Estate Planning Isn’t Just For The Elderly

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Utilizing Article 81 For Medicaid And Estate Planning Purposes After The Deficit Reduction Act Of 2005

By: Anthony J. Enea, Esq.*

Major Provisions of the Deficit Reduction Act of 2005

On December 18, 2005, the U.S. Senate, in a vote of 51-50 with Vice-President Cheney casting the deciding vote, passed the Deficit Reduction Act of 2005 (“DRA”). As a result of some differences in the Senate and House versions, the legislation was sent back to the House of Representatives for a final vote. On February 1, 2006, the House of Representatives approved the DRA by a vote of 216 to 214. On February 8, 2006, President Bush signed the legislation into law. Pursuant to the DRA, the States have a specified period of time within which to adopt said changes or enact enabling legislation if determined to be necessary. It is anticipated that New York will adopt said changes effective retroactively to February 8, 2006.

The DRA affects Medicaid eligibility and the transfer of asset rules in three (3) significant ways:

1. Creation of a sixty (60) month look back period for all transfers of assets, irrespective of whether they are outright transfers or transfers to certain trusts. Under the prior law there was a sixty (60) month look back period for transfers to certain trusts (i.e., Irrevocable Income Only Trust) and a thirty-six (36) month look back for all other transfers. Thus, under the DRA, an applicant for Medicaid will be required to inform Medicaid of all transfers made and provide financial documentation to Medicaid for the five (5) years preceding the date Medicaid is requested.

2. The penalty period (period of disqualification for Medicaid) created by a non-exempt transfer of assets will commence on the later of (a) the month following the month in which the transfer is made (as under prior law), or (b) the date on which an individual is both receiving institutional level of care (i.e., is in a nursing home or receiving care at home under the Lombardi program or other waivered program) and whose application for Medicaid would be approved, but for the imposition of a penalty period at that time. Under the new legislation, therefore, the penalty period for a non-exempt transfer of assets made within the sixty (60) month look back period will commence when the applicant has $4,150 or less, is receiving institutional care (in a nursing home or under a waivered long term home health care program), has applied to Medicaid for assistance, and the application would be approved but for the penalty period imposed. This is the most onerous measure contained in the new legislation.

It should be noted that, pursuant to the provisions of the new DRA, and as under prior law, no penalty period is imposed for transfers made by an applicant requesting non-waivered community Medicaid (homecare medicaid).

3. An applicant’s Homestead (house, condo, co-op) with equity above $500,000 will render an applicant ineligible for Medicaid. This provision does not apply if a spouse, child under age of 21, or a blind or disabled child resides in the house.

Each state, however, is given the ability to increase the amount of permitted home equity to an amount not in excess of $750,000. Additionally, homeowners will have the ability to reduce their equity through a reverse mortgage or home equity loan.

Some of the other significant changes contained in the DRA with respect to Medicaid are: (a) annuities will be required to name the state as a remainder beneficiary, and annuities that have a balloon payment will be considered a countable asset; (b) multiple transfers in more than one month must be aggregated; (c) the “income first” rule will be mandatory in all states (already required in New York); (d) penalty periods will be imposed for partial months (rounding down will no longer be permitted); (e) Partnership long term care insurance policies will be permitted in additional states other than the four presently permitted, which include New York.

Article 81 and Medicaid Planning

In large part, as a result of the ingenuity and foresight of the legislature, the bar and the judiciary, Article 81 of the Mental Hygiene Law, has evolved into a highly effective Medicaid and estate planning tool. Whether it is the Courts authorizing a Guardian to renounce an inheritance or authorizing a transfer of assets for purposes of facilitating Medicaid planning, Article 81 of the Mental Hygiene Law plays a critical role in planning for the incapacitated and his or her dependents.

Article 81.21 Statutory Recognition Of the Common Law Doctrine of Substituted Judgment

The following is a summary of its provisions which are of relevance to the authority given a Guardian to engage in Medicaid and Estate Planning. Article 81.21(a) of the Mental Hygiene Law (hereinafter “MHL”) provides that the Court may authorize the Guardian to exercise the powers necessary and sufficient to manage the property and financial affairs for the support and maintenance of the incapacitated person and those dependent upon the incapacitated person. The exercise of the powers must be consistent with the functional limitations of the incapacitated person, and his or her appreciation of the consequences and potential harm resulting from his or her inability to manage property and financial affairs. In exercising the powers the Guardian must give consideration to the wishes and preferences of the incapacitated person and the least restrictive form of intervention. Fashioning the powers of the Guardian in a manner that will insure the “least restrictive intervention” to the rights and liberties of the incapacitated person is given a high priority by the Courts.

Article 81.21(a) of the MHL further provides that the transfers may be in any form that the incapacitated person could have employed if he or she had the requisite capacity, with the exception of the execution of a new Will or a Codicil for the incapacitated person.

