADM-8, at 16. 11142 USC § 1396p(c)(1)(H)(i). 11242 USC § 1396p(c)(1)(D)(ii); GIS 08 MA/20 (7/24/08). 11318 NYCRR § 360-4.6(a). The income which is exempt and not counted includes the first $20 of unearned monthly income, the first $65 of monthly earned income plus one-half of the remainder, German and Austrian reparation payments, restitution payments to Japanese-Americans and Aleuts, payments related to Agent Orange litigation, certain Native American funds, health insurance premiums, and interest on a burial fund. 18 NYCRR § 360-4.6(a). See § 6.05[3], above. 11418 NYCRR § 360-4.6(b). These resource exemptions include a resource allowance ($3,850 for a single person, $5,600 for a couple), a burial fund of $1,500 plus additional burial items, and pre-paid funeral and burial irrevocable trusts. 18 NYCRR § 360-4.6(b). See § 6.06[3], above. 11596 ADM-8, at 18.

583

income. To the extent that the anticipated return is commensurate with the money invested, purchase of an insurance company or private annuity is considered a compensated transfer of assets.116 Under DRA ‘05, the purchase of an annuity is treated as a transfer for less than fair market value, unless the annuity meets the following criteria: (1) it names the State as the first remainder beneficiary for at least the total amount of medical assistance paid on behalf of the institutionalized individual or the second remainder beneficiary after a community spouse or minor or disabled child; (2) it is irrevocable and nonassignable; (3) it is actuarially sound; (4) it provides for equal payments during the term with no deferral or balloon payment.117 For a sample annuity see Form 8.206, below. In many cases where the applicant recipient has excess resources, converting them to a stream of “excess” income will serve no purpose. It may however, be used as a planning tool together with certain transfers made on or after February 8, 2006, under DRA ‘05. See discussion of Managing the Penalty Period at § 8.02[5], below. Also, a community spouse who has resources above the CSRA, but income below the MMMNA, may benefit from converting the excess resources into exempt income. See § 7.02, above. Even where the resulting income is above the MMMNA, Medicaid will only request 25% of the excess. See § 7.02[3], above. However caution should be exercised because New York must become a remainder beneficiary of an annuity of an institutionalized individual or her community spouse.118

[g] Transfers of Jointly Held Bank Accounts Clients often own bank accounts jointly or as tenants in common with a spouse or adult child. For Medicaid applicants or recipients whose eligibility is SSI-related (i.e., age 65 or older, blind, or disabled), there is a rebuttable presumption that the joint account is owned by the applicant or recipient.119 This presumption does not necessarily apply to an applicant/recipient’s spouse.120 Any action that reduces the control and ownership of the Medicaid applicant or recipient is considered a transfer of assets, even if the action was taken by another owner of the asset.121 See § 8.02[6], below. This presumption does not apply to jointly owned stock and other non-financial institution accounts. Comment: The local agency will allow the applicant to provide evidence to rebut the presumption

116See 96 ADM-8, at 8. 11742 USC §§ 1396p(c)(1)(F) and (c)(1)(G). SSL § 366(5)(e)(3)(i). Actuarially sound will be determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration. Tables are attached to GIS 14 MA/028 (12/04/2014). 118SSL § 366-a(10), added by 2006 N.Y. Laws 57 § 50-b. SSL § 366(5)(e)(3)(i). 11996 ADM-8, at 18. See Padulo v. Reed, 63 A.D.3d 1687, 881 N.Y.S.2d 581 (4th Dep’t 2009) (bond proceeds deposited into the joint account presumed to belong to applicant and applicant must rebut the presumption.). 120Matter of Rogers v. Novello, 26 A.D.3d 580, 809 N.Y.S.2d 250 (3d Dep’t 2006). 121SSL § 366(5)(d)(5); 18 NYCRR § 360-4.4(c)(2)(vi).

584

that the applicant owns the account.

[4] Transfers Between and By Spouses

[a] Transfers Between Spouses Exempt Transfers between spouses are exempt and no penalty period is imposed.122 Prior to filing the Medicaid application, an unlimited amount of assets may be transferred between spouses.123 After an institutionalized spouse is found eligible for Medicaid, transfers to or for the benefit of the community spouse, up to the amount of the Community Spouse Resource Allowance, are permitted within 90 days after the decision on the application, or longer, in the discretion of the local department. This time limitation is a matter of practice, and is not found in the actual law.124 See Chapter 7, above. Assets should be transferred to the community spouse prior to filing the Medicaid application whenever possible. If there is difficulty in transferring assets or a delay in the change of title, the application should explain that assets will be transferred which will bring the community spouse’s resources up to the Community Spouse Resource Allowance. The practitioner who represents a married couple should always consider the benefits of having the spouse who is applying for or receiving Medicaid coverage of nursing facility services (the “institutionalized” or “ill” spouse) transfer assets to the community spouse (i.e., noninstitutionalized, or “well” spouse). It may be critical to organize asset transfers so that the amount of the couple’s total countable resources as of the first date of a spouse’s continuous period of institutionalization will maximize the spousal share for purposes of calculating the community spouse resource allowance. See Practice Note at § 7.02[8], above. This strategy enables the ill spouse to apply for Medicaid alone, allows the community spouse to manage the assets during life, and gives the community spouse the opportunity to plan for distribution of the assets upon death. Under some circumstances, an unlimited amount of assets may be transferred to the community spouse after a Medicaid application has been filed. In Matter of Shah (Helen Hayes Hosp.),125 the Court of Appeals held that a spouse as guardian could transfer all of the assets of the incapacitated spouse to herself. For a complete discussion of Medicaid planning by guardians and the Shah case, see § 10.08[2], below. For a discussion of the local department’s right of recovery against the assets of the community spouse, see § 7.03[3], above, and against the estate of a community spouse, see § 8.05[2], below.

122SSL § 366(5)(d)(3)(ii)(A); 18 NYCRR §§ 360-4.4(iii)(b), (iii)(c). For purposes of transfers of assets, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. GIS 08 MA/23 (08/20/08). In 2011, New York legalized same-sex marriages. 2011 N.Y. Laws 95 adding DRL § 10-a. See Comment at § 6.05[2]. 123SSL § 355(5)(d)(3)(ii). 12418 NYCRR § 360-4.10(c)(6). 125Matter of Shah (Helen Hayes Hosp.), 95 N.Y.2d 148, 711 N.Y.S.2d 824, 733 N.E.2d 109 (2000).

585

[b] Transfers to Third Parties Prior to Medicaid Application Prior to the application for Medicaid coverage of nursing facility services, nonexempt transfers by either spouse to third parties are attributed to the Medicaid applicant, who is subject to any resulting penalty periods.126

[c] Transfers To Third Parties After Medicaid Application After the month in which institutionalized spouse has been determined eligible for Medicaid, transfers to third parties by the community spouse do not create a new penalty period for the institutionalized spouse, but could result in a penalty period for the community spouse if she subsequently applies for Medicaid nursing facility services for herself.127

[d] Apportionment of Penalty Period Between Spouses The penalty period is apportioned equally between spouses if the transfer to a third party results in a penalty period for the institutionalized spouse and the community spouse subsequently enters a nursing facility and applies for Medicaid.128 The penalty period for the institutionalized spouse is necessarily reduced, in order to apportion the remaining months of the penalty period between the spouses. Where a husband and wife both apply for Medicaid coverage of nursing facility services, any penalty period based on a transfer is apportioned equally between them. If both spouses are waiting out a penalty period in a nursing home, and one spouse dies or leaves the nursing home during the penalty period, the remaining portion of that spouse’s penalty period is imposed on the spouse who remains institutionalized.129 Thus, depending upon the circumstances, the penalty period may vacillate: it may initially be imposed on the institutionalized spouse, then apportioned equally if both spouses become institutionalized, and subsequently imposed on the lone institutionalized spouse if one spouse dies or leaves the nursing home. When an institutionalized spouse dies prior to the filing of a Medicaid application, the application should still be made to maximize the three-month retroactive coverage period. At the very least, the application should be made so that retroactive coverage applies to the decedent’s last month of life. See § 9.02[5], below. If the filing occurs during this time period, the penalty period will be apportioned ratably between the spouses. If the application is made too late to include the decedent’s last month of life, the penalty period will be imposed exclusively on the surviving spouse.130

Practice Note Make Transfers By and Between Spouses so as to Avoid the Imposition of a Penalty Period. If the spouse who requires nursing facility services transfers assets to the community

12696 ADM-8, at 16. 12718 NYCRR § 360-4.10(c)(5). 12818 NYCRR § 360-4.4(c)(2)(vii); 96 ADM-8, at 16. 12996 ADM-8, at 16. 130Where the applicant’s spouse died before becoming eligible for Medicaid, and before filing his own application, the penalty period is not apportioned. Matter of Woytisek v. Novello, 309 A.D.2d 869, 766 N.Y.S.2d 54 (2d Dep’t 2003).

586

spouse prior to the local department’s determination of eligibility, there is no limit on the amount of assets that may be transferred and no penalty period will be imposed. If the community spouse waits until the month after the institutionalized spouse becomes eligible for Medicaid, transfers of assets by the community spouse to third parties will not create a penalty period for the institutionalized spouse. However, transfers by the community spouse to third parties may result in the imposition of a penalty period of ineligibility for the community spouse if she enters a nursing home and applies for Medicaid within the look back period. In addition, the local department may seek to recover benefits paid on behalf of the institutionalized spouse from the assets of the community spouse in her capacity as a responsible relative. See Chapter 7, above.

[5] Managing the Penalty Period: Rule of Halves For transfers made prior to February 8, 2006, the formula used to calculate the penalty period and the effective date of the penalty period are structured in such a way that a person who follows the “rule of halves” may transfer approximately half of her assets, using the remainder to pay for the cost of nursing home care during the period of ineligibility that results from the transfer. In order to maximize the benefits of this strategy, both the penalty period and the length of time it will take to spend down the retained assets must be calculated. Comment: The relative amount of the assets to transfer and the amount to be retained to pay for the cost of care during the penalty period would vary, depending on the factors involved in each case (e.g., the actual cost of the nursing home, the amount of monthly income available to pay for care). Caution: This planning technique would no longer apply after the implementation of DRA ‘05 to transfers on or after the enactment date. Under DRA ‘05, the effective date of the penalty period will be the first day of the month after which assets have been transferred, or the date on which the individual is eligible for Medicaid and would otherwise be receiving institutional care based on an approved application but for the application of the penalty period, whichever is later.131 See § 8.02[3][b], above. In other words, an individual can no longer transfer assets and use other funds to wait out a penalty period because he would not be “otherwise” eligible, by virtue of the retained funds. Some practitioners anticipated that a “rule of halves” strategy could still be undertaken, by transferring assets then after part of the penalty period ran, making a partial return of assets and having the initial penalty period recalculated. However, although a partial return of assets is allowed, the recalculated penalty period will not begin to run on the original transfer date, because the returned assets will not render the individual as “otherwise eligible.”132

13142 USC § 1396p(c)(1)(D)(ii). 13206 OMM/ADM-5 at 19. See Alpin v. McCrossen, 2014 U.S. Dist. LEXIS 119682 (W.D.N.Y. Aug. 25, 2014).

587

A similar planning technique is available under DRA 2005, by combining a transfer with an actuarially sound annuity or loan. See discussion of annuities and loans at 8.02[1], above. At the time of the transfer the institutionalized person would have to make a loan or purchase an annuity, so that funds are not retained and she is otherwise eligible for Medicaid. The institutionalized person’s monthly income, including the annuity or loan repayment, would have to render her Medicaid eligible, but she could not actually receive Medicaid during the penalty period from the transfer. The shortfall for the nursing home payment could be made by an in-kind voluntary contribution from a non-legally responsible relative; see income exemptions discussed at § 6.05[3], above; or alternatively the individual’s income could be between the Medicaid rate and the private pay rate at the facility, rendering her a “certain medicaid-eligible individual” (individuals who are otherwise entitled to Medicaid in the facility but such benefits are not being paid because, their income exceeds the Medicaid level).133 For a sample annuity see Form 8.206, below. For a sample promissory note see Form 8.208, below. For a sample Medicaid Application based on a gift and loan see Form 9.210A, below. A number of fair hearings have upheld that an actuarially sound promissory note is not a transfer of assets.134 In Matter of DeGroat,135 the Department of Health found that the prepayment clause which allowed borrower to prepay but with a penalty, did not violate the DRA criteria. Another issue is that although under the DRA the purchase of an annuity, or making a loan or mortgage may not be considered a transfer; nevertheless the annuity or promissory note may be given a value as a resource even though they are drafted as “nonassignable.” There is some question whether a note or annuity can be made nonassignable under New York law.136 Thus the applicant would not be otherwise eligible and no penalty period would be triggered.137 However, a number of fair hearings have concluded that the promissory notes were non-negotiable because they did not have quantifiable value on the open market. In those cases experts established that the notes were worthless due to the fact there is no secondary market.138 In Matter of M.L.,139 the court approved Medicaid planning by a guardian in the form of a gift and loan provided the promissory note met the criteria of DRA ‘05. Caution:

13342 USC § 1396r(c)(7)(A); 42 CFR § 447.20. However, it is not clear if that person is “receiving nursing facility services for which Medicaid would otherwise be available but for the transfer penalty.” 134Matter of Rose M. F.H. # 346495 (Albany County, 5/18/2007) (upholding the agency finding that there was a transfer because the promissory note did not state it was non-assignable and a modification did not cure the defect because there was no return of the funds); Matter of Mary K. F.H. # 4733465H (Albany County, 8/29/2007); Matter of A.G. F.H. # 4733471N (Albany County 8/29/2007); Matter of G.A. F.H. # 4733466Z (Albany County, 8/29/2007); Matter of A.A. F.H. # 4733476H (Albany County, 9/7/2007); Matter of Edward H., F.H. # 4819798M (Albany County, 11/21/2007); Matter of Else F.H. # 5313861K (Nassau County, 11/20/2009)(upholding note even when signed when individual resided in nursing home). 135Matter of DeGroat, 1 F.H. #5061459Y (Rockland County, 10/01/08). 136UCC §§ 9-406, 9-408; Ins. Law § 3212. 137But see James v. Richman, 547 F.3d 214 (3d Cir. 2008) which finds nonassignable annuity purchased by community spouse to have no value as a resource. 138Matter of Mary K. F.H. # 4733465H (Albany County 8/29/2007); Matter of A.G. F.H. # 4733471N (Albany County 8/29/2007); Matter of G.A. F.H. # 4733466Z (Albany County 8/29/2007); Matter of A.A. F.H. # 4733476H (Albany County 9/7/2007). 139Matter of M.L., 25 Misc. 3d 1217(A), 901 N.Y.S.2d 907 (Sup. Ct. Bronx County 2009).

588

Another suggestion for creating an annuity with no value as a resource is to use a Grantor Retained Annuity Trust (GRAT). However, the Medicaid rules for the treatment of a trust will also deem this an available resource since the periodic payments from the GRAT will be treated as a restriction as to when distributions may be made, which would be ignored in deeming the trust resource available.140 A planning technique may be available under DRA 2005, to a disabled person under age 65 in need of nursing home care by combining an outright transfer and a transfer to a self-settled Supplemental Needs Trust. See § 8.03[1][a], below. There would be a penalty based on the outright transfer and the funds in the trust would be used to pay for nursing home care during the penalty period.

[6] Failure to Pursue Available Resource Treated as Transfer A transfer of assets occurs if a person or his spouse is entitled to property, but does not receive it because of any affirmative action or failure to act on the part of that person or his spouse or one acting on their behalf or at their direction.141 These actions or omissions may include a waiver of property rights, a renunciation of the spousal elective share, failure to affirmatively make a claim for the spousal elective share, or failure without good cause to pursue a court-ordered judgment.142 In a variety of circumstances, New York courts have steadfastly held that any action or omission that relinquishes property is a transfer of assets that creates a period of ineligibility. The test, as with any asset, is whether the asset is actually available.

Practice Note Use a Clayton Election Disclaimer to Avoid a Penalty Period. With a Qualified Disclaimer, an affirmative action by the spouse (which is considered a disqualifying transfer) is

14042 USC § 1396p(d)(3)(B)(i) states, “if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, … payment to the individual could be made shall be considered resources available to the individual … .” And 42 USC § 1396p(d)(2)(C) states that “this subsection shall apply without regard to—… (iii) any restrictions on when or whether distributions may be made from the trust … .” The periodic payments from the annuity may be treated as a restriction as to when distributions may be made, which would be ignored in deeming the resource available. See Matter of Lillian M. F.H. # 4908178H (Erie County 3/21/2008) (finding the GRAT an available resource under the Medicaid trust rules) and Matter of Lillian R. F.H. # M248653 (Albany County 10/31/2007) (finding the Trustee’s close relationship to the applicant made the GRAT an available resource). In Matter of Joan S. F.H. # 4813356Q (Onondaga County 12/19/2007) and Matter of V.D. F.H. # 4811493M (Onondaga County 19/21/2007) the Department of Health initially found that the GRATS were not available resources, however the Department of Health has reversed its approval in both these fair hearings and declared that a Medicaid GRAT would be treated as a Medicaid qualifying trust; thus, any portion of the income or principal of the trust that can be paid to or for the benefit of the Medicaid applicant must be deemed an available resource. 141SSL § 366(5)(d)(1)(i); 18 NYCRR §§ 360-4.4(c)(2)(i)(a)(1)–(4). 14296 ADM-8, at 5–6.

589

necessary. However if the deceased spouse's will provides for a Clayton Election then the disclaimer is made by the personal representative of the estate.143 In Molloy v. Bane,144 the Appellate Division held that a mother who renounced a share of her daughter’s intestate estate failed to pursue an available asset, thus transferring assets and causing a period of ineligibility. In Matter of Mattei,145 the Supreme Court in Nassau County applied the same reasoning to a guardian’s obligation to exercise the wife’s right of election against assets in a revocable trust in the estate of the deceased husband. The property in the trust was considered an available asset, but only to the extent necessary to pay for nursing facility services during the period of ineligibility resulting from the partial transfer of assets. In Matter of Dionisio v. Westchester County Department of Social Services,146 a waiver of property rights two weeks before the Medicaid recipient entered a nursing home and 20 months before she applied for Medicaid was held to be a transfer of assets. The applicant’s husband died four months after the applicant entered the nursing facility, leaving an estate valued at $469,500. The spousal elective share would have been one third, or $156,500. The representative of the applicant’s estate failed to rebut the presumption that the transfer was made for the purpose of qualifying for medical assistance. The date of transfer was considered to be the decedent’s date of death. However for post-DRA ‘05 transfers the state will consider the date of transfer the last date an institutionalized person can pursue his elective share.147 In Richartz v. New York City Human Resources Administration,148 the Appellate Division, Second Department remanded a case for a new Medicaid eligibility determination and held there was not substantial evidence supporting the determination that the waiver was revocable. The case involved a waiver of an elective share executed by a wife in 1990. The husband died seven years later, and when the wife subsequently applied for Medicaid, she was denied on the basis that her elective share was a resource. The court noted that waivers can be “unilateral, without consideration, absolute, or conditional.” Matter of Street149 is a rare case in which a court held that exercise of a spousal right of election was not in the best interests of the institutionalized surviving spouse. The Medicaid agency claimed that the spouse would not be eligible for Medicaid payment of nursing facility services if he did not pursue his spousal share as an available resource. The court focused on a best interests approach and did not speculate about whether the hospital would seek to evict an 87-year-old incapacitated person from a hospital. The court noted that the spouse’s quality of life

143Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992); Treas. Reg. §§ 20.2056(b)-7(d) and 7(h). 144Molloy v. Bane, 214 A.D.2d 171, 631 N.Y.S.2d 910 (2d Dep’t 1995). 145Matter of Mattei, 169 Misc. 2d 989, 647 N.Y.S.2d 415 (Sup. Ct. Nassau County 1996). 146Matter of Dionisio v. Westchester County Dept. of Social Servs., 244 A.D.2d 483, 665 N.Y.S.2d 904 (2d Dep’t 1997). 14706 OMM/ADM-5 at 16–17. 148Richartz v. New York City Human Resources Admin., 278 A.D.2d 237, 717 N.Y.S.2d 294 (2d Dep’t 2000). 149Matter of Street, 162 Misc. 2d 199, 616 N.Y.S.2d 455 (Sur. Ct. Monroe County 1994).

590

would not be altered or enhanced if he were to receive the approximately $40,000 in his spouse’s estate. Nor can the right of election be avoided by an incapacitated spouse failing to exercise the right. In Matter of Wurcel,150 the court held that, following the institutionalized wife’s death, her estate could look into the “allegations of fraudulent conduct on the part of a conflicted fiduciary” who failed to exercise the right of election against her husband’s will. Although it was too late to file an election, the estate could pursue “the person who may have consciously sought to deprive the incompetent spouse of the elective share.” In Flynn v. Bates,151 the Appellate Division, Second Department, had found that where there was a failure to exercise a right of election, the elective share would constitute an excess resource rather than a transferred asset. An inheritance was considered available as of the date the beneficiary received the first distribution in Matter of Little.152 The court focused on the date the inheritance was in control of the beneficiary, and therefore available, pursuant to 18 NYCRR Section 360-2.3(c)(1). The court rejected the reasoning of the Surrogate’s Court that the situation was analogous to a renunciation where the beneficiary is determined to be ineligible for failure to pursue available income and resources. The court noted that there was no allegation of collusion between the personal representative of the estate and the beneficiary. Incidentally, the holding in Little suggests that prior to the receipt of a distribution from an estate Medicaid benefits are correctly paid and not subject to recovery from the beneficiary. See § 8.05, below, for a discussion of Medicaid’s rights of recovery.

