- Domestic Relations Procedures for Providing Greater Financial Security
- March 13, 2012 | Author: Kim Boyer
- Law Firm: Durham Jones & Pinegar, P.C. - Las Vegas Office
In many states, traditional Medicaid planning options have or will come under increased scrutiny and attack. As a result, practitioners are exploring various domestic relations laws to increase financial security for the community spouse. This paper will share my experiences with these issues in practicing in Nevada. The topics discussed include avoiding adverse income taxation on retirement benefits, separation instruments, qualified domestic relations orders, divorce, and premarital agreements.1
II. Avoiding Adverse Income Taxation on Retirement Benefits
Many of our clients have retirement money set aside in IRAs, 401Ks and company or government deferred compensation plans. When transferring assets from the institutionalized spouse to the community spouse, care should be taken to avoid adverse income tax consequences.
In the year funds are distributed from such retirement plans, the distribution is subject to income tax unless the funds are rolled over into another retirement plan (or to the extent funded with after-tax dollars). If distributions are made before age 59 ½ an additional ten percent tax penalty is imposed under I.R.C. § 72(t)(1). There is an exception to the ten percent penalty when the owner is disabled, which will typically be applicable to the institutionalized spouse
Where the assets are transferred from the institutionalized spouse to the community spouse, a tax-free rollover is generally not available. The transfer of an IRA or 401K is not a taxable event if the IRA or 401K is distributed to a spouse pursuant to a divorce or separation instrument, or if a qualified plan is distributed pursuant to a qualified domestic relations order ("QDRO").2 Separation instruments, QDROs, and divorce are discussed below.
In cases where the couple has a spend-down, it is advisable to pay an estimated tax on these distributions as part of the spend-down. In many states, the value of the institutionalized spouse's retirement fund, less any penalty for the withdrawal is included, not discounted by the taxes that may be owed. For example, a husband and wife have a total of $120,000 in countable assets, including the institutionalized spouse's IRA of $60,000. One month after placement into a facility, the institutionalized spouse withdraws the $60,000 in the IRA and places those funds into a checking account. If taxes are $18,000, payment of those taxes would reduce the remaining spend-down by $18,000.
In one case, the community spouse kept her IRA as part of her community spouse resource allowance, as she did not have the choice of other assets to retain. The month that she accessed those funds post-eligibility, the distribution was properly considered taxable income under the Internal Revenue Code. However, the Nevada Welfare Department also considered it income and decreased her monthly maintenance allowance for that month. We successfully argued that once the IRA was set-aside to her as a resource, that any liquidation of that resource should be considered a resource, not income.
III. Separation Instruments
In most states, the community spouse resource allowance is the greater of: (a) either one-half of the asset assessment not to exceed $95,100 (2005) or $95,100, but not less than $19,020.00 (2005); (b) a court-ordered amount; or (c) an amount determined after a fair hearing in accordance with 42 U.S.C. § 1396r-5(f)(3).
In seeking an increased CSRA through the courts, many states have domestic relations procedures to resolve support issues between spouses who live separately but do not want a divorce. These could be actions for legal separation, separate support, or separate maintenance. However, some of these states do not have jurisdiction to address the division of marital assets, only an action for support. In those states, a court-ordered allowance may be brought under the court's equity jurisdiction.
In Nevada, community spouses can seek an increase in the community spouse resource allowance and an increase in the monthly maintenance allowance pursuant to a domestic relations statute, NRS 123.259 (which is attached as an Exhibit). Under NRS 123.259, the assets and income can be divided: (1) equally between the spouses; or (2) by protecting income for the community spouse through application of the maximum federal minimum monthly maintenance needs allowance set forth in 42 U.S.C. § 1396r-5(d)(3)(c) and by permitting a transfer of resources to the community spouse an amount which does not exceed the amount set forth is 42 U.S.C. § 1396r-5(f)(2)(A)(ii). The division cannot be contrary to a premarital agreement.
