Will a Prenuptial Agreement Be Recognized Under New Jersey Medicaid Eligibility Law

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney

A prenuptial agreement is “an agreement (contract) between prospective spouses [fiancées] made in contemplation of marriage and to be effective upon marriage that fixes the respective financial obligations and consequences of married couples upon death and/or divorce.” Jonathan E. Fields, Prohibited Subject Matter in Prenuptial Agreements, § 1.01 2006 Family Law Update (Ronald L. Brown Laura W. Morgan, eds., Aspen Publishers, 2006). Parties to a premarital agreement may contract with respect to mutual property rights and obligations; rights to acquire, manage, and dispose of property; disposition of property on separation, dissolution, or death; modification or elimination of spousal support; wills and trusts; and death benefits from life insurance policies. Uniform Premarital Agreement Act § 3(a), Uniform Laws Annotated p. 373. Since prenuptial agreements provide for the distribution of assets upon death or divorce, they can serve an important role in estate planning. They also allow couples to specify which assets should be considered marital property and which assets should be treated as personal property upon the dissolution of the marriage. Many couples use prenuptials as a guide that structures their finances according to a mutually predetermined plan. In addition, Prenuptial agreements allow an individual to protect a family business or specific piece of property from potential claims by a former spouse. Allison A. Marstona, Planning For Love: The Politics of Prenuptial Agreements, 49 Stan. L. Rev. 887 (1997).

Prenuptial agreements were once widely viewed as contemplating divorce and contrary to public policy, but in recent times have gained wide acceptance in many jurisdictions either by judicial declaration, through adoption of the Uniform Premarital Agreement Act (“UPAA”), or by other statutes expressly providing for their acceptability. New Jersey adopted the UPAA on November 3, 1988. N.J.S.A. §§ 37:2-31 to -41. Prior to the enactment of the UPAA, the validity of prenuptial agreements in New Jersey was governed by the holding in Marschall v. Marschall, 195 N.J Super. 16 (Ch. Div. 1984). Susan Reach Winters, Marriage Agreements – Prenuptial Agreements, 16 N.J. Prac., Legal Forms § 47:1 (4th ed.)(2014).

Although prenuptial agreements are now generally afforded acceptance they still remain a cause for concern for the court due to a potential of unequal bargaining power and because the parties do not stand at arm’s length to each other, rather there is a relationship of the greatest trust and confidence. Courts strictly scrutinize prenuptial agreements accordingly and are often unwilling to treat them like other contracts. An additional consideration with regard to prenuptials is that federal law may preempt spouse’s contractual terms. For example, if a spouse attempts to give waiver of rights to an Employee Retirement Income Security Act (“ERISA”) qualified pension plan in a prenuptial agreement courts have held this waiver to be invalid because federal law requires that an actual “spouse,” not merely a fiancée who signs a prenuptial agreement, of a plan participant waive such right.

In 2013 New Jersey Governor Chris Christie signed a bill that amended both N.J.S.A § 37:2-38 and N.J.S.A § 37:2-32. The new law restricts judicial interpretations of prenuptial agreements by mandating that judges evaluate the agreements as of the date of their signing, not the date of enforcement. Prior to the new law courts looked to the procedural and substantive fairness of prenuptial agreements prior to enforcing them. Generally, a contract would be found unconscionable if its enforcement would leave one spouse without means of reasonable financial support, however the new law has strengthened the enforceability of premarital agreements. In addition, a prenuptial agreement may be deemed unconscionable now only if one party did not receive full disclosure of assets, was without counsel or was otherwise uninformed or disadvantaged.

This new law has effectively removed judicial consideration of changed circumstances. For this reason it is important that both parties consult with independent legal counsel when signing a prenuptial agreement. Doing so potentially fosters important communication about important issues and ensures fairness and full understanding by both parties.

