The Center for Medicare and Medicaid Services (CMS) has apparently rejected Michigan’s proposed estate recovery program. Michigan’s proposed legislation was unique not only for being last in the union to be enacted, but also for being exceptionally lenient. It is therefore reasonable to assume that Michigan will be required to enact a more aggressive approach to estate recovery.

This issue has been appealed by the state of Michigan with a hearing set for January. There will be much more to say on this issue as it develops.

Many veterans are unaware of the Aid and Attendance Pension that is available to help them with their medical expenses, which include the cost of assisted living. Some veterans are simply unaware of this benefit. Others have been told that they do not qualify based on “having too much money.” It is important to understand the scope of the Aid and Attendance pension as a starting point. It is also important to realize that veterans who meet the service requirement and who have significant, reoccurring medical expenses can be eligible for this valuable and well-deserved benefit with proper estate planning.

The aid and attendance pension is available to veterans who served during a time of war. It is not necessary to have participated in combat, but simply to have been in the military during a time of war. In addition to the service requirement, it is also necessary to be medically eligible and to meet the income and asset test.

Medical eligibility generally means that the veteran needs assistance with activities of daily living, such as grooming or eating. This requirement is often fairly easily met.

Finally, there are the income and asset tests. The income and asset tests can be the most difficult barrier to qualification for the aid and attendance pension. Among other things, the successful applicant will need to show that reoccurring medical expenses along with standard expenses of daily living exceed monthly income. Regarding assets, there are no hard and fast rules, but having more than $80,000.00 in cash or readily available assets is likely to disqualify a married applicant.

An elder law attorney can accelerate qualification for an otherwise eligible veteran who exceeds the asset or income thresholds. The asset test can be satisfied by use of an asset protection trust. This will allow assets to be preserved for future needs without interfering with qualification for benefits. Moreover, a plan of this kind will facilitate qualification for Medicaid in the future in case nursing home care is required.

Successful applicants for the Aid and Attendance Pension can receive more than $1,800.00 per month in assistance. This money, when combined with the social security and perhaps a pension, is often enough to pay for assisted living and to prolong assets almost indefinitely.

Any adult caregiver who has control over a parent’s assets (such as by power of attorney, as a trustee, or through joint bank accounts) can be in a very dangerous position for several reasons.

First, adult caregivers who receive compensation are vulnerable to charges of undue influence, constructive trust and other damaging allegations. How do these arrangements become such a problem? Consider that in many families, it is common for one child to bear a disproportionate share of the caregiving duties. Second, realize that such a caregiver is generally closer geographically and sometimes emotionally to Mom and Dad. The opportunity for jealousy to develop is obvious as well as the opportunity for wrongdoing. And regardless of what actually happened, it is easy for there to be an appearance of wrongdoing. Finally, bear in mind that caregiving is extremely time-consuming, stressful and expensive for the caregiver. Just as a stay-at-home mother is worth well over $100,000.00 per year in terms of replacement cost, a caregiver often makes an economic sacrifice to take care of Mom and Dad rather than work at a job. When you consider all of these factors together, it is easy to see how there is an emotional thunderstorm forming around the care of many seniors. Money is a significant factor, but it is often less significant than the stress on, and the quality of, relationships among family members.

From an estate planning perspective, there are several solutions to these problems. One is that a durable power of attorney or trust agreement can allow compensation. But it is important to keep a log of activities and a clear paper trail—periodic accountings may not be a bad idea in some cases—in order to avoid disagreements down the line. Second, caregiver contracts can go a long way toward establishing and meeting expectations. Putting duties and compensation in writing is a helpful way to avoid misunderstandings and insure that Mom and Dad receive the care that they need.

One word of caution here is that siblings are not the only ones who may want to examine compensation for care. Here in Michigan, the Department of Human Services will want to review all transfers made within five years of entering a nursing home and applying for Medicaid. In most cases, the DHS will take the view that payment for caregiving is a gift rather than an exchange for fair market value. It is possible to therefore have a penalty imposed and a period of ineligibility for Medicaid long–term care assistance. The position of the DHS on this point is discouraging to caregivers and really the families of all seniors who need assistance from family members in order to retain independent living as long as possible. With proper planning, however, it is possible to provide appropriate compensation without endangering Medicaid eligibility. But this will require a two-pronged estate plan: on the one hand, there will be a care contract among the family members to avoid disagreements down the line. On the other, there will be an asset protection plan that shields the compensation among family members from being treated as a divestment resulting in ineligibility.