To avoid adverse income tax consequences, it is important to include language in the relevant order to preclude the transfer from being a taxable event. In the order for Division of Assets and Income, consider including language such as the following: "That any IRA Accounts or 401K listed herein titled in the name of [INSTITUTIONALIZED SPOUSE], shall be transferred from [INSTITUTIONALIZED SPOUSE] to [COMMUNITY SPOUSE] to be held as an IRA in the name of [COMMUNITY SPOUSE], and maintained for [his/her] benefit. Said transfer shall be considered a transfer of an individual's interest in an IRA or 401K to [his/her] spouse under a separation instrument pursuant to IRC § 408(d)(6), and this Order is a decree of Separate Maintenance as defined in IRS 71 § (b)(2)(A)."
IV. Qualified Domestic Relations Orders
To be eligible for Medicaid to pay long-term care, the institutionalized spouse can have very few assets in his or her name. In Nevada and in many states, funds held in the retirement plan of the institutionalized spouse are countable assets, which must be transferred to the community spouse to obtain Medicaid eligibility.
An administrator of an employer-sponsored qualified plan may not assign any pension interest to an alternate payee absent a qualified domestic relations order.3 The requirements of a qualified domestic relations order are the following:
- Any judgment, decree, or order which relates to the provision of child support, alimony payments, or post-marital property rights to a spouse, former spouse, child, or other dependent of a participant.
- The order must be made pursuant to a state domestic relations law (including a community property law).
- The order must create or recognize the existence of an alternate payee's right to, or assign to the alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a qualified plan.
- The order must specify the name and last known mailing address of the participant and each alternate payee.
- The order must specify the name of the plan to which the order applies.
- The order must specify the amount or percentage of the participant's benefits to be paid by the plan to each alternate payee (or the manner in which the amount or percentage is to be determined).
- The order must specify the number of payments or periods to which the order relates
- This order shall not require the plan to provide any type or form of benefit option not otherwise provided under the plan; shall not require the plan to provide increased benefits determined on the basis of actuarial value; and shall not require the payment of benefits to the alternate payee which are required to paid to another alternate payee under another order which was previously deemed to be a QDRO.
One question is whether the elder law attorney should prepare the QDRO, or whether it should be referred to a specialist. A defined-contribution plan, such as a 401K, is generally easier to divide as you can specify the exact dollar amount to transfer. On the other hand, a defined-benefit plan, such a military retirement pension or state-sponsored pension, is more difficult to divide and a specialist may be warranted.
If you decide the prepare the QDRO yourself, you can contact the plan administrator and ask for a sample QDRO and their checklist. However, many plans do not have sample QDROs and those that do have sample QDROs usually contain provisions that favor the participant over the alternate payee.
If timing is not an issue, you should consider submitting the proposed QDRO to the plan for review and approval prior to obtaining the Judge's signature on the QDRO. That way, if the proposed QDRO has a defect, you do not have to go back to court to correct it. You can make the changes and re-submit the proposed QDRO to the plan for approval. After the plan approves it, then you can submit it to the court. This method assumes you have the time for the delay inherent in receiving the plan's prior approval of the plan. If you must comply with a transfer in a certain number of days, then you would want the court to issue the QDRO, and if it is defective, obtain an amended order entered nunc pro tunc.
QDROs are not required to transfer IRAs. However, it is not always advisable in the pre-planning stage for retirees to rollover retirement funds from an employee sponsored retirement plan into an IRA. In some states, rolling the funds from the employee sponsored retirement plan into an IRA converts the funds from being unavailable to being available or countable for purposes of determining Medicaid eligibility.
In some circumstances, a divorce will preserve the most sufficient assets for the community spouse. This obviously is not a favored approach, and should be considered only after analyzing all other options to sufficiently provide for the community spouse. Some clients initiate the idea of a divorce, while other clients would never consider it regardless of the adverse financial consequences.
An initial analysis of the assets and income preserved without a divorce as compared to the assets and income preserved with a divorce must be performed. If there is not a substantial benefit to the community spouse, then the divorce should not be pursued. If however, planning strategies without a divorce will leave the community spouse impoverished, then the possibility of divorce should be considered.4
One consideration is whether the client is emotionally able to handle a divorce. In cases where the spouses have been married over 30 years, such spouses are devastated at the idea of a divorce. It is important for all of the family members that will be affected by the Medicaid planning or divorce to be present at a meeting, including the adult children or other close relatives. When the adult children are supportive of the plan, it can help the community spouse tremendously.