To discuss your NJ Medicaid eligibility matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

 

Medicaid Eligibility – Can a Parent Pay for Improvements to Child’s Home

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Eligibility Attorney

Can a parent make improvements to a child’s home when they are moving in with their child as opposed to a nursing home, and at what point do these payments become a gift causing ineligibility for Medicaid benefits.

You’re likely to get vague answers on most legal blogs that state, in short, yes a parent can pay for improvements to a child’s home, but talk to a lawyer to structure the payments so that your state Medicaid agency doesn’t treat the payments as gifts – which is not very helpful.

In a recent conversation with a representative at the New Jersey Medicaid eligibility office, the County Board of Social Services evaluates applications at the time they are received. She did say it would be important to save all the receipts for the improvements in this hypothetical. I asked her whether there were specific guidelines they followed in distinguishing a gift from an exempt payment for improvements. She said they follow state and federal rules, and the best she could offer me is that they look at what improvements were made and they see whether they were really for the purpose of making the home adequate for the parent. She also said they take into consideration how elaborate the improvements are (i.e. granite counter tops as opposed to Formica).

This representative did not have an answer for what would happen in the case of the value of improvements exceeding the value of the life estate a parent can buy in the child’s home after living in the home for one year. N.J.S.A. 10:71-4.10(b)(6)(iii). Her response is that it would all have to be evaluated on a case by case basis at the time the application was received. My suggestion! Come in and discuss your thinking and plan. Some improvements will be definite yes and others no. But let’s strategize together.

To discuss your NJ Medicaid matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

President Obama to take on “trust-fund loophole”

President Obama to take on “trust-fund loophole”

In his State of the Union address, President Obama will, according to a report in the New York Times, propose what his advisors are calling the “trust-fund loophole”, in order to help finance tax cuts for the middle class.

Very interesting. My practice does not involve “trust fund babies” but rather the same middle-class people the President is seeking to benefit. And it is often middle-class people who are the direct beneficiaries of this “trust-fund loophole”.

Let’s first look at what this “loophole” is and and how it works. Suppose a parent gave an adult child the home which the parent purchased in the 1960s for $10,000. Further suppose that when that parent dies that same house is worth $150,000.

When the adult child sells the parent’s home, she will realize capital gain in the amount of $140,000. This amount is the difference between the price at which she sells it – $150,000 – and the parent’s “tax basis” of $10,000. Because the parent gave the property outright during the parent’s life, the adult child received this “carry-over basis” of $10,000.

Now imagine same parent, adult child and house in a different example. Instead of giving the property to the adult child outright during the parent’s lifetime, the parent instead gives the property to the adult child following the parent’s death through a will, trust, life estate deed or other device through which the parent retained certain rights over the house. In that case, the child would receive a “stepped –up basis”–meaning a cost basis equal to the value of the house at the time of the parent’s death.

So we have a very different result. In this case the child’s gain on the sale of the property would be equal to the $150,000 sales price, minus the $150,000 “stepped-up basis” or zero. Zero as in zero capital gains tax to the adult child. Versus $140,000 in capital gains tax in the “carry-over basis” example.

This is the “trust fund loophole” that President Obama seeks to close. The New York Times story quotes administration officials as stating that the tax “would fall almost entirely on the top 1 percent of taxpayers” and “would apply to capital gains of $200,000 or more per couple”.

We’ll see. In the meantime, it’s interesting to see how the term “loophole” can mean different things to different people.

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Special Needs Trust and Medicaid Eligibility

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Special Needs Trust Attorney

Elderly parents concerned about Medicaid or other means-tested public benefits to cover the future costs of their own custodial care, may transfer their assets to protect them; however, such a transfer may compromise their own Medicaid eligibility for a period of time. An exception exists, however, for parents who transfer their assets to supplemental benefits trusts created for the sole benefit of their disabled child. Thus, parents confronting their own long-term care needs can protect assets for the lifetime care and support of their disabled child and access Medicaid benefits for themselves by transferring their assets to a trust created for the sole benefit of their disabled child.

