Medical Expense Deduction

Recent Tax Court Decision Clarifies When Long-Term Care Expenses are Deductible

There is no question that long-term care can be very expensive (both assisted living and nursing home level of care). However, many of these long-term care expenses can be deducted the parent’s income tax return as a medical expense deduction. A recent U.S. Tax Court recently ruled on whether or not non-medical caregiving expenses are deductable for non-medical personnel.

In the Estate of Lillian Baral (U.S. Tax Ct., No. 3618-10, July 5, 2011), Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Ms. Baral’s brother hired caregivers to assist Ms. Baral with her daily activities. On her income tax return Ms. Baral included, as a medical expense deduction, the payments made to the caregivers. The IRS said the expenses were not deductable. Following Ms. Baral’s passing, her estate appealed the IRS determination to the U.S. Tax Court.

The Internal Revenue Code provides that expenses for medical care may be claimed as an itemized deduction if they exceed 7.5% of adjusted gross income (this will increase to 10% of adjusted gross income in 2012). The definition of allowable medical expenses includes the cost of long-term care if a doctor has determined the parent is chronically ill. Chronically ill is defined as needed help with such basic activities as eating, going to the bathroom, dressing, or requiring substantial supervision due to a sever cognitive impairment.

In this case, the Tax Court agreed that the payments Ms. Baral made for caregivers for assisting and supervising her were deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personal since a physician found that the services provided to her were necessary due to her condition.

The issue of whether caregiving expenses are deductable as a medical expenses is a tricky area, but one that is worth exploring as the potential income tax savings may be substantial. Remember, the medical expense deduction may be available in both the nursing home as well as assisted living context. Please seek legal counsel for more detailed information.

Medicaid Asset Protection

Medicaid Asset Protection from Nursing Home Expenses

One of the most often used techniques to protect assets for a single individual is the use of the “controlled gifting” technique. With this technique the higher the fixed income and lower the nursing home costs the greater the savings. This technique involves controlled gifting and most likely the use of a financial power of attorney. Where the financial power of attorney is insufficient (for a variety of reasons) court intervention may be the only method by which to protect the assets.

The amount of assets that can be protected may well be significant but is usually in the range of 40%-60% of the exposed assets. This technique is complicated and must be done under the supervision of an elder law attorney familiar with this technique.

We often retain clients in situations where the client’s parent is in rehabilitation at a local nursing home. Often, Medicare has just run out and the client just received the first nursing home bill equal to the current month and the next month. Clients are often stunned and realize quite quickly that all of the assets will be gone very soon. Using the “controlled gifting” technique even under this scenario may well be an attractive route to take to protect the assets at issue and to set them aside to pay for the wide range of items and services that Medical Assistance will not pay. Remember, once on Medical Assistance, the recipient can only have $86/day for his/her needs.

Medicaid Recovery of Transferred Assets

What is cited below is another jurisdictional case which illustrates the limits of what a State may do to accomplish a Medical Assistance (i.e. Medicaid) recovery on community spouses’ assets. In this case, an attempt was made to put a Medicaid lien on the estate of a recently deceased community spouse at a time when the nursing home spouse continued to receive Medicaid benefits. In this case the court ruled that the State was prohibited from reaching into the spouses’ estate for recovery.

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An Idaho district court rules that the state cannot recover assets from the estate of a Medicaid recipient’s spouse that were transferred to the spouse before the Medicaid recipient died. In Re: Estate of Perry (Idaho Dist. Ct., 4th Dist., No. CV-IE-2009-05214, March 16, 2011).

Martha and George Perry owned property together. Mrs. Perry entered a nursing home, and Mr. Perry transferred the property into his name. Mrs. Perry then began receiving Medicaid benefits. Mr. Perry died before Mrs. Perry, and the property was sold. After Mr. Perry’s death, the state filed a claim against his estate seeking recovery of more than $100,000 in Medicaid benefits it had so far paid on Mrs. Perry’s behalf.

The state asserted that, because Mrs. Perry previously had an interest in the property during the marriage, the state could recover an amount equal to her ownership interest. The estate’s personal representative countered that the state was entitled only to recover an amount equal to Mrs. Perry’s interest in the home at the time of her death. Because Mrs. Perry was still alive at the time of the transfer, the personal representative argued the state could not recover any amount. The magistrate ruled that the state’s ability to recover costs was limited to assets that were transferred to the recipient’s spouse at death, not to inter vivos transfers. The state appealed. (Mrs. Perry died while the appeal was pending.)