[7] Transfer of Real Property with Reserved Life Estate For many older clients who own their homes, a transfer of the home while reserving a life estate is an attractive Medicaid planning option.153 Under the life estate, the grantor has the right to use and occupy the premises, and is responsible for paying costs and expenses in the absence of other directions in the conveyance.154 From a tax perspective, the reserved life estate gives the donee a stepped-up basis equal to the fair market value of the property at the death of the grantor.155 This limits the amount of capital gains tax liability upon a subsequent sale. This is a great benefit if the home is not the primary residence of the donee because the federal capital gains exemption of $250,000 for an individual ($500,000 for a couple) is applicable only to the sale of a primary residence.156

150Matter of Wurcel, 196 Misc. 2d 796, 763 N.Y.S.2d 902 (Sur. Ct. New York County 2003). 151Flynn v. Bates, 67 A.D.2d 975, 413 N.Y.S.2d 446 (2d Dep’t 1979). 152Matter of Little, 256 A.D.2d 1152, 684 N.Y.S.2d 124 (4th Dep’t 1998), leave to appeal denied, 93 N.Y.2d 807, 691 N.Y.S.2d 2, 712 N.E.2d 1245 (1999). 153See, e.g., Matter of Gersten, 173 Misc. 2d 692, 661 N.Y.S.2d 943 (Sup. Ct. Queens County 1997) (in an Article 81 Guardianship proceeding, the court granted the petitioner, who was the son of the alleged incapacitated person, the power to transfer the mother’s residence to himself with a retained life estate for his mother). 154Matter of Fisher, 169 Misc. 2d 412, 645 N.Y.S.2d 1020 (Sur. Ct. Rockland County 1996); Matter of Gaffers, 254 A.D. 448, 5 N.Y.S.2d 671 (3d Dep’t 1938). 155IRC § 1014(b)(9); Treas. Reg. § 1.1014-2(b)(1); see Planning for the Elderly § 17.07[2][h]. Step-up in basis provisions may change as a result of changes in the federal estate tax laws. 156IRC § 121.

591

There is not a similar step-up in basis if the house is sold prior to the death of the grantor. If the house is sold during the transferor/owner’s lifetime, the capital gain will be split according to IRS remainder interest tables between the owner of the life interest and the remainderman. The owner may have a homestead exemption, but the remainderman would not. See the Practice Note regarding a Reserved Special Power of Appointment, below. In addition, the transfer with the retained life estate will trigger the requirement for the filing of a federal gift tax return form. Since New York State has no gift tax and the federal exemption is $2 million, it is unlikely there will be any gift tax. In any event, upon death of the life tenant the property comes back into his estate for estate tax purposes and a credit is received for any gift tax paid. The retention of a legal life estate will preserve eligibility for property tax exemptions available to Veterans, Senior Citizens, and under the STAR program. See § 14.03, below.

Practice Note Clearly Establish a Life Estate in the Deed and Any Related Agreement. The property tax exemptions, as well as Medicaid transfer rules, apply only to a legal life estate. If conditions are imposed that are so “numerous, onerous, and fundamentally incompatible with the rights of the life tenant” there may only be a right of use and occupancy, which does not qualify for the various property tax exemptions.157 These conditions include, but are not necessarily limited to, those that prohibit the life tenant from assigning, renting, or leasing the life estate. The language in the deed and any accompanying agreement should specifically refer to a legal life estate.158 Only the value of the remainder interest is considered an uncompensated transfer for Medicaid purposes.159 The value of the life estate and the remainder interest is now an actuarial computation based on the age of the recipient and the fair market value (FMV) of the property. Use IRS “Table S, Single Life Factors,” in accordance with the most recent mortality table, “Table 2000CM,” and interest rates under IRS code 7520, “Section 7520 Interest Rates.”160 Determine the IRC Section 7520 interest rate that applies to the month and year to be used in the life estate computation. Interest rates under IRC Section 7520 can be found at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Section-7520-Interest-Rates. Once you have determined the appropriate

157Sofolarides v. Sofolarides, 39 Misc. 3d 1235(A), 972 N.Y.S.2d 147 (Sup. Ct. Queens County 2013), illustrates the problems which can arise when the so-called life estate is conditional. 158New York State Office of Real Property Services, Vol. 10 Opinions of Counsel SBRPS No. 58 (1996) (available at www.orps.state.ny.us/legal/opinions/v10/58.htm). See Louis W. Pierro & Edward V. Wilcenski, Revisiting Regulation of the Primary Residence, NYSBA Elder Law Attorney, Vol. 10, No. 3, at 61 (Summer 2000). 15996 ADM-8, at 20. For purposes of valuing life estates and remainder interests under the transfer rules, the policy and examples as provided in 96 ADM-8 apply, except the life estate and remainder interest tables published by the IRS must now be used, not the table in the 96 ADM-8 attachment. GIS 12 MA/001 (01/18/2012). 160Even though the expanded estate recovery was repealed and the emergency regulation expired (see § 8.05, below) the policy guidance provided in 11 OHIP/ADM-8 (09/26/2011) regarding the method to use in evaluating life estate interests under the transfer of assets provisions continues to apply. GIS 11 MA/028 (12/12/2011).

592

interest rate to be used in the life estate computation, “Table S” can be found at http://www.irs.gov/Retirement-Plans/Actuarial-Tables. Click on “Table S,” then scroll down to the appropriate interest rate (noted at the top of each section). Each section of the table provides the life estate and remainder interest at the specific interest rate.161 The life estate is not treated as an available resource, although ay rental income or profits received by the life tenant is considered income (reduced by applicable costs, expenses and taxes). If the property is sold, the portion allocable to the life will be treated as an available asset of the life tenant for purposes of Medicaid eligibility.162 Caution: The reservation of a life estate in a deed cannot create a valid interest in favor of a third party, even a spouse.163

Practice Note Retain Control Over Real Property with a Reserved Special Power of Appointment. A deed with a retained life estate will designate the grantee who will own the property upon the death of the grantor. Some clients may be concerned about the finality of the disposition of their home, even with the retained life estate. By including a “special power of appointment” in a deed, in addition or as an alternative to a life estate, a transferor can “change his mind” regarding who will own the home upon his death. The transfer of the home, with the life estate or the “special power of appointment” protects the home from Medicaid liens and may limit estate recovery. The transfer causes a penalty period for Medicaid purposes (although the agency may not reduce the value of the transferred property unless there is also a retained life estate). The retained power of appointment eliminates part of the capital gains tax problem. However a testamentary special power of appointment may not be enough to keep a gift from being complete and may not eliminate any possible gift tax consequences of the transfer.164 The special power of appointment allows the transferor to “change his mind” and redetermine at a later time who will receive the property at his death. The power can be a lifetime power (to be exercised during the transferor’s life) or a testamentary power (exercised by will) or

16111 OHIP/ADM-8(09/26/2011) at 7; GIS 13 MA/06 (03/28/2013). In the event of future changes to the IRS website, the interest rates can be found by searching the website for “Section 7520 Interest Rates” and “Table S” can be found by searching “actuarial tables.” 16296 ADM-8, at 21. See Matter of Giordano, 28 Misc. 3d 519, 905 N.Y.S.2d 462 (Sup. Ct. Nassau County 2010) (court allowed H.C.F.A. table to calculate value of life estate and allowed apportionment of expenses of the sale). But see Matter of Wolf v. N.Y. State Dept. of Health, 2010 N.Y. Misc. LEXIS 2134 (Sup. Ct. Nassau County 2010) (value of life estate is based on the current fair market value of the property and the age of the person because 96 ADM-8 is silent on the issue of deduction of mortgages or other items). 163Sganga v. Grund, 1 A.D.3d 342, 766 N.Y.S.2d 585 (2d Dep’t 2003). But see, Frierson v. Blumberg, 10 Misc. 2d 295, 298, 172 N.Y.S.2d 221 (Sup. Ct. Queens County 1958). It is unclear in Sganga v. Grund whether the life estate would have been valid if it was “granted” rather than “reserved,” but it would appear it would make no difference since it relies on Estate of Thomson v. Wade, 69 N.Y.2d 570, 516 N.Y.S.2d 614, 509 N.E.2d 309 (1987). 164Priv. Ltr. Rul. 201310002, http://www.irs.gov/pub/irs-wd/1310002.pdf.

593

both.165 The power must be limited so that the property cannot be transferred back to the original owner, his creditors or his estate. It should also contain specific recording requirements and time limits, so that valid title can be determined and the property remains insurable by a title insurance company. Be aware that some title companies will consider the title unmarketable despite these precautions. At one point Medicaid might have challenged the transfer with a retained special power of appointment, but this issue has been resolved in trusts (see discussion at § 6.06[3][h], below.) and the resolution should apply to deeds with similar provisions. A similar result may be obtained by putting the homestead (or at least the remainder interest being transferred) in a trust that contains a limited power of appointment for the grantor. Using the trust will have additional advantages: Normally, if the house is sold during the transferor/owner’s lifetime, the capital gain will be split according to IRS remainder interest tables between the owner of the life interest and the remainderman. The owner may have a homestead exemption, but the remainderman would not. If the deed and trust are drafted so that the transferor has a life interest and a lifetime “special power of appointment” in the trust, then for capital gains purposes all of the gain will be treated as passing back to the transferor/grantor of the trust and may qualify the entire property for the homestead exemption from capital gains.166 However, unlike a life estate, Medicaid does not allow a reduction in the value of the transfer based on the retained life interest in the trust property. Therefore a combination could be used where the life interest is retained in the deed and the property is transferred to the trust that contains the special lifetime power of appointment. For a sample trust with lifetime and testamentary powers of appointment see Form 6.205, above. A sample special power of appointment for inclusion in a deed is at Form 8.205, below. Caution should be used in including a power of appointment in a deed regardless of the precautions taken as many title insurance companies now consider these as “unmarketable title.”167 DRA ‘05 provides for the purchase of a life estate in another’s home if the purchaser resides in the home for at least one year after the date of the purchase.168

[8] Medicaid Planning By Guardians New York courts have consistently authorized guardians, pursuant to Mental Hygiene Law Section 81.21, to engage in Medicaid planning if a competent, reasonable individual in the position of the incapacitated person would be likely to engage in such planning if she had the capacity to act. The cases include the full range of exempt transfers, transfers pursuant to a will, transfers to co-owner beneficiaries of bank accounts, and transfers utilizing the rule of halves.

165The lifetime power would make the gift incomplete for gift tax purposes. With current gift and estate tax exemptions this may not be an issue. 166IRC § 678(b); Priv. Ltr. Rul. 200104005. Note this provision specifically applies to trusts and may not apply if the special power is reserved in the deed. 167For articles warning of the problems and unintended consequences of life estates and powers of appointment see Bagwell, Marvin, “Land Title: Life Estates—New Legal Fad Gives Title Underwriters Trouble,” N.Y.L.J. February 11, 2004, at 5; and Bagwell, Marvin, “Land Title: Powers of Appointment—A Predicament Involving Death and Taxes,” N.Y.L.J. July 14, 2004 at 5. 16842 USC § 1396p(c)(1)(J).

594

The cases use the Medicaid transfer of asset rules as a critical factor in determining whether the proposed transfers meet the criteria of Mental Hygiene Law Section 81.21. See § 10.08[2], below. In the first case to consider the issue, the Kings County Supreme Court held that Medicaid planning is a proper objective of a guardian’s transfers and does not violate public policy.169 The court noted that an express purpose of Article 81 is to allow the guardian to take advantage of opportunities for planning that are available to persons who have sufficient mental capacity. The court approved a transfer of assets to the only child of the incapacitated person in order to continue her pattern of support for her child, and his wife and children, and to engage in the kind of Medicaid planning the incapacitated person would have done if she had sufficient capacity. The courts will approve proposed transfers even in the absence of any prior pattern of gifting. In these cases, the intent to make gifts is discerned by examining bank account beneficiaries, will provisions, and the pattern of intestate distribution. In Matter of Goldberg (Ginsberg),170 the guardian was permitted to gift a portion of the incapacitated person’s assets pursuant to the terms of various Totten trust accounts she had established prior to her incapacity, and consistent with how her property would be distributed under the laws of intestacy. In Matter of Beller (Maltzman),171 the evidence established that the incapacitated person would not have chosen to spend down her assets on nursing home care prior to applying for Medicaid. The court noted that the law provides a way for her to preserve a portion of her assets for the benefit of her son and grandchildren and concluded that a competent, reasonable person in similar circumstances would pursue the same course of action. The gifts in Beller were consistent with the terms of various Totten trust accounts established prior to incapacity and also followed the provisions of her will. As in Heller, below, the absence of any prior pattern of gifting did not mandate disallowance of the proposed transfers. In Matter of Heller (Ratner),172 the guardian was permitted to establish resource and burial accounts and gift a portion of the incapacitated person’s assets pursuant to the terms of various Totten trust accounts she had established prior to her incapacity, and pursuant to the laws of intestacy. The absence of any prior pattern of gifting did not mandate disallowance of the proposed transfers, because they were consistent with her previously manifested intent. Medicaid planning by guardians has received appellate approval in the Second and Third Departments. In the case of Matter of John XX.,173 the Third Department permitted a guardian to transfer $640,000 to the incapacitated person’s adult children. The guardian retained $150,000 to pay for the cost of nursing home care during the 36-month “look back” period. The court emphasized that denying the request would deprive the incapacitated person of options that were available to persons with decision making capacity. In Matter of Shah,174 the Court of Appeals granted a guardian-spouse the power to

169Matter of Klapper, N.Y.L.J. Aug. 9, 1994, at 26 (Sup. Ct. Kings County). 170Matter of Goldberg (Ginsberg), N.Y.L.J., Aug. 31, 1994, at 24 (Sup. Ct. Kings County). 171Matter of Beller (Maltzman), N.Y.L.J., Aug. 31, 1994, at 23 (Sup. Ct. Kings County). 172Matter of Heller (Ratner), N.Y.L.J., July 28, 1995, at 24 (Sup. Ct. Kings County). 173Matter of John XX., 226 A.D.2d 79, 652 N.Y.S.2d 329 (3d Dep’t 1996). 174Matter of Shah (Helen Hayes Hosp.), 95 N.Y.2d 148, 711 N.Y.S.2d 824, 733 N.E.2d 109 (2000).

595

transfer all of the incapacitated person’s assets to herself. The court rejected the claim of the local Medicaid agency that it was entitled to recover assets from the spouse as a responsible third party. New York trial courts in various counties have approved exempt transfers of assets to minor children,175 to a spouse,176 and to a spouse and a caretaker son.177 In Matter of Vignola,178 a case decided after the federal criminal “gag rules” became effective, but before they were enjoined in federal court (see § 8.02[3], above), Justice Kassoff of the Queens County Supreme Court permitted a renunciation of one half of an inheritance, but required that the Medicaid application be made only after the expiration of a period of time equivalent to the penalty period that would have been imposed had the application been filed immediately. Although the court approved the proposed transfer, it emphasized that its order was not binding on the local and state Medicaid agencies because they were not made parties to the proceeding. Similarly, the guardian in Matter of DiCecco,179 was authorized to transfer a home to a son of the incapacitated person, reserving a life estate in the incapacitated person, and to transfer liquid assets to the other children of the incapacitated person, provided sufficient resources were retained to pay for the cost of care during the period of ineligibility. The court stated that, as a result of not applying for Medicaid until the expiration of the period of ineligibility, no penalty period could be imposed and the federal criminalization statute apparently would not be violated.180 However, the court cautioned that it could not insulate the institutionalized spouse from civil or criminal liability because the state was not made a party to the action.181 In Matter of Hagerdorn,182 the court granted an application for Medicaid planning but only retroactive to the date of the guardians application for such relief. However, in Matter of Rolland,183 the court declined to make its order effective nunc pro tunc to the date the original petition was filed, in order for the transfer to predate the effective date of DRA ‘05. The court there held that it can only sign an order nunc pro tunc to correct ministerial errors. However in

175Matter of Daniels, 162 Misc. 2d 840, 618 N.Y.S.2d 499 (Sup. Ct. Suffolk County 1994). 176Matter of Lauda, N.Y.L.J., July 2, 1996, at 31 (Sup. Ct. Nassau County); Matter of DaRonco, 167 Misc. 2d 140, 638 N.Y.S.2d 275 (Sup. Ct. Westchester County 1995); Matter of Parnes, N.Y.L.J., Sept. 12, 1994, at 32 (Sup. Ct. Kings County). 177Matter of DeLuca, N.Y.L.J., Dec. 14, 1993, at 27 (Sup. Ct. Nassau County). 178Matter of Vignola, N.Y.L.J., Sept. 26, 1997, at 34 (Sup. Ct. Queens County); see also Matter of Baird, 167 Misc. 2d 526, 634 N.Y.S.2d 971 (Sup. Ct. Suffolk County 1995) (partial renunciation permitted). 179Matter of DiCecco, 173 Misc. 2d 692, 661 N.Y.S.2d 943 (Sup. Ct. Queens County 1997). 180At the time, Section 217 of the Kennedy-Kassebaum Health Insurance Portability and Accountability Act of 1996, 42 USC § 1320a-7b(a)(6), was in effect. The section purported to make it a crime for a person to knowingly and willfully transfer assets if the transfer resulted in the imposition of a penalty period of ineligibility. This law was subsequently repealed and replaced by a similar provision purporting to penalize the paid advisor of the transferor. See § 8.02[3], above. 181This decision was made prior to the order in New York St. Bar Ass’n v. Reno, 97-CV-1760 (N.D.N.Y. 1998), in which the court issued a permanent injunction against enforcing 42 USC § 1320a-7b(a)(6). This statute providing for criminal sanctions against paid advisors of individuals who counsel clients to transfer assets in order to qualify for Medicaid. See § 8.02[3], above. 182Matter of Hagerdorn, 9 Misc. 3d 560, 800 N.Y.S.2d 338 (Sup. Ct. Monroe County 2005). 183Matter of Rolland, 13 Misc. 3d 230, 818 N.Y.S.2d 439 (Sup. Ct. Tompkins County 2006).

596

Matter of Miller,184 the court granted the application nunc pro tunc back to the date of incapacity finding that “an incapacitated person without the aid of a Guardian should not be given any lesser rights simply because he is incapacitated,” and “this Court will not penalize an Incapacitated Person for the very incapacity this Court is charged with protecting.” And in Matter of Ostrander,185 the court the court denied nunc pro tunc relief but granted gift giving powers prospectively, finding that nunc pro tunc relief should be limited to the correction of ministerial errors. In Matter of Daniel J.V.,186 the court allowed in a SCPA Article 17-A proceeding the establishment and funding of a supplemental needs trust for the ward’s benefit nunc pro tunc with funds that were bequeathed to the ward by his godmother. The establishment and funding were nunc pro tunc to the earlier date of an order to show cause and petition in the Supreme Court, which had sought to establish an SNT for the ward’s benefit, in order to recoup on behalf suspended or terminated Medicaid and Social Security Income (SSI) benefits. However, in David J.Z. v. Emil Z.,187 where the court had previously allowed substantial transfers to the spouse, the court denied a transfer funds from a medical malpractice action holding that those funds were intended for the future needs of the Incapacitated Person and should therefore remain for his benefit. Medicaid planning by a guardian may also be available for more complex “gift and loan” plans after DRA 2005. In Matter of Ruland (Chaber)188 the court allowed the guardian of the property to transfer assets of the incapacitated person resulting in a period of ineligibility for Medicaid nursing home care and also allowed a DRA-compliant promissory note to be used to pay for the cost of nursing home care during the period of Medicaid ineligibility. In Matter of M.L.189 the court upon reconsideration, granted the guardian’s initial application to conduct medicaid planning in the form of a gift and loan. The court reversed its previous order which allowed the same however required the guardian to set up a trust for the benefit of the incapacitated person with the gifted funds. For a full discussion of Medicaid planning by guardians, see § 10.08, below.

Practice Note Serve the Local and State Medicaid Agencies as Interested Parties in Guardianship Petitions Requesting the Power to Transfer Assets if the Incapacitated Person Receives Medicaid or the Guardian is Creating a Supplemental Needs Trust. Guardians appointed under either Article 81 of the New York Mental Hygiene Law (Adult Guardians) or Article 17-A of the New York Surrogate’s Court Procedure Act (Guardians of Mentally Retarded and

184Matter of Miller, 20 Misc. 3d 1111(A), 867 N.Y.S.2d 376 (Sup. Ct. Queens County 2008). 185Matter of Reeves, 2009 N.Y. Misc. LEXIS 5367 (Sup. Court Wayne County 2009). 186Matter of Daniel J.V., 33 Misc. 3d 1222(A), 943 N.Y.S.2d 791 (Sur. Ct. Bronx County 2011). 187Matter of David J.Z. v. Emil Z., 24 Misc. 3d 1241(A), 901 N.Y.S.2d 898 (Sup. Ct. Nassau County 2009). 188Matter of Ruland (Chaber), Index No. 8354/05 (Sup. Ct. Rockland County 2007). 189Matter of M.L., 25 Misc. 3d 1217(A), 901 N.Y.S.2d 907 (Sup. Ct. Bronx County 2009), reconsidering 24 Misc. 3d 1036, 879 N.Y.S.2d 919 (Sup. Ct. Bronx County 2009).