UPDATE: This story reports  on a survey in Ireland that shows caregiving to be on the decline:

The tradition of relatives caring for sick, elderly or disabled loved ones at home is under severe threat, a new report warned yesterday.

Many of Ireland’s 161,000 carers are struggling to cope and feel over-burdened, unappreciated and unable to have a life of their own.

HT: Elder Law Prof Blog.

Perhaps the most important lesson an estate planning attorney can convey to a client is that your end-of-life decisions will be made for you-and possibly expose your estate to significant and unnecessary expense-unless you create legally enforceable estate plan documents. Without a clear expression of your wishes, some of your most important decisions may be made by a family member, a stranger, or a probate judge who may have no idea what your real wishes were. This can lead to increased costs, family disagreements, and other forms of waste. Several types of legal documents can help you and your family avoid these problems:

• A medical power of attorney is used to appoint someone to make your medical decisions and provide that person with guidance regarding your wishes.

• A financial power of attorney appoints someone to make your financial decisions. There are many different types of financial powers of attorney with significant differences between them. For example, whether your agent has the power to make gifts to others can have tax implications, as well as expose your estate to risk. On the other hand, without gifting authority, Medicaid planning can become more difficult.

• A living will can provide detailed instructions for how you wish to be treated during disability.

• A will is a set of instructions to the probate court for the distribution of your estate. This is one area that causes some financial loss to many families. The probate process is time-consuming and often expensive. It is not uncommon for the cost of administration to equal 4-8% of the value of an estate. In this economy many people are putting off their estate plans. A failure to plan altogether will almost certainly result in much more in the way of expense down the road.

• A revocable living trust is a document that provides instructions and authority to another person for handling your estate both during your lifetime and after your passing. Because the trust agreement is revocable, you can make changes to the agreement or remove property from the trust at any time before your death. A revocable living trust is useful for avoiding probate only and does nothing to protect against creditors or the cost of long-term care.

• An irrevocable trust is a set of instructions regarding your estate that generally cannot be changed by the creator of the trust in at least one way. So, for example, a trust would be irrevocable if the creator of the trust could not receive any principal placed in the trust.

If you should die or become disabled without at least some of these documents in place, it is very likely that your family will need to seek authority from a probate court to make decisions for you. The probate court has a number of procedures and powers that correspond in many respects to the estate plan documents listed above. In Michigan, the court receives its jurisdiction over these matter from the Estate and Protected Individuals Code, MCL 700.1101:

• A conservatorship is a procedure of the probate court in which a person is appointed to have authority over your property. The conservator must make regular accountings of your trust property

• A guardianship is a procedure by which the court establishes a decision-maker related to issues concerning your physical well-being, such as your medical care and where you live.

• A protective order can be granted that will provide authority for a specific action having to do with your estate, such as the transfer of your home.

• An estate of a deceased person can be distributed to creditors and heirs by means of probate. This procedure will generally take at least six months and cost at least 4-8% of the value of the estate. In the alternative, a trust administration will generally be less time-consuming and expensive and can be handled in a more discrete manner.

The difficulties with going to the probate court are many. First of all, the process will be much more time- consuming and expensive. Secondly, probate proceedings are generally public matters, though they often deal with subjects that are precisely things that people would prefer to keep private. But above all, it is very difficult for a probate judge to know exactly what a person may have wanted. And the judge must err on the side of safety and caution. The approach is understandable, and it is certainly not an error on the part of the judge who must be cautious, but it can nonetheless be costly when long-term care or disability issues are being handled and, more to the point, differ from what the protected person may have wanted.

One final point about decision-making: failure to execute proper estate plan documents will leave you in the default position. That is, your estate and your decisions will be governed by the state’s default rules. That is usually not a good position to be in for tax purposes and it is almost always disastrous when it comes to disability planning.

There are two apparently contradictory themes running throughout this blog and indeed the field of elder law in general. On the one hand, one is regularly advised to plan ahead for long-term care needs with asset protection trusts and similar techniques. On the other hand, the law changes so rapidly in Medicaid qualification that pre-planning seems impossible. For just a few examples consider that recently a cap has been placed on the value of the automobile you can buy, the state has to be named as a remainder beneficiary on annuities, and estate recovery has been enacted. The list of changes is seemingly endless and the pace of change is rapid. So how is it possible to advise people to plan ahead when the law could be different tomorrow?

