New York Elder Law Attorney Blog

by Michael Ettinger, Esq.

Medicaid annuities have been a viable planning option for New York spouses since The Deficit Reduction Act of 2005.

Say you have a spouse who needs nursing home care (the "institutionalized spouse") but you have more assets than the Medicaid law allows you, the spouse at home (the "community spouse") to keep. Currently, the community spouse may keep about $125,000 in resources (not including the house, which is exempt if a spouse is living there). But what if the couple has $400,000 in assets? That's $275,000 in excess resources.

Many well meaning advisers, including lawyers, will tell you that it is too late and you have to first spend down that $275,000 before Medicaid will pay. Not correct.

Elder law attorneys have a number of good planning options here. One, spousal refusal was the subject of an earlier blog post.

Another planning option, the Medicaid annuity, may in some cases turn out to be the best planning option.

The community spouse purchases a Medicaid annuity worth the excess $275,00 which must make repayments of the full amount of the annuity plus interest with the community spouse's actuarial life expectancy. Now, the $275,000 has disappeared and the institutionalized spouse is immediately eligible for Medicaid, saving nursing home costs of $12,000 or more per month. Spouse at home receives an increased income which is also almost all sheltered from Medicaid.
What if the spouse at home dies first, or before all the payments are made? The children may be named the beneficiary and receive the balance of the payments.

by Michael Ettinger, Attorney at Law
The Medicaid Asset Protection Trust (MAPT) is a technique commonly used by elder law attorneys. It consists of an irrevocable trust, usually set up by a parent of parents sixty-five and older. One or more of the adult children are named as "trustees" to manage the trust for the benefit of the "beneficiaries" who remain the parents during their lifetimes. For example, the parents retain the right to the exclusive use and enjoyment of the home and the income from all of the trust assets. The establishment and "funding" of the trust, i.e. retitling the home and the investments in the name of the trust, starts the five year look-back period running. After five years, those assets become exempt and are protected from the costs of long-term care.

Once the MAPT is established, there are certain things the parties can and cannot do. Below are a list of the "Do's and Don'ts" concerning the MAPT.

Do make all transfers to your trust, as advised by the law firm, in a timely manner.
Do use trust assets for repairs or improvements to the home or other property in the trust.
Do use trust assets for payment of real estate taxes and homeowners insurance.
Do take dividends and income on trust assets on at least a quarterly basis.
Do call the law firm when you wish to make a gift from the trust to any of your beneficiaries.
Do call the law firm when a Grantor needs Medicaid benefits or dies.
Do call the law firm when personal or financial circumstances change significantly.
Do call the law firm if you wish to change trustees or break the trust.
Do provide your homeowner's insurance company with the "letter of instruction" and a copy of the trust for real property transferred to the trust.
Do provide your CPA or tax preparer with the "letter of instruction" regarding the trust tax return
and the "letter of instruction" tax deductibility of legal fees.
Do choose your trustee carefully to avoid the expense (and unpleasantness) of changing
the trustee.
Do call the law firm if you want to take out a reverse mortgage on the property in the trust.

Don't use trust assets to pay telephone or utility bills.
Don't use trust assets to pay personal expenses.
Don't use trust assets to purchase an automobile.
Don't take principal or capital gains from trust assets.
Don't transfer IRA's or 401(k)'s to the trust.
Don't allow beneficiaries to return to the trust or the Grantor any gifts made from trust assets.
Don't make additional transfers to the trust without advising the law firm.

by Michael Ettinger, Esq.
A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), allows seniors, age sixty-two and older, to tap the equity in their homes. The demand for these loans is exploding due to the lingering effects of the recession and the leading edge of the boomer generation reaching retirement age.

The attractiveness of these loans are that no payments are made on the loan until the home is sold, the last owner vacates for assisted living or nursing home care or the last owner dies. After death, the loan repayment terms allow an additional twelve months for estate administration and probate.

The difference between the sale price and the loan goes to the heirs under the will or living trust. If the home sells for less than the loan, the estate owes nothing since these loans are covered by insurance, taken out by the borrower, to repay the lender for any shortfall. While the insurance adds 2% to the cost of the loan, the mortgage insurance fee is tax deductible.

Although about half of reverse mortgages are taken out to pay off existing mortgages, thereby eliminating payments, there are other options besides taking a lump sum. Borrowers may also take out a line of credit or receive a monthly check for a term certain, such as ten or twenty years, or for life. Proceeds are received tax-free. Since the loan is based solely on the equity in the home, there is no income check or credit check required.

The amount that you may borrow depends on your age and the value of the property. For example, maximum loan amounts on a fixed rate mortgage for home values up to $625,500 or more are $324,070 for a sixty-two year old and $384,850 for a seventy-five year old. Homes of lower values receive proportionately less loan amounts.

Due to the high cost of the mortgage repayment insurance (2%) and the loan origination fee (2% of the first $200,000, 1% of amounts over $200,000, with a cap of $6,000), these loans are not recommended where the homeowner may move or sell in a few years or is at risk for long-term care and may need Medicaid planning. Once a reverse mortgage is placed on a home, it is not amenable to being protected from nursing home costs with a Medicaid Asset Protect Trust.

A consultation with an experienced elder law attorney can help you weigh the pros and cons of going forward with a reverse mortgage, as well as available alternatives, such as home equity loans, selling the home and trading down, or opting to rent.