THIS PAPER IS LIMITED TO THE STATE OF OKLAHOMA FOR YEAR 2002 AND IS
NOT INTENDED AS LEGAL ADVICE. THE READER IS ADVISED TO SEEK THE
OPINION OF AN ATTORNEY AND TO NOT RELY ON THIS PAPER.
1. GENERAL RULES OF GIFTING
The transfer of resources without consideration is a gift and is penalized under Medicaid. An
institutionalized individual, an institutionalized individual’s spouse, the guardian or legal representative
of the individual or individual’s spouse who disposes of assets on or after August 11, 1993 for less
than fair market value on or after the look-back date … subjects the individual to a penalty period for
the disposal of such assets. OAC 317:35-9-67(4). Yes, that means if blackacre is deeded to son or
daughter for $1 it will be treated as a gift at full value.
The look-back period is a 36 or 60 month period of time. This look back time period is measured back in time from the date of application for Medicaid, as opposed to the date of admission into nursing care. “For an institutionalized individual, the look-back date is 36 months before the first day the individual is both institutionalized and has applied for medical assistance. However, in the case of payments from a trust or portions of a trust that are treated as transfers of assets, the look-back date is 60 months. OAC 317:35-9-67(4).” If a transfer of resources has occurred during this look-back time period, then under Medicaid a disqualifying penalty is calculated. “The penalty period consists of a period of ineligibility … determined by dividing the total uncompensated value of the asset by the average monthly cost ($2,000) to a private patient in a nursing facility in Oklahoma… The penalty period begins the first day of the first month during or after which assets have been transferred…” OAC 317:35-9-67(4).
2. WHO HAS AUTHORITY TO MAKE A GIFT OR TRANSFER?
In order to legally make a gift, “there must be a donor competent to make it; freedom of will on his part; an intention on his part to make it; a donee capable of taking the gift; the gift must be complete, and nothing left undone; the property must be delivered by the donor, and accepted by the donee; the gift must go into immediate and absolute effect; the gift must be gratuitous; and the gift must be irrevocable.” Harmon v. Kerns, 36 P.2d 898 (Okla. 1934).
If a gift is determined to be beneficial in a particular case, it must be determined how the transfer of the resource will be accomplished. Either the individual himself or herself, an attorney-in-fact or a guardian must make the gift.
Can the individual act for himself? Any individual who is of sound mind and not under any legal disability may make a gift of his or her property. Conservatorship of Spindle, Matter of, 733 P.2d 388, 390(Okla. 1986). The general rule is that a gift is valid if the donor has sufficient mental capacity to comprehend the transaction, if he understands the extent and value of his property, what persons are the object of his bounty, and the manner in which he is distributing his property among them. Jonte v. English, 40 P.2d 646, 648 (Okla. 1935). Advanced age and reduced mental processes will not invalidate a gift where the donor is competent to understand the nature and effect of the transaction. McSpadden v. Mahoney, 431 P.2d 432, 436 (Okla. 1967). The donor can have old age type problems and still be competent,[the donor] ” may have been somewhat erratic, eccentric and emotionally unstable and during the latter part of her life began to show signs of old age and senility such as childishness and forgetfulness. Such evidence in itself is insufficient proof of mental incapacity.” Anselman v. Oklahoma City University, 172 P.2d 782, 789 (Okla. 1946). In addition there is a presumption favoring sanity. When an alleged gift, conveyance or power of attorney is given at a time when the donor or grantor has not been judicially adjudged incompetent there is a presumption favoring sanity. Robertson v. Robertson, 654 P.2d 600,604, (Okla. 1982). But, be careful about the potential problem with fraud or undue influence when the gift is being made to a donee in a confidential relationship to the donor. A confidential relationship is one that exists whenever trust and confidence are placed by one person in the integrity and fidelity of another. Estate of Gerard v. Gerard, 911 P.2d 266, 271 (Okla. 1995). To avoid this problem independent counsel could be obtained for the donor. McSpadden v. Mahoney, 431 P.2d 432, 437 (Okla. 1967).
If the individual is not competent to make the gift himself, is there a durable power of attorney in place? The attorney-in-fact can make a gift. The attorney-in-fact has a fiduciary relationship to the principal under the power of attorney. In the absence of a specific power to make gifts in the power of attorney itself or in other written instructions from the principal, the attorney-in-fact may be exposed to liability for breach of fiduciary duty. Drafting gifting language in the durable power of attorney is difficult. I have at times used the following: [I authorize my attorney-in-fact to make gifts of my property in the event it is ever necessary that I should qualify for Medicaid. In such an event, I direct my attorney-in-fact to seek legal advice from an attorney skillful in Medicaid planning.];or, [ I authorize my attorney-in-fact to make gifts to any person or persons among any of my beneficiaries of my revocable trust, up to the maximum annual exclusion amount exempt from Federal Gift Tax under the Internal Revenue Code, as now in effect and as the IRC may be hereafter amended. It is my wish, if possible, but not mandatory, that if gifts are made under this power, that all of my trust beneficiaries will receive a gift and in the same percentage as if they had inherited from me under the revocable trust, in order that all of my trust beneficiaries will be treated equitably. In the event it is ever necessary that I should qualify for Medicaid, my attorney-in-fact shall have authority to make gifts to any member of my family in such amount as may be recommended in order to qualify for Medicaid. In such an event, I direct my attorney-in-fact to seek legal advice from an attorney skillful in Medicaid planning.] These clauses depend upon the good faith of the attorney-in-fact. It is unwise to tie the attorney-in-fact’s hands. What if someone gifted property would not cooperate for the overall best interest of the donor? There may be heirs who have financial and legal difficulties and who should not receive a gift. That is why I use a flexible gifting clause. Make sure that the power of attorney has an indemnification clause for the attorney-in-fact and contains consent for a gift to made to the attorney-in-fact himself or herself, if that might be the case.