597

Developmentally Disabled Persons) may be granted the authority to transfer assets of the incapacitated person. If the petition requests court approval to transfer a residence owned by an incapacitated person who is a Medicaid recipient, or to create, and transfer assets into, a supplemental needs trust in order to qualify for Medicaid, the local Department of Social Services and the New York State Department of Health should be served as interested parties. Serving those agencies as interested parties should prevent any subsequent challenge after the court approves the proposed transfers. If the incapacitated person does not currently receive Medicaid and the proposed transfers will not immediately involve issues related to Medicaid eligibility, it is not necessary to serve the local Department of Social Services and the New York State Department of Health. If the guardian subsequently applies for Medicaid, the prior transfers will be considered in reaching the eligibility determination. For a complete discussion of guardianships, including permissible transfers, see Chapter 10, below. For a discussion of federal law governing Medicaid and a guardian’s ability to transfer assets, see Planning for the Elderly § 10.12[1][g].

§ 8.03 Transfers To and From Trusts Even before DRA 05, Medicaid looked back 60 months from date of application for nursing facility services and imposed a penalty period of ineligibility based on value of nonexempt transfer to trust. Assets other than homestead may be transferred to trust for disabled child or any disabled person under age 65. For the treatment of a trust as an exempt resource see § 6.06[3][h], above.

[1] Trust-Related Transfers All transfers including those that are considered to be trust-related are now subject to the 60-month look-back period.1 A “trust” is broadly defined as a “legal instrument by which an individual gives control over his/her assets to another (the trustee) to disburse according to the instructions of the individual creating the trust.”2 An individual is considered to have created a trust if her assets were used to form part or all of the trust corpus, the trust is a lifetime trust not created in a will, and the trust was established by the individual or her spouse, or a person, court or administrative entity acting at the direction of, or with authority to act on behalf of, the individual or the individual’s spouse.3 Trust-related transfers include transfers into a newly created trust or an existing trust, and distributions from a trust to someone other than the Medicaid applicant or recipient. A transfer into an irrevocable grantor trust that prohibits payment to the grantor will create a penalty period

1SSL § 366(5)(e)(1)(vi); For transfers prior to Feb. 8, 2006, see SSL § 366(5)(d)(1)(vi); 18 NYCRR § 360-4.4(c)(2)(i)(c). 296 ADM-8. The list of instruments in the administrative directive that fall within the definition of a trust includes an annuity, escrow account, investment account, exception trust (i.e., OBRA ‘93 individual and pooled trusts), irrevocable trust, revocable trust, supplemental needs trust, testamentary trust, and third party trust. 318 NYCRR § 360-4.5(b). A lifetime trust is not considered to be created in a will if the trust is created during the lifetime of the Medicaid applicant or recipient and funded by a pour-over provision in the spouse’s will.

598

of ineligibility.4 For calculating the penalty period, see § 8.02[3][a], above. To the extent the trustee has any discretion to pay principal to the grantor or his spouse, it is considered an available resource.5 Payments made to or for the benefit of the grantor are considered available income.6 A provision in a self-settled lifetime trust that limits, suspends, or diverts any income, principal, or beneficial interest of the creator or the creator’s spouse, which is triggered if they apply for Medicaid or require medical, hospital, nursing, or long-term care, is void as against public policy and the full amount that could be distributed is considered available.7 In New York, a court may invade principal for the support of a trust’s income beneficiary unless the trust provides otherwise.8 Unless the trust prohibits such invasion, the local agency may require the settlor or beneficiary to assign the right to seek this invasion to the agency.9 These rules governing trust related transfers apply to New York Medicaid applications and recertifications made on or after September 1, 1994 and to transfers made and trusts created on or after August 11, 1993.10 Comment: These trust rules affect Medicaid’s rights. However, other creditors including hospitals, nursing homes and home care agencies will have the rights of a general creditor, which are not subject to the limitations of Medicaid. In New York a person cannot insulate his own assets from his creditors by putting them in a trust.11 Note that Medicaid’s right to recover against an estate is limited to assets passing under a valid will or intestacy (see § 8.05[1], below), but those restrictions do not apply to other creditors. Trust-related transfers do not include transfers to “exception” trusts that meet the statutory criteria (i.e., transfers into a trust for the sole benefit of a disabled child or into a trust established for the sole benefit of a person under the age of 65 who is disabled)12 unless the person is over

418 NYCRR § 360-4.5(b)(1). These trusts are commonly referred to as Medicaid Qualifying Trusts or income only trusts. 518 NYCRR § 360-4.5(b)(1)(ii). 618 NYCRR § 360-4.5(b)(1)(iii). 7EPTL 7-3.1(c); 18 NYCRR § 360-4.5(d); 96 ADM-8, at 13. EPTL 7-3.1(c) and 96 ADM-8 do not apply to testamentary trusts or trusts for disabled persons established under SSL § 366(2)(b)(2)(iii). If the trust was created prior to the effective date of the 1993 amendments to the “Medicaid Qualifying Trust” provisions of the federal Medicaid statute, the assets in a trust established by the Medicaid applicant or recipient or her spouse are deemed to be available to the applicant/recipient, but not the spouse. For trusts established after the 1993 amendments became effective, the assets are deemed to be available to both spouses. This may affect Medicaid eligibility, see § 6.06[3][h], above, and the liability of a spouse as a responsible third party, see § 7.03[3], above. 8EPTL 7-1.6(b). 9Tutino v. Perales, 153 A.D.2d 181, 550 N.Y.S.2d 21 (2d Dep’t 1990). 10These effective dates no longer have practical significance because trust-related transfers made prior to August 11, 1993 were beyond the 60-month “look-back” period on August 10, 1998. 11EPTL 7-3.1; Vanderbilt Credit Corp. v. Chase Manhattan Bank, 100 A.D.2d 544, 473 N.Y.S.2d 242 (2d Dep’t 1984); United Presbyterian House at Syosset v. Julie Lincks, 2003 N.Y. Misc. LEXIS 414 (Sup. Ct. Nassau County Feb. 11, 2003). 12See SSL §§ 366(2)(b)(2)(iii), 366(5)(d)(3)(ii)(C), (5)(d)(3)(ii)(D); 18 NYCRR §§ 360-4.4(iii)(c), 360-4.5(b)(5); EPTL 7-1.12; 96 ADM-8.

599

the age of 65 at the time she makes the transfer.13 Example: Carter established an irrevocable “income only” trust on August 30, 2003 and transferred $300,000 into the trust on the same day. On September 1, 2007, Carter entered a nursing home and applied for Medicaid. Although at the time the local Medicaid agency only looked back 36 months from the application for outright transfers (August 2004) which were done prior to February 8, 2006, it would have considered any trust-related transfers made within 60 months of the application (from August 2002) in determining whether an ineligibility period should be imposed.

Practice Note Transfer a Home to an Irrevocable Trust Where the Home May be Sold During Grantor’s Lifetime. Irrevocable trusts (usually income only trusts) have been commonly used to accomplish transfers of the homestead. Grantor trust provisions, such as the use and occupancy of the property, achieve a step-up in basis (as part of the estate when the Grantor dies) for heavily appreciated assets,14 and provisions (such as a testamentary power of appointment) were often included that would avoid the payment of gift tax when the trust was funded.15 Provisions such as a lifetime power of appointment were also included in order to preserve the homestead exemption from capital gains tax16 in case the home was sold during Grantor’s life. Gain on the sale of a home by a trust is excludable if the trust beneficiary is treated as the owner of the trust under Grantor trust rules for the purpose of vesting the trust corpus or income in the beneficiary.17 Medicaid may not consider the assets in a trust available if there is a retained power of appointment.18 See § 6.06[3][h], above. These provisions should still only be used when necessary, as state and federal gift tax law make them unnecessary for gift tax avoidance in most cases. For more detailed information on placing a home in a trust and using special powers of appointment, see Practice Note at § 8.02[7], above. Revocable trusts created by a Medicaid applicant or recipient, or her spouse, are considered fully available because payment may be made to the applicant or recipient; any other payments from the revocable trust are transfers of assets.19 However there are a number of inconsistent fair hearing decisions on this issue, especially concerning the funding of the revocable trust with an exempt homestead. Some decisions have held that the since the homestead exemption is personal to the applicant/recipient, transfer to a

1396 ADM-8. 14IRC § 1014(a)(1),(b); Treas. Reg. § 1.1014-(1)(a). 15IRC § 2511; Treas. Reg. § 25.2511(b). 16IRC § 121. 17Priv. Ltr. Rul. 200018021. 18Verdow v. Sutkowy, 209 F.R.D. 309, 2002 U.S. Dist. LEXIS 16975 (N.D.N.Y. 2002). 1918 NYCRR §§ 360-4.5(b)(2), (b)(3).

600

trust nullifies the exemption, or alternatively, there is a transfer without consideration triggering a penalty,20 while others have held funding the trust was not a transfer.21

[2] Transfers into Exception Trusts for Disabled Persons

[a] Exception Trusts Trusts that are established for the sole benefit of a disabled person, and funded with the assets of the disabled person, are exceptions to the general rule that the principal and income of discretionary self-settled trusts are considered available to the Medicaid applicant or recipient. As a result, 96 ADM-8 refers to these types of supplemental needs trusts as “exception trusts.” There are two forms of exception trusts which contain the assets of a person with a disability: an individual OBRA ‘93 “payback” trust established for a disabled person under the age of 65; and an OBRA ‘93 pooled trust established for a disabled person of any age.22 The beneficiary must be disabled as defined in the Social Security Act.23 These trusts are exempt from the Medicaid rules regarding availability of income and resources.24 It should be noted that, under separate provisions, a penalty period of ineligibility for Medicaid is not imposed as a result of a transfer of assets into the trust where it is for the “sole benefit” of the disabled person under the age of 65.25 The criteria of the “sole benefit” rule differs for an exception trust with a payback provision.26 See § 8.02[2][b], above, and § 8.03[2][d], below. However, there is no similar exemption for transfers to a trust for the benefit of a person over the age of 65. Transfers when an individual is over the age of 65 would only occur to a pooled trust, since there is no restriction that the beneficiary be under the age of 65 (see § 8.03[2][c], below) and would only occur where the individual is receiving community-based services and, consequently, there is no transfer of asset penalty. See § 8.02[1], above. Comment: These exception supplemental needs trusts are not considered to be available income or

20FH # 4314740Z (New York City, 02/05/2008); FH# 6543915L (Suffolk County, 05/08/2014). 21Matter of Estate of A.B., FH # 5217935P (New York City, 01/07/2010). However, this hearing held that there was a penalized transfer “from the trust” when the community spouse who funded the trust died and the home went to a third party. 22EPTL 7-1.12; SSL § 366(2)(b)(2)(iii); 18 NYCRR § 360-4.5(b)(5); 96 ADM 8 at 8–10. These exception trusts were part of the Omnibus Budget Reconciliation Act of 1993, and are popularly known as “OBRA ‘93 supplemental needs trusts.” See 42 USC § 1396p(d)(4)(A) (individual trusts), (C) (pooled trusts). 23I.e., “he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” 42 USC § 1382c(a)(3)(A). Pursuant to the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, the standard for determining disability for a child under the age of 18 is a medically determinable physical or mental impairment which results in marked and severe functional limitations and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months. 42 USC § 1382c(3)(C)(i). 24SSL § 366(2)(b)(2)(iii). 2542 USC § 1396p(c)(2)(B)(iv); SSL § 366(5)(d)(3)(ii)(D); 18 NYCRR § 360-4.4(c)(2)(iii)(c)(iv). 26CMS State Medicaid Manual § 3257(B)(6).

601

resources for purposes of eligibility for Supplemental Security Income (SSI). For a discussion of supplemental needs trusts and SSI eligibility, see § 4.02[5], above. In addition, a beneficiary with a disability may also be eligible for Temporary Assistance, Food Stamps, and the Home Energy Assistance Program (HEAP). In general, a properly structured supplemental needs trust will not jeopardize eligibility for these benefits.27 However, a supplemental needs trust may be considered an available resource for some federal benefits, including HUD rent subsidies.28

[b] Individual Payback Trust To qualify as an individual OBRA ‘93 payback trust, the following conditions must be satisfied:

• The trust is established for the benefit of a disabled person under the age of 65 by a parent, grandparent, guardian of the disabled person, or a court.

• The trust is funded with the assets of the disabled beneficiary.

• Under the terms of the trust agreement, the state Medicaid agency must be reimbursed, up to the total value of medical assistance provided to the beneficiary, from the remaining balance in the trust upon the death of the beneficiary.29

The New York Court of Appeals has held that the words of the statute are clear and absolute, that when an SNT “is established pursuant to 42 USC Section 1396p(d)(4)(A) or Social Services Law Section 366 (2)(b)(2)(iii)(A), the beneficiary explicitly provides the State with a right to recover the total Medicaid paid on behalf of that individual. There is no temporal limitation.”30 For a sample OBRA ‘93 payback trust, see Form 8.201, below. For a discussion of cases involving supplemental needs trusts, see § 8.03[2], below. Medicaid’s right to a payback from a self settled trust cannot be defeated by having a structured settlement or annuity pay into a supplemental needs trust, but by having a separately

27See 01 INF-08. This OTDA Informational Letter can be accessed at the OTDA web site http://www.otda.state.ny.us/main/directives/2001/default.htm#infs. 28Although irrevocable trusts including SNTs may not be counted as assets (24 CFR § 5.603(b)(2)), nevertheless the H.U.D. Section 8 rent subsidy program imposes a two year penalty counting the actual or presumed income. 24 CFR § 5.603. After the two years, disbursements from the trust may be considered income. 24 CFR 5.609. DeCambre v. Brookline Hous. Auth., 2015 U.S. Dist. LEXIS 37807 (D. Mass. 2015) (Income includes disbursements from a special needs trust). 2942 USC § 1396p(d)(4)(A); SSL § 366(2)(b)(2)(iii); see also Matter of Moretti, 159 Misc. 2d 654, 606 N.Y.S.2d 543 (Sup. Ct. Kings County 1993). Moretti was the first case in New York to apply OBRA ‘93. The conservator of a person who had suffered severe brain damage sought to establish a supplemental needs trust that would be funded with the remaining proceeds of the settlement of the personal injury action. The court held that the proposed supplemental needs trust was explicitly authorized by the new federal law and granted the conservator’s request to transfer the funds she held as conservator into the trust and permitted her to act as trustee. 30Matter of Abraham XX, 11 N.Y.3d 429, 871 N.Y.S.2d 599, 900 N.E.2d 136 (2008); Ruben N. v. Dep’t of Social Services of the City of New York, 71 A.D.3d 897, 898 N.Y.S.2d 459 (2d Dep’t 2010).

602

designated remainderman. In Sanango v. N.Y. City Health & Hosp. Corp.,31 the court below had allowed an annuity to be purchased and provide payments for the life of the beneficiary into the SNT, with guaranteed payments for 240 months. The court below directed that, in the event of the beneficiary’s death prior to the receipt of all guaranteed payments, payments would be made to the beneficiary’s estate and not into the SNT. The Appellate Division reversed holding that the arrangement prejudiced and impaired Medicaid’s right to receive reimbursement up to the total value of all medical assistance provided. Likewise a homestead purchased by a self settled trust may be required by a court to be owned by the trust and not the beneficiary.32 In Matter of Petosa,33 the Surrogate allowed a father to buy real estate from his son’s Supplemental Needs Trust, but required annual proof of mortgage payments by the father to the supplemental need trust. In Matter of Krushnauckas,34 the court found that the Attorney General’s objection to a provision that allowed transferring the principal to a pooled trust (because it could defeat Medicaid’s payback) was without merit as the use of a pooled trust (see § 8.03[2][c], below) would have been allowable in the first instance. Trusts with an early termination provision (that is, termination prior to the death of the beneficiary) must provide for a Medicaid payback at the time of termination, that no entity other than the beneficiary may benefit from the termination, and the power to terminate is given to someone other than the beneficiary.35 The disabled person may self-petition the court to establish a supplemental needs trust.36 In Matter of Woolworth,37 the Appellate Division, Fourth Department, held that the court below could not restrict the funding of the proposed SNT, nor condition approval of the SNT on the restricted funding. For a special proceeding “self-petition” requesting court approval of a supplemental needs trust, see Form 8.202, below.38 For a sample order in a self-petition supplemental needs trust case, see Form 8.203, below.

31Sanango v. N.Y. City Health & Hosp. Corp., 6 A.D.3d 519, 775 N.Y.S.2d 343 (2d Dep’t 2004). 32Matter of Fontan, 2008 N.Y. Misc. LEXIS 3948 (Sur. Ct. New York County 2008). 33Matter of Petosa, N.Y.L.J., Oct. 9, 2009, at 38 (Sur. Ct.). 34Matter of Krushnauckas, 40 Misc. 3d 1218(A), 975 N.Y.S.2d 708 (Sur. Ct. Nassau County 2013). 35POMS SI 01120.199, effective October 1, 2010. A trust that was previously determined to be exempt shall continue to be excepted, provided the trust is amended to conform with the requirements of PMS SI 01120.199 through SI 01120.203 within 90 days. 36Matter of Crawford, N.Y.L.J., June 27, 2003, at 32; Matter of Gillette, 195 Misc. 2d 89, 756 N.Y.S.2d 835 (Sur. Ct. Broome County 2003). In Gillette, the court held that a previous attempt to establish the supplemental needs trust by an attorney-in-fact was defective and the court refused to establish the trust nunc pro tunc. 37Matter of Woolworth, 76 A.D.3d 160, 903 N.Y.S.2d 218 (4th Dep’t 2010). 38Another alternative, similar to a special proceeding self-petition brought independently and not part of a guardianship proceeding, is to bring an unenumerated miscellaneous proceeding in Surrogate’s Court pursuant to SCPA 202. In comparison to a self-petition brought as part of an Article 81 guardianship proceeding, both the Supreme Court special proceeding and the Surrogate’s Court procedure may be less expensive and simpler. The choice of whether to utilize Surrogate’s Court or Supreme Court may depend on the individual practitioner’s familiarity with a particular court, whether one forum will decide the matter more quickly and efficiently, and other factors related to local practice.

603

In Matter of Adele Y., the court approved a single transaction order authorizing the funding of a supplemental needs trust.39 Any transfer made into the trust by the disabled person after the age of 65 is treated as a transfer of assets, and will result in the imposition of a penalty period.40

[c] Pooled Trust The other type of exception trust is an OBRA ‘93 pooled trust. It must conform with the following requirements:

• It must be established and managed by a not-for-profit organization.

• The assets must be pooled for purposes of investment and management, but each beneficiary must have a separate account within the pooled trust.

• Only certain individuals or entities may create the individual trust account:

○ the disabled individual; ○ the disabled individual’s parent; ○ the disabled individual’s grandparent; ○ the disabled individual’s legal guardian; or ○ a court.41

Practice Note Be Aware of the Social Security Administration Requirements for Supplemental Needs Trusts if the Beneficiary with a Disability Receives or May Be Eligible for Supplemental Security Income (SSI). Although these provisions are generally consistent with the Medicaid rules, the Social Security Administration has imposed a requirement that the person establishing the trust must have “legal authority to act with respect to the assets” of the beneficiary. A parent or grandparent does not have the legal authority to transfer the assets of an adult child, regardless of the nature of the child’s disability. A court-appointed guardian clearly meets this requirement, and an agent acting under a power of attorney executed by the person with a disability also has the requisite legal authority and should be recognized by the Social Security Administration. The result of this policy is that a supplemental needs trust funded with

39Matter of Adele Y., 35 Misc. 3d 1226(A), 953 N.Y.S.2d 548 (Sup. Ct. Bronx County 2012). The application was filed by Mental Hygiene Legal Service (MHLS). The court found authority under MHL § 81.16 to authorize, direct, or ratify any trust, or other transaction; it chose to use the incapacitated person’s funds to fund the NYSARC pooled trust. 4096 ADM-8, at 10. 4142 USC § 1396p(d)(4)(C); SSL § 366(2)(b)(2)(iii)(B). A Social Security Administration representative payee should be able to establish an account in a pooled trust. POMS GN 00602.075 and SI 01120.200I.

604

the assets of a disabled beneficiary who receives SSI may have to be established by a court-appointed guardian, even if a parent or grandparent is available to establish the trust. In the case of a pooled trust, because the person with a disability is authorized to establish the pooled trust account, it may be possible to avoid the need for a guardian, but only if the person has sufficient decision making capacity to understand the transaction. For a more detailed discussion of transfers of assets and trusts under the SSI rules see § 4.02[5], below. Unlike individual trusts, the person creating the account (the “sponsor”) has an option to direct the distribution of the remaining balance (if any) upon the death of the disabled person. If the sponsor chooses to have the remaining balance in an individual trust account retained by the pooled trust after the death of the beneficiary, the state may not seek reimbursement.42 Any amounts not retained by the pooled trust must be used to reimburse the state for the cost of medical assistance provided to the beneficiary during his lifetime. Comment: There are “pooled trusts” which may be funded by third parties. These need not contain any Medicaid reimbursement or payback provisions. See § 12.07[1], below. Any amounts that are designated to be retained by the pooled trust must be used for the benefit of other beneficiaries who are disabled. This provides an opportunity for sponsors who make this election to help others who may not have a source of supplemental support, rather than have the remaining balance of a trust account disappear into the state coffers. Although not detailed in regulations, it appears that the trustees of the pooled trust may decide either to allocate these remainder funds among existing trust accounts or use them to fund newly created accounts. Although no penalty period is imposed for the transfer of assets into a pooled trust by a person under the age of 65, there is a penalty period for transfers into pooled trusts if the beneficiary is over 65.43 In Matter of Salomon,44 a guardian appointed under SCPA Article 17-A was granted the

4242 USC § 1396p(d)(4)(C)(iv); SSL § 366(2)(b)(2)(iii)(B); 18 NYCRR § 360-4.5(b)(5)(i)(b). 4396 ADM-8, at 10. Although New York’s Administrative Memo penalizes transfers into pooled trusts by persons over the age of 65, the CMS State Medicaid Manual appears to provide otherwise. The CMS State Medicaid Manual states at § 3259.7(B)(2): “Resources placed in an exempt trust for a disabled individual are subject to imposition of a penalty under the transfer of assets provisions … unless the resources placed in the trust are used to benefit the individual, and the trust purchases items and services for the individual at fair market value … . These rules apply to both income and resources placed in the exempt trusts discussed in this section.” 44Matter of Salomon, N.Y.L.J., Sept. 2, 1998, at 23 (Sur. Ct. New York County). See also Matter of Patane, N.Y.L.J., June 30, 2000, at 32, col. 6 (Sur. Ct. Kings County) (authorizing transfer of assets of person with mental retardation into a pooled trust); Matter of Banks, N.Y.L.J., June 28, 2000, at 32, col. 6 (Sup. Ct. New York County) (authorizing transfer of one-half of Medicaid recipient’s assets retroactively into pooled trust by Article 81 guardian despite claim by DSS for Medicaid provided during period of time during which recipient owned assets).

