New York Probate and Estate Administration Lawyer Blog
Long-term nursing home care can quickly consume a person’s life savings. As a result, families often explore Medicaid planning strategies designed to preserve assets while still allowing an individual to qualify for Medicaid benefits. When an incapacitated person is under a guardianship established pursuant to Article 81 of the Mental Hygiene Law, a guardian generally must obtain court approval before implementing such planning. In Matter of M.L., 2009 NY Slip Op 52160(U), the Supreme Court, Bronx County, considered whether a guardian should be permitted to engage in Medicaid planning through a combination of gifts and a promissory note loan designed to preserve assets for the incapacitated person’s intended beneficiary while allowing the incapacitated person to become eligible for Medicaid coverage.
Background Facts
M.L. was an incapacitated person under an Article 81 guardianship. The court had previously appointed a guardian of both her person and property. The guardian sought authority to implement a Medicaid asset protection plan that involved gifting a portion of M.L.’s assets and loaning another portion through a promissory note arrangement.
The guardian initially requested permission to gift a percentage of M.L.’s assets to her niece, V.S., who was the primary beneficiary under M.L.’s will, and to loan another percentage of the assets to the guardian through a promissory note. The guardian argued that the plan would allow M.L. to qualify for Medicaid while preserving a portion of her estate for her intended beneficiary.
The court initially denied the requested gift-and-loan strategy and instead directed the guardian to establish a trust for M.L.’s benefit with a banking institution serving as co-trustee.
The guardian then moved for reargument. Counsel argued that the trust structure would likely be treated as an available resource for Medicaid purposes and therefore would not accomplish the intended Medicaid planning objectives. Counsel also explained that an irrevocable asset protection trust would prevent the assets from being considered available resources but would make the assets unavailable for enhancing M.L.’s quality of life during her lifetime.
The guardian maintained that the original gift-and-loan plan was the most appropriate strategy because it reflected M.L.’s testamentary intentions. Under her will, V.S. was the primary beneficiary of her estate. The guardian also pointed out that V.S. and other family members had been actively involved in caring for M.L.
At the time of the application, M.L. possessed approximately $366,649 in assets, including bank accounts, certificates of deposit, brokerage accounts, and bonds. Her monthly income consisted of only $250 in Social Security retirement benefits. She was residing in a nursing home where her private-pay costs were approximately $20,160 per month.
Issue
Should the court authorize the guardian to implement a Medicaid planning strategy involving a gift of assets to the incapacitated person’s niece and a promissory note loan designed to pay for nursing home care during the Medicaid penalty period?
Holding
Yes. The court authorized the guardian to implement the proposed Medicaid planning strategy, including the gift of a portion of the incapacitated person’s assets and the creation of an actuarially sound promissory note loan that complied with federal and state Medicaid requirements.
Discussion
The primary disagreement before the court involved the legal standard that should govern Medicaid planning applications brought by guardians.
The court examiner argued that M.L.’s assets should simply be used to pay for her nursing home care and questioned whether the proposed gift-and-loan strategy was truly in her best interests.
The guardian’s attorney disagreed and argued that the proper analysis was not a traditional “best interest” test. Instead, counsel contended that the court should apply the doctrine of substituted judgment recognized under Mental Hygiene Law § 81.21.
Under the substituted judgment doctrine, the court considers what a competent and reasonable person in the incapacitated person’s position would likely do under the same circumstances. Counsel pointed to the Law Revision Commission comments to the guardianship statute and argued that this approach better respected the incapacitated person’s own intentions and preferences.
The proposed Medicaid plan worked in several steps. First, M.L.’s Social Security income would continue to be used toward her nursing home expenses, and funds would be reserved for burial expenses. Next, a portion of her assets would be gifted to V.S. This transfer would create a Medicaid penalty period during which Medicaid would not immediately cover nursing home costs.
To address that penalty period, another portion of M.L.’s assets would be loaned through a promissory note. The guardian would use those loan proceeds, together with M.L.’s income, to pay the nursing home’s private-pay charges during the penalty period. Once the penalty period expired and M.L.’s remaining assets fell below Medicaid eligibility limits, she would become eligible for Medicaid benefits.
The guardian also agreed to be personally bound by the promissory note and to use the loan proceeds to pay for M.L.’s care during the penalty period.
The court ultimately accepted this approach. Upon reconsideration, it concluded that the gift-and-loan plan was appropriate and authorized the guardian to proceed.
The court specifically directed that the promissory note comply with federal Deficit Reduction Act requirements and Medicaid regulations. The note was required to provide equal repayment terms, prohibit deferred payments, and remain enforceable after the lender’s death. The court cited Social Services Law § 366 and 42 U.S.C. § 1396p in support of these requirements.
In granting the application, the court effectively recognized that Medicaid planning can be an appropriate exercise of guardianship authority when structured in compliance with applicable Medicaid rules and when consistent with the incapacitated person’s known estate planning objectives.
Conclusion
In Matter of M.L., 2009 NY Slip Op 52160(U), the court approved a Medicaid asset protection strategy that combined a gift of assets with an actuarially sound promissory note loan. The decision illustrates that guardians may be authorized to engage in Medicaid planning on behalf of incapacitated individuals when the proposed plan complies with Medicaid regulations and reflects the incapacitated person’s likely wishes and testamentary intentions. The case remains an important example of how New York courts may balance the cost of long-term care with an incapacitated person’s estate planning goals. If you are considering Medicaid planning for an elderly or incapacitated family member, an experienced New York elder law attorney or estate planning attorney can help evaluate available options and seek appropriate court approval when guardianship is involved.