One issue is what happens when the institutionalized spouse is mentally incapacitated. A few states do not permit a person who is incapable of consent to be a party to divorce, such as Arkansas. Some others allow the proceeding, but require steps to preserve the interests of the incapacitated spouse, such as a guardian ad litem, unless there is already a guardian appointed (Wisconsin, Missouri and North Carolina). Some states do not have such safeguards. In Florida, mental incompetence is a grounds for divorce as long as the spouse has been incompetent for three years.5
In Nevada, there is no specific provision in the family law statutes. There is a general provision applicable to all civil procedures which provides that a guardian ad litem must be appointed when an "incompetent person is a party to an action or proceeding, upon the application of a relative or friend . . . or of any other party to the action or proceeding."6 Some family court judges will not require a guardian ad litem, but would appoint one upon an application. Other family court judges will require a guardian ad litem without application, and I have served as guardian ad litem in several divorce cases, typically pro bono. The family law bench typically lacks knowledge in disability issues. The family law judges that request a guardian ad litem are more open to wanting to know about the laws related to Medicaid and special needs trusts.
In Nevada, it is the Welfare Division that will closely scrutinize the Decree of Divorce, which further protects the incapacitated spouse. The Nevada Welfare Division requires a copy of the decree of divorce as part of the supporting documentation submitted with a Medicaid application. The Nevada Welfare Division will then analyze the Decree of Divorce to ascertain whether it is fair and equitable. If the Decree of Divorce is not in accordance with the law, then the Nevada Welfare Division would most likely find a transfer of assets for less than fair market and impose a disqualification period.
In other states, it is most likely that the divorce court or the welfare division or both would require the award of assets and income to be in accordance with general principals of divorce law, and will not take Medicaid into consideration. See Newby v. Newby, 734 N.E.2d 663 (Ind.App. 2000). In Newby, the Court stated "we find the trial court's consideration of Wife's eligibility for Medicaid in fashioning this order was improper."7 However, there is room for effective advocacy.
Under Nevada law, a couple can petition for an equal division of assets. Accordingly, there is no incentive for a divorce under Nevada law when a couple has all community property.8 However, if the community spouse has substantial separate property, then a divorce would preserve more assets and provide greater financial security. In states that have taken an aggressive approach to planning strategies, and dependent on the factual circumstances, divorce may be appropriate planning tool.
An issue to consider is establishing and funding a trust under 42 U.S.C. 1396p(d)(4)(A) or (d)(4)(C) for the divorced institutionalized spouse. A (d)(4)(A) trust must be established by a parent, grandparent, guardian or a court. Because there is a divorce action, the divorce court could establish the trust if the institutionalized spouse is under the age of 65. For a person over the age of 65, a joinder into a (d)(4)(C) trust can be considered. A drawback to either of these trusts in the required payback provision. Also, the transfer of assets into the trust may create a disqualification period, and if so, then only a portion of the assets should be transferred into the trust so there are sufficient assets to pay for the care during the disqualification period.
Another issue to consider is revision of both spouse's wills or trusts, powers of attorney for assets, and powers of attorney for health care. In many states, a divorce will by operation of law preclude the divorced spouse from serving as a fiduciary under documents executed before the divorce or inheriting under the will or trust executed before the divorce. In addition, beneficiary designations for insurance policies, annuity contracts, retirement plans and the like should be reviewed and modified after the divorce if the prior spouse is to remain as the beneficiary.
VI. Premarital Agreements
When our clients remarry, a premarital agreement should always be considered. A premarital agreement in which the parties continue separate ownership of assets is an avoidance strategy against nursing home costs, and this factor can help the couple feel more comfortable about entering into a premarital agreement.9 Another main concern for our clients in remarriage is that they will usually have adult children from a prior relationship, raising issues related to estate planning.