605

power to transfer approximately $50,000 into an account in the UJA-Federation Community Trust II. In the case of Matter of Altschuler,45 the Nassau County Supreme Court denied the application to transfer assets held in an individual OBRA ‘93 payback supplemental needs trust to the UJA-Federation Community Trust II because the remainder beneficiaries of the individual supplemental needs trust had not provided written consent. However, the court stated that the UJA pooled trust met the statutory requirements for an exception trust and did not require approval by the State Department of Social Services. The court explicitly rejected the argument of the New York State Department of Social Services that the trust remainder must be paid to the state.

Practice Note Use Pooled Trust for Disabled Persons Over Age 65 Who Have Excess Assets. A pooled trust is the only supplemental needs trust option for persons over the age of 65 because individual payback trusts are available only to beneficiaries under the age of 65. Unfortunately, the State of New York has adopted the position that a transfer into a pooled trust by a person over the age of 65 is a transfer that creates a penalty period. A pooled trust is established and managed by a not-for-profit organization. Each beneficiary of the trust has an individual account, but for investment purposes the trust funds are pooled together. The trustees are selected by the not-for-profit organization and administer the trust according to the terms of the trust instrument. The not-for-profit organization may set a minimum contribution to establish an individual account and may require that the not-for-profit organization receive a specified amount upon the death of the beneficiary. The sponsor (i.e., the person who establishes the account) may elect to have the remainder retained by the pooled trust, rather than paid back to the state. The language used for individual OBRA ‘93 payback trusts should be used in drafting pooled trusts, because these trusts will be subject to the same requirements. The sponsor agreement is the document that activates an individual trust account. It incorporates the terms of the pooled trust by reference. There are a number of pooled trust models. They vary in the required minimum contribution, the identity of the trustees and the required remainder interest payable to the not-for-profit organization.46 Legislation enacted in 1997 permits the not-for-profit organization that manages the trust to act as trustee, but only if it serves as a co-trustee with a trust company.47 Individuals may serve as trustees of pooled trusts, provided the not-for-profit organization is fulfilling the requirement that it manage the pooled trust.48

45Matter of Altschuler, 169 Misc. 2d 613, 645 N.Y.S.2d 999 (Sup. Ct. Nassau County 1996). 46For example, the UJA Federation Community Trust (UJA Federation, 130 East 59th Street, Suite 737, NY, NY 10022, 212-836-1811) requires a $25,000 minimum initial contribution and a payment of 50% of the remainder upon the termination of the trust account. The Community Living Corporation Pooled Trust (600 Bedford Road, Mount Kisco, NY 10549, 914-241-2356) requires a $5,000 minimum contribution and has no minimum payment upon the termination of the trust account. 47SSL §§ 366(2)(b)(2)(iii), (2)(b)(2)(iv). 48A more restrictive interpretation is that individuals may not serve as trustees of pooled trusts following New York’s enactment of legislation authorizing the not-for-profit organization to serve as trustee.

606

In Matter of Smergut (LD),49 the court found there is nothing in the Mental Hygiene Law, the Social Security Law or the EPTL that prevents a properly appointed independent guardian from transferring funds into a trust controlled by the provider of services to an incapacitated person. The following not-for-profit organizations have established and manage pooled trusts in New York State. All of these trusts accept disabled individuals as beneficiaries and they do not have to be members or consumers of the particular agency. Unless otherwise indicated, the organizations have both self-settled trusts and third-party trusts. AHRC New York City Foundation, Inc. 200 Park Avenue South New York, NY 10003 212-780-2682 ACLD-Adults & Children with Learning and Developmental Disabilities, Inc. 807 South Oyster Bay Road Bethpage, NY 11714 516-822-0028 x197 Catholic Family Center (formerly Family Service of Rochester, Inc) 30 North Clinton Avenue Rochester, NY 14604-1482 585-232-1840 Center for Disability Rights, Inc. 497 State Street Rochester, NY 14608 585-546-7510 Community Living Corporation (CLC) 105 South Bedford Road, Suite 300 Mt. Kisco, NY10549 914-241-3628 Disabled and Alone, Life Services for the Handicapped, Inc. (Third-party trusts only) 352 Park Avenue South, 11th Floor New York, NY 10010 212-532-6740/800-995-0066 Future Care Community Pooled Trust (A partnership of Al Sigl Community of Agencies, Lifespan and the Arc of Monroe) 1000 Elmwood Avenue Rochester, NY 14620 585-402-7840 LCG Community Trust 14 Mount Hope Place Bronx, NY 10453-6102 (718) 466-2200

However, the legislation states that a not-for-profit organization may act as co-trustee, which suggests that it is not mandatory and is merely in addition to individuals and other entities already authorized to act as trustees under New York law. 49Matter of Smergut (LD), 31 Misc. 3d 875, 924 N.Y.S.2d 747 (Sup. Ct. Nassau County 2011).

607

Legal Services for the Elderly, Disabled or Disadvantaged of WNY (Western New York Coalition Pooled Trusts) 237 Main Street, Suite 1015 Buffalo, NY 14202 716-853-3087 Lifetime Care Foundation for the Jewish Disabled (Check for other restrictions) 4510 16th Avenue Brooklyn, NY 11204 718-851-8906 or 718-851-6300 Life’s Worc 1501 Franklin Avenue PO Box 8165 Garden City, NY 11530 516-741-9000 ex. 241 NYSARC, Inc. 318 Delaware Avenue, Suite 22 Delmar, NY 12054 518-439-8311 People Inc. (Western New York Coalition Pooled Trusts) 1219 North Forest Road P.O. Box 9033 Williamsville, NY 14231 716-634-8132 S.A.F.E 1501 Broadway, 12th Floor New York, NY 10036 Phone: 800-239-6734 The Theresa Foundation Pooled Trust 4912 Creekside Drive, Clearwater, FL 33760 727-894-4489 UJA Federation of New York (Services provided through F.E.G.S. Community Trust) 130 E. 59th Street New York, NY 10022 212-836-1339 United Community Services of Boro Park 1575 50th Street 3rd Fl Brooklyn, NY 11219 718-854-9300 (Self-settled trust only) Westchester ARC Foundation 121 Westmoreland Avenue White Plains, NY 10606 914-428-8330, ext. 3336 YAI/National Institute for People with Disabilities 460 West 34th Street New York, NY 10001-2382 212-563-7474

608

[d] Transfer to Trust for Sole Benefit of Disabled Person In addition to exempt transfers into the exception trusts described in § 8.03[1][b], above, no penalty period will result from the transfer of assets to a trust established for the sole benefit of a disabled child or other disabled person under 65 years of age.50 See § 8.02[2][b], above. This will typically be a third-party supplemental needs trust with the remainder interest payable to the estate of the disabled beneficiary. See Form 12.205, below, for a Third Party Supplemental Needs Trust. In a third-party trust, in order for a transfer to a trust to be considered for the sole benefit of a disabled child or other disabled person under 65 years of age it must provide for spending the funds in the trust “on a basis that is actuarially sound over the life expectancy of the individual.”51 If the trust does not so provide then the exemption from the transfer penalty is void. Also, the remainder interest in the trust must vest in the estate of the beneficiary.52 There is an exception to these criteria of the sole benefit rule described above for self-settled trusts which contain a “payback” provision.53

Practice Note Include the Following or Similar Language in Order to Make a Third Party Supplemental Needs Trust a Sole Benefit Trust Which Is Actuarially Sound. “Notwithstanding the discretion of the Trustee to expend the principal of the Trust in his sole and absolute discretion, the Trustee shall expend each year from the principal an amount equal to no less than (fraction) of the principal, such expenditure being actuarially sound based on the life expectancy of the beneficiary at the time this trust was established.” In addition modify the provision for the remainder interest so that at the end of the trust term (that is, the death of the beneficiary), the remainder interest vests in the estate of the beneficiary. Additionally, the “sole-benefit” requirement is satisfied by not permitting distributions other than for the sole benefit of the disabled beneficiary (although payments to traveling companions of the beneficiary and other similar distributions that are designed to benefit the beneficiary, but incidentally inure to the benefit of a third party, are permissible) and not designating remainder beneficiaries, but rather having the remainder distributed as part of the beneficiary’s estate. If the beneficiary receives Medicaid when over the age of 55 or while permanently institutionalized, Medicaid will have a right of recovery against the beneficiary’s estate.54 For purposes of eligibility for Supplemental Security Income (SSI), the Social Security Administration clarifies that a trust is for the sole benefit of an individual even if it: compensates a trustee or other individuals for investment, legal, or other services related to the trust; makes payments to third parties for goods and services provided to the beneficiary; or after the death of

50SSL §§ 366(5)(d)(3)(ii)(C), (D); 18 NYCRR § 360-4.4(c)(2)(iii)(c). 51CMS State Medicaid Manual § 3257(B)(6). 52CMS State Medicaid Manual § 3257(B)(6). But see POMS 01120.201F(2) which allows transfer of the remaining trust corpus to a residual trust beneficiary after the individual’s death. 53CMS State Medicaid Manual § 3257(B)(6). 54SSL § 369(2)(b)(i).

609

the beneficiary, distributes the remainder of the trust to the State for reimbursement of medical assistance, to a pooled trust established by a nonprofit organization, or to a residual beneficiary.55 However, Social Security offices may require that the Medicaid payback provision come before other provisions, such as payment for funeral expenses of the beneficiary. For special provisions where a beneficiary is in receipt of SSI, see § 4.02[5], above. Caution: When drafting a supplemental needs trust, do not include language that creates an ascertainable standard to provide for the beneficiary’s health, education, maintenance, and support. This creates the possibility that the trust will be considered available, as a court could compel the trustee to make distributions under this standard. If a trust with this language has already been created, it may be possible to reform the trust under EPTL 10-6.6. See § 2.04[5], above. Decanting to a proper supplemental needs trust prior to the vesting in a beneficiary creates a third-party supplemental needs trust that does not require a Medicaid payback provision.56

[3] Judicial and Government Supervision of Exception Trusts

[a] Exception Trusts Closely Supervised People with disabilities are diverse in the nature and origins of their disabilities, their unique special needs, and even the extent to which they rely on government benefits.57 Supplemental needs trusts funded with assets of the disabled person are closely regulated by the courts that approve the establishment of these trusts and by the local Medicaid agency.58 The trustee must provide the local DSS with notice:

• of the creation or funding of the trust;

• in advance of distributions for less than fair market value;

• in advance of “substantial depletions” from trusts in excess of $100,000, defined as: 5% for trusts between $100,000 and $500,000; 10% for trusts between $500,000 and $1,000,000; and 15% for trusts in excess of $1,000,000); and

55Social Security Administration, Program Operations Manual Systems (POMS) 01150, Transmittal No. 13, SSA Pub. No. 68-0501150(C)(2) (Sept. 2000). 56Matter of Kroll (Ratowsky—Schreiber), 41 Misc. 3d 954, 971 N.Y.S.2d 863 (Sur. Ct. Nassau County 2013). 57Although people with very severe disabilities are frequently wholly dependent on Medicaid, which covers the cost of care and services in residential facilities, many people with disabilities reside in apartments in the community, are covered by private insurance and/or Medicare and do not incur substantial Medicaid bills. 58The enabling statute, SSL § 366(2)(b)(2)(iv) authorizes the Department of Social Services to promulgate regulations. These regulations are found at 18 NYCRR § 360-4.5(b)(5)(iii).

610

• of the death of the beneficiary.59

If the trust is established with court approval, the court will probably impose additional requirements on the trustee including, but not limited to, submission of an annual accounting, posting of a bond, obtaining court approval for certain expenditures and submission of proposed annual budgets for expenditures from the trust.60 Comment: Court approval is not always required to establish and fund a self-settled supplemental needs trust. For example, if there is a parent or grandparent available to establish the trust, and the disabled beneficiary has sufficient decision making capacity to transfer the funds into the trust (or execute a power of attorney authorizing an agent to fund the trust) it can be done without the intervention of a court. In the case of a pooled trust account, the disabled beneficiary may also establish the account and fund it. If the disabled beneficiary is not able to make the transfer or execute a power of attorney, a guardian would have to be appointed and court approval is necessary. If the beneficiary receives Supplemental Security Income (SSI), it may be necessary for a guardian to be appointed even if a parent or grandparent is available to establish the trust. See Practice Note § 8.03[1], above. For a discussion of SSI and trusts, see § 4.02[5], above.

Practice Note Have Trust Preapproved by the Local Agency. Even if the trust is being established without a court proceeding, submit the proposed SNT to the legal department of the local agency. In New York City submit it to HRA Office of Legal Affairs (OLA) MICSA Division, 180 Water Street, 16th Flr, New York, NY 10038. Trusts can be submitted to OLAMAReferrals@hra.nyc.gov (this is a shared mailbox for referrals to OLA and is monitored by at least two to three people every day). Submit it along with the applicant/recipient’s SSA award letter, if receiving SSI or SSDI. If the funds are from a settlement of a personal injury case submit proof the Medicaid lien has been satisfied including the underlying case caption and index number. The local agency attorney will review the proposed trust and supporting docs, and if satisfied, will provide you with a letter of approval indicating the trust will pose no bar to the applicant/recipient’s Medicaid eligibility or recertification. You can then submit the executed trust with the approval letter to the local agency.

5918 NYCRR § 360-4.5(b)(5)(iii). 60See, e.g., Matter of Fontan, 2008 N.Y. Misc. LEXIS 3948 (Sur. Ct. New York County June 26, 2008) (requiring that the trust can be amended by order of the court, any fees paid to attorneys may be reviewed by the court, ownership housing must be vested in the trust, and trustee’s compensation can be reduced in appropriate circumstances by the court); Matter of Gaonkar, N.Y.L.J., Oct. 13, 1999, at 35 (Sur. Ct. Westchester County); Matter of Alessio, N.Y.L.J., July 13, 1999, at 29 (Sur. Court Bronx County) (approving provision allowing funeral expenses to be paid, but excluding provision requiring the State to provide a detailed accounting, prior to payment of remainder interest); Matter of Kaplan, N.Y.L.J., Apr. 27, 1999, at 32 (Sur. Ct. Westchester County) (requiring notice of lease, purchase, or sale of real property to State Office of Mental Retardation and Developmental Disabilities because that agency responsible for providing housing to beneficiary); Matter of Goldblatt, 162 Misc. 2d 888, 618 N.Y.S.2d 959 (Sur. Ct. Nassau County 1994).

611

It is probably less necessary to obtain advance local agency approval if the applicant/recipient is receiving Medicaid by virtue of being on SSI. The Social Security administration will not pre approve trusts. However the Field Office will refer the trust to a member of a Regional Trust Reviewer Team (RTRT) in accordance with Social Security’s Regional Centralization of SSI Trust Reviews workflow for SSI trust resource determinations.61 After submitting the executed and funded trust to the Social Security Administration a notice and copy along with the applicant/recipient’s SSA award letter should be submitted to the Medicaid agency. Where a trust is established by the court, the trust could recite the beneficiary as the grantor, pursuant to an order of the appropriate court.62 In Matter of Goldblatt,63 Surrogate Radigan imposed numerous requirements on the proposed trust in addition to those required by statute and regulation. The court directed that the trust include provisions similar to the statutory supplemental needs trust language contained in EPTL 7-1.12(e). Court approval was required for any amendments to the trust. The remainder interest, after providing for reimbursement to the state, was required to be distributed to the estate of the disabled beneficiary, rather than to specifically named individuals. This would not foreclose the possibility that the disabled beneficiary would make a will, or that the beneficiary’s intestate distributees would be different than the residuary beneficiaries named in the proposed trust. In addition, the court directed that references be made to EPTL 11-1.1 (powers of fiduciaries), EPTL 11-2.2 (investment powers), and EPTL 11-2.3 (prudent investor act), rather than repeating the substance of statutory provisions governing the trustee’s powers in the trust document. The trust could only authorize compensation of the trustee up to the statutory limits, and could not authorize the trustee to be reimbursed for expenses, without court approval. The court also mandated that the trustee either be fully bonded or manage the trust assets in a joint arrangement with the clerk of the court. Finally, the court required the trustee to file annual accountings. Comment: Even if a supplemental needs trust is not subject to these court imposed requirements, and the trust doesn’t require annual accountings, the trustee should be prepared to provide an accounting to the local Medicaid agency when the beneficiary is recertified. In Matter of Morales,64 Justice Leone applied the OBRA ‘93 trust provisions and New York’s conforming legislation to approve the creation of a trust funded with the assets of the disabled person and included in the text of the decision a specimen trust which incorporates many of the requirements imposed by Surrogate Radigan in Goldblatt. See Form 8.201, below. A judge may impose additional criteria for supplemental needs trusts subject to her

61Social Security Administration Emergency Message EM-14026 (4/23/2014). 62Matter of Gillette, 195 Misc. 2d 89, 756 N.Y.S.2d 835 (Sur. Ct. Broome County 2003). 63Matter of Goldblatt, 162 Misc. 2d 888, 618 N.Y.S.2d 959 (Sur. Ct. Nassau County 1994). 64Matter of Morales, N.Y.L.J., July 28, 1995, at 25 (Sup. Ct. Kings County).

612

approval. These criteria often parallel the Goldblatt requirements and also often may require notice to state and local “Medicaid agencies,” submission of annual proposed budgets that detail proposed expenditures on behalf of the disabled beneficiary, and court approval of the resignation of trustees. See Matter of Ramos,65 where the court modified a number of provisions in the proposed trust and required the annual report sent to the local agency. In Matter of Lula A.,66 the Surrogate held that the only appropriate provision for an annual accounting for a disabled but competent individual was the accounting required by SCPA 1719. However in Matter of Korn,67 where the Surrogate’s Court determined it was the testator’s intent to protect a disabled beneficiary and thus fashioned an SNT under the will, it also found there is no statutory requirement that annual accountings be filed with the court; an SNT need not be treated any differently than a testamentary trust or inter vivos trust and it was unnecessary to mandate an annual accounting and burden the trust with the inherent costs. But see, Matter of Skornski,68 where the Surrogate approved letters of trusteeship, but required annual accountings with the court regarding the third-part supplemental needs trust under the will. The courts generally do not permit a supplemental needs trust to contain a provision which purports to insulate the trust from creditors because it is a self-settled trust and, while it is insulated from the claims of the local department until the termination of the trust, it is not insulated from the claims of other creditors. Nor may a supplemental needs trust authorize the trustee to engage legal counsel in disputes with the local Department of Social Services or State Department of Health since this could be construed as an advance assessment of the merits of a case. Further, a supplemental needs trust may not contain a provision which exonerates the trustee from liability for any loss or damage, other than for the trustee’s own individual or joint acts of fraud, bad faith or willful misconduct, because those limitations on a fiduciary’s liability are against public policy. In Matter of Perry,69 a Surrogate’s Court approved the transfer of approximately $17,800 into the NYSARC Inc. Community Trust, provided that the trust be revised to include the Goldblatt and Morales provisions. In Cano v. Shmonie Corp.,70 the court allowed a provision for an application to amend the trust in order to make the SNT “portable,” and to comply with potential objections of the local DSS offices in other States, in the event that the beneficiary move out of New York State. In Matter of Valia C,71 the court required the following language to be inserted “No annuity or life insurance policy is to be purchased without prior approval of the social services district or appropriate agency providing the medical assistance or other government benefits to the beneficiary and notification made pursuant to Paragraph 5.2 hereunder.”

65Matter of Ramos, N.Y.L.J., March 15, 2007, at 27, 2007 N.Y. Misc. LEXIS 1093 (Sur. Ct. New York County). 66Matter of Lula A., N.Y.L.J., April 27, 2010, at 34 (Sur. Ct. Bronx County). 67Matter of Korn, N.Y.L.J., March 9, 2010, at 45 (Sur. Ct. Kings County). 68Matter of Skronski, N.Y.L.J. Aug. 10, 2010, at 31 (Sur. Ct. Richmond County). 69Matter of Perry, N.Y.L.J., July 10, 2000, at 35 (Sur. Ct. Westchester County). 70Cano v. Shmonie Corp., N.Y.L.J., July 22, 2004 (Sup. Ct. Bronx County), preference granted on appeal, 2004 N.Y. App. Div. LEXIS 13398 (2d Dep’t Nov. 9, 2004). 71Matter of Valia C, N.Y.L.J., Jan. 22, 2009, at 37.

