The Intersection of Estate Planning and Elder Law

A Dangerous Place for Those Who Don’t Know the Rules

It’s called a “Sweetheart Will.”  A man in his eighties leaves everything to his wife—his $100,000 IRA, a $20,000 savings account and the couple’s home.  His wife is suffering from early onset Alzheimer’s and while the husband is mentally alert, he is neither in the best of health nor able to care for his wife on an everyday basis.  Medicaid benefits pay for the bulk of the wife’s care.  Then, the husband suddenly dies.

Law practices have seen this countless times.  In a case like this, the wife inherits all of the husband’s assets along with ownership of the home.  The problem is because the couple received bad advice or no advice at all, they had no idea this type of a windfall would disqualify the wife from Medicaid benefits.  What seemed like a good idea at the time has left an ailing widow with no way to pay for her care, at least not for very long.

This scenario highlights one of the potential pitfalls of do-it-yourself estate planning, or estate planning by someone with limited perspective.  Even an otherwise excellent attorney who is not well versed in the nuances of how estate planning and elder law intersect can lead a client down the wrong path.

In a case like this, for example, the couple would have benefited from mirror image wills incorporating a special needs trust for the surviving spouse.  This way, at the death of the husband, all assets would pass to the special needs trust, thereby helping to ensure that the wife would keep her Medicaid benefits and her husband’s assets would be available to supplement her care.

Traditional estate planning often centers on minimizing transfer taxes, which in turn leads to the myth that only high-net-worth clients need estate planning attorneys.  True, many estate planning attorneys focus their practices on clients with taxable estates.  But the reality is that most Americans don’t have enough assets to justify hiring an attorney solely for tax purposes.  According to the United States Census Bureau and Tax Policy Center, of the almost 2.5 million American citizens and residents who died in 2008,[1] fewer than two percent held federally taxable estates.

What services should an estate planning attorney provide for a client with a non-taxable estate?  Many attorneys assume such clients need only execute simple wills and, occasionally, a general power of attorney.  Others suggest titling assets jointly or executing a Revocable Living Trust in order to avoid probate or to allow a loved one access to the client’s assets.  This is where traditional estate planning and elder law converge, often with painful results.  Estate planning advice given without consideration of potential elder law issues could present significant hurdles for clients should they find themselves in need of public benefits in the future.

Social Benefits Programs

The vast majority of modest to low-net-worth clients don’t realize they might qualify for social programs, which isn’t surprising given the criteria for qualification can be dizzying to someone not familiar with the system.   For example, to qualify for nursing home Medicaid, a person must be continuously confined to a nursing home facility for thirty consecutive days and in need of some form of nursing or rehabilitative care.  If an individual meets the so-called “medically needy test,” they then must pass an asset test, which takes into account the value of all non-exempt assets.  Exempt assets include your home, car, burial plot and some limited life insurance policies, along with your spouse’s assets.  Assuming you meet the assets test, you must then meet the income criteria, which says, among other things, that Medicaid recipients must pay all of their monthly income to the institution caring for them, after permitting allowances for “personal needs” and a spouse’s monthly income.

And, if that isn’t enough, there are Medicaid’s two sleeping giants—the transfer penalty and estate recovery.

Even if you pass all of the tests, you might be subject to a penalty period during which you would be ineligible for coverage if you transferred assets for “less than fair market value” within the five years prior to applying for aid.  In other words, the state divides the value of all gifts made within the five years leading up to the Medicaid application by the average monthly cost of nursing home care in order to determine the penalty period.  For example, in Tennessee, the average monthly cost of nursing home care for 2012 is $4,567.  Thus, if an individual transferred $60,000 within the five-year period, they would be subject to 13.13 months of ineligibility running from the date of the Medicaid application.

Then there is estate recovery. One of the most common fears among elderly clients is that Medicaid will “come and take my home” if they receive any benefits during their lifetime.  Federal law does in fact require states to seek recovery of any Medicaid benefits from the estate of a deceased Medicaid recipient.  An applicant’s home, vehicle and several other items are treated as exempt assets that are not counted under the asset test when qualifying for Medicaid.  However, while these assets are exempt for qualification purposes, they are subject to Medicaid’s right to reimburse itself for benefits paid out to the Medicaid recipient after the recipient has died.  There are several exceptions to this rule, very few of which are common knowledge to those that do not routinely deal with elder law clients.  For example, assets transferred to a disabled child either outright or in a special needs trust will not only avoid treatment as a transfer for Medicaid purposes, but will also avoid estate recovery.