Both federal and New Jersey law, as well as New Jersey regulations, define a transfer for the “sole benefit of” a disabled child as a transfer arranged in a way that no individual except the disabled child “can, in any way, benefit…at the time of the transfer, or at any time in the future” from the transferred assets. U.S. Dept. of Health and Human Services Health Care Financing Administration State Medicaid Manual (Trans. No. 64, Nov. 1994) and N.J.A.C. 10:71-4.10(b) 8. Federal law provides that no transfer penalties will apply if a trust created for the sole benefit of a disabled child is “actuarially sound” or has a “payback provision.” New Jersey regulations are more restrictive than federal law, however, since New Jersey has added a requirement that the trust must contain a payback provision naming New Jersey as the first remainder beneficiary, regardless of actuarial soundness. N.J.A.C. 10:71-4.10(f). If a disabled child receives a transfer and the money leaves his bank account by the end of the month whether that will disqualify him for Medicaid.

Based on what I read it appears that would count as income.

A person should not be entitled to qualify for means-tested benefits while a beneficiary of a trust funded with significant assets, unless strings are attached. Those strings limit the amount of resources the beneficiary can own, and the amount of income he or she can receive. Thus, while assets in a properly drafted special needs trust or supplemental benefits trust are exempt from being counted while the beneficiary’s eligibility is determined, how the trust assets are paid or applied for the beneficiary thereafter may well affect his or her eligibility. The trustee of a special needs trust or supplemental benefits trust must always be mindful of the resource and income limitations related to different programs for which the beneficiary may be eligible.

The purchase by the special needs trust or supplemental benefits trust of a resource that is not exempt from being counted (principal residence, household good and personal effect, a vehicle, etc…) will adversely affect the beneficiary’s eligibility. In order to be eligible for Medicaid, the beneficiary’s income cannot exceed the monthly income cap. The calculation of income includes earned income, such as wages, and unearned income, such as pensions, Social Security and disability benefits, spousal support and inheritances. New Jersey regulations provide a list of third-party payments not counted by New Jersey Medicaid as income. N.J.A.C. 10:71-5.3.

A parent, spouse or other relative or third party who leaves a disabled individual his or her assets outright by will or living trust may jeopardize the disabled individual’s eligibility to receive public benefits. To avoid that outcome, the will or living trust of a parent, spouse or other relative or third party can provide that the assets, including the home, if desired, be held in a supplemental benefits trust for the disabled individual’s benefit. If the trust is not to be funded with assets of the beneficiary, then most of the federal and New Jersey requirements with respect to special needs trusts do not apply. Supplemental benefits trusts are private matters between the grantor or testator, the trustee and the beneficiary.

While the terms of a supplemental benefits trust are not mandated by law, the availability of trust assets to the disabled beneficiary will determine whether his or her eligibility for public benefits programs is compromised. If the beneficiary has the rights, authority or power to liquidate the property, the value of the property is counted as a resource for Medicaid eligibility purposes. 20 C.F.R. §416.1201(a). N.J.A.C. 10:71-4.1(c). If a disabled beneficiary has legal authority to revoke a trust and then use the funds to meet his or her food or shelter needs, or direct the use of the trust principal for his or her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes. Social Security Administration Program Operations Manuel System (POMS), SI 01120.200.

Mandatory disbursements from a trust to a disabled beneficiary without restriction on the anticipation, assignment or sale of the right to future payments may also be a resource to the beneficiary. For example, if the trust provides for payment of $100 per month to the beneficiary for spending money, absent a prohibition to the contrary, the beneficiary may be able to sell the right to future payments for a lump sum settlement. Social Security Administration Program Operations Manuel System (POMS), SI 01120.200.

Under the terms of a properly drafted supplemental benefits trust, the disabled individual has no control or access to the trust funds. As a result, the funds are not considered a resource available to the disabled individual for purposes of Medicaid, SSI eligibility or Division of Developmental Disabilities residential services. N.J.A.C. 10:71-4.1©. 20 C.F.R. §416.1201(a). N.J.A.C. 10:46-1.3.