Article 81.21(a) of the MHL further provides that the powers which may be granted include, but are not limited to the power to:

  • Make gifts;
  • Provide support for persons dependent upon the incapacitated person for support, whether or not the incapacitated person is legally obligated to provide that support;
  • Convey or release contingent and expectant interests in property, including marital property rights and any right of survivorship incidental to joint tenancy or tenancy by the entirety;
  • Exercise or release powers held by the incapacitated person as trustee, personal representative, guardian for minor, guardian, or donee of a power of appointment;
  • Enter into contracts;
  • Create revocable or irrevocable trusts of property for the estate which may extend beyond the incapacity or life of the incapacitated person;
  • Exercise options of the incapacitated person to purchase securities or other property;
  • Exercise rights to elect options and change beneficiaries under insurance and annuity policies and to surrender the policies for their cash value;
  • Exercise any right to an elective share in the estate of the incapacitated person’s deceased spouse;
  • Renounce or disclaim any interest by testate or intestate succession or by inter vivos transfer consistent with paragraph (c) of Section 2-1.11 of the Estates, Powers and Trusts Law of New York;
  • Authorize access to or release of confidential records; and
  • Apply for government and private benefits.
    1. Section 81.21(e) of the Mental Hygiene Law specifies that prior to granting the Petition requesting a transfer of the incapacitated person’s assets, the Court must find by ” clear and convincing evidence” and shall make a record of the following findings (emphasis added):
      The incapacitated person lacks the requisite mental capacity to perform the act or acts for which approval has been sought and is not likely to regain such capacity within a reasonable period of time or, if the incapacitated person has the requisite capacity, that he or she consents to the proposed disposition;
    2. A competent, reasonable individual in the position of the incapacitated person would be likely to perform the act or acts under the same circumstances; and
    3. The incapacitated person has not manifested an intention inconsistent with the performance of the act or acts for which approval has been sought at some earlier time when he or she had the requisite capacity or, if such intention was manifested, what is the likelihood he or she would have changed such intention under the circumstances existing at the time of the filing of the Petition. Clearly, these are factual issues that will require an investigation by counsel for the Petitioner.

As is appropriately noted in the Law Revision Commission Comments to Section 81.21 of the MHL, the above stated list of powers is intended to be “illustrative rather than exclusive”. But more importantly, the Commission correctly recognized that Section 81.21 gives statutory recognition to the common law doctrine of “substituted judgment” which is recognized by the Courts in New York and other jurisdictions. An example of the utilization of this doctrine is the Court’s decision in Matter of Florence, 140 Misc.2d 393, 530 N.Y.S.2d 986. Simply stated, the Guardian, utilizing the power to engage in property management for the incapacitated person, including the power to transfer assets of the incapacitated person to another person, may be authorized to undertake the acts that the incapacitated person could have if he or she had the capacity to do so.

The Courts in New York have been quick to employ the doctrine of “substituted judgment”, by granting Guardians the authority to transfer the assets of the incapacitated person in a varied set of circumstances. However, before the Guardian is permitted to transfer the assets of his or her Ward, there are several factors delineated in Section 81.21(b)which must be addressed in the Petition requesting the transfer of assets and which are considered by the Court before ruling upon the requested transfer.

Factors Considered by the Court

Illustrative of the information that needs to be disclosed in the Petition pursuant to the provision of ‘81.21(b) of the MHL is:

(a) Whether the disposition is consistent with any known testamentary plan or pattern of gifts. The Petitioner requesting the transfer of assets should articulate all of documentary proof whether it be contained in a Last Will, Revocable or Irrevocable Trust or any other writing in which the incapacitated has previously expressed an intention to transfer his or assets in a manner that is consistent with or similar to the transfers requested in the Petition;

(b) Whether the incapacitated person expressed or manifested any intention that is inconsistent with the proposed disposition;

(c) Whether the incapacitated person has engaged in making any significant gifts or pattern of gifts prior to his or her incapacity; and

(d) Whether the incapacitated person has sufficient capacity to make the proposed disposition and if so his consent should be attached to the Petition.

In determining whether the Court should approve the proposed transfer, the Court pursuant to Section 81.21(d) of the MHL will consider among other things: (a) whether the incapacitated person has sufficient capacity to make the proposed disposition and if so, whether there has been consent; (b) whether the incapacitated person’s disability will be of long or short duration; (c) whether the needs of the incapacitated person and his or her dependents or others depending upon him for support can be met from the assets remaining after the proposed transfer is made; (d) whether the proposed donees of the transfer are the natural objects of the incapacitated person’s bounty; (e) whether the proposed transfers will produce tax savings which will benefit the Ward or his or her dependents; (f) whether the transfer is consistent with any known testamentary plan or pattern of gifts; and (g) any other factors that the Court deems relevant.

