By Pauline Yeung-Ha

Technological advances have increased life expectancy significantly. As the population ages, caring for the elderly has become more prevalent. Rising health care costs is a concern for seniors. Many seniors are house rich, cash poor—their major asset is their home which they seek to protect against unexpected long-term care costs. Medicaid planning will allow seniors to preserve their assets and eventually become eligible for government benefits, such as community-based (home care) or institutional-based (nursing home) Medicaid, however, the planning is a process and cannot be done at the last minute. Depending on the complexity of the matter, the planning process may involve a team of professionals, such as an elder law attorney, accountant, financial advisor, and geriatric care manager.

What are Advance Directives? 

The most important part of the Medicaid planning is to have advance directives in place. These are legal documents known as the power of attorney, health care proxy, and living will. Without these documents, if the client becomes incapacitated, the planning cannot be effectuated as no one has legal authority to make any decisions or execute any type of documents on the client’s behalf. Unfortunately, lacking these would require an Article 81 guardianship proceeding such that the court, in its discretion, would appoint a guardian to act on behalf of the client.

The law governing powers of attorney can be found in New York General Obligations Law, Article 5, Title 15. As of September 1, 2009, subsequently amended and became effective on September 12, 2010, the New York Power of Attorney law allows the appointed agent to perform many legal and financial functions for the principal, such as real estate, banking, insurance, taxes, business, stocks and bonds, benefits from governmental programs or civil or military service, health care billing and payment, retirement accounts, and personal and family maintenance.

Anyone who has executed a power of attorney using the old New York State form prior to September 1, 2009 need not be concerned as his or her existing power of attorney remains valid. It is only after September 1, 2009 that certain features must be included in the power of attorney in order to be accepted by financial institutions within the state. The notable changes are highlighted below:

• The power of attorney will be considered “durable” unless noted otherwise.
• In order for the agent to act, the appointed agent must sign before a notary accepting his or her role and responsibilities as agent. A lapse in time between the signing of both the principal and agent will not invalidate the power even if the principal becomes incapacitated before the agent signs the form.
• A separate section of the Power of Attorney called the “Statutory Gifts Rider” (SGR) acknowledges that gifting could fundamentally change the principal’s estate plan and specifically outlines options for gifting. The SGR notes that in granting these powers to the agent, it could “significantly reduce your property or change how your property is distributed at death.” Because of the seriousness of this power, it must not only be notarized by the principal, but also signed by two witnesses. The SGR also allows the principal to expand the amount of the gift to any amount and provides that the agent must act according to the principal’s instructions, or if there are none, in the principal’s best interest.
• The SGR further permits the principal to grant authority for the agent to make gifts to himself or herself. In many instances, in order to achieve Medicaid eligibility in a timely manner, the agent would need immediate access to the principal’s funds and must have flexibility to transfer assets out of the principal’s name. As such, the ability for an agent to transfer assets to himself or herself is instrumental in the long-term care or Medicaid planning process.
• As an additional safeguard, the power of attorney permits the principal to appoint a monitor who can request records of all transactions done or made on the client’s behalf.

Another essential document is the health care proxy. The health care proxy is a very simple form which the principal can execute without a physician’s involvement. In order to have a valid health care proxy, the form must properly identify the principal and agent and be signed and dated by the principal in the presence of two witnesses (over eighteen years old) declaring that the principal appeared to be of sound mind and acted on his or her free will. The principal may designate alternate agents in the event the primary agent is unable to serve.

With respect to issues regarding artificial nutrition and hydration, the principal should always address this issue in the document, either by stating that he or she does or does not want artificial nutrition or hydration, or in the alternative, stating that the agent is aware of the principal’s wishes regarding artificial nutrition or hydration, but with no specific instructions. We opt for the latter of not stating the specific wishes. This way, if the client does not have a living will and is unable to make medical decisions, a validly executed health acre proxy can serve the role of the living will as long as the agents are aware of the principal’s wishes. Further, although it is not necessary to include HIPAA language in the health care proxy, as a practical matter, including the HIPAA language has proven useful as it helps the agent obtain access to medical information.

The purpose of the Health Care Proxy is to offer the client as much control as possible over his or her medical needs during his or her lifetime while he or she is still capable and to keep the care in continuum by entrusting the designated agent to carry out his or her wishes. The health care proxy is a flexible document and can be revoked at any time. The principal may place limitations in the health care proxy such as expiration date upon the occurrence of a certain condition and wishes as to organ and/or tissue donation. However, if no expiration date is indicated, the proxy shall remain effective indefinitely until it is revoked.

Although there is no specific form required to create a health care proxy, it is best to use the NYS Department of Health’s model form. The form is provided in seven different languages and can be obtained at https://www1.nyc.gov/nyc-resources/service/1795/health-care-proxy.