A. Requirements for Validity
The Uniform Premarital Agreement Act has been enacted in twenty-five states, including Nevada. Thus, the requirements for a valid premarital agreement under the Uniform Premarital Agreement Act will be discussed.10 First, a premarital agreement should be in writing and should be signed by both parties. Second, because the parties entering into a premarital agreement are entering into a contract, they must have general contractual capacity, which is an issue elder law practitioners frequently face. The agreement is enforceable without consideration, but is only effective upon marriage.
Third, the parties must enter into the agreement voluntarily and the agreement must be free from fraud, duress and undue influence. To reduce claims of duress and undue influence, both parties should have the opportunity to consult with counsel, and the agreement should be executed weeks in advance of the wedding.11 When an elderly client has physical limitations, an argument could be made that additional time was necessary for the elderly person to make appointments and meet and consult with attorneys and review the agreement. More than sufficient time should always be provided.
Fourth, an agreement will be void if it was unconscionable at the time of execution and there was a lack of a "fair and reasonable" disclosure of the "property or financial obligations" or a lack of a waiver of such disclosure.12 While not necessarily required by statute, each party should be represented by separate counsel.
B. Drafting Concerns
Following are some of the drafting concerns associated with premarital agreements for elderly. As an avoidance strategy against nursing home and costs, appropriate provisions should be included. The premarital agreement should contain provisions that clearly characterize the parties' property, and then provide that neither spouse would have any claim against the other's separate property and that neither would be liable for the other's debts. A specific provision should be included protecting the separate property of the spouse not residing in the nursing home or providing that a spouse's separate property shall not be used for the payment of uninsured medical expenses.13
Another frequent goal of premarital agreements in remarriages is the safeguarding of the inheritance for children or grandchildren. This protection can be provided through the use of provisions that clearly characterize the parties' property. After the property is characterized, the agreement should provide for its distribution upon either divorce or death. The agreement should also include a mutual waiver addressing elective shares, and other rights at common law or established by statute. In addition, provisions can be included which would prevent one's new spouse from acting as executor, or administrator, of the estate. The premarital agreement can contain a provision requiring the parties to execute certain estate planning documents. Many times the household furnishings, even though not great in overall value, are very important to the parties or their children. If a party wants to ensure that his or her children receive certain personal property, a provision addressing its distribution should be included.
Even if not specifically required in the premarital agreement itself, remarriage is a time for the parties to review and revise their estate plans. If one spouse has much greater wealth than the other, that spouse may wish to provide for the other. Possible considerations are life insurance or a QTIP trust that may provide income to a spouse during life while allowing the ultimate passage of wealth to the next generation without negative tax consequences.
Another consideration is health care decision-making, and review and revision of health care powers of attorney. In most states, if one spouse becomes incapacitated, the other spouse will be given preference to serve as conservator or guardian unless the incapacitated spouse has nominated another individual or has appointed an agent under a durable power of attorney. The parties may also wish to specify who will make decisions about the funeral and burial.
A choice of law provision indicating which state law shall govern the agreement is important. Elderly clients are likely to retire to other states where the law governing premarital agreements could alter the interpretation of the document and the understanding of the parties. Also, the client's estate may be probated in another state.
Provisions regarding the marital residence should be addressed. If one spouse owns the home in which they will reside, and the owner-spouse want his or her children to receive the house, this issue should be addressed. Specifically, can the surviving spouse occupy the house and if so, for what period and what expenses will that spouse be required to pay.
A waiver of surviving spouse benefits from a plan governed by ERISA, can only be signed after marriage. However, the premarital agreement can require that such a document be executed after marriage.14
A waiver of alimony should be considered. Under the Uniform Premarital Agreement Act, a modification or elimination of spousal support in a premarital agreement is not enforceable if it causes one party to the agreement undue hardship in light of circumstances not reasonably foreseeable at the time of the execution of the agreement. A provision addressing the concept of "foreseeable circumstances" should be considered, possibly including a non-exclusive list of events such as disability, illness, or institutionalization.15
Traditional Medicaid planning options are under increased scrutiny and attack. We must devise new and creative planning strategies to protect our clients, until such time as legislative changes are made to provide more protection.