Transferring Assets to Joint Ownership

The example we used at the beginning of this article demonstrates the danger of so-called “Sweetheart Wills” in which one spouse leaves all of their assets outright to the other.  The pitfalls of transferring assets to a non-spouse might be even worse when it comes to qualifying for social aid.

For clients with modest estates, general practitioners and estate planning attorneys often advise transferring assets to joint ownership to avoid probate and to allow loved one’s access to property.  However, adding a non-spouse as a joint owner on a bank account or other property will likely be considered a gratuitous transfer for Medicaid purposes.  If the transaction occurred within the five years leading up to the filing of a Medicaid application, a transfer penalty will likely be imposed.  The applicant could attempt to argue that adding a joint owner on an asset was done for purposes other than qualifying for Medicaid, but recent precedent suggests the courts are less than sympathetic to that argument.[2]

If the motivation behind such a transfer is merely to allow a loved one access to a bank account, an attorney should consider suggesting a durable power of attorney.  Or, the attorney might suggest adding the loved one’s name to the account as an authorized signor only, with no ownership rights.

A Matter of Trusts

Trusts are typically used to help applicants qualify for social aid or to prevent estate recovery of certain assets.  Certain trusts also prove very useful in preventing individuals who are already receiving public benefits from losing them.

A common misconception among many attorneys and elder law clients is the idea that a Revocable Trust Agreement, or RTA, will somehow help them qualify for aid.  In reality, an RTA is generally not an effective planning tool for elder law purposes.  For example, placing assets in an RTA will not render any of the assets non-exempt for qualification purposes.  Also, use of an RTA will not protect assets from estate recovery after the Medicaid recipient has passed away.

It’s quite possible that a client might have very few assets but, because of their income, still fail to qualify for Medicaid benefits.  Tennessee, for example, is an income cap state that allows those with less than $2,094 in monthly income to receive Medicaid, provided they are otherwise qualified.  This would lead one to the logical conclusion that, should an applicant’s income exceed $2,094, they would have no hope of qualifying for Medicaid.  Not necessarily.  An applicant might still satisfy the income test through use of a Miller Trust, also known as a Qualified Income Trust.[3]

An applicant who exceeds the income cap can still qualify for benefits provided all income in excess of the income cap is placed into a Miller Trust each month.  The trust provisions must include language allowing the state to reimburse itself from the remaining trust assets for any benefits received by the applicant over his or her lifetime.  Many estate planning attorneys are simply unaware of how a Miller Trust can help clients with modest incomes and few assets.

For those facing elder law or other special needs issues, an estate planner who understands the general structure of special needs law becomes invaluable in working through the various programs and documents that provide access to social benefits.  One or more of the following types of special needs trusts often become viable planning options.

Standalone Third Party Special Needs Trusts — Standalone third party special needs trusts often prove useful for clients who would like to provide for a disabled child, relative or other beneficiary.  In most cases, a direct gift to a disabled beneficiary would almost surely disqualify him from receiving supplemental security income (SSI), Medicaid and a variety of other social benefits.  Many estate planners don’t realize that including a social aid recipient in a will can drastically impact their access to benefits.  Other attorneys might see the red flag but then advise their clients to disinherit the disabled individual or to leave assets to someone else and simply trust them to care for the disabled beneficiary.  However, an attorney with both estate planning and special needs training would be able to introduce the client to the option of utilizing a third party special needs trust.

The reality is that government benefits are limited and a special needs trust can improve a recipient’s quality of life by adding to those benefits while preserving government aid.  A valid third party special needs trust will restrict use of trust assets to expenditures that supplement government assistance and will generally not be required to include a pay-back provision allowing the state to reimburse itself at the death of the beneficiary.  Instead, the trust provisions will include language directing any remaining assets to other individuals upon the beneficiary’s death.