Service of the Petition upon Interested Persons

Section 81.21(a) of the MHL specifically delineates upon whom the Petition seeking the proposed transfer is to be served:

(i) The persons entitled to notice in accordance with paragraph one of subdivision (d) of Section 81.07 of this Article. For example, spouse if any, parents, if any, adult children, if any, etc.; and

(ii) If known to the Petitioner or Guardian the presumptive distributees of the incapacitated person as that term is defined in Section ‘103 of the Surrogate’s Court Procedures Act, unless the Court dispenses with such notice; and

(iii) if known to the Petitioner or Guardian, any person designated in the most recent Will or similar instrument of the incapacitated person as beneficiary whose sights or interests would be adversely affected by the relief requested in the Petition.

The incapacitated persons Last Will and any other documents of a testamentary nature executed should be carefully scrutinized to determine whom will be effected by the proposed transfer. It is not unusual to have one set of individuals who are interested parties for purposes of the Petition seeking the appointment of a Guardian, and a different group of individuals being interested parties for purposes of the Petition seeking the transfer of assets. Additionally, it is as equally important that a determination be made whether any interested person is a person under a disability, which would require an appointment of a Guardian ad Litem to protect his or her interests with respect to the proposed transfer.

Required Findings to Be Made by Court to Grant the Petition

Clearly, the legislature’s incorporation of the judicial doctrine of “substituted judgment” in Section 81.21(e)(2) of the MHL was imperative in allowing both the elder law practitioner and the Judiciary to be as creative and pragmatic as possible with respect to the transfer of assets for Medicaid and estate planning purposes.

Before discussing some of the case law illustrative of the Medicaid and estate planning that has been permitted pursuant to Section 81.21 of the MHL, I direct your attention to Section 81.16(b) of the MHL and Section 81.22 of the MHL which authorize the Court to direct or ratify any transaction to establish protective arrangements including a trust (revocable or irrevocable) which may even extend beyond the life of the incapacitated person. These sections are often neglected provisions of Article 81, which the attorney can look to when confronted with Medicaid or estate planning issues for an incapacitated person, and where a Supplemental Needs Trust may be appropriate.

Relevant Case Law Regarding Transfer of Assets Requests by Guardians under Article 81

Commencing in 1994, the genesis of the Judiciary’s willingness to expansively interpret Article 81 began to take form. The following cases are merely illustrative of the scope and breadth of the Judiciary’s recognition of the doctrine of “substituted judgment.”

A. Matter of Klapper, N.Y.L.J. Aug. 9, 1994, p. 26, col. 1, (Sup. Ct. Kings City). The son/Guardian of a nursing home resident (his mother) sought permission to transfer the majority of mother’s assets (approximately $340,000.) to his family. The Court held that use of such Medicaid planning is legally permissible and the transfer for purpose of Medicaid planning would not violate public policy. In reaching its decision, the Court found that the mother had an “extensive history” of consistently providing financial support to her son and his family. The Court noted that the annual expenses of the son and his family were approximately $62,400 per year, however, the annual income was approximately $43,000, a shortfall of $19,000, per year or $1,500 per month.

The Court determined that there is no question that the use of such Medicaid planning by competent persons is legally permissible and that proper planning benefits their estates. The Court opined that transfers for the purpose of Medicaid planning do not violate public policy. Rather, it appears to be the intention of Article 81 to permit such a transfer. The Court opined that the fundamental policy underlying Article 81 is to assist the incapacitated person to compensate for his or her limitations and to provide the least restrictive alternative. In order to effectuate this policy, an incapacitated person should be permitted to have the same options available relevant to transfers of property that are similarly available to competent individuals.

B. Matter of Cooper (Daniels), 162 Misc.2d 840, 618 N.Y.S.2d 499, 1994 (Suffolk City). The sister/Guardian of an incapacitated person sought authority to (a) renounce her Ward’s share in his deceased wife’s estate, (b) transfer the assets of a bank account to the Ward’s two children, ages 20 and 23, and (c) transfer the Ward’s real property to her 20 year old child. The Court held that a “competent, reasonable individual…would prefer that his property pass to his child rather than serve as payment for Medicaid and nursing home care bills where a choice is available”. The Court further found that denying an incompetent person, through her Guardian, the same rights to conduct Medicaid planning that are available to any competent person in the State of New York would achieve a result “in direct contravention of the expressed intention of Article 81.”

The Court allowed the requested renunciation and transfer of assets, while requiring retention of sufficient funds in the guardianship to pay for the nursing home care during the Medicaid penalty period. The Court further allowed the transfer of real property to the 20 year old child relying on Social Services Law Section 366 (5)(d)(3)(I)(B) which permits the transfer of a home to a child under age of 21 without negatively affecting Medicaid eligibility.