613

Payment of the trust beneficiary’s children’s college tuition from trust funds is not generally a permissible provision of a Supplemental Needs Trust.72 In Matter of Graham,73 the court denied a trustee/guardian permission to make Medicaid disqualifying transfers from a supplemental needs trust, holding that the proposed distribution is not for the beneficiary’s needs as defined by the trust document and that the criteria in Mental Hygiene Law Section 81.21 are not applicable to a supplemental needs trust. In Matter of Freedhand,74 the Surrogate modified the proposed trust to provide that disbursements to pay attorneys are subject to judicial review for reasonableness, a copy of the annual accounting be sent to the beneficiary, and notice of a trustee’s resignation does not have to be filed with the court. In Matter of Jon Z.,75 the Surrogate allowed payment for the legal services and the Article 17-A guardian from a Supplemental Needs Trust. In DiGennaro v. Community Hospital of Glen Cove,76 the court disapproved a supplemental needs trust where the parents were to be both trustees and remaindermen, citing a conflict of interest (see § 8.03[b], below. for discussion of family members as trustees). Such a provision might also run afoul of the New York law against a trustee making discretionary payments in his own favor unless the trust expressly states that the provision does not apply.77 Caution: For tax purposes the IRS may consider a trustee who is a remainderman and has unlimited discretion over income and principal as holding a general power of appointment, which may cause unanticipated tax consequences for the trustee. Courts will also scrutinize payments from a supplemental needs trust. In Matter of Jon Z.,78 the Surrogate’s Court found that the legal services and the 17-A guardians of the person could be paid out of the Supplemental Needs Trust. Courts may exercise discretion to approve applications to make expenditures from a supplemental needs trust even where the trust does not so require. In Matter of Geraldine R.,79 the court reviewed the request even though the local Medicaid agency objected to the review. In rare cases, individuals (or their guardians) may decide not to utilize a supplemental needs trust because their assets are sufficient to support the beneficiary without Medicaid.80

72Matter of Cimino, 196 Misc. 2d 434, 769 N.Y.S.2d 353 (Sup. Ct. Suffolk County 2003). 73Matter of Graham, 195 Misc. 2d 628, 760 N.Y.S.2d 810 (Sup. Ct. Suffolk County 2003). 74Matter of Freedhand, N.Y.L.J., June 9, 2010, at 33 (Sur. Ct.). 75Matter of Jon Z., 29 Misc. 3d 923, 907 N.Y.S.2d 595 (Sur. Ct. Broome County 2010) citing Matter of Arnold O., 279 A.D.2d 774, 719 N.Y.S.2d 174 (3d Dep’t, 2001) and Matter of Pineda, N.Y.L.J., May 28, 1997, at 26, col. 3 (Sup. Ct. New York County) which allowed payment to an Article 81 guardian from SNT’s. 76DiGennaro v. Community Hosp. of Glen Cove, 204 A.D.2d 259, 611 N.Y.S.2d 591 (2d Dep’t 1994). 77EPTL 10-10.1, as amended by 2003 N.Y. Laws 633 and 2004 N.Y. Laws 82. 78Matter of Jon Z., 29 Misc. 3d 923, 907 N.Y.S.2d 595 (Sur. Ct. New York County 2010). 79Matter of Geraldine R., N.Y.L.J., May 14, 2012, at 38 (Sup. Ct. Bronx County). 80See, e.g., Matter of LaBarbara, N.Y.L.J., Apr. 26, 1996 (Sup. Ct. Suffolk County), in which Justice

614

In Liranzo v. LI Jewish Education/Research,81 the court held that the trustee of a supplemental needs trust had a duty to make decisions based on the long term needs of the beneficiary that would extend the life of the trust for as long as possible. This duty includes a good faith effort to seek Medicaid’s assistance for at home health services. Contrast this with Matter of JP Morgan Chase Bank N.A. (Marie H.),82 where the Surrogate’s Court found even in a purely discretionary trust where the beneficiary was receiving Medicaid there was a duty for the trustee to become knowledgeable about the beneficiary’s condition and needs, and to provide services that would meet those needs.

[b] Using Income to Fund Supplemental Needs Trusts A supplemental needs trust may be funded with an income stream, with the exception of Supplemental Security Income, and the excess income transferred into the trust will not count for purposes of Medicaid eligibility.83 When a Medicaid household consists of a husband and wife, the spouse not receiving services can also put income into the trust.84 The Surrogate’s Court, Nassau County approved the establishment of a supplemental needs trust solely with social security disability payments in Matter of Kennedy.85 The court reasoned that although the spend down requirement of Social Services Law Section 366(2)(a)(7) appeared to be inconsistent with the supplemental needs trust provisions of Social Services Law Section 366(2)(b)(2)(iii), they should nevertheless be construed together and the court therefore considered the supplemental needs trust as an exception to the general Medicaid rules including the spend down rules.86 The Surrogate’s Court, Onondaga County approved a petition to create a supplemental needs trust that was to be funded with the beneficiary’s Social Security Disability Income benefits in Matter of Lynch.87 Lynch involved a beneficiary with Social Security Disability Income of $1,218.00 per month. The purpose of the trust was to protect the $293 each month which represented his monthly spend down in order to qualify for Medicaid. The court rejected the argument that any income, including government benefits, may fund a supplemental needs trust

Luciano refused to approve a supplemental needs trust because the amount of the income generated by the funds of the disabled person exceeded the costs of medical treatment and services. Although there appears to be no statutory basis for the denial of the trust under these circumstances, the decision serves as a cautionary reminder that the size of the trust may be a factor for judges approving supplemental needs trusts. 81Liranzo v. LI Jewish Education/Research, N.Y.L.J., July 10, 2013, at 31 (Sup. Ct. Kings County). 82Matter of JP Morgan Chase Bank N.A. (Marie H.), 38 Misc. 3d 363, 956 N.Y.S.2d 856 (Sur. Ct. New York County 2012). 8396 ADM-8 at 8, § 7(b). See also Joseph R.K. v. DeBuono, 97 CV-0948 (N.D.N.Y. Feb. 25, 1998). But see Wong v. Doar, 571 F.3d 247 (2d Cir. 2009), where the affirmed the lower court’s holding that Social Security Disability Insurance payments pass through the beneficiary’s hands first, and therefore may be included in HRA’s calculation of Net Available Monthly Income. 84Matter of J.T., F.H. # 4576742M (Oneida County, 11/16/2006). 85Matter of Kennedy, 3 Misc. 3d 907, 779 N.Y.S.2d 346 (Sur. Ct. Nassau County 2004). 86Matter of Kennedy, 3 Misc. 3d 907, 910, 779 N.Y.S.2d 346, 348 (Sur. Ct. Nassau County 2004). 87Matter of Lynch, File No. 90-1897 (Sur. Ct. Onondaga County 2000).

615

without affecting Medicaid eligibility.88 However, the court approved the funding of the trust with the Social Security Disability Income based on the following “unique circumstances”: there are no particular purposes for which disability income payments must be used (unlike Supplemental Security Income, which is specifically intended to pay for food, clothing, and shelter); the guardian/sister funded a third party trust which purchased a house for use as the beneficiary’s residence; the house will be certified as a residence for developmentally disabled individuals, thereby saving the State money and keeping the property on the tax rolls; and two individuals currently living in a State facility will eventually move into the house, which will create two openings for an additional two people.89 In Matter of Ullman,90 the Surrogate’s Court Onondaga County denied a request to establish a supplemental needs trust to be funded with the beneficiary’s Supplemental Security Income (SSI), which was scheduled to increase from $500 to $905 when he moved into a not-for-profit community residence. The court noted that the trust authorized the trustee to make payments for the beneficiary’s room and board, and thus could be considered “in-kind” income which would reduce his SSI. In addition, SSI is specifically intended to provide for basic living expenses, including food, clothing, and shelter, while a supplemental needs trust is designed to augment the beneficiary’s basic income support. Accordingly, the court found that a supplemental needs trust is not intended to allow a person to isolate SSI benefits in order to qualify for increased benefits. Comment: Although, in justifying its decision, the court in Lynch stated there were “unique circumstances” present, the policy of the New York State Department of Health is to approve the transfer of Social Security Disability Income into a supplemental needs trust regardless of the particular circumstances of an individual case.91 In Matter of G.G.,92 the Department of Health held: “If the Agency finds that the trust in question meets the legal definition, the Agency is directed to exempt monthly income which the Appellant places in (or diverts to) the trust.” Wong v. Doar93 was originally brought to challenge the budgeting of income put into an SNT by an institutionalized individual under the age of 65. The Second Circuit held that for institutional Medicaid since Social Security Disability Insurance payments pass through the individual’s hands first, these payments may be included in the calculation of Net Available

88Id. at 2. Note that this unreported case was a reargument and reversal of the case reported at Matter of Lynch, 703 N.Y.S.2d 653 (Sur. Ct. Onondaga County 1999). 89Id. at 3. 90Matter of Ullman, 184 Misc. 2d 7, 707 N.Y.S.2d 603 (Sur. Ct. Onondaga County 2000). 91Joanne Criscione, Senior Attorney, State of New York Department of Health, Bureau of Medicaid Law, in a letter dated June 25, 2002 to the New York City Human Resources Administration Office of Legal Affairs, stated that “[t]he Department’s policy that Social Security disability payments placed into a SNT are exempted from being counted as income is supported by Matter of Lynch … .” The letter concluded that the Medicaid recipient “may transfer her SSD payments into her supplemental needs trust without affecting her Medicaid eligibility, because they are exempt income.” 92Matter of G.G., F.H. # 3660793L (Onondaga County, April 1, 2002). 93Wong v. Doar, 571 F.3d 247 (2d Cir. 2009).

616

Monthly Income. And in Matter of E.L.,94 the Department of Health did find that income from a structured settlement that was assigned and deposited directly into a supplemental needs trust was exempt from post eligibility chronic care budgeting. In Matter of J.T.,95 the Department of Health held that a recipient’s spouse’s employment income constitutes an asset of a disabled individual which can be placed into a pooled trust to “meet her spenddown” and reduce surplus income. Caution: N.Y. Department of Health Informational 05 OMM/INF-1 (4/19/2005) suggests that this income disregard applies to Medicaid eligibility determinations, but not chronic care budgeting. See Comment at § 6.05[3], above. Over 65 disabled persons putting income into a pooled trust on or after February 8, 2006, may be accumulating a penalty period for later nursing home care under DRA ‘05.96 However the transfers are exempt to the extent the funds were returned when the trustees used funds for the benefit of the disabled person.97 In Correri v. Commissioner of the N.Y.S. Dep’t of Health, et. al.,98 the court held assets including monthly income of a nursing home resident could be transferred to a trust for a disabled child and not count as net available income for the Medicaid recipient. In Matter of Kaiser v. Commissioner of N.Y.S. Dep’t of Health, et al.,99 the court also held that a nursing home resident’s income could be deposit into the Supplemental Needs Trust established for her disabled daughter. In this case the agency argued that the Court in Correri failed to distinguish between eligibility and post-eligibility budgeting. But the court found that such an interpretation would have the effect of “eviscerating trusts that depend on income” and that “statutes and regulations are to be harmonized, and not interpreted in a way that would leave one section without meaning or force.” However, in Jennings v Commissioner, N.Y.S. Dept. of Social Servs.,100 the Appellate Division upheld the Department of Health’s interpretation that post-eligibility budgeting regulations were triggered, and the agency was required to count the income placed by a nursing home Medicaid recipient in a third party SNT for purposes of determining her own contribution towards her post-eligibility benefits. The court relied on the federal law and regulations on post eligibility chronic care budgeting which requires that income disregarded for eligibility purposes

94Matter of E.L., F.H. #5851797N (New York City June 13, 2012). 95Matter of J.T., F.H. # 4576742M (Oneida County June 21, 2006). 9642 USC § 1396p(c)(1)(D)(ii). 97GIS 08 MA/020 (7/24/08). The CMS State Medicaid Manual also provides at § 3259.7(B)(2): “Resources placed in an exempt trust for a disabled individual are subject to imposition of a penalty under the transfer of assets provisions … unless the resources placed in the trust are used to benefit the individual, and the trust purchases items and services for the individual at fair market value … . These rules apply to both income and resources placed in the exempt trusts discussed in this section.” 98Correri v. Commissioner of the N.Y.S. Dep’t of Health, et. al., Index No. 017372/04 (Sup. Ct. Nassau County 2005). 99Matter of Kaiser v. Commissioner of the N.Y.S. Dept. of Health, 13 Misc. 3d 1211(A), 824 N.Y.S.2d 755 (Sup. Ct. Nassau County 2006). 100Jennings v. Commissioner, N.Y.S. Dept. of Social Servs., 71 A.D.3d 98, 893 N.Y.S.2d 103 (2d Dep’t 2010).

617

be counted, subject to certain required deductions not relevant here.101 The court also gave great weight to the interpretation in CMS’s State Medicaid Manual that income placed in an SNT is subject to the post-eligibility rules in 42 CFR Section 435.832.102

Practice Note Use a Supplemental Needs Trust for Income to Reduce or Eliminate a Spenddown. A disabled individual under the age of 65 can divert or place income into an individual payback supplemental needs trust or a pooled trust. If the individual receives income above the Medicaid allowable level, it can be placed in the trust and should not affect either Medicaid community based services (including home health care) or institutional (nursing home) care. However, see Caution regarding chronic care budgeting, above. The trust could then use the funds for the individual’s needs, which could include rent payments that would otherwise make it impossible for the individual to live in the community. A disabled individual over the age of 65 can divert or place income into a pooled supplemental needs trust that will accept income (e.g., NYSARC Trust II). Because of transfer penalties for institutional care for persons over the age of 65, this will only assist someone who requires community based services. The trust could then use the funds for the individual’s needs. The pooled trust’s provisions would determine the amount that would remain in the trust for the benefit of other trust members on the beneficiary’s death. Beyond this, there would be a Medicaid payback provision. Some pooled trusts require minimum initial funding; however, the NYSARC Trust has no minimum. For information on the NYSARC Trusts contact John J. Sherman, NYSARC, Inc., 393 Delaware Ave., Delmar, NY 12054; 518-439-8311. Within these contexts, income transferred into a supplemental needs trust should not be counted for eligibility or spend-down. In Matter of M.O.,103 the New York Department of Health held that income may be diverted to the NYSARC Trust and will not be considered income for the purposes of computing available income for contribution to the cost of care. In Matter of J.T.,104 where a couple applied as a household, the spenddown from the working spouse’s earned income was not counted when deposited into a pooled trust. Caution: The trust may be used by a “disabled person,” however, persons over 65 receiving Medicaid have often never been determined to be disabled. New York State Department of Health requires a separate disability determination.105 Disability determinations for all individuals who are over age 65 and are establishing a pooled trust are to be performed by the State Disability Review Team in Albany. Social Security Administration Ruling SSR 03-3p, Evaluation of Disability and Blindness in Initial Claims for Individuals Aged 65 or Older, prescribes the method used to determine disability for individuals over age 65. A completed and signed DSS-1151 interview form, all appropriate portions of form DSS-486T, and all pertinent medical

10142 USC § 1396p(d)(1); 42 CFR § 435.832(c). 102State Medicaid Manual § 3259.7(C)(5)(b). 103Matter of M.O., F.H. # 3945750N (New York City MAP, February 25, 2004). 104Matter of J.T., F.H. # 4576742M (Oneida County, June 21, 2006). 10505 OMM/INF-1 (4/19/2005).

618

evidence,106 must be submitted to the State Disability Review Team in Albany. The State Disability Review Team will perform the disability determination and send the completed Disability Review Team Certificate (DSS-639) to the local district. If the individual is determined disabled, any of the disabled individual’s income placed in his or her pooled trust account must then be disregarded in determining the disabled individual’s eligibility for Medicaid.

[c] Family Members as Trustees of Supplemental Needs Trusts It is not unusual for a parent to petition the court to be appointed as trustee of a supplemental needs trust in which the parent has a remainder interest after the “payback” to the state Medicaid agency. The courts are divided about whether this conflict of interest should prevent a parent from acting as a trustee. In Matter of Morales,107 the court compared the role of a trustee to that of a guardian and, noting that Article 81 prefers family members as guardian, held that the conflict of interest should not prevent a parent from acting as trustee when the remainder interest is payable to the estate of the beneficiary. Other courts have found an impermissible conflict of interest and directed that the remainder interest be modified.108 Since a supplemental needs trust is a discretionary trust, if the trustee is a remainderman, it may run afoul of the New York law against a trustee making discretionary payments in his own favor unless the trust expressly states that the provision does not apply.109 The court in Matter of Pace,110 relied on the reasoning of Morales, and held that the parents and brother of a disabled adult were not automatically disqualified from serving as trustees. The court emphasized that the remainder interest of the State is adequately protected by regulations mandating certain notifications to the local agency and provisions of the trust requiring, inter alia, annual accountings reviewed by a court examiner and the filing of a bond. The court distinguished DeGennaro v. Community Hospital of Glen Cove111 because that case did not involve a supplemental needs trust, but an income only “Medicaid qualifying trust,” the trustees were not required to file a bond, file annual accounts, and the decision was issued prior to

106For additional requirements see GIS 12 MA/027 (10/12/2012). Additional items which must be submitted and include admission and discharge summaries from hospitalizations occurring during the desired disability determination time period, in addition to medical records from other treatment facilities. See Forms 6.201, 6.202, 6.203, above. 107Matter of Morales, N.Y.L.J., July 28, 1995, at 25 (Sup. Ct. Kings County). 108See, e.g., DeGennaro v. Community Hosp. of Glen Cove, 204 A.D.2d 259, 611 N.Y.S.2d 591 (2d Dep’t 1994); Merer v. Romoff, 172 Misc. 2d 807, 660 N.Y.S.2d 241 (Sup. Ct. New York County 1997) (court directed remainder to be paid to estate of infant beneficiary, rather than to issue and alternatively to intestate distributees, and appointed independent trustee rather than parents because of conflict of interest with beneficiary and DSS); Matter of Devita, N.Y.L.J., May 22, 1995, at 32 (Sup. Ct. Suffolk County); Matter of McMullen, 166 Misc. 2d 117, 632 N.Y.S.2d 401 (Sup. Ct. Suffolk County 1995) (co-trustees as named remainder man); Matter of Kacer, N.Y.L.J., Nov. 1, 1994, at 33 (Sup. Ct. Suffolk County) (remainder payable to issue of the beneficiary and then alternatively to the named trustees). 109EPTL 10-10.1, as amended by 2003 N.Y. Laws 633 and 2004 N.Y. Laws 82. Such a provision may cause the IRS to consider the trustee as holding a general power of appointment and cause unintended tax consequences to the trustee. 110Matter of Pace, 182 Misc. 2d 618, 699 N.Y.S.2d 257 (Sup. Ct. Suffolk County 1999). 111DeGennaro v. Community Hosp. of Glen Cove, 204 A.D.2d 259, 611 N.Y.S.2d 591 (2d Dep’t 1994).

619

the federal and state legislation authorizing self-settled trusts for persons with disabilities. The court noted that an automatic exclusion of a disabled person’s family members as trustees would violate public policy as embodied in Article 81. Instead, the court suggested that the decision to appoint a family member or an independent person or entity as trustee should be based on the family member’s “history of caring and sacrificing for the disabled person; proven financial and fiduciary skills; and attitudes concerning the appropriate use and expenditure of the disabled person’s funds. In addition, the proposed trustee’s personal financial stability and credit history, including any existing judgments and bankruptcies, would be a relevant area of inquiry.” The court in Matter of Regina112 held that annual accounts, proposed budgets, and other safeguards were sufficient to enable the court to “trust but verify” the actions of the beneficiary’s parent as trustee. The court also denied the request by the Department of Social Services for oversight authority that went beyond the notice and reporting requirements imposed by the State regulatory framework.

[4] Transfers into Trust-like Device for Disabled Person in State Facility

A person with a developmental disability or mental retardation who resides in a state facility, including but not limited to a community residence, may be able to utilize an arrangement in which assets are transferred to the Commissioner of the N.Y.S. OPWDD113 to be held in trust for the person.114 Mental Hygiene Law Section 13.29 provides that the Commissioner may accept gifts or trusts of property on behalf of the state and use them, inter alia, for the benefit of a patient in a facility. When there is no person able or willing to administer a trust as a trustee, and a pooled trust is not utilized, this arrangement should be considered. See Comment, § 10.08[2][c], below. Matter of Larson115 involved an application by co-guardians to shelter a $25,000 inheritance received by David Larson, a resident of an Individualized Residential Alternative under the jurisdiction of OMRDD. Mr. Larson was under 65 and receiving SSI and Medicaid. The court found that this arrangement met the definition of a trust contained in both federal and state law116 and that a guardian appointed under SCPA Article 17-A had the authority to exercise substituted judgment to transfer assets with court approval.117 Notably, the State took the position that the transfer was for valuable consideration in that OMRDD waived its claim and thus did not create a penalty period for SSI. The court approved the transfer with the condition that the Commissioner file annual accounts with the court.

112Matter of Regina, N.Y.L.J., Nov. 2, 2001, at 20 (Sup. Ct. Queens County). 113Office for People With Developmental Disabilities. 114Matter of Larson, 190 Misc. 2d 482, 738 N.Y.S.2d 827 (Sur. Ct. Nassau County 2002). 115Matter of Larson, 190 Misc. 2d 482, 738 N.Y.S.2d 827 (Sur. Ct. Nassau County 2002). 116Matter of Larson, 190 Misc. 2d 482, 483, 738 N.Y.S.2d 827 (Sur. Ct. Nassau County 2002), citing 42 USC § 1396p(d)(4)(A), SSL § 366(2)(b)(2)(iv), and 18 NYCRR § 360-4.5(e). 117Matter of Larson, 190 Misc. 2d 482, 485, 738 N.Y.S.2d 827 (Sur. Ct. Nassau County 2002), citing Matter of Daly, 142 Misc. 2d 85, 536 N.Y.S.2d 393 (Sur. Ct. Nassau County 1988). It is essential that the assets actually be transferred to the Commissioner so that the property does not continue to be owned by the resident who receives government benefits. See, e.g., Matter of Patrick BB., 284 A.D.2d 636, 725 N.Y.S.2d 731 (3d Dep’t 2001).