An important aspect of special needs planning is knowing when to use and when not to use provisions of the law.  For example, Crummey powers are often usedin third party special needs trusts.  A father establishes an irrevocable special needs trust for his disabled daughter in order to ensure that she would receive support beyond her monthly SSI and Medicaid benefits.  The father himself has a taxable estate and wants to reduce his estate by making annual exclusion gifts of $13,000 to his daughter’s special needs trust.  Under federal tax law, if the trust does not include a Crummey power, the gift will not be treated as a present interest and will not qualify for the annual exclusion.  Instead, the father would be required to pay the gift tax due or allocate a portion of his unified credit to the gift.  On the other hand, if the trust includes a Crummey power, the daughter would have a right to withdraw the gift from the trust for a set period.  The daughter’s access to the assets could cause her to lose her social benefits.  Thus, without some knowledge of complicated special needs issues, even an excellent estate planner might not realize that including a Crummey power in an otherwise valid special needs trust could lead to the loss of social benefits.  Typically, the safest path is to leave out the Crummey power and instead make gifts to the trust that are covered by the donor’s unified credit.  Another option is a Cristofani trust, which names one or more beneficiaries who are given Crummey powers and then separately names one or more special needs beneficiaries who are not given a Crummey power.

(c)(2)(B) Special Needs Trusts So called (c)(2)(B)Trusts tie directly into Medicaid planning.  Typically, when a Medicaid recipient dies, the recipient’s remaining assets, including their home, are subject to estate recovery.  Furthermore, as explained above, any assets transferred to someone other than an applicant’s spouse within the five-year review window will trigger a transfer penalty that prevents access to Medicaid for a specific period of time.  However, a Medicaid applicant may transfer assets to a disabled child without incurring a transfer penalty and the assets will not be subject to estate recovery at the applicant’s death.[4]  Assets may be transferred outright to the disabled child, but such a transfer poses the problem of disqualifying the disabled child from receiving social benefits.  Thus, the more common technique for transferring assets to a disabled child is through a (c)(2)(B) Trust.  The trust generally must follow the requirements discussed above for third party special needs trusts, but a pay-back provision must also be included allowing the state to recover benefits paid to the disabled child (not the original Medicaid applicant) at the child’s death.

For example, a mother who meets the medically “needy test” for Medicaid receives $1,000 in monthly income, owns a house, a checking account with $10,000 and a savings account with $50,000.  The mother’s son has suffered his whole life from various mental and physical ailments and is currently receiving SSI and Medicaid.  The son has lived in the mother’s home and he will function at a much higher level if allowed to remain there.  Obviously, the mother does not qualify for Medicaid because she fails the asset test.  However, the mother could transfer all of her assets to a (c)(2)(B) Trust benefiting her son.  Such a transfer would allow the mother to qualify for Medicaid.  At the death of the mother, the state would not seek recovery of the trust assets; rather the home and the additional assets would continue to be available to support the son.  Finally, at the son’s death, the state would seek recovery for benefits paid on behalf of the son from the assets, if any, remaining in the trust.

First Party Special Needs Trusts Let’s assumeaclient receives property that effectively disqualifies him from social aid.  Or, a Medicaid recipient inherits money or gets a payout from a litigation claim.  In either case, the money will most likely disqualify the individual from receiving additional benefits unless one of several federally permitted options is used.

Execution of a first party special needs trust is one such option.  Unlike third party special needs trusts, which are funded by assets owned by someone other than the aid recipient, the first party variety are funded with assets owned by the individual receiving social aid.  The terms of a first party trust are very similar to those of third party trust, except that first party trusts must include a payback provision allowing the state to reimburse itself for benefits paid to or for the benefit of the special needs individual.  First party special needs trusts also have additional limitations:

  • They may only be created by a parent, grandparent or legal guardian of the individual receiving benefits.  If no such party exists, a court of competent jurisdiction must agree to create the trust and order the assets be paid into the trust.
  • They may only be created and funded for a beneficiary who is under the age of 65.  Thus, this particular type of trust is less common among elder law clients and more common among special needs children.

