Estate Planning for the Disabled and Advanced Directives for Seniors

By Florencio (Larry) Ramirez

The legal issues affecting estate planning in general have become more complex in recent years, and this is particularly true with regard to planning for seniors and children and adults with disabilities. Well-intentioned philanthropy can easily backfire—with disastrous results for those who most need assistance. There are several considerations that might go into an effective estate plan for a disabled child or adult, but for the most part we are not considering the amount or size of the estate as much as whether they have any estate at all. In addition, owing to considerations of guardianship and conservatorship, the concerns regarding health care directives and the right to die are in most cases nonexistent. Advanced planning for such directives is imperative not only for the disabled but for all elderly clients.

Trusts for the Disabled

For purposes of this article, discussions of “disability” and “the disabled” refer to children or adults who, owing to physical or mental handicap, are unable to make without assistance the decisions of ordinary life, such as those concerning medical care or personal finances. In most cases, these individuals would be eligible to receive or actually are receiving governmental benefits or services in the form of Supplemental Security Income (SSI) or Medicaid.

In years past it was common for lawyers to draft estate planning documents that would place assets in trust to shelter them so that the beneficiary would not be disqualified from receiving Medicaid, Medicare, or Social Security benefits. This type of trust is referred to as a “disability trust,” and the considerations for such trusts are considerably different than for those created for estate tax planning. Placing assets in a disability trust eliminates any incidents of ownership on behalf of the donee/beneficiary. Therefore, these assets were not counted for the purposes of determining eligibility for governmental benefits or required to be used for reimbursing the government from any residuary estate for payments made to elderly or disabled clients during their lifetime.

In 1993 this procedure was severely limited. The Omnibus Budget Reconciliation Act of 1993 (OBRA) amended the Federal Medicaid Law and Section 1917, 42 USC §1396p to expand the scope of Medicaid disqualifying trusts, extended the “look-back” period to 60 months for transfers to a trust, and defined the period of ineligibility for receiving benefits. The “look-back” period refers to the period that the government can go back in time to determine if a disqualifying event has occurred. As an example, if a beneficiary were to receive property or cash with a value of $250,000, or if that were the amount deposited into trust, and the monthly cost of institutionalized care were $2,500, the individual would be disqualified from receiving benefits for a period of 100 months. Obviously, the effects of a well-intentioned but carelessly planned gift could be disastrous because the law would force the elderly or disabled person to expend their entire estate prior to becoming eligible for disability or medical benefits.

However, there are still planning devices that can be utilized to prevent the negative effects of gifts to disabled or elderly indi-viduals. There are two forms of trusts that are permitted under OBRA (see 42 USC §1396p(d)(4)(A) and (C)). These trusts recognize that disabled persons have financial needs beyond essential medical care.

The first of these trusts is often referred to as the “payback” trust. Section 1396p(d)(4)(A) provides that “a trust containing the assets of an individual under age 65 who is disabled [as defined in Section 1614(a)(3)] and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or court, if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this title” (emphasis added), remains effective for sheltering the settlor’s assets held in such a trust from being considered available to the beneficiaries for Medicaid purposes. This type of trust, as an example, could be created after a medical malpractice or personal injury settlement has been awarded.

The second type of trust is referred to as the “pay-to” trust or a charitable pooled account trust. In this situation, the trust is established and managed by a nonprofit association, a separate account is created for each beneficiary (but for investment and management purposes the trust pools these accounts), the accounts are established solely for the benefit of individuals who are disabled, and, to the extent that amounts remaining in the trust at the beneficiary’s death are not retained by the trust, the trust pays to the state from such remaining assets an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the state plan. This trust permits a parent, grandparent, legal guardian, the disabled person, or the court to create this trust. An example of a situation where this type of trust might be needed is where the disabled individual receives a large sum of money as the result of an underpayment of governmental benefits, such as SSI. Surprisingly, the receipt of these monies could disqualify the individual because of the income restrictions in the Medicaid law.

