NtNew Jersey has become one of only a handful of states to expressly permit guardians to transfer the assets of their wards for the purpose of attaining eligibility for Medicaid.1 Now in the Garden State, a self-sufficient adult child who acts as a legal guardian to a mentally incompetent parent can give away — or even transfer to himself — all or a part of the parent's assets to aid the parent's eligibility for Medicaid benefits.

The New Jersey Supreme Court, often a leading light among state high courts, ruled on Aug. 5 in the case of Mildred Keri, a mentally incompetent senior citizen, and found in favor of her son and legal guardian Richard Keri.2 The court reasoned that the legal representative of a mentally incompetent person should be allowed to make, on behalf of his ward, the same choice the ward would've made had she been able. The decision cleared the way for Richard Keri and his brother to “inherit” $92,000 that would've been spent on Mildred Keri's care before she would've been allowed to partake in Medicaid.3 I represented Richard Keri in that case.

Clearly, Medicaid planning is essential to help preserve assets for the next generation. For advisors, such planning usually involves helping a client transfer his wealth to his children at a point at which it is inevitable that the parent will need nursing home care.

Medicaid, a joint federal and state program created under Title XIX of the Social Security Act of 1965, provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify based on financial need.4 Under the New Jersey “Medicaid Only” program, for example, an applicant's countable resources cannot exceed $ 2,000.5 After Medicaid was enacted, concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, led Congress to adopt legislation imposing periods of Medicaid ineligibility, “penalty periods,” in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself “needy.”6

This legislation imposes a 36-month “look-back period” for transfers to individuals, in which Medicaid officials look back from the application date to analyze the applicant's asset transfers.7 Transfers to trusts are subject to a 60-month look-back.8 If a Medicaid applicant disposes of assets for less than fair market value within that 36 or 60-month look-back period, the applicant may be subject to a Medicaid penalty period, based upon the value of the uncompensated transfer.9 The penalty period is calculated by dividing the amount of the transfer by the average monthly cost of nursing home care (which, in New Jersey, is currently $6,050).10

Through proper planning, however, the penalty period resulting from the transfer of assets can be minimized. Appropriately sequenced transfers of an elder's assets are made (for example, to the elder's heirs outright or to an appropriate trust) while sufficient assets are retained in the elder's name to pay for nursing home care during any period of Medicaid ineligibility that results from the transfers. With proper planning, once the ineligibility period expires, the assets of the elder will be spent down to the point where he will be eligible for Medicaid.

State and federal safeguards protect a prospective Medicaid applicant's right to nursing care by mandating that a Medicaid-approved nursing facility cannot transfer or otherwise discriminate in quality of care against a patient based upon that patient's payment status as a Medicaid recipient.11 Thus, because the facility is prohibited from transferring or discharging a resident based upon a change in pay status from private to Medicaid payment, and a proper Medicaid plan will reserve “key money” to privately pay for nursing care during any period of ineligibility resulting from planning transfers, a proper plan will not adversely impact the elder's quality of life.

MEDICAID PLANNING

In its simplest form, Medicaid planning has been recognized by some as a prudent estate-planning technique by which an individual may preserve assets for future generations.12 It also has been criticized as “the widespread divestiture of assets by mostly wealthy individuals,”13 and even as “self-imposed impoverishment to obtain, at taxpayers' expense, benefits intended for the truly needy.”14

Some courts have been overtly hostile to Medicaid planning's more controversial form, in which the elder has become incompetent and his guardian seeks to engage in Medicaid planning on his behalf.15

Nevertheless, in New Jersey, the propriety of Medicaid planning on behalf of an incompetent elder is no longer in doubt. In the Mildred Keri case, Chief Justice Deborah T. Poritz wrote for a unanimous court on Aug. 5, for the first time directly addressing and authorizing the use of Medicaid planning by a guardian/child for an incapacitated parent.16 The opinion recognized Medicaid planning as a legally permissible estate-planning tool for which Congress has established the public policy.17 As the Keri Supreme Court concluded, “So long as the law allows competent persons to engage in Medicaid planning, incompetent persons, through their guardians, should have the same right.”18

In the years leading up to the Keri decision, courts within the state have had remarkably different takes on the concept of Medicaid planning by guardians on behalf of incompetents. In 1998, one appellate court reasoned that “[c]oncepts of equal protection and inherent fairness dictate that an incompetent should be given the same opportunity to use techniques of Medicaid planning and estate planning as others more fortunate.”19 In contrast, a 2002 court of equal jurisdiction referred to the technique as “troubling” and as “prematurely forc[ing] enrollment on the public dole.”20 The rancor felt toward Medicaid planning by some lower court judges was vehemently expressed by the trial court in Keri: “I do not [pauperize] human beings and citizens in the United States solely to make them [wards] of the taxpayers. I don't know when probate judges got in to this business of doing estate planning post-incompetency, but I don't do it.”21

PROPOSED PLAN

The Keri case involved 88-year old Mildred Keri, who lived alone in her home in New Brunswick, N.J. She was exclusively dependent on her two sons, petitioner Richard Keri and Charles Keri. Although Richard and Charles regularly visited their mother and arranged for her care to avoid placement in a nursing home, the arrangements became increasingly difficult.22 When their mother's deteriorating health and mental status made nursing home care unavoidable, Richard Keri applied to be his mother's guardian and to engage in Medicaid planning on her behalf.

