Tuesday, June 20, 2006

Failure to Exercise Spousal Right of Election a Transfer for Medicaid

Category: Elder Law, Probate and Estate Administration

A new New Jersey ruling affects estate plans where one spouse leaves assets to another spouse in a testamentary trust, and the surviving spouse then needs to apply for Medicaid for his or her long term care needs. The case is I.G. v. Department of Human Services (N.J. Super. Ct. App. Div., No. A-0006-05T5, June 13, 2006).

In New Jersey, a surviving spouse has a right to an "elective share" of a deceased spouse's estate. The "elective share" statute, N.J.S.A. 3B:8-1 to -19, essentially provides that the surviving spouse must receive 1/3 of the "augmented estate" of the deceased spouse. The "augmented estate" is defined to include both probate and certain non-probate assets (to prevent a person from disinheriting a spouse by merely ensuring that all assets pass to a non-spouse via a non-probate vehicle, such as joint ownership or the use of a beneficiary designation). Per N.J.S.A. 3B:8-1 the "'augmented estate' consists of the value of all property of both the deceased and surviving spouse as well as other property transferred to third parties without adequate consideration before the decedent's death."

What happens from a Medicaid perspective if (1) the first spouse's will leaves everything in a trust to the surviving spouse, and (2) the surviving spouse does not make an elective share claim?

According to I.G. v. Department of Human Services, the failure of the surviving spouse to make an elective share claim is a "transfer" for Medicaid purposes. The court found that the failure to elect the elective share was a transfer of an amount equal to 1/3 of the deceased spouse's estate.

What is the effect of this case?

First, if your estate plan calls for all your assets to pass into a discretionary trust for the benefit of your spouse, or if you disinherited your spouse altogether, in the hopes of shielding assets in the future from a Medicaid spend-down, you need to re-examine your plan as it likely will not meet your goals.

Second, if a surviving spouse (or his or her fiduciary if he or she cannot act) fails to seek the elective share, this failure to act will (1) create a penalty period, during which the surviving spouse will not qualify for Medicaid, and (2) that penalty period will come into effect at the time when (a) the surviving spouse has exhausted all of his or her assets outside the trust, and (b) the surviving spouse is in a nursing home. The elective share claim must be made within 6 months from the date of death.

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