Both of these trusts require that distributions to the beneficiary be absolutely discretionary and for “supplemental” needs, in essence anything that would not be considered an expense of daily living or necessary or essential medical care.

Since the enactment of OBRA, Revenue Ruling 2002-20. 2002-17 I.R.B. 7-94 (April 29, 2002) has expanded the types of trusts that may be created for the benefit of disabled persons. These all involve the use of charitable remainder trusts. Simply, a charitable remainder trust is a trust where assets are used for the benefit of an income beneficiary during his or her lifetime; upon the beneficiary’s death, the remainder passes to a charitable organization.

The first such trust provides that income distributions made for the financial aid and best interests of the disabled person must be completely discretionary and must not supplant any governmental benefits. At the death of the income beneficiary, the balance of trust assets available to the disabled beneficiary at their death are distributed to his or her estate, thus making them available to creditors, specifically government entities who provided benefits to the disabled person during his or her life. Although any “remainder” would go to charity, this might create litigation between the charity and the government.

The second type of trust is similar to the first in that distributions must be completely discretionary, but it also provides a “payback.” If there are funds remaining in the trust after repayment to the state, a testamentary power of appointment over the balance is provided, exercisable by the trust beneficiary. Again, the trust provides that any funds left over pass to charity, but the law treats this provision as ineffective and makes these monies available for repayment.

The third and last variation involves the use of a charitable remainder unitrust—a custom-designed and individually managed trust that enables one to designate a variable income for the lifetime of a disabled individual or a fixed term of years, claim a current income tax deduction, and make a future gift to charity. This form of trust arrangement involves a situation where the trust distributes a specific portion of a unitrust to the income beneficiary, and the trustee distributes additional sums if needed for the beneficiary’s care, support, and maintenance. The estate of the trust beneficiary receives the balance of the distributee’s available trust funds at the disabled person’s death. The remaining funds are therefore available to creditors for repayment of funds paid on behalf of the disabled person during his or her lifetime.

Other recent developments in this area are the result of the Deficit Reduction Act of 2005. This act will restrict access to long-term nursing care through Medicaid and Medicare, requiring that any individual assets be utilized prior to seeking payment of these services through Medicaid or Medicare. The act provides:

Asset Transfers. The provisions of this chapter would reduce Medicaid spending by an estimated $2.4 billion over the 2006-2010 period and by $6.3 billion over the 2006-2015 period, primarily by increasing penalties on individuals who transfer assets for less than fair market value in order to qualify for nursing home care and by making individuals with substantial home equity ineligible for nursing home benefits. (emphasis added)

Medicaid currently imposes a period of ineligibility for nursing home benefits on individuals who transfer assets for less than fair market value. The penalty period is based on the value of any assets transferred during the three years prior to application—the look-back period—and starts on the date the assets were transferred. Those rules have relatively little effect because any penalty period usually has expired by the time an individual applies for Medicaid.

Under the 2005 act, the penalty period would start when an individual becomes eligible for Medicaid, and the look-back period would be extended from three years to five years. The act also would codify certain protections against undue hardship for individuals who transfer assets. Those changes would apply only to asset transfers that occur after enactment, so the effect of the longer look-back period would not be felt until January 1, 2009.

The government expects that the provision would deter some individuals from transferring assets and thus delay or prevent them from receiving nursing home benefits; others would pay a penalty in the form of delayed eligibility for nursing home benefits. Those provisions would reduce Medicaid spending by $1.5 billion over five years and $4 billion over ten years.

Under current law, the value of an individual’s home is not included when determining eligibility for Medicaid. The act would make individuals with more than $500,000 in home equity ineligible for nursing home benefits; states would be able to raise that limit to $750,000. That figure would be adjusted annually for inflation starting in 2011. The prohibition would not apply if an individual’s spouse, minor child, or disabled child (regardless of age) lives in the house and would allow exemptions in the case of hardship. This provision would apply to individuals who apply for Medicaid after January 1, 2006. The government estimates that this change would reduce Medicaid spending by $298 million over the 2006-2010 period and by $878 million over the 2006-2015 period. Woe to those clients who are not cognizant of these provisions and fail to visit their lawyer in a timely fashion.