An irrevocable trust funded with assets of a third party for the benefit of a disabled individual: 1) is not a special needs trust subject to the federal requirements of 42 U.S.C.A. Section 1396p(d)(4)(A) or state requirements prescribed in New Jersey regulations at N.J.A.C. 10:71-4.11 (g), and 2.) the trust assets and income are unavailable to the disabled beneficiary and are an excludable resource for Medicaid because a trustee other that the disabled beneficiary has sole discretion to disburse funds and the disabled beneficiary cannot compel a distribution. A.M. v. Div. of Med. Assistance Health Servs., HMA8525-05 (Final Agency Decision, June 26, 2006), http://lawlibrary.rutgers.edu/oal/search.shtml.

If a mother transfers money to a self-settled special needs trust whether that qualifies for the disabled child exemption.

Before 1993, some elders placed their otherwise countable resources in a self-settled irrevocable special needs trust, and then tried to qualify for long term care Medicaid services (to pay the huge monthly nursing home bill).

Now, a self-settled special needs trust does not work if the grantor/settlor is over the age of 65 years. Since 1993, the use of a self-settled special needs trust has been restricted by 42 U.S.C. 1396p(d)(4)(A) to those under the age of 65 years. Thus, since 1993, elder law attorneys refer to the self-settled special needs trust as an “under-65” or “payback” or “d(4)(A)” special needs trust, and distinguish it from the third party gift receptacle SNT’s, which are funded by third parties for the benefit of an ill disabled beneficiary. Cynthia L. Barrett, The Special Needs Trust, SH059 ALI-ABA 395 (February, 2003).

To discuss your NJ special needs trust matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

 

Do I Recommend That Parents Gift Their Home to a Child(ren)?

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney

A client purchased their home in 1971 and paid $75,000 for it. Over the years they put an additional $150,000 of renovations into the home. The home is now valued at $875,000. The parents want to change ownership to the house so that it will be owned by the parents and their son jointly with rights of survivorship. Their question to me is, will Medicaid penalize this transfer? Then I’m asked if it is a better approach to transfer the house outright to their child now to start the five-year look back period under New Jersey Medicaid?

I’m not always a big fan of outright gifting valuable assets to children without compelling reasons. Generally (but not always), I think everyone is better off using a trust or waiting until the owner dies. A transfer of the home to a child will cause five years of ineligibility for Medicaid benefits for both parents. Depending on their health and other resources, this may or may not be a risk they should take. A transfer outright to a child has several drawbacks, including the following: The house is subject to claims of creditors and others should the child be sued or divorced or pass away. In addition, when the child sells the house, he/she will have to pay capital gains taxes calculated on the difference between the parents’ purchase price, plus the value of the improvements made to the property, and the son’s selling price. While you may not have to pay gift taxes on the gift or capital gains when your children sell the house, they may be facing other significant taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. If the children sell the house, they will have to pay capital gains taxes on the difference between your purchase price and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

These risks are avoided by transferring the house to a properly-drafted irrevocable grantor trust. The trust protects the house for the parents (and the son and his family as well) and gives the son a “step-up” in basis upon the parents’ death, reducing or eliminating capital gain taxes.

When you give anyone property valued at more than $14,000+ in any one year, you are supposed to file a gift tax form. Also, under current law, you can gift a total of $5.34 million over your lifetime without incurring a gift tax. If your residence is worth less than $5.34 million, you likely won’t have to pay any gift taxes, but you should still file a gift tax form.

Inherited property does not face the same taxes as gifted property. If the children inherit the property, the property’s tax basis is “stepped up,” which means the basis would be the value of the property at the time of the owner’s death. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage for long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult with an elder law attorney, who can advise you on the best method for passing on your home.

To discuss your NJ Medicaid and other elder law matters, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.