Consider the actual case of a man — we’ll call him Bill — in his mid-fifties.  Bill was born with physical and mental disabilities, which allowed him to receive SSI and Medicaid benefits for many years.  Bill’s grandfather had executed a will leaving his sizable estate to separate trusts for his children.  At the death of a child, each trust was to be distributed to that child’s descendants, per stirpes, outright and free of trust.  The grandfather’s will did not take into consideration Bill’s condition; rather Bill was to receive his share outright like the rest of the grandchildren.  When Bill’s father died, Bill received several hundred thousand dollars from his trust and faced disqualification from SSI and, more importantly, from his much needed Medicaid benefits.  In order to retain his benefits, the local chancery court executed and funded a first party special needs trust, which currently holds Bill’s inheritance.  In effect, Bill was able to retain his benefits and his inheritance remains available to supplement his social aid.

However, in order to establish and fully fund the trust, Bill spent more than $7,000 in legal fees.  Had the grandfather’s estate plan included a special needs trust for Bill, there would have been no need to pay several thousand dollars to execute the trust and Bill’s trustee would have had another $7,000 to help improve Bill’s quality of life.  And, had Bill been over 65, his options for retaining his benefits would have been much more limited.  The bottom line is it is best to hire an attorney with enough experience to anticipate elder law and special needs problems during the planning process.

Powers of Attorney Without Gifting Powers

One final area where elder law and traditional estate planning converge is in the drafting and execution of powers of attorney (POAs).  In elder law planning cases, clients are often not competent to sign new estate planning documents, much less deeds or other contracts.  Nevertheless, to qualify for Medicaid or other benefits, these clients routinely must spend down their assets or transfer property to other individuals.  Without an effective POA, an attorney’s only option is to file for a conservatorship against the individual, which typically involves thousands of dollars in legal fees and poses ethical issues regarding representation of the client.

An effective POA solves many of the problems that threaten to restrict a client’s access to social aid on account of incompetency.  Many elder law clients have planned their estates in the past and have some form of power of attorney.  However, most of the POAs tend to be very basic and do not include gifting powers.  Without a gifting power, financial institutions and Medicaid caseworkers might argue that any transfers of property by an attorney-in-fact are invalid.  A client’s family then gets a painful surprise when they learn that, despite having had the foresight to plan for the future, their loved one’s documents are insufficient.  Attorneys drafting POAs should thoroughly discuss the pros and cons of including gifting powers.  If there is any indication that social benefits might come into play in the future, an attorney can suggest including gifting powers in the POA with language that specifically grants the attorney-in-fact the ability to engage in transfers for purposes of qualifying for social programs.

One additional caveat for POAs focuses on the common practice of limiting gifting powers to the annual exclusion amount of $13,000.  For clients who may face elder law or special needs issues, this limitation could be a huge problem as some clients may need to transfer much more than the annual exclusion amount in order to qualify for social benefits.  Attorneys simply cannot afford to fill in a standard, simple POA form without considering each client’s specific needs.  If those needs include planning for social benefits, drafting an effective POA can be the difference between a smooth experience and a drawn out, stressful ordeal.


A financial planner that we routinely work with recently revealed his rule for ensuring the best possible service for his clients: “Stay in your lane.”  He understands the danger of trying to navigate through areas in which he has little experience.  Law is a profession of specialties, each of which provides a unique service to a client with specific needs.  Attorneys owe it to their clients to stay in their respective lanes.  Those who help plan estates must educate themselves in the nuances of elder law and special needs so they can provide the best service or, at the very least, recognize when they’re in over their heads.  When arriving at the busy intersection where traditional estate planning and elder law issues meet, it’s best to do so with your eyes open.

[1]  To date, the United States Census Bureau has released Birth, Death and Marriage statistics only through 2008.

[2] See Mallery v. Shah, (N.Y. Sup. Ct., App. Div., 3rd Dept., No. 513277, March. 1, 2012), where the court imposed a transfer penalty on a Medicaid applicant, rejecting her contention that she had added joint owners on her assets for estate planning purposes alone and should therefore not be subject to the penalty.

[3] See generally Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990); 42 U.S.C. § 1396p(d)(4)(B).

[4] 42 U.S.C. 1396p(c)(2)(B).

By Dana Perry, CELA | Chambliss, Bahner & Stophel, P.C. | Chattanooga, TN |

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This article is for informational purposes only and is not intended to be advertising, solicitation, or legal advice.  This article may not reflect the most recent legal changes.  Individual circumstances vary, and laws differ from state to state.  If you have a question about your specific situation, we recommend that you find a certified elder law attorney in your area.