Advanced Directives for Seniors

There are other considerations appropriate for discussion here as well, but these considerations are appropriate for every client, whether they are in need of a complex estate plan or a simple will. The first consideration is a well-drafted general durable power of attorney, which contains health care directives and perhaps a right-to-die declaration. The power of attorney is “durable” because it continues in effect after disability or incapacity, but it requires specific language to have this effect.

Anyone over 50 can understand the effects of the aging process. We may be leading a healthy, productive life when, suddenly, we suffer a stroke, heart attack, or catastrophic illness that prevents us from managing our daily affairs. Many people wrongfully assume that a husband or wife can make financial decisions or health care decisions for the spouse who is ill. Unfortunately, that is not the case.

The fact of marriage alone is insufficient to empower the other spouse with the disabled spouse’s legal authority to make decisions on his or her behalf. For example, suppose a husband and wife have prior marriages and children from those marriages. They have separate estate plans, but they created a durable power of attorney for the wife in case of the husband’s incapacitation. One day the husband suffers a stroke and is rushed to the hospital. The wife has no confidence in the medical facility and wants to move her husband to another hospital, but the current hospital refuses to allow the move without some written authority. Presto! The wife produces the durable power of attorney, giving her the authority to make those decisions, and the situation is resolved. The power of attorney should contain language similar to that of the following example:

Durability in the Event of Disability or Incapacity. This Power of Attorney shall not be affected by any disability or incapacity hereafter incurred by me but shall be exercisable notwithstanding any disability or incapacity which arises after the date hereof, it being my express intention that this Power of Attorney shall be durable and extend through any disability or incapacity upon my part. This Power of Attorney shall remain in full force and effect until revoked by operation of law or by a revocation in writing signed and acknowledged by me and recorded in the office of the County Clerk of Dona Ana County, New Mexico.

The drafter should also consider whether the power of attorney should grant authority to make decisions regarding real estate, banking, collections, litigation, stocks and bonds, personal property, government transactions (very important), insurance, personal care, and estate planning powers limited to renouncing gifts or other forms of inheritance. I have seen documents that were all-inclusive and others where a power of attorney and separate health care directives were drafted.

Also, the client may wish to consider the execution of a right-to-die declaration, euphemistically referred to as a “living will.” These declarations are state-law specific and permit a person under certain circumstances defined by state law to end his or her life by withdrawing “maintenance medical treatment.” As an example:

I hereby direct that if I am ever certified under the New Mexico Right-To-Die Act (1978 NMSA Sec. 24-7-1 to 24-7-11), or a similar statute of another jurisdiction, by two physicians, one of whom is the attending physician, as having a “terminal illness,” or being in an “irreversible coma” as those terms are defined in the New Mexico Right to Die Act, then maintenance medical treatment shall not be utilized for the prolongation of my life, and I request that I be permitted to die naturally, and that I not be kept alive by artificial means or maintenance medical treatment utilized merely for the prolongation of my life. I specifically intend that hydration and nourishment induced into my body, through either feeding tubes or intravenously, shall be considered as maintenance medical treatment and may be withdrawn in accordance with this Declaration. I also mean to include within the definition of maintenance medical treatment, the administration of antibiotics.

The reality is that many, many children and adults must receive governmental benefits in order to provide necessary and essential medical care and income. However,  the federal government and states have created a tax and regulatory structure that has become increasingly confusing and have created a set of conflicting and confusing statutes and rules that even the most expert practitioner has difficulty navigating. No matter how well-intentioned you might be, you must be very careful when thinking about providing for these individuals through a testamentary or inter vivos gift. Please seek expert advice.

Florencio (Larry) Ramirez is a former judge of the Third Judicial District Court in Las Cruces, New Mexico, and a former chair of the GP|Solo Division. He is of counsel with Carrillo Law, L.L.C., in Las Cruces and may be reached at .

Copyright 2007

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