620

[5] ABLE Act Accounts Achieving a Better Life Experience Act of 2014 or the ABLE Act of 2014117.1 signed into federal law on December 19, 2014, provides a potential but limited alternative for some people to a Supplemental Needs Trust. It permits a state to establish and maintain a new type of tax-advantaged savings program, The new law will allow people with disabilities to open special accounts where they can save up to $100,000 while maintaining SSI eligibility. Any amount (including earnings) in the ABLE account, any contributions to the ABLE account of the individual, and any distribution for qualified disability expenses (as defined in subsection (e)(5) of such section) shall be disregarded for such purpose with respect to any period during which such individual maintains, makes contributions to, or receives distributions from such ABLE account, Assets above $100,000 will count as resources under SSI, but the individual's SSI benefits will not be terminated, but will be suspended until such time as the individual's resources fall below $100,000. For Medicaid coverage it does not matter how much money is accrued in an ABLE account. The ABLE Act is modeled after 529 college savings plans and interest earned on savings will be tax-free. Funds accrued in the accounts can be used to pay for education, health care, transportation, housing and other expenses. To be eligible, individuals must have a disabling condition that occurred before age 26 and each person may only open one ABLE account. There is a Medicaid payback provision; however the amount to be paid back is only for Medicaid received after the creation of the account. An ABLE account may not receive annual contributions exceeding the annual gift-tax exemption ($14,000 in 2015). Any person, such as a family member, friend, or the person with a disability, may contribute to an ABLE account for an eligible beneficiary. The Secretary of the Treasury is required to issue regulations or other necessary guidance and each state must enact enabling legislation. Internal Revenue Bulletin 2015-12 (3/23/2015) Notice 2015-18 contains advance notification of a provision anticipated to be included in the proposed regulations. New York has not as of this writing enacted such legislation.

§ 8.04 Medicaid Liens As required by federal law, New York restricts use of liens and recoveries to recoup Medicaid payments prior to death. Lien may be placed against property of Medicaid recipient prior to death pursuant to court judgment that Medicaid benefits were incorrectly paid, and against real property of person who does not intend to return and who is not reasonably expected to be discharged from medical institution, if no protected relatives reside there. Lien may attach to proceeds of personal injury or malpractice verdict, judgment, award, or settlement.

117.1 113 P.L. 295 Title IV, Division B; IRC Sec. 529A

621

[1] Lien Against Property for Benefits Incorrectly Paid A lien is permitted against the property of a Medicaid recipient who received incorrectly paid benefits.1 The local Department of Social Services must obtain a judgment for the amount of services incorrectly paid prior to imposing a lien.2

[2] Lien Against Real Property of Institutionalized Person

[a] Lien Prohibited if Home Occupied by Certain Relatives A lien is prohibited against the real property of a person who is permanently institutionalized if one of the following lawfully resides in the home:

• a spouse;

• a child under 21 or who is blind or permanently and totally disabled; or

• a sibling who has an equity interest in the home and who resided in the home for at least one year before the date of the recipient’s admission to the medical institution.3

[b] Permanent Absence of Institutionalized Person Even if the home is not protected because one of the above relatives resides there, the local department may not impose a lien on real property unless a person is permanently absent because she resides in a medical institution, is not reasonably expected to be discharged, and is required to spend for costs of medical care all but a minimal amount of his income required for personal needs.4 If an institutionalized person5 does not have a subjective intent to return home and is not reasonably expected to return home, the home loses its exempt status. In addition, no lien may be imposed on the home of a person receiving Medicaid extended coverage under the Partnership for Long-Term Care Program, after the person has exhausted the coverage and benefits under an approved long-term care insurance policy.6 Comment: The local Medicaid agency must give a permanently institutionalized individual the opportunity to make an exempt transfer of the homestead before imposing a lien, and allow a

1SSL § 369(2)(a)(i); 18 NYCRR § 360-7.11(a)(1). 2SSL § 369(2)(a)(i); 18 NYCRR § 360-7.11(a)(1). 3SSL § 369(2)(a)(ii); 18 NYCRR § 360-7.11(a)(3)(ii). For purposes of liens and recoveries, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. In 2011, New York legalized same-sex marriages. 2011 N.Y. Laws 95 adding DRL § 10-a. GIS 08 MA/23 (08/20/08). See Comment at § 6.05[2]. 4SSL § 369(2)(a)(ii), as amended by 2014 N.Y. Laws 60 Part C § 62; 18 NYCRR § 360-7.11(a)(3)(ii). The 2014 amendment was made to exclude persons receiving these services as part of Benchmark Medicaid in a MAGI related category. GIS 14 MA/016 (08/05/2014). See CMS State Medicaid Director Letter #14-001 (02/21/2014) at http://medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-14-001.pdf. 5This includes an inpatient in a nursing facility, intermediate care facility for the mentally retarded or other medical institution. 18 NYCRR § 360-4.4(c)(2)(i)(b). 6SSL § 367-f.

622

reasonable time (i.e., at least 90 days and more if circumstances beyond the control of the individual create difficulties or delays).7 There is a presumption that the Medicaid recipient is in “permanent absence status” and will not return home if she resides in a residential health care facility (i.e., nursing home); enters a skilled intermediate care facility; is transferred from acute care to alternate level of care while awaiting placement in a residential health care facility; or does not have a community spouse and resides in an acute care hospital for more than six calendar months.8 Comment: Submit medical evidence to demonstrate that the person has a reasonable expectation of returning home in order to overcome the presumption that the person is in permanent absence status. This objective evidence will prevent the home from being subject to a lien. Note that, in contrast, it is the subjective intent to return home which controls the determination of whether the home loses its exempt status and may be considered an available resource. Although the regulation states only that adequate medical evidence may overcome these presumptions, the court in Anna W. v. Bane9 held that the regulation was more restrictive than the SSI regulations regarding the circumstances under which a homestead may be considered an available resource for purposes of Medicaid eligibility because it did not consider a person’s subjective intent to return home.10 The effect of the court’s holding is that the state is enjoined from enforcing the regulation as written, and must consider the subjective intent of a person to return home before determining that the home is an available resource, regardless of whether the medical evidence indicates that the person is not reasonably expected to return home. If an institutionalized person has a subjective intent to return home in the future, the local department may not consider the home an available (excess) resource. Conversely, if the person is in permanent absence status, and does not have a subjective intent to return home, the home becomes an excess resource and Medicaid eligibility will be denied.11 If the home is placed into a revocable trust, there is a question as to whether a lien can be imposed on the trust assets. However, the local Medicaid agency may try to require an applicant for institutionalized care to revoke the trust as a condition of eligibility.

702 OMM/ADM-3 at 7. 818 NYCRR § 360-1.4(k). 9Anna W. v. Bane, 863 F. Supp. 125 (W.D.N.Y. 1993). 1020 CFR § 416.1212(c) provides that “if an individual (and spouse, if any) moves out of his or her home without the intent to return, the home becomes a countable resource because it is no longer the individual’s principal place of residence.” 1118 NYCRR § 360-2.2(d). This regulation states that the provisions of 18 NYCRR § 352.23(b)(6), allowing conditional Medicaid eligibility for six months while the institutionalized applicant sells real property, no longer apply.

623

However, within the context of estate recovery, the amount that may be recovered from enforcement of the lien is limited to the value of services provided while the person was in permanent absence status because the home did not become subject to a lien until the recipient stopped residing there permanently.12 The local Department of Social Services must provide adequate notice and prove at a hearing that the person cannot reasonably be expected to be discharged from the institution and return home.13 If the person returns home, the lien dissolves.14 However, the home may be subject to estate recovery after the person’s death. See § 8.05, below.

Practice Note Document a Client’s Intent to Return Home to Maintain the Home as an Exempt Asset. A person who owns a home and becomes institutionalized will not be eligible for Medicaid due to excess assets unless the person has an intent to return home. This intent may be expressed in a letter or affidavit signed by the person, or by written statements of relatives or friends who have personal knowledge of the person’s intent to return home. A subjective intent to return home controls, even if there is no reasonable expectation that the person will be discharged and return home. However, in contrast to the determination whether the home is an available resource, the controlling factor for the imposition of a lien is whether the person is permanently absent and not reasonably expected to be discharged. If the agency prevails after adequate notice is provided and a hearing (if requested), a lien can be imposed on the home even if there is a subjective intent to return home.

[c] Limits on Enforcement of Lien If a lien has been placed on a home, any adjustment or recovery on the lien may only be made when the home is not occupied by a sibling who has an equity interest in the home, who resided in the home for at least one year before the date of the recipient’s admission to the medical institution, and who has continued to reside in the home subsequent to the recipient’s admission to a medical institution or by a caretaker adult child who resided in the home for at least two years prior to the date of institutionalization while providing care that enabled the person to reside at home, and who has continued to reside in the home since the recipient’s admission to the institution.15 See § 8.02[2][a], above, for similar provisions involving exempt transfers of a homestead. The provisions restraining adjustment or recovery of a lien must be read together with the

12SSL § 369(2)(a)(ii). 1342 USC § 1396p(a)(2); 42 CFR § 433.36(d). 1418 NYCRR § 360-7.11(a)(3)(i). 15SSL § 369(2)(a)(iii); 02 OMM/ADM-3 at 7, 8.

624

provisions prohibiting liens and recoveries and the separate provisions governing exempt transfers (see § 8.02[2], above). A lien is prohibited if a spouse, a minor, blind, or disabled child, or a sibling who has an equity interest in the property resides in the home. The enforcement provisions therefore only apply when a caretaker child resides in the home or, after a lien is placed against real property, a person in one of the protected classes begins to reside in the home. In addition, a lien may be waived “[i]n cases of undue hardship, as determined pursuant to the regulations of the department in accordance with criteria established by the secretary of the federal department of health and human services.”16 For a discussion of undue hardship, see § 8.05[4], below. No adjustment or recovery on a lien or against an estate may be made until after the death of a surviving spouse and only when there is no surviving minor, blind, or disabled child.17 See §§ 8.05[2] and [3], below. Since no lien is permitted to be placed against property if a sibling who has an equity interest in the property resides in the home, the limitation on enforcement appears superfluous. The Medicaid applicant or recipient is permitted to transfer the home to an adult caretaker child without penalty, so a lien may be avoided merely by making a transfer to the caretaker child. See § 8.02[2][a], above. Medicaid’s right of recovery against an estate is not subject to the above prohibitions and limitations that apply to liens when a sibling who has an equity interest or a caretaker child resides in the home. See § 8.05, below. Anomalously, the local department may therefore have a greater right under estate recovery provisions than through enforcement of a lien when a sibling or caretaker child resides in the house. This may enable the local department to obtain recovery from an estate that includes a house in which a sibling who has an equity interest or a caretaker child resides.

[3] Liens Against Personal Injury and Malpractice Causes of Action A lien may be attached against a cause of action for personal injury or malpractice to the extent Medicaid services were provided for the injuries suffered.18 See §§ 7.03[1] and [4], above. And the amount of the lien should be limited to the proportion of the recovery attributed to medical costs. See discussion in this subsection of Arkansas HHS v. Ahlborn, below. However, no lien may be imposed or recovery made during the lifetime of a recipient under the following circumstances: when the proceeds result from an action against a residential health care facility;19 when the “injury-related” Medicaid was provided for school-based medical care and services to which a child with a disability was entitled pursuant to the Federal Individuals with Disabilities Act;20 or when there is a claim or award under the Workers’ Compensation Law or the Volunteer

16SSL § 369(5). 17SSL § 366(2)(b)(ii). 18SSL § 104-b(1); 02 OMM/ADM-3 at 14–17; Matter of Arceny, N.Y.L.J., Sept. 10, 2001, at 23 (Sur. Ct. Nassau County) (lien limited to amounts of Medicaid expended on care and services related to injuries caused by defendants). See also 42 USC § 1396a(a)(25)(H). Although Medicaid Managed Care plans can pursue third-party health insurance coverage, liens are the sole provenance of the Department of Health and the local agencies. 19Pub. Health Law § 2801-d(5); 02 OMM/ADM-3 at 15. 2002 OMM/ADM-3 at 15.

625

Firemen’s Benefit Law.21 Even if the plaintiff is an infant, a Medicaid lien may be asserted against proceeds of a personal injury settlement or award. In Gold ex rel. Gold v. United Health Services Hospital, Inc. and Santiago ex rel. Santiago v. Craigbrand Realty Corp.,22 the New York Court of Appeals held that the restrictions contained in Social Services Law Section 104(2), which limit the enforcement of a lien against proceeds payable to a recipient of public assistance who is a minor under the age of 21, do not apply within the Medicaid context. The court held that Medicaid liens are governed by the broad assignment, subrogation, and recoupment provisions contained in federal and state Medicaid statutes and regulations, which operate independently from statutes that relate to public assistance liens. The Medicaid recipient must provide notice of the commencement of any action by serving the local agency or the department of health.23 The local department must serve a notice of lien that contains information about the parties involved, the accident, and the nature of the lien, upon the plaintiff, defendant, their respective attorneys, and insurance carrier by registered mail. A copy must also be served upon the Medicaid recipient and her attorney by regular mail.24 The notice of lien must be served upon the insurance carrier at least 20 days prior to any payment to the plaintiff.25 In addition, the notice of lien must be filed in the County Clerk’s office in the county where the local department that issued the notice of lien is located.26 In Gilbert v. Brookdale Hospital Medical Center,27 the New York City DSS asserted a lien against the proceeds of a medical malpractice settlement. DSS gave notice to the plaintiffs’ attorneys and to the plaintiffs by certified mail on March 9, 1998, but did not provide notice to the defendants or their insurance carriers. On or about April 1, 1998, the infant plaintiff received $1,000,000, which represented one-third of the total settlement. The court found that Social Services Law Section 104-b must be strictly construed because it is in derogation of the common law prohibiting a levy against a recipient of public assistance.28 In Gilbert, the court vacated the lien because the plaintiffs, the defendants, their respective attorneys, and the insurance carriers were not served by registered mail, and therefore the notice requirements of Section 104-b were not met.29

21SSL § 104-b; 02 OMM/ADM-3 at 15. 22Gold ex rel. Gold v. United Health Services Hospital, Inc. and Santiago ex rel. Santiago v. Craigbrand Realty Corp., 95 N.Y.2d 683, 723 N.Y.S.2d 117, 746 N.E. 172 (2001). 23SSL § 104-b(1) amended by 2011 N.Y. Laws 59 and CPLR § 306-c added by 2011 N.Y. Laws 59. 24SSL § 104-b(2); 02 OMM/ADM-3 at 16. 25SSL § 104-b(2); 02 OMM/ADM-3 at 16. 26SSL § 104-b(3); 02 OMM/ADM-3 at 16. 27Gilbert v. Brookdale Hosp. Med. Ctr., N.Y.L.J., July 24, 1998, at 25 (Sup. Ct. Kings County). 28Gilbert v. Brookdale Hosp. Med. Ctr., N.Y.L.J., July 24, 1998, at 25 (Sup. Ct. Kings County), citing Franklin v. Fiorella, 99 Misc. 2d 325, 416 N.Y.S.2d 169 (Sup. Ct. Chautauqua County 1979). 29In dicta, the court rejected the plaintiff’s argument that a lien may never be imposed against an infant. The court, relying on Cricchio v. Pennisi, 90 N.Y.2d 296, 660 N.Y.S.2d 679, 683 N.E.2d 301 (1997), stated that a lien is never enforced against the Medicaid recipient, but only against the third party responsible for the injuries. The court asserted that Baker v. Sterling, 39 N.Y.2d 397, 384 N.Y.S.2d 128, 348 N.E.2d 584

626

In George v. Weir-Metro Ambulette Service Inc.,30 Medicaid liens were vacated because DSS failed to comply with the statutory requirements that a lien be served and filed before an action is settled and the proceeds distributed to the plaintiff. The court held that once the settlement funds had been distributed to the Medicaid recipient, no lien may attach pursuant to Social Services Law Section 369(a)(2) which prohibits a lien against a Medicaid recipient’s property until after her death. But in Iannizzi v. Seckin,31 the court found that a plaintiff may not defeat a DSS lien by negotiating and reaching a settlement, without notice to the DSS, and then placing the settlement funds in escrow. The court had previously ordered that the settlement proceeds be held in escrow in order to determine the validity of the DSS lien. The subsequent transfer of the settlement proceeds to a guardianship account would not invalidate the DSS claim to recoupment. In Torres v. Hirsch Park, LLC,32 the Appellate Division upheld the lower court’s order to pay settlement proceeds into court, and to stay entering judgment pending compliance with a prior order directing plaintiff to provide the defendant with authorizations to obtain his Medicare and Medicaid records. The court also found that a general release and stipulation of settlement was defective where they failed to include provisions releasing and holding the defendant harmless from potential Medicare and Medicaid liens. A stipulation of settlement may be set aside on the ground of mutual mistake where none of the parties considered the impact of a potential Medicaid lien in negotiating the settlement.33 In Navedo-Levy v. Methodist Hospital,34 the court held that an amended notice of lien could not only update the amount of the lien, but correct mistakes in the amount of the original notice. In Estate of Barnes v. Lawrence Nursing Care Center,35 the court held that the recovery of damages by the patient in an action brought pursuant to Public Health Law Section 2801-d, while exempt for purposes of determining initial or continuing eligibility for medical assistance, is not exempt from a Medicaid lien. See §§ 6.05[3] and 6.06[3][i], above.

(1976), does not prevent a lien from being asserted against the responsible third party when the injured party is a minor or infant. 30George v. Weir-Metro Ambulette Service Inc., N.Y.L.J., Nov. 21, 2000, at 28 (Sup. Ct. Kings County). 31Iannizzi v. Seckin, 5 A.D.3d 555, 556, 772 N.Y.S.2d 838 (2d Dep’t 2004). The lower court (Iannizzi v. Seckin, N.Y.L.J., Dec. 9, 2002, at 33 (Sup. Ct. Kings County)) had cited the unreported case of Mejia v. Brooklyn Hospital Center (Index No. 14241/93 (Sup. Ct. Kings County July 25, 2000)), but distinguished it because in that case there were numerous statutory deficiencies in the DSS’ Notice of Lien. 32Torres v. Hirsch Park, LLC, 91 A.D.3d 942, 938 N.Y.S.2d 145 (2d Dep’t 2012). The court relied on CPLR 2601 and 5003-a. Regarding the statutory duty to report the identity of a claimant who is entitled to Medicare benefits it relied on 42 USC § 1395y(b)(8). 33Mahon v. New York City Health and Hospitals Corp., 303 A.D.2d 725, 756 N.Y.S.2d 875 (2d Dep’t 2003). 34Navedo-Levy v. Methodist Hosp., 19 A.D.3d 566, 567, 796 N.Y.S.2d 538 (2d Dep’t 2005), appeal denied, 5 N.Y.3d 714, 806 N.Y.S.2d 165, 840 N.E.2d 134 (2005). 35Estate of Barnes v. Lawrence Nursing Care Ctr., 2 Misc. 3d 337, 773 N.Y.S. 2d 208 (Sup. Ct. Kings County 2003).

627

In Andree v. County of Nassau,36 the court found that DSS’s placement of a lien on settlement or personal injury awards received by a disabled student to pay for services that are mandated to be provided free of charge is a violation of Individuals with Disabilities Education Act (IDEA), 20 USC Section 1400, et seq. The court also held that a claim was stated for a procedural due process cause of action, in that Social Services Law Section 104-b allows a lien to be placed without warning or prior notice.37 In Arkansas HHS v. Ahlborn,38 a unanimous United States Supreme Court held that when a Medicaid recipient obtains a tort settlement following payment of medical costs on her behalf by Medicaid, the lien is limited to the amount of proceeds meant to compensate the recipient for medical costs and not from damages for pain and suffering, lost wages, and loss of future earnings. Caution: Effective October 1, 2016,39 Section 202(b) of the federal Bipartisan Budget Act of 2013 will negate the holding in Ahlborn. The law amends 42 USC § 1396a(a)(25), 42 USC § 1396k(a)(1)(A), and 42 USC § 1396p(a)(1)(A) to permit recovery not just for health care items or services but for “any payments” recovered from a third party. To resolve any ambiguity about lien rights against tort recoveries, § 202(b)(3) amended 42 USC § 1396p(a)(1)(A) to permit Medicaid programs to place a lien against “rights acquired by or assigned to the State” in accordance with 42 USC § 1396a(a)(25)(H) or 42 USC § 1396k(a)(1)(A). It is unclear how this will effect the New York Law and the New York case law that came down after Ahlborn. Prior to Ahlborn, the rule in New York had been that a valid Medicaid lien may be enforced against the entire amount of a personal injury settlement, award, or verdict before the proceeds are transferred into a supplemental needs trust. In Cricchio v. Pennisi and Link v. Town of Smithtown,40 the New York Court of Appeals had held that a Medicaid lien may be enforced against the proceeds of a personal injury settlement, pursuant to Social Services Law Section 104-b, prior to the funding of a supplemental needs trust. Initially, the decision in Cricchio held that the lien could only be satisfied from the portion of the settlement allocated for past medical expenses, not the amount allocated to pain and suffering, and remanded the case for an allocation. However, the court granted an unusual post-decision motion to modify the language of the decision, and amended its decision to leave open the question of whether the lien could be satisfied only from the portion of the settlement allocated to past medical expenses or from the entire proceeds.