The answer to this paradox is that while there are frequent changes in Medicaid qualification law, the changes are related to what is considered exempt when qualifying for Medicaid. But if the asset is no longer in the applicant’s name, it cannot be regulated by rule changes. Put another way, if your assets are in the name of a trust, you do not have to worry about changes in the rules affecting those assets. The rules don’t apply to assets that are not held in your name.

Michigan’s estate recovery law is currently under review in Washington. Exactly what form the law takes will be unclear for some time. And even once Michigan establishes clear rules for estate recovery, it is entirely possible that the rules will become more strict. Yet for those who have placed their home in an irrevocable trust, the final form of estate recovery does not really matter. Once the five year look back period has passed, the house will be fully protected from the estate recovery program.

It is still very possible to plan ahead even as the rules are changing. Indeed, because the rules are constantly changing to become more strict, pre-planning makes all the more sense.

There are a variety of reasons why one may wish to rescind an irrevocable trust, even if only in part. For instance, it may be the case that an irrevocable trust was established in order to shield assets from the cost of long term care, but long term care is needed before the five year look back period has elapsed. The assets of the trust are therefore needed to pay for long term care. The ability to return assets directly from the trust to pay creditors will provide a simple solution for executing an alternative spend down plan or paying through the remaining look back period.

Michigan law allows assets in an irrevocable trust to be handled contrary to the instructions provided in the original trust by means of an agreement between the grantor or settlor and the beneficiaries of the trust. These agreements can control any portion of the trust corpus, including, for example, just enough to pay the nursing home for one month. By executing a new agreement monthly, the nursing home can be paid each month until the look back period has elapsed and the grantor can safely apply for Medicaid without disclosing the transfer to the trust.

It is crucial to determine when a nursing home patient will be better off to execute a more sophisticated plan rather than wait until the look back period has elapsed. It is also important to provide for the grantor’s incapacity at the inception of the estate plan in order to insure that one will not need to go to probate court to carry out the asset protection plan. In the end, these principals can help to ensure the creation of an estate plan that will protect assets in the event of disability while at the same time maximizing the financial independence and security of the grantor.

When one spouse requires long-term care in Michigan, the Department of Human Services will do an assessment of the couple’s total resources. Without any planning or asset positioning, the spouse at home will be permitted to keep 1/2 of the couple’s assets as of the date the spouse needing long-term care entered either the hospital or long-term care, with a maximum of $104,400.00 and a minimum of $20,880.00 (in 2008). For example, a marital estate valued at $100,000.00 in non-exempt assets will be limited to $50,000.00 that the at-home spouse can keep. The remainder will have to spent on long-term care or converted to exempt assets before Medicaid will provide assistance with the cost of long-term care.

One simple estate planning technique to overcome this problem is to place the marital home in a revocable living trust before any health problems arise. Instead of being excluded from the total value of the estate, under Michigan law, the equity value of the home held in a living trust will be counted as an asset. So a couple with $100,000.00 in the bank and a home in a trust worth $150,000.00 will be treated as though they have $250,000.00 in assets when the asset declaration is completed. This couple will therefore be entitled to keep the full $104,400.00.

There are several cautions to using this technique. First of all, the home must be returned to the name of a natural person (not the trust) before applying for Medicaid. Failure to do so promptly can have horrific consequences. Second, relying on this technique can leave the home exposed to estate recovery. A more comprehensive asset protection plan is necessary well in advance of disability to be certain to avoid estate recovery. Third, this technique will not help with a home valued at more than $500,000.00. A variety of different asset protection techniques can be utilized in those circumstances. But for a married couple hoping to secure assets through retirement, placing a home in a revocable living trust can be quite helpful.

Sue Schiebel has written an excellent article on Medicaid Planning. While her article concerns MassHealth, which is the Massachusetts Medicaid program, the rules and ideas explained are the same in Michigan. She writes:

A lot of middle-aged people don’t realize Medicare, the federal health insurance program, pays for a very limited amount of skilled nursing home care. As we live longer, that means more of us will have to spend our own money for long-term care or must rely on MassHealth, the state health insurance for low income people. Many people wind up doing both — first using up many of their own assets to “spend down” to Medicaid limits so they are financially eligible for state help.

Medicaid qualification is a complex area of the law. To highlight just one counter-intuitive aspect, consider that donations to a church or charity are treated as gifts under the law. One making such a gift is technically creating a period of ineligibility for Medicaid. Strictly speaking, a person making significant donations to a church could be ineligible for Medicaid for several months after all other assets have been spent down. An elder law attorney helps families cope with these bizarre rules and avoid such unfortunate results.