C. Matter of Parnes, N.Y.L.J. Nov. 2, 1994, pg. 32, col. 2 (Sup. Ct., Kings City). The Petitioner requested permission to transfer $150,000 in liquid assets of an incapacitated nursing home resident to her husband who had liquid assets totaling $345,000 as well as the transfer of the incapacitated person’s share of a jointly owned house ($110,000). The Court held that the transfer would aid the husband in meeting his own household and medical expenses and in providing to his incapacitated spouse services and items not covered by Medicaid. The Court granted the application even in the absence of any evidence that the Ward had ever contributed to her husband’s support, and in the absence of any evidence of pattern of gift giving. The Court also noted that a husband’s exercise of spousal refusal would not violate public policy.

D. Matter of DaRonco, 167 Misc.2d 140, 638 N.Y.S.2d 275 (1995) The Conservator/Wife of an incapacitated spouse sought to convert the conservatorship to a guardianship and to authorize the transfer of the entire incapacitated spouse’s estate to herself, and to subsequently exercise a “spousal refusal” when applying for Medicaid. The Court granted the petition converting the conservatorship to a guardianship, and authorized the requested transfers. The Court determined that the cost of nursing home care for the Ward exceeded the Ward’s monthly income and would eventually result in depletion of his entire estate in less than seven years. The Court further held that the “spend down” of the incapacitated person’s estate would eventually leave his wife/Guardian and minor son destitute. The Court also noted that, because the proposed transfers would be to a spouse, gift
taxes would be avoided and no Medicaid penalty period would be incurred due to the spouse/Guardian’s invocation of her spousal refusal rights pursuant to Social Services Law Section 366(3)(a).

E. Matter of Baird, 167 Misc. 2d 526.634 N.Y.S.,2d 971, (1995). The proposed Guardian sought to renounce part of the incapacitated person’s interest in the Estate of a deceased friend for Medicaid planning purposes. The Court held that NYS Dept. of Social Services was not a necessary party in the Article 81 proceeding. The Court cited MHL§81.07(d)(1)(viii) for authority that the local Dept. of Social Services and not the State Dept. of Social Services is a party entitled to notice of the proceeding.

The Court held that the Guardian under Article 81 has the power to renounce part of the incapacitated person’s interest in the estate of a deceased friend in order to provide funds to pay for nursing home costs during the Medicaid “penalty period”, while allowing the remaining funds to pass to her children and not be used for her nursing home expenses. The Court opined that a competent reasonable person would make the renunciation and that a person involved in an Article 81 proceeding should have the same options available as a competent individual who has assets. Again, a clear invocation of the doctrine of “substituted judgment.”

F. Matter of Shah, 95 NY 2d 148, 711 N.Y.S.2d 824 (6/8/2000). The Court of Appeals affirmed the decision of the Appellate Division, 2nd Department, which authorized the Guardian/spouse to transfer to herself the entire assets of her
incapacitated spouse for the purpose of allowing her to then exercise a spousal refusal and make her spouse eligible for Medicaid, and to further be able to refuse to use those assets for support of her spouse.

G. Matter of Christine Banks, Sup. Ct. NY City 6/14/2000 – N.Y.L.J. (6/27/2000). The Court allowed the Guardian of an incapacitated nursing home resident that had a large accumulated debt to be able to transfer one-half of $164,000 of her belatedly discovered assets to a pooled trust pursuant to Social Services Law ‘366.2(b)(2)(iii)(B).

§366.2 of the Social Services Law permits the establishment of a pooled trust for an incapacitated person that is funded by one-half of the person’s assets. The other one-half is spent down and then the person is eligible for Medicaid.

H. Matter of John XX, 226 A.D.2d 79; 652 N.Y.S 2d 329 (1996). The Appellate Division affirmed the trial court’s Order granting the Petition of an Art. 81 Guardian to distribute certain assets of the incapacitated person to his adult daughters. The Court held that subject to the provisions of Section 81.21 of the MHL that Guardians have the authority to effect transfers of assets for the purpose of rendering incapacitated persons Medicaid eligible.

The Court opined that a contrary conclusion would have the effect of depriving incapacitated persons of the range of options available to competent individuals. The Court further opined that the proposed transfer did not constitute a fraud on the Department of Social Services as a future creditor.


As the baby boomers come of age, and begin to face all of the medical and physical problems associated with aging, I am certain that reliance upon Article 81 and its body of case law will increase with greater frequency. The continued creativity of the elder law bar partnered with the willingness of the judiciary to broadly interpret Article 81 and the doctrine of “substituted judgment” will help insure that the rights of the incapacitated are not in any way compromised.

Enea, Scanlan & Sirignano, LLP