There are a variety of reasons why one may wish to rescind an irrevocable trust, even if only in part. For instance, it may be the case that an irrevocable trust was established in order to shield assets from the cost of long term care, but long term care is needed before the five year look back period has elapsed. The assets of the trust are therefore needed to pay for long term care. The ability to return assets directly from the trust to pay creditors will provide a simple solution for executing an alternative spend down plan or paying through the remaining look back period.

Michigan law allows assets in an irrevocable trust to be handled contrary to the instructions provided in the original trust by means of an agreement between the grantor or settlor and the beneficiaries of the trust. These agreements can control any portion of the trust corpus, including, for example, just enough to pay the nursing home for one month. By executing a new agreement monthly, the nursing home can be paid each month until the look back period has elapsed and the grantor can safely apply for Medicaid without disclosing the transfer to the trust.

It is crucial to determine when a nursing home patient will be better off to execute a more sophisticated plan rather than wait until the look back period has elapsed. It is also important to provide for the grantor’s incapacity at the inception of the estate plan in order to insure that one will not need to go to probate court to carry out the asset protection plan. In the end, these principals can help to ensure the creation of an estate plan that will protect assets in the event of disability while at the same time maximizing the financial independence and security of the grantor.

Yours Truly scored a victory for community spouses of Pennsylvania nursing home patients on Tuesday, May 29, 2008. On that day the Pennsylvania Supreme Court sent the Department of Public Welfare packing. It denied DPW’s appeal from the decision of the Commonwealth Court that DPW could not refuse to grant Medicaid based on a proper, Medicaid-compliant, immediate annuity purchased by the community spouse.

To start at the beginning, on February 5, 2003, Pauline Ross entered a nursing home. On April 8,
2005, Pauline’s community spouse, Leonard Ross, transferred $418,026.66 in marital assets into a Fidelity & Guarantee “Medicaid Qualified, Single Premium,Immediate Annuity.” Under the annuity contract, F&G pays Leonard $10,211.83 per month from May 15, 2005, to September 15, 2008. Leonard established the F&G Annuity so that Pauline would be eligible for Medical Assistance-Nursing Home Care benefits and to pass the marital assets on to the next generation. Leonard is the owner and sole annuitant of the F&G Annuity, and Leonard’s three children are the beneficiaries if Leonard dies before September 15, 2008. Pauline had no monetary interest in the F&G Annuity, and, after Leonard transferred the marital assets into the F&G Annuity, Pauline had no assets with which to pay for her nursing home care.

Pennsylvania refused to approve Medicaid for Pauline, claiming that the annuity could be sold to J.G. Wentworth at a 40% discount, an immediate payment of $250,000. Pauline, according to the Commonwealth, had that much in available assets.

There were several problems with DPW’s case. First of all this would be a loan, not a sale, and loan proceeds are not considered an asset under Medicaid law. Secondly, there was solid testimony proving that F & G would not permit J.G. Wentworth to purchase the annuity. Finally, federal Medicaid law clearly permits exactly this sort of transaction. Pennsylvania and only four other states try to deny Medicaid in such cases.

An administrative law judge–a DPW employee, of course–ruled against Ms. Ross. She said Mr. Ross would have to dump the annuity on J.G. Wentworth and lost 40% of his investment. On appeal, the Pennsylvania Commonwealth Court pummeled the Department. It ruled that Mr. Ross was within his rights to invest in an annuity and his wife is entitled to Medicaid. Tuesday’s ruling by the supreme court was the final smackdown. Pennsylvania’s highest state court told DPW it could not deny Medicaid based on a properly amortized Medicaid-friendly annuity purchased by the community spouse.

Tuesday’s ruling also completed the tri-fecta. Two federal district courts had already told DPW it was acting illegally. Those cases were Mertz, ex rel. Mertz v. Houstoun, 155 F. Supp. 2d 415 (E.D. Pa., 2001), and James ex rel. James v. Richman, 465 F. Supp. 2d 395 (M.D. Pa., 2006). DPW appealed the James ruling to the federal court of appeals, but has little chance of winning.

This decision means that if your spouse is in a nursing home, you can preserve a substantial amount of money through an annuity, in addition to the 50% or $104,400 the DPW says you can keep. This annuity purchase is done after your spouse is in a nursing home. If an annuity sales person tells you to put your money into an annuity now, in case you or your spouse needs to go into a nursing home, run–do not walk–away. However, if your spouse is in a nursing home in Pennsylvania and your assets, apart from your house and one care, are higher than $25,000, we can help you save the excess. Call us for a consultation.

John B. Payne, Attorney

Dearborn, Michigan & Pittsburgh, Pennsylvania

(800) 220 7200

FAX (313) 562 3340

©2008 John B. Payne, Attorney

www.law-business.com

An astounding thing happened during the fall of 2007. Michigan changed its Medicaid policy with respect to annuities and implemented those changes with retroactive effect.

The new policy requires annuities to have several features in order to avoid being considered a divestment. Among the requirements is a rule that the state of Michigan must be named a remainder beneficiary to the extent of Medicaid benefits received. This law applies to all annuities purchased or altered after February 8th, 2006, the day President Bush signed the Deficit Reduction Act into law.

This policy change is troubling is several respects. First, it certainly defeats a common sense understanding of justice and fair play to change the rules retroactively, particularly where the financial consequences can be so significant. The law changed in October of 2007, but it applies to all annuities purchased or changed more than a year and half before the new policy was announced. Annuities not in compliance with the new policy can be considered a divestment–just as though the money used to purchase the annuity had been given away. So, for example, a $60,000.00 annuity could result in more than 10 months of ineligibility for Medicaid and under the new law, this penalty time would not begin to run until the purchaser was otherwise out of money and in the nursing home.

Second, this policy change–with all of its harsh consequences–is not necessarily understood by those selling and recommending annuities. Even today, annuities are still being sold with the idea that they will help one to qualify for nursing home care. But for many annuities, just the opposite is true. How many annuities are likely to be sold with Michigan as a remainder beneficiary? Would you invest your money that way? Many annuities will actually prevent qualification and it may be extremely difficult or impossible to undo the transaction. With nursing home costs averaging $6,500.00 per month or more, the problem is widespread and troubling.

The lesson here is that Medicaid policy is potentially an issue for almost everyone at or approaching retirement age. It is important to consult with an elder law attorney before making any long term decisions on annuities or other financial products. The impact on Medicaid qualification may surprise you.