The third important document is the living will. New York did not adopt a living will statute, therefore the living will continues to be authorized based on case law. The primary case which set out the criteria for New York’s living will is found in In re Westchester County Medical Center, 72 N.Y.2d 517 (1988). It was in this case that the “clear and convincing” evidence standard was established to determine a patient’s wishes. This court stated that “the ideal situation is one in which a patient’s wishes were expressed in some form of writing, perhaps a living will.” It applies when the patient’s condition is irreversible and one is unable to make his or her wishes known. The living will, although signed in advance, does not become effective until the individual is determined to be terminally ill, unconscious, or nominally conscious due to brain malfunction or damaged—and not expected to regain his or her ability to make decisions. The signed document does not need a notary, but must be signed before two witnesses.

What is the Medicaid Asset Protection Trust?

The Medicaid Asset Protection Trust (MAPT, “Medicaid Trust,” or “Trust”) is irrevocable and may not be revoked, altered, or amended after it has been signed. The transfer of assets to the Medicaid Trust will trigger the five-year look-back period for Medicaid nursing home eligibility. However, the transfer will not affect community-based (or home care) Medicaid benefits since the look-back period is only one month and no penalty period will be imposed for the transfer made to the Trust. Therefore, it is possible for seniors in New York to achieve Medicaid eligibility status and apply for home care benefits when necessary.

The senior who is the grantor must not serve as trustee of the Trust and cannot manage the Trust assets. If the grantor serves as trustee, the entire principal in the Trust would be considered available to the grantor for Medicaid eligibility purposes. Further, no principal distributions may be made to the grantor. This is to ensure that that the assets contained in the Trust are protected from Medicaid and other government programs. When drafting the Trust, the attorney must be careful so as to not give too much control to the grantor where Medicaid would deem the assets available to the grantor. Powers such as the ability for the grantor to change or remove trustee, the ability for the trustee to make loans to the grantor, or giving the grantor a general power of appointment are ill-advised.

On the other hand, lifetime and testamentary limited powers of appointment are frequently used by elder law attorneys, in which the grantor is prohibited from changing the beneficiary to himself/herself, his/her creditors, his/her estate, or the creditors of his/her estate. The inclusion of these limited power of appointment provisions are primarily used for taxation purposes. The goal is to prevent the transfer of assets into the Trust to be treated as a completed gift for gift tax purposes. Furthermore, due to the incomplete gift, if the Trust holds the grantor’s most valuable asset, which is the home, the home will be included in the grantor’s gross estate subject to a step-up in basis. The new basis of the home will be the fair market value as of the grantor’s date of death. If the home is sold shortly after the grantor’s death, there may not be any capital gains tax.

For income tax purposes, the Trust is often structured as a grantor trust via the substitution of asset powers as set forth under IRC 674 (4)(C). As a result of being a grantor trust, all income tax generated by the Medicaid Trust will be attributed to the grantor. The tax flowing to the Grantor is generally more favorable as it is paid at lesser rates.

In New York, if the grantor’s primary residence is held in the Trust, the grantor will still be eligible for real estate tax exemptions such as enhanced STAR (New York State School Tax Relief), senior citizen exemption, and veteran’s exemption, as long as he/she has the right to lifetime use and enjoyment of the property. If the home is sold during the grantor’s lifetime, the capital gains exclusion will also be preserved.

Depending on the preference of the grantor, the Trust can be drafted to require that all income be distributed to the Grantor (this type of trust is more commonly known as the “income-only trust”) or none to the grantor at all. Keep in mind that if income is required to be distributed to the grantor, that income, whether it be distributed or not, will be counted for Medicaid eligibility purposes. In addition, if the MAPT provides for distribution of income to the grantor at the trustee’s discretion, that income will still be counted for Medicaid eligibility purposes.  

In the Medicaid planning process, the Medicaid Asset Protection Trust is a very useful planning tool for many of our clients. Since the five-year look-back period is quite a long wait, many of them are reluctant to simply give away their assets outright to children. Family circumstances and tax laws can change over time. Unlike a will, the Medicaid Trust avoids probate, allows the clients’ assets to be distributed in accordance to their wishes upon their demise, and most importantly, offers stability, comfort, and asset protection for the clients.

Pauline Yeung-Ha is a partner in the law firm of Grimaldi & Yeung LLP, concentrating in the practice areas of trusts, wills, and estates, elder law as well as special needs planning, and is admitted to practice in both New York and New Jersey. She is currently a member of New York State Bar Association’s (NYSBA) Elder Law Section Executive Committee, and Co-Chair of the Diversity Committee and Co-Chair of the Estates, Trusts and Tax Issues Committee. She is also a member of NYSBA’s House of Delegates. Ms. Yeung-Ha serves on the Board of Trustees of the Brooklyn Bar Association and is the Co-Chair of the Pro Bono and Community Service Committee of the Asian American Bar Association of NY. She serves as Secretary on the Board of CaringKind, a non-profit organization in New York City. She also serves on the Board of Directors of the National Academy of Elder Law Attorneys, NY Chapter.