The Idaho District Court affirms, holding the definition of “estate” in federal Medicaid law does not permit the state to recover property interests the Medicaid recipient divested before death. The court determines that there is a conflict between state and federal law because state law would allow the state to recover from the spouse’s estate so long as the property was once community property, but the court concludes that federal law preempts state law.

from www.elderlawanswers.com

Medical Assistance Update

FIA Transmittal 11-26

The Department of Human Resources just released an update changing the document requirements for a Medical Assistance application. The changes for what is required in the initial application is a profound change in terms of the financial statement documentation that is initially needed. Instead of a full five years worth of documentation, what would be needed initially is a snap shot of statements covereing the eligiblity month and then the previous years statements but only for the anniversary month (i.e. if you are seeking eligiblity for July 2011, then you would need financial statements for July 2010, July 2009, July 2008, July 2007, and July 2006). However, an additional item that will be needed are tax returns for the previous five years. These new provisions take effect for all applications beginning May 1, 2011.

POA Breach of Fiduciary Duty

A Power of Attorney Holder’s Breach of Fiduciary Duty

There is no question that a financial power of attorney holds what is called a “fiduciary duty” to act in the best interests of the grantor. But what if that power of attorney holder breaches that duty and takes “mom’s” funds for herself? What if her taking of mom’s funds caused mom to be disqualified from Medical Assistance (i.e. Medicaid)? Can she be found liable?

An interested case in Indiana answered that quesion in the affirmative.

An Indiana appeals court rules that a woman breached her fiduciary duty to her mother when, among other things, she refused to cash out a life insurance policy in order to qualify her mother for Medicaid and later profited from the policy. Shaw v. Covenant Care Waldron Home (Ind. Ct. App., No. 73A04-1005-SC-317, March 2, 2011) (unpublished).

Joni Shaw admitted her mother to a nursing home. Ms. Shaw signed the admission agreement on behalf of her mother as her attorney-in-fact. Ms. Shaw applied for Medicaid on her mother’s behalf, but the application was denied due to a life insurance policy. Ms. Shaw refused to cash out the policy, and the Medicaid application was never approved. In addition, Ms. Shaw withdrew funds from her mother’s account and deposited them into her sole account. After her mother died, her brother, who was the beneficiary of the life insurance policy, gave her $8,000 from the proceeds of the policy.

The nursing home had an outstanding balance of $5,709.40, which Ms. Shaw refused to pay. The nursing home sued, alleging breach of contract and breach of fiduciary duty. It argued that an attorney-in-fact who breaches a duty to the principal is liable to third parties as though he or she were the principal. The small claims court found in favor of the nursing home, and Ms. Shaw appealed.

The Indiana Court of Appeals affirms, holding that Ms. Shaw breached her fiduciary duty to her mother. According to the court, because Ms. Shaw profited from refusing to cash in the life insurance policy and she transferred funds from her mother’s account to her own account, it was clear that Ms. Shaw was acting in her own self-interest to the detriment of her mother.

from www.elderlawanswers.com.

The interesting question from a Maryland point of view is what right does the nursing home have to sue the attorney-in-fact. Can other interested family member’s sue on behalf of mom? The answer to that question is “yes.” However, court action will need to be started to give that family member standing to recover the stolen assets.

Inherited IRA and 401(k)s

Does a Surviving Spouse have a Right to the Deceased Spouse’s 401(k) or IRA?

When choosing a beneficiary for a retirement plan, it is important to understand how your spouse will be treated under the plan. Surviving spouses are treated differently under 401(k)s and individual retirement accounts (IRAs). While a 401(k) provides protections for a surviving spouse, an IRA does not.

Because the 401(k) is an employee-based retirement system, it is governed by a federal law, the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, a surviving spouse is usually the automatic beneficiary of a retirement plan (There may be some exceptions. For example, the spouse may have to be married to the employee for a certain amount of time). The spouse must consent in writing if the employee wishes to name someone else as the beneficiary.

IRAs, on the other hand, are not governed by ERISA, so they do not include the same protections for spouses. This is true even if a 401(k) is rolled into an IRA. In a recent case, Charles Schwab v. Debickero (U.S. Ct. App., 9th Cir., No. 07-15261, Jan. 22, 2010) a husband rolled his 401(k) into an IRA with Charles Schwab & Company after he retired. He named his children as the IRA’s beneficiaries. After he died, his wife claimed that she was entitled to the account funds as his surviving spouse. She argued that because her husband rolled his 401(k) into the IRA, she should receive the same protections that the 401(k) gave her. The court disagreed, finding that the IRAs are excluded from ERISA coverage even if the funds originated in a 401(k).

If you have an IRA and want your spouse to be its beneficiary, you have to specifically name the spouse as a beneficiary. If you have a 401(k) and want your spouse to be the beneficiary, you should still fill out a beneficiary designation form, naming your spouse. And if you roll it over into an IRA, make sure you fill out a new beneficiary designation form. If you want someone other than your spouse to be the 401(k)’s beneficiary, you will need the spouse’s consent in writing, as noted above.

Whether you have a 401(k) or an IRA, it is important to regularly check your beneficiary designations to ensure they are current.

from www.elderlawanswer.com

New Estate Tax and Gift Tax Rules

Congress passed and President Obama has signed into law the deal extending the Bush tax cuts that he struck with Congressional Republicans. The legislation restores the estate tax for two years at a 35 percent tax rate, with estates up to $5 million exempt from paying any tax ($10 million for couples). If Congress does not change the law in the interim, in 2013 the estate tax will revert to what it was scheduled to be in 2011 — a 55 percent rate and a $1 million exemption.