Mildred Keri's home, which was her only significant asset, was valued at about $170,000. Her monthly income was $1,575.45.23 Richard Keri estimated that, given his mother's income and estimated nursing home expenses in the amount of $6,500 a month, his mother would need to use $4,924.55 a month from savings to pay for nursing care.

Consequently, in his proposed plan to the court, Richard Keri sought permission to sell Mildred's home and transfer $92,000 of the sales proceeds to himself and his brother equally. A 16-month penalty period would result, calculated by dividing the $92,000 transfer by the monthly average nursing home cost in New Jersey which, at the time of the application, was $5,540.

The remaining $78,000 would be used to pay for his mother's nursing home care during the 16-month Medicaid ineligibility period, after which Mildred's assets would be spent down and she would be eligible for Medicaid beginning in the seventeenth month following the transfer.24

REVERSAL

In reversing the appellate court's decision in Keri, the state high court endorsed New York's presumption in favor of Medicaid planning, finding that “a competent, reasonable individual… would prefer that his property pass to his child rather than serve as a source of payment for Medicaid and nursing home care bills.”25

The high court found that a lower court decision in In re Trott26 “impliedly established” the presumption in favor of Medicaid planning by recognizing that maximizing funds available to a ward's beneficiaries (by reducing amounts owing to the state) is in the best interests of the ward's estate.27 As Chief Justice Poritz recognized, “When a Medicaid spend-down plan does not interrupt or diminish a ward's care, involves transfers to the natural objects of a ward's bounty, and does not contravene an expressed prior intent or interest, the plan, a fortiori, provides for the best interests of the ward and satisfies the law's goal to effectuate decisions an incompetent would make if he or she were able to act.”28

The Keri Supreme Court adopted the framework established in the Trott decision, whereby it is presumed that Medicaid planning is in the ward's best interests unless there is, as the Trott opinion put it, “substantial evidence that the incompetent, as a reasonably prudent person, would, if competent, not make the gifts proposed.”29

The Trott criteria, which was established by a chancery court in 1972 and often relied upon by courts in the years that followed, allows gifting by a guardian if the following five criteria are met: “(1) the mental and physical condition of the incompetent are such that the possibility of her restoration to competency is virtually nonexistent; (2) the assets of the estate of the incompetent remaining after the consummation of the proposed gifts are such that, in the light of her life expectancy and her present condition of health, they are more than adequate to meet all of her needs in the style and comfort in which she now is (and since the onset of her incompetency has been) maintained, giving due consideration to all normal contingencies; (3) the donees constitute the natural objects of the bounty of the incompetent by any standard…; (4) the transfer will benefit and advantage the estate of the incompetent…; (5) there is no substantial evidence that the incompetent, as a reasonably prudent person, would, if competent, not make the gifts proposed.”30

The New Jersey Supreme Court in Keri characterized this last criterion as “a subjective test with a high evidentiary burden to rebut substituted judgment: that ‘there is no substantial evidence’ the ward, ‘if competent,’ would not approve a Medicaid spend-down plan.”31

In addition to adopting the clearly articulated standards set forth in Trott, Chief Justice Poritz provided a careful analysis of those criteria as they applied to Keri.

After concluding that Mildred Keri's mental status satisfied the first criterion, the court found that the second criterion was met, given the proposed spend-down plan, coupled with the fact that nursing home placement was necessary and that federal and state law prohibits discrimination of nursing home residents on the basis of Medicaid pay status.32 The court found that the proposed donees of the spend-down plan were the objects of the ward's bounty, thus satisfying the third criterion. Because the proposed plan would benefit the ward's estate, the fourth criterion was met.

The Keri court also found that the guardian had satisfied the fifth criterion. Although it recognized Mildred Keri's preference to remain in her home, rather than a nursing home, the fact that the only source to pay for in-home care was the house itself resulted in “a veritable ‘Catch-22.’33 Moreover, because her dementia had resulted in increasingly difficult behavior, the court noted that in-home care might not have been feasible. The court concluded that there is “simply nothing in the record to suggest” that Mildred, while competent, would have disapproved of the Medicaid planning proposal.34

Finally, the court rejected the N.J. Appellate Division's notion that Medicaid planning by a guardian/child is a conflict of interest, reasoning that “the natural objects of a ward's bounty often are the same persons likely to be chosen by the courts as guardians,” and citing New Jersey's statutory preference for appointing a spouse or heirs as guardians: “Disqualifying those individuals from receipt of asset transfers on conflict of interest grounds prevents the use of substituted judgment in the majority of cases because, if not disabled, incompetent persons most likely would transfer their assets to their guardians.