NRS 123.259 Division of income and resources of husband and wife: Manner; conditions; restrictions.
- Except as otherwise provided in subsection 2, a court of competent jurisdiction may, upon a proper petition filed by a spouse or the guardian of a spouse, enter a decree dividing the income and resources of a husband and wife pursuant to this section if one spouse is an institutionalized spouse and the other spouse is a community spouse.
- The court shall not enter such a decree if the division is contrary to a premarital agreement between the spouses which is enforceable pursuant to chapter 123A of NRS.
- Unless modified pursuant to subsection 4 and 5, the court may divide the income and resources:
- Equally between the spouses; or
- By protecting income for the community spouse through application of the maximum federal minimum monthly maintenance needs allowance set forth in 42 U.S.C. § 1396r-5(d)(3)(c) and by permitting a transfer of resources to the community spouse an amount which does not exceed the amount set forth is 42 U.S.C. § 1396r-5(f)(2)(A)(ii).
- If either spouse establishes that the community spouse needs income greater than that otherwise provided under paragraph (b) of subsection 3, upon finding exceptional circumstances resulting in significant financial duress and setting forth in writing the reasons for that finding, the court may enter an order for support against the institutionalized spouse for the support of the community spouse in an amount adequate to provide such additional income as necessary.
- If either spouse establishes that a transfer of resources to the community spouse pursuant to paragraph (b) of subsection 3, in relation to the amount of income generated by such a transfer, is inadequate to raise the income of the community spouse to the amount allowed under paragraph (b) of subsection 3 or an order for support issued pursuant to subsection 4, the court may substitute an amount of resources adequate to provide income to fund the amount so allowed or to fund the order for support.
- A copy of a petition for relief under subsection 4 and 5 and any court order issued pursuant to such a petition must be served on the State Welfare Administrator when any application for medical assistance is made by or on behalf of an institutionalized spouse. He may intervene no later than 45 days after receipt by the Welfare Division of the Department of Human Resources of an application for medical assistance and a copy of the petition and any order entered pursuant to subsection 4 or 5, and may move to modify the order.
- A person may enter into a written agreement with his spouse dividing their community income, assets and obligations into equal shares of separate income, assets and obligations of the spouses. Such an agreement is effective only if one spouse is an institutionalized spouse and the other spouse is a community spouse or a division of income or resources would allow one spouse to qualify for services under NRS 427A.250 to 427A.280, inclusive.
- An agreement enter into or decree entered pursuant to this section may not be binding on the Welfare Division of the Department of Human Resources in making determinations under the State Plan for Medicaid.
- As used in this section, "Community spouse" and "institutionalized spouse" have the meanings respectively ascribed to them in 42 U.S.C. § 1396r-5(h).
1 As Nevada is a community property state, the portions of this article dealing with community property may be of limited use to practitioners in states whose domestic relations laws are not similar to Nevada. However, the sections on avoiding adverse income taxation and qualified domestic relations orders have broader applicability, and the section on premarital agreements is applicable in the twenty-five states that have enacted the Uniform Premarital Agreement Act.
2 I.R.C. § 408(d)(6) and I.R.C. § 402(d)(4)(J).
3 I.R.C. § 414(p)(1)-(3).
4 See "Divorces Among the Elderly are Alarming," Eye on Elder Issues, July 2004, Volume 1, Issue 3 ("In many circumstances, both spouses are still competent and it is the ill spouse who is requiring very expensive medical or nursing home care and is insisting upon the divorce to protect their well spouse. . . . Attorneys desperately look for alternative solutions, but often see couples who never intended to get divorced. The clients are emotionally devastated by the necessity to make the decision to do so at a time when they are most vulnerable. For a society that professes to adamantly support the institutional of marriage, this is indeed a sad and desperate situation. . . . Obviously, further legislative changes are needed in the Medicare Catastrophic Coverage Act to avoid such a devastating and distasteful outcome.").