The new $5 million estate tax exemption and 35 percent rate are retroactive to January 1, 2010. The heirs of those dying in 2010 will have a choice between applying the new rules or electing to be covered under the rules that have applied in 2010 — no estate tax but only a limited step-up in the cost basis of inherited assets. This will benefit the heirs of tens of thousands who died in 2010 with relatively modest estates and who would have been subject to capital gains tax on inherited assets above a certain threshold.

The law makes the estate tax exemption “portable” between spouses. This means that if the first spouse to die does not use all of his or her $5 million exemption, the estate of the surviving spouse could use it.

The law unifies the estate, gift and generation-skipping transfer tax exemptions at $5 million. (For 2010 there is no generation-skipping tax, while the gift tax exemption has been $1 million for a number of years.) A 35 percent tax rate will apply to gifts or transfers over the $5 million threshold. (There is no change in the $13,000 annual exclusion amount for gifts.)

from www.elderlawanswers.com.

Asset Transfer Does Not Trigger Penalty

Normally, for every $6,800 transferred out of a Medical Assistant’s name or their spouse, it will result in a penalty of one month of ineligibility. However, a frequent question is what happens if my parent transferred funds when they were healthy but during the five year look back period?

Maryland case law on this is silent. However, a New Jersey case highlights, at least in New Jersey, how the court ruled in favor of the applicant with a $100,000 transfer.

“A New Jersey administrative law judge finds that a Medicaid applicant who was healthy at the time he transferred funds to his daughter transferred the funds for a reason other than to qualify for Medicaid. R.C. v. Division of Medical Assistance and Health Services and Hudson County Board of Social Services (N.J. Office of Administrative Law, Hudson County, OAL DKT. NO. HMA 08047-10, Oct. 22, 2010).

While R.C. was healthy he transferred $100,000 to his daughter to help with her financial problems. A year later, R.C. suffered a stroke and his health began to deteriorate. He was eventually admitted to a nursing home.

R.C. applied for Medicaid benefits. The state denied benefits, finding that R.C. had made an uncompensated transfer of assets to his daughter. R.C. requested a hearing.

The administrative law judge (ALJ) reverses, finding that the transfer was made exclusively for a purpose other than establishing Medicaid eligibility. The ALJ concludes that because R.C. was employed and in good health when the transfer occurred and the stroke was unexpected, R.C. provided convincing evidence that he did not transfer the money in order to qualify for Medicaid.” From Elderlawanswer.com.

Federal law and the Maryland Medical Assistance Manual allow this exception. However, in practical terms, there is a huge gray area concerning which facts fit within this exception. If this exception were to be utilized in a Maryland Medical Assistance application, expect the application to be denied and the issue to be decided on appeal.

New Average Nursing Home Costs Released

Metlife recently released their study confirming that nursing and assisted living rates increased nationwide between 2009 and 2010. For Maryland, in the Baltimore region nursing home costs for semi-private rooms ranged from $6,200/month to $8,742/month. Nursing home costs for private rooms ranged from $6,510/month to $11,005/month. Statewide, assisted living costs in 2010 ranged from $2,800/month to $$8,250/month with the average assisted living cost at $4,122/month.

Nursing Home Expenses

Use of Medicaid Recipient’s Income to Pay Existing Nursing Home Expenses

The Department of Health and Mental Hygiene released a critical Medical Assistance eligibility update (MR 154). The changes in this update are profound. It now allows a nursing home Medical Assistance recipient to use her income to pay for nursing home related expenses (up to 3 months retroactive) to the extent Medical Assistance does not cover said expenses (i.e. she has resources in excess of $2,500). This is a profound change by the Department and took many years of litigation by another respected elder law attorney to finally achieve this result. Bottom line, however, is that this can be a benefit for many families that are faced with outstanding nursing home expenses with no normal Medical Assistance coverage for said expenses.

The issue is this, your mother has outstanding nursing home bills and when the application was made for Medical Assistance, she did not have enough assets to pay these invoices. Given the size of nursing home costs, the outstanding expenses could well be thousands, even tens of thousands of dollars. The nursing home is going to look for payment of these invoices and may well start the involuntary discharge process unless they are paid. This new Medical Assistance provision allows for mom’s income to be used to offset these expenses for the three months prior to eligibility. Since this is a brand new provision, it is unclear at present at how efficiently such a request will be implemented by the Department of Social Services. If you find yourself in this position, it is best to contact an elder law attorney to guide you through this process.

Update: The Department of Health and Mental Hygiene will likley apply the allowance for three months prior to the application date which will overlap the current retroactive Medical Assistance eligibility period. However, there will be some instances where retroactive Medical Assistance eligilbity may not be available and where this new provision may be of profound help to many individuals.