Many of my clients are uneasy about placing their assets into a trust as part of an asset protection plan. In order to demystify the process and help you understand why you might consider having a trust drafted for your specific needs, I would like to explain some of the reasons you might consider having a trust and little bit of how a trust works.

Trusts are an important part of elder law and estate planning. Elder law is really the art and science of preserving personal and financial independence for seniors. Many forces threaten a senior’s independence, from ailing health to limited finances to extensive regulatory systems. The goal in creating comprehensive estate plans is to extend resources as much as possible and to create options. How is this possible? The right trust agreement is an important tool for achieving this goal.

Consider that property–whether a house, a car, or cash in the bank–can be owned by a trust. What this means is that a trustee will have control and legal title of property held in trust and a duty to manage that property according to the terms of the trust. This method of holding property has great flexibility and a number of important advantages.

To understand how this is possible, one must begin to see that under the law, ownership itself has many facets. It is possible, for example, not to own something for purposes of an obligation to a creditor, but at the same time to have full use and enjoyment of that same property. This apparent contradiction can be explained by the fact that beneficial enjoyment of property is not the same as simple ownership.

In general we tend to think about ownership like a baseball umpire thinks about a play at first base. Either the first baseman was holding the ball before the runner crossed first base or he wasn’t. In the same way, your name is either on the bank account number 5555551111 or it isn’t. Or so the everyday understanding of ownership goes.

If bank account number 5555551111 is held in trust for your benefit, whether you can be said to own that account will depend on whom you ask, when, and what the trust agreement says. The fact of the matter is that you can get very different answers about who owns what from the IRS and DHS, particularly with regard to property held in trust. In this way the rules of ownership with a carefully drafted trust will quickly start to seem more like juggling than baseball: you have control of the ball and sometimes you have the ball in your hand, but if you are a good juggler (or, to continue the analogy, you have a good trust) you will not be holding the ball at the critical moment. That is perhaps a tangled analogy, but it shows the delicate balancing that can be accomplished with a properly drafted trust (or a lot of practice juggling).

To give a more concrete example of how the various aspects of ownership can be effectively handled by a trust, consider that it is possible to have a trust with the following terms:

1. The principal placed in the trust will be unavailable for purposes of long-term care. Therefore, from the time property is placed in the trust, it will be out of the original owner’s name and the five year look-back period will begin to run.

2. For tax purposes, the principal held in the same trust will be owned by the original owner. The trust will not have to file a separate tax return, pay the higher rates that complex trusts are subjected to, or otherwise incur any additional tax liability for the original owner beyond the interest, capital gains, etc. that the original owner would otherwise have had.

3. The income generated by the principal held in the trust will be payable to the original owner. The assets held in the trust will therefore continue to provide support and income throughout retirement, but at the same time at least 50% of the assets held in the trust will be protected from the cost of long-term care. After 5 years, the entire principal will be protected from the cost of long-term care.

4. In some cases, this same trust can return the assets to the original owner. But only when the original owner decides it is necessary to do so.

A trust then, can be a legal document that allows you to enjoy your assets, but also to protect them. An attorney who understands the way that a trust will be read by the IRS, the Department of Human Services, the Department of Veteran’s Affairs and other government agencies can teach you how to juggle your finances and preserve your financial independence.

Retirement for many people is defined as the time when they are able to live off of the income from their assets combined with Social Security and perhaps a pension. But anything from a car accident to a stay in long-term care can quickly deplete retirement assets and jeopardize the fruits of a lifetime’s work. This can be particularly devastating for a married couple when one of the spouses falls ill and the assets of both must be devoted to the care of one. Medicaid law permits the Community Spouse (the spouse not in long-term care) to retain a maximum of $104,400.00 in non-exempt assets, but without planning, in many cases that amount can be lower.

Modern estate planning offers solutions to this problem and provides financial security in retirement. This form of estate planning is far more than naming beneficiaries on accounts or providing a list what is to go to whom. It is a matter of restructuring an estate to be sure that assets are protected and preserved for their intended purposes. These techniques allow security, tax benefits, and even asset protection for one’s heirs.

One often hears of estates consumed by the cost of long term care. See, for example this story. A modern estate plan can help you to ensure that you will receive the benefits of your assets without exposing those assets to the claims of creditors or the cost of nursing home care.