36Andree v. County of Nassau, 311 F. Supp. 2d 325, 333 (D.N.Y. 2004). 37Andree v. County of Nassau, 311 F. Supp. 2d 325, 336 (D.N.Y., 2004). 38Arkansas HHS v. Ahlborn, 547 U.S. 268, 126 S. Ct. 1752, 164 L. Ed. 2d 459 (2006). In Alhorn there was an agreement apportioning the settlement between medical costs and other damages, however the court found the result would be the same for a judge-allocated settlement or a jury award which establishes a liability for both medical care and other kinds of damages. 39The effective date was changed from 2014 to 2016 by § 211 of the Protecting Access to Medicare Act of 2014, Pub. L. No. 113-93. 40Cricchio v. Pennisi and Link v. Town of Smithtown, 90 N.Y.2d 296, 660 N.Y.S.2d 679, 683 N.E.2d 301 (1997). The Cricchio and Link cases were decided together.

628

Subsequently, in Calvanese v. Calvanese/Matter of Callahan,41 the New York Court of Appeals held that the Medicaid lien can be enforced against the entire amount of the settlement proceeds, without regard to any allocation made between pain and suffering and past medical expenses. As in Cricchio, the Court endorsed New York’s assignment, subrogation, and lien provisions as appropriate means to comply with the subrogation requirement under federal law.42 The Court rejected any arguments limiting the scope of the Department’s right to reimbursement from third parties on the grounds that it would weaken the role of Medicaid as the payor of last resort.43 In addition the court noted that this would create an “anomalous situation in which Medicaid applicants could be disqualified from eligibility for financial resources that include prior personal injury settlements allocated to pain and suffering, but Medicaid recipients could shield such funds from recoupment by the Department after having received significant public assistance.”44 Prior to Ahlborn, the New York cases created the possibility of a major inequity: if the amount of the lien was equal to or greater than the amount of the personal injury settlement, there was no incentive to pursue a personal injury action. The Court of Appeals left it to the discretion of the local department to accept a reduced amount in satisfaction of the lien in order to leave a sufficient amount to fund the trust for items not covered by Medicaid. However, the local department may only have the authority to waive liens up to a maximum amount equal to two years of maintenance.45 Only the local public welfare official had the authority both to fix the amount of the lien and to release and discharge it.46

41Calvanese v. Calvanese/Matter of Callahan, 93 N.Y.2d 111, 116, 688 N.Y.S.2d 479, 481, 710 N.E.2d 1079 (1999). 42A Medicaid applicant is required to assign her right to seek reimbursement from third parties. See 42 USC § 1396k(a)(1); 42 CFR § 433.146(c); SSL § 366(4)(h)(1); 18 NYCRR § 360-7.4(a)(6). These assignment provisions are consistent with the federal law requirement that a State must acquire the rights of Medicaid recipients “to payment by any other party for such health care items or services,” and must retain from the recovery an amount “necessary to reimburse it for medical assistance payments made on behalf of an individual.” 42 USC §§ 1396a(a)(25)(H), 1396k(b). Although the foregoing language appears to limit a State to a third party’s payment for “such health care items or services,” the New York Court of Appeals had adopted a more expansive interpretation. 43See also Santiago v. Craigbrand Realty Corp., 268 A.D.2d 28, 706 N.Y.S.2d 87 (1st Dep’t 2000). 44Calvanese v. Calvanese (In re Callahan), 93 N.Y.2d 111, 119, 688 N.Y.S.2d 479, 483, 710 N.E.2d 1079 (1999). In reality, this “anomalous situation” would not exist—a Medicaid applicant would not be disqualified because of a personal injury settlement allocated solely for pain and suffering if the applicant transferred the funds into a supplemental needs trust as permitted by law. See also Towne v. County of Saratoga, 255 A.D.2d 650, 680 N.Y.S.2d 129 (3d Dep’t 1998) (allowing lien to be satisfied from proceeds of settlement against State Office of Mental Health prior to funding of the supplemental needs trust although most of the medical costs recovered would be passed from the county to the state, and the state Office of Mental Health, as settling tort-feasor, had agreed to waive its right to be reimbursed for certain medical costs; the court stated that the state only waived its right to collect certain medical costs and was not a “blanket waiver”). For additional cases involving liens, see n.20, above. 45SSL § 104-b(13). Although “maintenance” refers to cash assistance, it applies to the value of Medicaid services provided. 46James v. City of Olean, 309 A.D.2d 1244, 765 N.Y.S.2d 88 (4th Dep’t 2003); Veno v. Saleh, 306 A.D.2d 876, 760 N.Y.S.2d 913 (4th Dep’t 2003).

629

After Ahlborn, only the portion of the personal injury settlement or award specifically allocated to compensate for past medical expenses arising out of the personal injury is available to satisfy a Medicaid lien. Any portion allocated to compensate for pain and suffering, lost wages, and other non-medical damages is not available to satisfy the lien. A minor’s personal injury settlement or award is also subject to this policy.47 In Lugo v. Beth Israel Med. Ctr.,48 the court held that in determining the allocation the court must confirm the full value of the case and the value of the various items of damages, including plaintiff’s injuries and how they compare to verdicts awarded in other cases. The parties are also entitled to be heard on the fair allocation of the settlement proceeds and the local agency is entitled to an opportunity to challenge the data proffered by plaintiffs as to the “true value” of the case. In Harris v. City of New York,49 even though plaintiff and defendant settled the litigation on the basis that the entire award was for pain and suffering, the Medicaid agency was entitled to a Lugo hearing to determine the percentage of the settlement that was for pain and suffering and what amount is to be paid to the agency to reimburse it for medical expenses. In Homan v. County of Cattaraugus Dept. of Social Servs.,50 the court held a plaintiff cannot avoid a Medicaid lien by settling with the tortfeasor for pain and suffering only, nor is the agency limited to a right of subrogation rather than a lien. And finally the court decided that the agency has a lien against proceeds received by an applicant/recipient as a supplemental uninsured/underinsured motorist under another’s insurance policy. See also Chamorro v Cole,51 holding that parties may not avoid a Medicaid lien merely by making a self-serving declaration regarding how they wish settlement proceeds to be allocated. In Matter of Homan v. County of Cattaraugus Dept. of Social Servs.,52 the court held Ahlborn does not permit a plaintiff to avoid a Medicaid lien by settling with the tortfeasor for pain and suffering only and that Ahlborn does not limit the agency to a right of subrogation rather than a lien. However in Matter of Wigfall,53 where the Medicaid agency asserted a lien, was given notice but defaulted and the recipient’s estate claimed none of the gross settlement proceeds represented reimbursement for past medical expenses, but were instead entirely for conscious pain and suffering, the allegations were deemed “due proof” of the facts and the court approved the rejection of the payment of any portion of the Medicaid lien.

47GIS 06 MA/022 (9/14/06). See also Lugo v. Beth Israel Med. Ctr., 13 Misc. 3d 681, 819 N.Y.S.2d 892 (Sup Ct. New York County 2006). 48Lugo v. Beth Israel Med. Ctr., 13 Misc. 3d 681, 819 N.Y.S.2d 892 (Sup Ct. New York County 2006). The court also held that only the amount of the Medicaid lien needs to be held in escrow pending the determination of the allocation. In Chambers v. Jain, 15 Misc. 3d 1120(A), 839 N.Y.S.2d 432 (Sup. Ct. Queens County 2007) the court held the agency was timely served with the application for an Infant’s Compromise Order when it acknowledged that it received the petition for an Infant’s Compromise Order by mail. 49Harris v. City of New York, 16 Misc. 3d 674, 837 N.Y.S.2d 486 (Sup. Ct. New York County 2007). 50Homan v. County of Cattaraugus Dept. of Social Servs., 74 A.D.3d 1754, 905 N.Y.S.2d 387 (4th Dep’t 2010). 51Chamorro v. Cole, 2010 N.Y. Misc. LEXIS 4593 (Sup. Ct. Bronx County Sept. 17, 2010). 52Matter of Homan v. County of Cattaraugus Dept. of Social Servs., 74 A.D.3d 1754, 905 N.Y.S.2d 387 (4th Dep’t 2010). 53Matter of Wigfall, 20 Misc. 3d 648, 859 N.Y.S.2d 864 (Sur. Ct. Westchester County 2008).

630

In Morales v. New York City Health & Hosps. Corp.,54 the court would not allow an Ahlborn allocation to reduce the lien where the parties had stipulated that the settlement required that all Medicaid liens would be satisfied in full. In D.C. v. City of New York,55 where the City was both the tortfeasor and the lien holder, the court held that a settlement which was characterized as compensation for pain and suffering was binding and the lien was vacated. The court did not reach the more general question whether the City may ever enforce its lien when it is also the defendant. In Fried v. City of New York,56 the court found that in any settlement between a plaintiff and a city agency the proceeds covered by the Infant Compromise Order do not to include compensation for past medical expenses to which any Medicaid lien could attach. In a motion post Ahlborn the court did not allow vacatur of a negotiated Medicaid lien in a settlement order reached prior to Ahlborn.57 However, the Ahlborn limitations on a Medicaid recovery against a tort action do not apply to the agency’s claim against the estate of a Medicaid recipient pursuant to Social Services Law Section 369(2)(b)(i)(B).58 See § 8.05, below. Likewise neither anti-lien provisions of the statute nor the Ahlborn holding have any application to other public assistance funds, under the New York Social Services Law.59 In Matter of Paez,60 the court found there was no reason why the same principles of the Ahlborn allocation should not be utilized in making an allocation between wrongful death and personal injury. Only the portion of the recovery allocated to personal injury is available to satisfy the Medicaid’s claim because the wrongful death recovery is solely for the benefit of the decedent’s distributees to compensate them for their pecuniary injuries, while the personal injury recovery accrues to the decedent’s estate and is subject to the claims of the decedent’s creditors. And in Matter of Heard,61 decedent’s estate received recovery for injuries sustained while living at a nursing home and continuing to his date of death. The court allowed estate recovery of all medical assistance and did not limit the recovery to the cost of medical care resulting from the personal injury. For Medicare recovery rights see § 5.03[3], above. It is unclear if the Ahlborn allocation

54Morales v. New York City Health & Hosps. Corp., 34 Misc. 3d 835, 935 N.Y.S.2d 850 (Sup. Ct. New York County 2011). 55D.C. v. City of New York, 18 Misc. 3d 1116(A), 856 N.Y.S.2d 497 (Sup. Ct. Kings County 2008). 56Fried v. City of New York, 35 Misc. 3d 601, 940 N.Y.S.2d 795 (Sup. Ct. Kings County 2012). The court rejected the holding in Sullivan v County of Suffolk, 1 F. Supp. 2d 186 (E.D.N.Y. 1998) as not persuasive and not binding since the issue of the validity and extent of state liens is generally a determination involving state law. 57Fergeson v. IHB Realty, Inc., 13 Misc. 3d 1029, 821 N.Y.S.2d 848 (Sup. Ct. Kings County 2006). 58Matter of Ramirez, 14 Misc. 3d 480, 826 N.Y.S.2d 553 (Sur. Ct. Bronx County 2006); Matter of Heard, 79 A.D.3d 74, 911 N.Y.S.2d 534 (4th Dep’t 2010). 59Corridan v. Public Adm’r, N.Y.L.J., June 10, 2009, at 110, 2009 N.Y. Misc. LEXIS 2570 (Sup. Ct. Suffolk County). 60Matter of Paez, 20 Misc. 3d 1102(A), 867 N.Y.S.2d 18 (Sur. Ct. Bronx County 2008). 61Matter of Heard, 79 A.D.3d 74, 911 N.Y.S.2d 534 (4th Dep’t 2010).

631

applies to Medicare liens.62 Other insurers may have subrogation rights against funds in a Supplemental Needs Trust. In Iron Workers Locals 40, 361 & 417 Health Fund. v. Dinnigan,63 the court found that funds in the special needs trust were specifically identifiable as the funds intended for potential reimbursement of an ERISA insurer and therefore subject to subrogation. Caution: The personal injury attorney’s retainer should make clear (subject to Appellate Division rules) that the fees for settling liens, the Ahlborn hearing, and establishing a supplemental needs trust, are to be paid from the client’s share of the recovery and not be part of the contingent fee.64

[4] Effect of Lien on Funding of a Supplemental Needs Trust In Cricchio v. Pennisi and Link v. Town of Smithtown,65 the New York Court of Appeals had held that a Medicaid lien may be enforced against the proceeds of a personal injury settlement, pursuant to Social Services Law Section 104-b, prior to the funding of a supplemental needs trust. The basis of the decision is that the defendant is a responsible third party from whom the Medicaid agency is required to seek recovery. The court took pains to emphasize that the lien was not attached to the property of the disabled person, but rather to the property of the defendant tort-feasor. Regarding the allocation of the portion of the recovery subject to the lien see discussion in § 8.04[3], above.

Practice Note Urge the Local and State Medicaid Agencies to Settle Medicaid Liens So As to Allow the Supplemental Needs Trust to Be Funded Adequately. Even after an allocation between medical costs and pain and suffering, there may be cases in which the lien takes a substantial amount of the proceeds and present a compelling need to advocate that the lien should be deferred until the death of the beneficiary. In most cases liens are compromised, albeit not always fairly. Advocates can demonstrate how the supplemental needs trust may actually save money and resources for Medicaid by supporting independent community living and preventing premature institutionalization and by purchasing care, treatment and services not covered by Medicaid. In addition, the Medicaid agency’s priority remainder interest in the trust is protected by the mandatory reporting requirements in 18 NYCRR Section 360-4.5(b)(5)(iii), which limits the risk that the trust will be depleted when the beneficiary dies. See § 8.03[2], above. Thus, if the agency defers enforcing its lien, the purposes of the supplemental needs trust are fulfilled: the disabled beneficiary derives benefit from the personal injury settlement during her lifetime and, upon her death, the Medicaid agency recovers the cost of care provided.

62In Calvert v. Weiner, 2007 N.Y. Misc. LEXIS 6395 (Sup. Ct. Bronx County Aug. 20, 2007), the court stated it would hear argument at the Lugo hearing as to whether Ahlborn should be applied to the Medicare lien. 63Iron Workers Locals 40, 361 & 417 Health Fund, 911 F. Supp. 2d 243 (S.D.N.Y. 2012). 64Davis, Howard S., Unanswered Questions Over Fees for Attorneys in “Ahlborn” Cases, N.Y.L.J., April 17, 2009. 65Cricchio v. Pennisi and Link v. Town of Smithtown, 90 N.Y.2d 296, 660 N.Y.S.2d 679, 683 N.E.2d 301 (1997).

632

[5] Lien Prohibited if Beneficiary of Partnership Long-Term Care Policy

No lien may be imposed for correctly paid Medicaid on the property of a person who received long-term care benefits under a policy approved by the New York State Partnership for Long Term-Care.66 See § 5.05, above.

§ 8.05 Recoveries Against Estates Medicaid only has right of recovery against estate of deceased person who received Medicaid services after age 55 if there is no surviving spouse or child who is under 21, blind or disabled. New York has repealed enhanced Medicaid estate recovery. Recovery against estate of spouse of Medicaid recipient may be allowed if spouse had sufficient resources to support Medicaid recipient while Medicaid extended coverage, but failed to provide support.

[1] Strict Limitations on Right of Recovery Against Estates There are strict limitations on the right of the local Department of Social Services to recover against the estates of decedents who were Medicaid recipients and the estates of their spouses. There is no right of recovery against an estate for Medicaid benefits correctly paid,1 except from the estate of a person who was permanently institutionalized and who owned real property that was subject to a valid Medicaid lien,2 or the estate of a person who received Medicaid benefits when he was over the age of 55.3 For persons receiving Benchmark Medicaid in a MAGI related group (see § 6.04[1], above) recovery is limited to medical assistance for nursing facility services, home and community-based services, and related hospital and prescription drug services.3.1 “Correctly paid” benefits do not include benefits paid as a result of a mistake made by

66SSL § 367-f; 02 OMM/ADM-3 at 8. 142 USC § 1396p(b)(1); SSL § 369(2). In Bourgeois v. Stadtler, 256 A.D.2d 1095, 685 N.Y.S.2d 166 (4th Dep’t 1998), leave to appeal denied, 93 N.Y.2d 805, 689 N.Y.S.2d 429, 711 N.E.2d 643 (1999), the Fourth Department denied recovery by the local agency after the creators of a self-settled “trigger trust” died. The trust provided that it would terminate upon the death of the creators or one day prior to their entrance to a nursing home. The court held that because Medicaid benefits were correctly paid, based on eligibility criteria in effect at the time, there was no right of recovery. The creation of the trust was not a fraudulent conveyance under Debt. & Cred. Law §§ 275 and 276. The subsequent enactment of EPTL 7-3.1(c), which prohibited these “trigger trusts” as void against public policy, was not retroactive so as to invalidate trust. See also Matter of Akullian, 167 A.D.2d 596, 563 N.Y.S.2d 223 (3d Dep’t 1990) (no recovery against estate where Medicaid benefits correctly paid). 2There is also a right of recovery upon the sale of real property subject to a lien. See 02 OMM/ADM-3 at 7. 3SSL § 369(2)(b)(i); 02 OMM/ADM-3 at 7. The age when a Medicaid recipient becomes subject to estate recovery was lowered from 65 to 55 by OBRA ‘93. 42 USC § 1396p(b)(1)(B). This change did not become effective in New York until April 1, 1994, when the change was incorporated in SSL § 369(2)(b)(i). It also only applies to Medicaid payments made on or after October 1, 1993 and to decedents who died on or after October 1, 1993. Prior to that date, estate recovery is only available if the decedent received Medicaid when he was age 65 or older. 3.1SSL § 369(2)(b)(i) amended by 2014 N.Y. Laws 60 Part C § 62-a. GIS 14 MA/016 (08/05/2014). See CMS State Medicaid Director Letter #14-001 (02/21/2014) at http://medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-14-001.pdf.

633

DSS when determining a person’s eligibility for Medicaid. In Oxenhorn v. Fleet Trust Company,4 the New York Court of Appeals held that Medicaid benefits were incorrectly paid, and therefore subject to recovery, where the local Medicaid agency mistakenly failed to count the principal of a self-settled, irrevocable trust as an available resource. In Oxenhorn, the deceased beneficiary of the trust disclosed the existence of the trust at the time of the Medicaid application. Although the trustee had discretion to invade principal for the “support, care, and maintenance” of the beneficiary, the Columbia County DSS approved the application and disregarded the trust principal. During the approximately four years during which Medicaid paid for the cost of nursing home care, only the income of the trust was applied to the cost of her care. The New York Court of Appeals explained that under Social Services Law Section 106-b, the local Medicaid agency has the right to recover overpayments made to “ineligible persons.” Moreover, because there was a mistake in the eligibility determination, the benefits were paid to an ineligible person and therefore were incorrectly paid and subject to recovery. The Court stressed its familiar theme that Medicaid is the “payor of last resort” and limiting recovery would not be consistent with that policy. Oxenhorn makes it clear that “incorrectly paid” benefits include those obtained as a result of a mistake in the eligibility determination, in addition to benefits obtained through fraud and misrepresentation. There is no right of recovery against the estate of a person receiving Medicaid extended coverage under the Partnership for Long-Term Care Program, after the person has exhausted the coverage and benefits under an approved long-term care insurance policy.5 See §§ 5.05, 6.06[3][g], above, for a discussion of the Long-Term Care Partnership Program. The following Medicaid payments from the Medicare Savings Program (see § 5.03[2], above) are exempt from estate recovery: Medicare Part A and Part B premiums, deductibles, co-insurance and co-payments.6 There are exemptions from estate recovery for reparations paid to special populations, see § 6.06[3][d], above, and certain assets and resources of American Indians and Alaska Natives.7 Any adjustment or recovery shall be made “only after the death of the surviving spouse” and “only at a time” when there is no surviving child who is under 21, blind, or disabled.8 Assuming that there is an enforceable right of recovery against an estate, the Department of Social Services is a preferred creditor and has priority over all other creditors and beneficiaries.9

4Oxenhorn v. Fleet Trust Co., 94 N.Y.2d 110, 700 N.Y.S.2d 413, 722 N.E.2d 492 (1999). 5SSL § 367-f; 02 OMM/ADM-3 at 8. 6Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) § 115; GIS 10 MA/008 (03/04/2010). 702 OMM/ADM-3 at 9–10; State Medicaid Manual § 3810. 8SSL § 369(2)(b)(ii). For purposes of liens and recoveries, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. In 2011, New York legalized same-sex marriages. 2011 N.Y. 95 adding DRL § 10-a. GIS 08 MA/23 (08/20/08). See Comment at § 6.05[2]. 9SSL § 104(1). In a wrongful death action, there may be a right of recovery against the amounts attributable to the decedent’s pain and suffering because they are assets of the estate. In contrast, there is no right of recovery against any recovery for the decedent’s wrongful death because those assets do not belong to the estate but vest in the distributees based on their respective pecuniary damages caused by the death. Matter of Maier, N.Y.L.J., Dec. 3, 1998, at 33 (Sur. Ct. Nassau County).

