Article by John C. Lincoln

The Letter and the Spirit of the Law of Long-Term Care Planning

The following article is provided as a courtesy by its author. It is provided for informational purposes only, and should not be taken as legal advice. You SHOULD in every case act or rely only upon the advice of an attorney who practices extensively in this area of the law. You SHOULD NOT in any case act or rely upon written materials of a general nature, such as the following article.

The Letter and the Spirit of the Law of Long-Term Care Planning

The purpose of long-term care planning is the preservation of the assets and income of a prospective nursing home resident for the benefit of the spouse, family, and heirs. The law of long-term care planning is incredibly complex and, in many ways, unfair. The complexity and basic unfairness of the system give rise to the opportunity for the use of a number of strategies in long-term care planning that reverse the unfairness of the system.

We find a common example of this fairness reversal in the rule that the titling of a home in a revocable living trust destroys the exemption for the home. ALTCS Eligibility, Policy, and Procedures Manual (Manual)§906.55.B.11. There is no good reason for the rule. For almost any other purpose, the titling of the home in a revocable living trust effects no change as a practical matter. For instance, the trustor of a revocable living trust continues to file his individual tax returns as before. Creditors can reach the assets of the trustor without regard to the revocable living trust.

The rule is unfair because it can result in the irretrievable loss of the home exemption. The knowledgeable long-term care planning attorney will “reverse” the unfairness of the rule in a suitable case. If the prospective nursing home resident, the “ill spouse”, has not yet been institutionalized for a continuous period of 30 days, the attorney may recommend the preparation of a revocable living trust, and the titling of the home in the living trust. After the ill spouse has been institutionalized for 30 days, the attorney would then advise that the home be withdrawn from the trust pursuant to a power to do so reserved at the time the trust was drafted. The effect of the strategy is that the spouse who does not require institutionalization, the “Community Spouse”, is allowed to to keep a greater share of the couple’s combined assets than would otherwise be the case. The unfairness of the rule is thereby effectively reversed.

This “fairness reversal” is obviously not an effect or a strategy of which the Arizona Long Term Care System (ALTCS) is fond. The ALTCS policymakers, the state Legislature, and Congress, would all likely concur that this strategy and many others in common use are inconsistent with the spirit of the law. Due to the use of strategies such as this, which are clearly allowed, although not intended, by the law, there are those who believe that long-term care planning is not appropriate. Of course, if that were true, much of estate tax planning would also be inappropriate. The use of family limited partnerships in order to obtain estate tax discounts is clearly not within the spirit of the tax law. They are, nevertheless, commonly used.

Much of long-term care planning, however, is not only consistent with the letter of law, it is also entirely consistent with the spirit of the law. The law expressly provides for and actually encourages many of the strategies that are used in long-term care planning. Some of the protections for the family of an ALTCS recipient are automatic. An individual is financially eligible for ALTCS if he has no more than $2,000 in countable assets. Manual, §908.B. There are, however, a number of exemptions. The biggest exemption is the home. So long as the individual intends to return home, the home will be exempt. Manual, §906.24B.1.b.ii. There is no limitation in value on the exemption for the home. One car is exempt. There is no limitation in value for a married couple. Manual, §606.1.D. The household goods are exempt, with no limitation in value. Manual, §906.26.B. A married couple could, therefore, own a million dollar home, a $100,000 car, and $50,000 worth of antique furniture , and one of the spouses still be eligible for ALTCS.

Federal law provides protections for a spouse beyond the exemptions that protect the home, the car, and the household goods. The Community Spouse Resource Deduction (CSRD) is the amount that the “Community Spouse” gets to keep under Federal law so that she will not be impoverished. 42 U.S.C. §1396r-5(c)(1)(A)(ii),(2)(B), and (f)(2)(A). The maximum CSRD as of January 1, 2004, is $92,760. Manual, Appendix 6C. The minimum CSRD is $18,552.00 These protections for the Community Spouse are expressly provided for by the letter, and are therefore consistent with the spirit, of the Federal law. Between the minimum and the maximum, the amount is determined as one-half of the countable assets, as of the “snapshot” date. The snapshot date is the date when the ill spouse has been “institutionalized” for a continuous period of 30 days. Manual, §605.2.

Even as to these protections for which provision is expressly made by Federal law, planning is often necessary to preserve the protection intended by Congress. If a couple has not consulted with a long-term care planning attorney, they may do things that will prejudice the Community Spouse’s right to keep the highest possible amount. If, for instance, the couple own a home worth $100,000, and have a mortgage of $90,000, they may decide to use $90,000 from their $180,000 total savings to pay off the mortgage. This would be, they might think, a logical thing to do to preserve the house for the well spouse. If they pay the mortgage off before the “snapshot” date, the well spouse will get to keep $45,000. The other $45,000 will have to be “spent down.” If, however, they waited to pay off the mortgage until after the “snapshot” date, the well spouse would get to keep the entire $90,000 remaining after paying off the mortgage.

What if it is not a matter of advising the client not to do something that will diminish the CSRD, but advising the client to do something that will increase the CSRD? In other words, in the example above, suppose that the house is free and clear. Is it within the spirit of the provisions of Federal law allowing the maximum CSRD to advise the clients to borrow $90,000 against the house? The result will be exactly the same as in the example above.

There should not really be any difference in policy between the first and second examples. In both cases, the clients are being enabled to take full advantage of the maximum protection allowed by law for the community spouse. The fact that the clients in the second example need to rearrange their fact situation to match the fact situation in the first example should be immaterial. Otherwise, the mere happenstance of how individuals happened to arrange their finances, for purposes irrelevant to long-term care planning, would allow some the full benefit of the protections expressly provided by Congress, and others little or no benefit. The different results would be the products purely of chance.

Gifts can be made to certain persons, even in very large amounts, all within the express intent and purpose of Federal law. A home, even a very expensive one, can be gifted without any penalty whatsoever to a child who is blind, or who is permanently and totally disabled. The home can be gifted to a brother or sister who has some equity interest in the home, and who has lived there for at least one-year before the applicant became institutionalized. It can be gifted to a child who lived in the home for least two years immediately before the date of institutionalization, and who provided care that permitted the applicant to continue to live at home, instead of in an institution or other facility. 42 U.S.C. §1396p(c)(2)(A).

Although Arizona is an “income cap” State, Federal law expressly provides for the device of an income cap trust, otherwise known as a “Miller” trust. 42 U.S.C. §1396p(d)(4)(B). An individual is ineligible for ALTCS if his income is over $1,692.00 (the year 2004 amount) per month. This “cap” is circumvented through the use of an income cap trust. The idea underlying an income cap trust is that any income remaining in the trust when the trust terminates, whether by revocation or the death of the trustor, will be paid to ALTCS to reimburse the state, at least in part, for the care for which it paid. In practice, it is doubtful that there is really ever any substantial amount remaining in the trust, available for reimbursement to the State. In any event, the circumvention of the “income cap” is within both the letter and the spirit of Federal law.

As with any area of the law, some of the strategies used in long-term care planning are within the letter, but not the spirit, of law. Medicaid law is grossly unfair in many respects, and it is appropriate to use the law as a shield against that unfairness. The examples given here, however, illustrate that much of what a long-term care planning attorney does furthers the express purposes of the law.