5 See Barbara S. Hughes and Linda Roberson, "Family Law Issues for Older and Disabled Clients," NAELA 2004 Institute.
6 NRS 12.050.
7 The Court further stated "As a condition of eligibility for Medicaid, an applicant is required to assist the State by assigning to it any legal rights he or she may have to support and payment for medical care from any third party. Id. See also 42 U.S.C. § 1396k(1)(a)(A). Hence, a decision about an award of spousal maintenance that is based upon making a husband or wife eligible for Medicaid would have the effect of eliminating or shifting resources to which the disabled spouse would otherwise be entitled. It would also prematurely shift to the taxpayers of Indiana the financial burden of the disabled spouse's care. As we said in Lowes, 'A former spouse should not be relieved entirely of his maintenance obligation only to qualify the disabled spouse for Medicaid, any more than a noncustodial parent should be relieved of his child support obligation to qualify the custodial parent for Aid to Families with Dependent Children.'" Newby v. Newby, 734 N.E.2d 663 (Ind.App. 2000) (citing Lowes v. Lowes, 650 N.E.2d 1171, 1176 (Ind.Ct.App. 1995)).
8 Community property is all property acquired after marriage by either husband or wife or both, except separate property or unless altered by a premarital agreement or altered by a court order. NRS 123.220. Separate property is all property of the spouse owned by that spouse before marriage, and that acquired after marriage by gift or inheritance or award for personal injury damages. NRS 123.130. The title of an asset does not necessarily control, and the spouse whose name is not on the asset may still have a community property interest in that asset. Accordingly, it is often necessary to trace assets to determine their character as community property or separate property.
9 See Clifton Kruse, "Love May be Less Wonderful the Second Time Around," 13 NAELA Q. 11 (Winter 2000) (Premarital agreement may not be honored by the welfare agency, and a divorce may be necessary to effectuate the terms of the premarital agreement. "Our clients do not want to lose their premarital assets. The love for their new mate may continue, but the cost in money is seen as too great . . . Lose one's lifetime savings or experience burdening guilt. This is the dichotomy, the limited range of choice our clients face.").
10 Because the Act has not been adopted in every state, practitioners must know the law of their state before drafting the agreement.
11 See In the Matter of the Estate of Ingmand, 2001 WL 855406, Iowa Court of Appeals, July 31, 2001, an unpublished opinion (The Court upheld a premarital agreement when three days before their marriage, the husband told his wife that they needed to go get a marriage license, and got her into his car, drove her to his attorney's office, where she was presented with a prenuptial agreement and told that she would not be getting married unless she signed. The wife declined to either read the document carefully or take it for independent review, and signed it that day.); see Lebeck v. Lebeck, 881 P.2d 727 (N.M. Ct. App. 1994) (The Court found that the short amount of time between the execution of the agreement and the date of the wedding of several days was insufficient alone to show that there was duress or undue influence.).
12 See Fick v. Fick, 851 P. 2d 445 (Nev. 1993) (The Court found the agreement to be unenforceable because there was not a full disclosure of assets prior to the execution of the agreement.); see In re Estate of Thies, 903 P.2d 186 (Mont. 1995) (The Court upheld the premarital agreement precluding the wife from taking an elective share where the husband had fairly, although not fully, disclosed his assets.).
13 Schlaefer v. Financial Management Service, Inc., 996 P.2d 745 (Ariz. 2000) (The parties entered into a premarital agreement, and the wife thereafter incurred substantial medical bills. After her death the hospital sued the husband for the wife's medical bills. The Arizona Court of Appeals reversed the trial judge's decision requiring the husband to pay his wife's medical bills. The appellate court pointed out that the premarital agreement changed the nature of the couple's debts-they no longer were presumed to be community debts but had been "transmuted" into separate debts.).
14 Hagwood v. Newton, 282 F.3d 285 (4th Cir. 2002) (A spouse can waive his or her rights to an ERISA plan only by designating in writing another beneficiary. The court concluded that the premarital agreement did not constitute an effective waiver of benefits under 29 U.S.C. § 1055).
15 See Cary v. Cary, 937 S.W. 2d 777 (Tenn. 1996) (The Court held that a waiver of alimony provision will be enforced unless the enforcement would render the spouse deprived of alimony a public charge.).