634

In Matter of Snell,10 the decedent, in December 1996, had transferred a one-half interest in his home to his daughter as a tenant-in-common, causing himself to be ineligible for Medicaid until September 1997. Decedent and his daughter agreed with the nursing home to be liable for the debt for the period of Medicaid ineligibility. After his death the house was sold and his share of the proceeds was put in escrow to satisfy the nursing home’s claim. The executrix used the funds to pay the nursing home. However, the Court held that the DSS claim had priority over the claim of the nursing home and surcharged the executrix for the amount owed to the Medicaid agency. However in Matter of Shannon,10.1 the Appellate Division held that was not the case where a claim accrued during the decedent’s lifetime against a guardianship account, with no competing creditors. In that case the nursing home should have been paid before any funds passed to the estate. Recovery against an estate may be waived if it would impose an “undue hardship.”11

[2] New York Definition of Estate As part of the 2012 New York State budget process, the expanded Medicaid estate recovery enacted in 2011 was repealed.11.1 Federal law gives states the option to define the term “estate” broadly or narrowly.12 In 2011, New York enacted enhanced Medicaid estate recovery whereby an individual’s “estate” includes all of the individual’s real and personal property and other assets passing under the terms of a valid will or by intestacy and also includes any other property in which the individual has any legal title or interest at the time of death, including jointly held property, retained life estates, and interests in trusts, to the extent of such interests.13 The enhanced recovery of assets passing outside probate or intestacy, was to be effective only pursuant to regulations adopted by the Commissioner of Health, which could be promulgated on an emergency basis.14 Also, it was not to be construed to alter, change, affect, impair or defeat any rights, obligations, duties, or interests accrued, incurred, or conferred prior to the effective date of the legislation.14.1 The Department of Health promulgated an emergency regulation amending 18 NYCRR Section 360-7.11, effective September 8, 2011, which in many respects went beyond the bounds of the statute. In particular with regard to “life estates” not only did it conflict with existing New York Law (see EPTL 6-4.7 and 6-5.1), but it also effected existing rights in apparent contradiction to the effective date provision of the legislation.15 The emergency regulation expired on December 6, 2011, without a permanent regulation being promulgated.15.1 And as

10Matter of Snell, 194 Misc. 2d 695, 754 N.Y.S.2d 525 (Sur. Ct. Nassau County 2003). 10.1Matter of Shannon, ___ A.D.2d ___, 988 N.Y.S.2d 50 (1st Dep’t 2014). 11SSL § 369(5); 02 OMM/ADM-3 at 8. For a discussion of undue hardship, see § 8.05[4], below. 11.1SSL § 369(6) as amended by 2012 N.Y. Laws 56. 1242 USC § 1396p(b)(4)(B). 13SSL § 369(6) as amended by 2011 N.Y. Laws 59. 14SSL § 369(6) as amended by 2011 N.Y. Laws 59. 14.12011 N.Y. Laws 59, Part H, § 111 (u). 15New York State Register, Vol. 33, Issue 39, at 19 (9/28/2011). 15.1See GIS 11 MA/028 (12/12/2011) regarding the expiration of the emergency regulation and the policy

635

noted above in 2012, expanded Medicaid estate recovery was repealed.15.2 Therefore, in New York the term estate for purposes of recovery against the estate of a Medicaid recipient, means all real and personal property and other assets included within the individual’s estate and passing under the terms of a valid will or by intestacy.15.3 A Medicaid estate claim may apply to the estate’s portion of the settlement of a personal injury action, but not to a wrongful death action which is brought not on behalf of decedent’s estate, but on behalf of the decedent’s distributees, and the damages recovered are for the injuries suffered by the distributees as a result of the decedent’s death.16 Comment: This definition of an individual’s estate for purposes of recovery applies only to the estate of the Medicaid recipient and not to the estate of a legally responsible relative.16.1 Government reparation payments to special populations are exempt from estate recovery.16.2 In Matter of Albasi,17 the court found that Medicaid, under Social Services Law Section 369, had a claim against property passing from an irrevocable trust where the trust contained a general power of appointment.

[3] Limitations on Recovery Against Surviving Spouse and Estate of Spouse

If a Medicaid recipient is survived by a spouse, no recovery against the recipient’s estate may be made until after the death of the surviving spouse.18 However, if the local Medicaid agency has the right to recover from the proceeds of a recipient’s personal injury cause of action, it may recover against the recipient’s estate even if no lien was filed and there is a surviving spouse or a blind, minor, or disabled child.19

guidance in 11 OHIP/ADM-8 (09/26/2011). A remnant of the process remains in the change in methodology for the calculation of the value of a life estate. See § 8.02[7], above. 15.2SSL § 369(6) as amended by 2012 N.Y. Laws 56. 15.3SSL § 369(6). 16Matter of Miller, 47 Misc. 3d 409, 412 (Sur. Ct. Queens County 2015); Matter of Ramirez, 14 Misc. 3d 480, 483, 826 N.Y.S.2d 553, 556 (Sur. Ct. Bronx County 2006). 16.1See Matter of Schneider, 70 A.D.3d 842, 894 N.Y.S.2d 162 (2d Dep’t 2010), discussed at § 8.05[4], below. 16.2CMS State Medicaid Manual, § 3810.A.8. 02 OMM/ADM-3 at 10. 17Matter of Albasi, 196 Misc. 2d 314, 765 N.Y.S.2d 213 (Sur. Ct. Bronx County 2003). 18SSL § 369(2)(b)(ii); 18 NYCRR § 360-7.11(b)(2). For purposes of liens and recoveries, a spouse is construed to encompass legal same-sex marriages in a jurisdiction that recognizes and performs same-sex unions. In 2011, New York legalized same-sex marriages. DRL § 10-a. GIS 08 MA/23 (08/20/08). See Comment at § 6.05[2]. 19SSL § 369(2)(c); Matter of Vivas, 268 A.D.2d 298, 702 N.Y.S.2d 31 (1st Dep’t 2000), leave to appeal denied, 95 N.Y.2d 752, 711 N.Y.S.2d 154, 733 N.E.2d 226 (2000) (allowing recovery of personal injury

636

In cases involving the local department’s efforts to recover from the estate of a surviving spouse, courts have denied recovery unless the surviving spouse could be considered a “responsible relative,” who had the means to support the Medicaid recipient during the time benefits were received. The Fourth Department permitted recovery at an interest rate of 9% against the estate of a Community Spouse who was held to be a responsible relative where she transferred assets in excess of the Community Spouse Resource Allowance into a joint account with a third person.20 The decree affirmed by the court held that because the transfer rendered her estate insolvent, it violated Section 273 of the New York Debtor and Creditor Law. Likewise the Third Department held where the fiduciary for the estate failed to establish that decedent had sufficient remaining assets to be considered solvent, the agency’s objection to the transfer of a car as fraudulent pursuant to Debtor and Creditor Law Section 273 should have been granted.21 However the court in applying Debtor and Creditor Law to the purchase of an annuity, did not find it fraudulent as there was no “existing debt” at the time and decedent received fair consideration in return.22 Prior to the OBRA ‘93 amendments and New York’s conforming legislation, the New York Court of Appeals analyzed the right of recovery against the estate of a spouse of a Medicaid recipient. In Matter of Craig,23 recovery was denied against the estate of the surviving spouse because the surviving spouse did not have sufficient income and resources to pay for her husband’s medical services at the time the expenses were incurred. Without the ability to pay, the court held that the spouse was not a legally responsible relative under Social Services Law Section 363(3)(a). The analysis would not change following the OBRA ‘93 amendments because they did not affect the concept of requiring payment from a responsible relative. In Acevedo v. Rojas,24 the court held that there was no right of recovery for public assistance benefits against a surviving spouse’s share of wrongful death proceeds absent proof of sufficient ability to support the spouse at the time she received public assistance under Social Services Law Section 101(1). In Matter of Conroy,25 the Third Department denied a right of recovery against the estate of a spouse of a Medicaid recipient where the evidence demonstrated that she was not a financially responsible relative at the time Medicaid was received. In Matter of Tomeck,26 the New York Court of Appeals found that because the federal anti-alienation provision did not foreclose the local Medicaid agency from attributing the

claim from the estate of a Medicaid recipient despite surviving spouse). 20Matter of Klink, 278 A.D.2d 883, 718 N.Y.S.2d 758 (4th Dep’t 2000), appeal dismissed, 96 N.Y.2d 851, 729 N.Y.S.2d 666, 754 N.E.2d 768 (2001). 21Matter of Steele, 85 A.D.3d 1375, 925 N.Y.S.2d 250 (3d Dep’t 2011). The court did not consider Debtor & Creditor Law §§ 275 and 276 as they were not raised before Surrogate’s Court and, thus unpreserved for review. 22Matter of Steele, 85 A.D.3d 1375, 1377, 925 N.Y.S.2d 250, 253 (3d Dep’t 2011). 23Matter of Craig, 82 N.Y.2d 388, 604 N.Y.S.2d 908, 624 N.E.2d 1003 (1993). 24Acevedo v. Rojas, 230 A.D.2d 878, 646 N.Y.S.2d 714 (2d Dep’t 1996). 25Matter of Conroy, 201 A.D.2d 855, 608 N.Y.S.2d 333 (3d Dep’t 1994). 26Matter of Tomeck, 8 N.Y.3d 724, 840 N.Y.S.2d 550, 872 N.E.2d 236 (2007).

637

husband’s Social Security benefits to the wife (see § 7.02[8][c], above), she had sufficient means to pay for the husband’s nursing home care and therefore an implied contract was created and there was a potential estate recovery against the wife’s estate. However in a later proceeding to collect from assets transferred to a trust the Appellate Division held they were barred by the six year statute of limitations (and not the 10-year look-back period under SSL § 104) as the claims against the trust either arose when the wife executed the spousal refusal, or otherwise during her lifetime when she engaged in some allegedly fraudulent or illegal transfer to the trust or, at the latest, when plaintiff learned of some allegedly fraudulent activity.27 For purposes of the analysis of spousal obligation to Medicaid, a spouse is only liable for support until the time of the community spouse’s death and then only for services rendered prior to his death.28 Comment: The liability of a spouse or the estate of a spouse to a nursing home would fall under the Debtor and Creditor Law and the common-law “doctrine of necessaries.” The doctrine requires that a creditor seeking to recover from a spouse has the burden to prove that the necessaries were furnished on the credit of the community spouse, although there is a presumption in favor. Also, a community spouse is legally responsible for such expenses, only insofar as they are commensurate with that spouse’s means.29 A spouse’s obligation to provide for a husband’s or wife’s necessities ends with the death of the responsible spouse.30 Comment: The courts have interpreted the statute as permitting recovery against the estate of a surviving spouse if the spouse is determined to have been a “responsible relative” who had the means to support the Medicaid recipient at the time benefits were received. However, the local department may seek recovery against a community spouse during the lifetime of the institutionalized person, rather than wait to seek recovery against the estate. See § 7.03, above.

[4] No Recovery if Survived By Minor, Blind, or Disabled Child The statute requires that “any such adjustment or recovery shall be made only after the death of the individual’s surviving spouse, if any, and only at a time when the individual has no surviving child who is under twenty-one years of age or is blind or permanently and totally

27Christopher v. Tomeck, 82 A.D.3d 1307, 917 N.Y.S.2d 751 (3rd Dep’t 2011). 28Richardson v. Bryant, 19 Misc. 3d 1129(A), 866 N.Y.S.2d 95 (Sup. Court Monroe County 2008), aff’d, 66 A.D.3d 1411, 885 N.Y.S.2d 848 (4th Dep’t 2009); Matter of Schneider, 15 Misc. 3d 1146(A), 841 N.Y.S.2d 823 (Sur. Court Nassau County 2007). 29Wayne Health Care DeMay Living Ctr. v. Blair, 2011 N.Y. Misc. LEXIS 1832 (Sup. Ct. Wayne County 2011). 30Richardson v. Bryant, 19 Misc. 3d 1129(A), 866 N.Y.S.2d 95 (Sup. Court Monroe County 2008), aff’d, 66 A.D.3d 1411, 885 N.Y.S.2d 848 (4th Dep’t 2009).

638

disabled.”31 New York courts have interpreted the law to prohibit recovery if the Medicaid recipient is survived by a disabled child. In Matter of Andrews,32 the Third Department held that the existence of a surviving disabled child prevents the local department from recovering any property from an estate. In Andrews, the local Department of Social Services conceded that it could not recover against the intestate share of the disabled son, but sought recovery against the non-disabled daughter’s share. The court rejected the claim in its entirety, reaffirmed that recovery against the share of the disabled child is prohibited, and stated that recovery against the daughter is not allowed because she was not a responsible relative of her deceased parent. In Matter of Burstein,33 the Surrogate’s Court of New York County held that recovery against an estate is prohibited if the decedent is survived by a disabled child who is a beneficiary of the estate, even if a portion of the estate passes to other beneficiaries. The court rejected the additional criteria set forth in the 1985 case Matter of Samuelson34 as outside the scope of the statute’s plain language and purpose where the disabled child is a beneficiary. In Samuelson, the decedent made no provision for her disabled daughter, and gave her entire estate to her son. The Second Department upheld the Medicaid claim of approximately $28,000 because the disabled child was not financially dependent on the decedent and was not a beneficiary of the estate. The court in Samuelson did not give any consideration to the nonbinding, precatory statement in the decedent’s will that she was not providing for her disabled daughter because she hoped her other child would provide whatever material comforts were needed. Comment: If a decedent is survived by a financially independent disabled child who is not a beneficiary of the estate, or if part of the estate passes to other beneficiaries, the local department may seek recovery. The practitioner should be prepared to demonstrate that the disabled person was financially dependent on the decedent and that estate recovery will hurt the disabled child by reducing the property available as an informal means of support for the disabled child. Caution: The practitioner should not confuse the limitations on estate recovery against a Medicaid recipient with the “responsible relative” standard that governs recovery against the estate of a spouse. See Practice Note at § 6.06[3], above. In Matter of Schneider,35 the Appellate Division held the limitation on recoveries from a Medicaid recipient’s estate where the recipient is survived by a permanently disabled child is inapplicable where the agency seeks recovery from the estate of the community spouse. The court in Schneider however limited the recovery to the extent that the spouse, as a responsible relative, had excess resources and excess monthly income at the time the applicant applied for Medicaid.36

31SSL § 369(2)(b)(ii); 18 NYCRR § 360-7.11(b)(2). 32Matter of Andrews, 234 A.D.2d 692, 650 N.Y.S.2d 470 (3d Dep’t 1996). 33Matter of Burstein, 160 Misc. 2d 900, 611 N.Y.S.2d 739 (Sur. Ct. New York County 1994). 34Matter of Samuelson, 110 A.D.2d 187, 493 N.Y.S.2d 784, (2d Dep’t 1985). 35Matter of Schneider, 70 A.D.3d 842, 894 N.Y.S.2d 162 (2d Dep’t 2010). 36Matter of Schneider, 70 A.D.3d 842, 894 N.Y.S.2d 162 (2d Dep’t 2010).

639

[5] Waiver of Recovery if Undue Hardship A recovery against an estate may also be waived if there is “undue hardship.”37 A claim for undue hardship may be asserted by the fiduciary or any beneficiary of the estate of the deceased Medicaid recipient.38 The local agency “should consider the potential for undue hardship when deciding whether to pursue a particular recovery” and may also waive recovery against a portion of an estate to avoid causing undue hardship.39 New York State policy is consistent with the federal State Medicaid Manual’s interpretation of “undue hardship.”40 Undue hardship may exist where the estate subject to recovery is the sole income producing asset of the beneficiaries (such as a family farm or business with limited income), is a homestead of modest value (defined as no higher than fifty percent of the average price of homes in the county where the home is located as of the date of the recipient’s death) and the home is the primary residence of the beneficiary, or there are other compelling circumstances.41 No undue hardship exists if Medicaid or estate planning strategies were used to divest assets in order to avoid estate recovery or the hardship claimed is the inability of a beneficiary to maintain a pre-existing lifestyle.42 In Matter of Cox,43 the local DSS was permitted to recover approximately $30,000 from the estate of a person who received Medicaid while residing in a nursing home. The assets in the estate were the proceeds of a sale of the decedent’s real property, which was subject to a Medicaid lien. The executrix of the estate argued that DSS should not be allowed to recover because New York had failed to enact regulations setting forth the criteria and procedure for waiving recovery where there is undue hardship.44 The court in Cox held that the executrix did not have standing to challenge the failure of the State to promulgate regulations because she failed to show or allege how she had been harmed.45 In Matter of Andrus,46 the Surrogate’s Court for Allegany County found that the stipulation of settlement and compromise with an estate by a local county agency, was illegal, unauthorized and resulted in a gift of a substantial sum of public money to a private charity in violation of Section 1 of Article VIII of the New York State Constitution. The Court found that

3742 USC § 1396p(b)(3); SSL § 369(5); 02 OMM/ADM-3 at 8. 3802 OMM/ADM-3 at 8. 3902 OMM/ADM-3 at 8. 4002 OMM/ADM-3 at 8; State Medicaid Manual § 3810. 4102 OMM/ADM-3 at 8; State Medicaid Manual § 3810(c). 4202 OMM/ADM-3 at 8. 43Matter of Cox, 180 Misc. 2d 83, 687 N.Y.S.2d 594 (Sur. Ct. Cattaraugus County 1999). 44The federal provision for the undue hardship exception is at 42 USC § 1396p(b)(3). New York’s conforming legislation is SSL § 369(5). 45Matter of Cox, 180 Misc. 2d 83, 687 N.Y.S.2d 594 (Sur. Ct. Cattaraugus County 1999). 46Matter of Andrus, 85 Misc. 2d 1062, 381 N.Y.S.2d 985 (Sur. Ct. Allegheny County 1976).

640

where there was no basis to reject or compromise the Medicaid claim it violated Section 1 which prohibits a locality from giving or loaning any money or property to or in aid of any individual, or private corporation or association, or private undertaking.

[6] Scope of Recovery

[a] Value of Services The amount that may be recovered by the local department includes the actual cost of nursing facility services, home and community based services, related hospital and prescription drug services, and any other items included in the state plan.47 The local agency will document their claim with a Claims Detail Report (CDR). Surrogate Holzman, in denying a motion to reargue, found that the local agency had failed to meet its burden of establishing a meritorious claim when it had only submitted an “indecipherable” CDR without explanation.47.1

[b] Statutes of Limitations on Medicaid Claims A six-year statute of limitations applies to claims against an estate based on the implied contract that exists between the recipient and the local Department of Social Services.48 Therefore, the local department must make a claim within six years of the date a fiduciary is appointed.49 The local department is only permitted to recoup the actual cost of services provided within 10 years of the Medicaid recipient’s death.50 Although the right of recovery against an estate begins to accrue when the recipient reaches the age of 55, this 10-year recoupment period limits the extent of the recovery. Example: Phil received Medicaid services from age 40 to his death at age 85. Beginning when Phil turned 55, Medicaid had a right of recovery against his estate for the cost of Medicaid services provided. However, because Phil died when he was 85, only the value of services provided from age 75 until his death at age 85 may be recovered.

[7] Creditor’s Claims and Surrogate’s Court Procedure Act A claim by the Medicaid agency to recover against an estate must be asserted in

4742 USC § 1396p(b)(1)(B)(i), (ii). This does not include surcharges for bad debts or charitable allowances. Matter of Costello v. Geiser, 85 N.Y.2d 103, 623 N.Y.S.2d 753, 647 N.E.2d 1261 (1995) (recovery against father as responsible relative of infant). 47.1In re Estate of Faulkner, 35 Misc. 3d 1234(A), 953 N.Y.S.2d 549 (Sur. Ct. Bronx County 2012). 48SSL § 104; CPLR § 213. 49Matter of Bustamante, 256 A.D.2d 463, 682 N.Y.S.2d 102 (2d Dep’t 1998); Matter of Bricker, 183 Misc. 2d 149, 702 N.Y.S.2d 535 (Sur. Ct. Bronx County 1999); Matter of Holmes, 77 Misc. 2d 382, 353 N.Y.S.2d 676 (Sur. Ct. Nassau County 1974). 50SSL § 104; Matter of Bustamante, 256 A.D.2d 463, 682 N.Y.S.2d 102 (2d Dep’t 1998); Matter of Colon, 83 Misc. 2d 344, 372 N.Y.S.2d 812 (Sur. Ct. Kings County 1975).

641

Surrogate’s Court if the local agency does not agree to a waiver and the fiduciary rejects its claim.51 A creditor has seven months to file a claim after the issuance of letters testamentary or letters of administration.52 After the seven-month period has elapsed, the fiduciary of the estate is insulated from personal liability if estate assets were distributed in good faith. This means that the fiduciary cannot be held liable for distributing assets if he did not know about, or had no reason to know about, any claims. A fiduciary is presumed to know that a decedent received Medicaid, and that a claim against the estate may exist. Assuming the fiduciary has distributed assets in good faith, a creditor who failed to file a claim within the seven-month time period may still enforce the claim against the beneficiaries or distributees of the estate.53 The claim must be in writing, describe the factual basis of the claim, explain that the fiduciary or a beneficiary may request an undue hardship waiver, and be delivered personally to the fiduciary or by certified mail, return receipt requested.54 If a Medicaid recipient who resided in a nursing home at the time of death dies without a spouse or minor children, and no fiduciary has been appointed within six months after death, the Medicaid agency may seek recovery directly from the decedent’s personal account in the nursing home up to a maximum of $5,000.55 However, there is no recovery from the personal account of a recipient who died in a Veterans Administration facility (even if the person was transferred to the VA facility and a personal account exists in the prior non-VA nursing home) or died in a private nursing home which contracted with, and was paid by, the VA.56

5102 OMM/ADM-3 at 10-13. SCPA Article 18 governs and sets forth detailed procedures for claims against an estate. 52SCPA 1802. 53EPTL 12-2.1. 54SCPA 1803; 02 OMM/ADM-3 at 10. 55SCPA 1310(4); 02 OMM/ADM-3 at 12–13. 5602 OMM/ADM-3 at 13.

642