Taxation & Estate Planning

New NJ Case - Life Care Contract Deemed to be a Gift for Medicaid

By Deirdre Wheatley-Liss

 A basic question in determining Medicaid eligibility is "Did you make a gift in the past 5 years?"  If the answer is "Yes" a penalty period will be assessed before a person qualified for Medicaid.

A key distinction is that a transfer for fair market value is not a gift.  If I give my son my car, that is a gift equal to the value of the car.  If I sell my car to my son for the Kelly Blue Book value, I have made a transfer of property, but I have not made a gift because I exchanged the car for cash. If I sell my car to my son for 50% of the Kelly Blue Book value, then I have done a part sale/part gift.  To the extent I got paid, it is a transfer for fair market value and does not create a penalty period.  To the extent I did not get paid, it is a gift in an amount equal to the difference in the fair market value and what I got paid.

To take advantage of the fact that a transfer for "fair market value" is not a gift, some seniors began to enter into Life Care Contracts with their children.  These contracts would be structured along the lines of "I parent give you child $150,000, and in return, you child agree to care for me for life". The theory was that the Life Care Contract was a transfer for fair market value and not a gift since the child was promising to provide services in return for the dollars.

In re E.S. v. DIVISION OF MEDICAL ASSISTANCE  AND HEALTH SERVICES, et al the Appellate Division upheld an prior Administrative Law Judge ruling that a Life Care Contract where mother made a lump sum transfer to daughter for future personal care services was a gift, and not a transfer for fair market value, and a penalty period should be assessed.

This ruling is not surprising.  Logic says that how can you be sure that the lump sum is equal to future care - what if mom dies in 3 months, or needs a nursing home in 6, or lives until 110?  A contract between two unrelated parties would not create a situation that allowed for either such a windfall (if mom dies earlier) or detriment (if mom dies later).

Note that this ruling does not address "pay as you go" personal care contracts where a child might contract with a parent to be hourly for caregiver services actually rendered.

Image: graur razvan ionut / FreeDigitalPhotos.net

Full post as published by New Jersey Estate & Elder Planning Blog on April 16, 2010 (boomark / email).