Is there a guardianship in place? If there is, the guardian can file a petition with the guardianship court for transfer of resources under a substituted judgment theory. The reason used could be that if the ward were presently competent, the ward would make the gift of resources himself or herself and the transfer is in the ward’s overall best interest; or because the transfer is permitted under the Medicaid regulations and the assets will be otherwise used up for nursing care that can be paid for under Medicaid. A common situation is where property protected for the community spouse under the resource allowance is in the name of the institutionalized incompetent spouse. Under Medicaid this property is required to be transferred into the community spouse’s name within one year. OAC 317:35-19-21(3)(B)(iv). An example could be a transfer without Medicaid penalty to a trust for the benefit of a minor blind or disabled child (as determined by Social Security). OAC 317:35-9-67(4)(F). Another example could be where the resource allowance of the community spouse has been increased through the fair hearing appeal process from an assessment of resources prior to application for Medicaid. In such a case additional resources can be transferred to the community spouse, which when invested will produce earnings sufficient to increase the community spouse’s income up to the monthly minimum maintenance needs allowance. The Oklahoma Guardianship and Conservatorship Act at 30 OS§1-114(B)(4) and (8) arguably give the court the power to compel the payment and distribution of property of a ward and to make such orders as may be necessary for the exercise of said power. Other jurisdictions have permitted Medicaid planning through guardianship. In Re John XX, 652 NYS 2d 329 (App.Div. 1996), appeal denied, 659 NYS2d 854 (1997); In Re Labis, 714 A2d 335 (NJ Super. Ct. App. Div. 1998).
3. POTENTIAL FINANCIAL EXPLOITATION
Impoverishing an elderly individual by gifting to the younger generation carries with it the risk of overreaching, undue influence and fraud upon the elderly. The Medicaid attorney may want to obtain written declarations of support for the gifting from the elderly individuals and from all of the heirs at law and other beneficiaries of any will or trust. Good communication and seeking input from all affected persons is a good rule of thumb.
The bottom line is that once the gift is made and the property or money is gone, there are no guarantees. There may be a moral obligation to use that money or property somehow for the best interest of the elderly individual, but that is not a legal obligation that could be enforced.
When nursing home admission is knocking at the door, there is no real concern about financial exploitation. But if an individual has been talked into doing this years in advance of any hint of a problem, or by someone not the natural object of their bounty, you must be very careful handling the matter. Make certain that your representation is of the elderly individual is independent without a conflict of interest and that all risks associated with gifting away resources is explained in writing.
Lots of people seem to think they know the law. I recently was involved in a case where a step-son convinced his step-mother that she could qualify her husband for Medicaid by gifting to the step-children $10,000 each. To prove that this was correct, the step-son took her to an income tax return preparer, who verified that it was legal to give away $10,000 per person each year. The gifts were made. A Medicaid disqualification penalty was imposed. Demand for the return of the money was made. The step-children denied that they gave Medicaid advice. They said that she wanted to cheat Medicaid by giving the money to them. The checks all had written notations as gifts. The step-mother had to pay privately for nursing care for her husband until the penalty expired. A constructive trust lawsuit was filed and eventually settled for less that what was given away.
4. HALF A LOAF STRATEGY
Half a loaf is better than no loaf at all! What the half a loaf strategy refers to is gifting away part of the property. The property retained, plus the monthly income, will be needed to pay for nursing care and support of the community spouse. I have found that the actual cost of nursing care in Oklahoma is approximately $3,000 per month. Add to that the prescription medications for both spouses and the normal living costs of the community spouse. That is the amount of money that will be needed each month to be retained and available to wait out the penalty period after an asset transfer.
For example, assume you determine that a couple has $52,000 of savings. They have together $3,000 per month in income. The cost of nursing care and prescription medication is $3,500 per month. The cost for the community spouse to live at home is $1,500 per month. They will need $5,000 per month. Since $3,000 income comes in every month, there is a $2,000 per month shortfall. If a gift of $26,000 is made, there will be a Medicaid penalty of 13 months. They will need over this 13 month penalty period savings of $26,000. They have only gifted ½ of their savings, leaving $26,000 on hand. By the end of the penalty period, their savings are gone and the penalty for the gift has expired. Medicaid could then be applied for at that time.
5. LIMITING THE PENALTY TO THE LOOK-BACK PERIOD IN LARGER ESTATES
As explained in paragraph 1, the look-back period is a 36 or 60 month period of time. This look back time period is measured back in time from the date of application for Medicaid. The 36 month look-back applies to a transfer from an individual. The 60 month look back applies to a transfer from a trust.
Allowing the penalty period to expire before applying for Medicaid is essential to effective Medicaid planning for large gifts. The maximum penalty for a transfer from an individual is $72,000 (36 x $2,000) if Medicaid is not applied for until the 37th month, but there is no limit to the maximum penalty for any transfer caught in the look-back.
For example, assume that you determine a couple has $200,000 of excess resources. If that sum is gifted, the maximum potential penalty period is 100 months. But because the look-back is only 36 months the maximum penalty need not exceed 36 months, if Medicaid is not applied for until the 37th month.
If during the 36month look-back time period no transfers were made no further penalty will be assessed. The offending transfer in my example was made 37 months ago. Because that transfer is outside of the look-back, it is not a disqualifying transfer and is ignored under Medicaid.
Now, what would happen if Medicaid were applied for in the 35th month? The 36 month look-back would be followed. In the 35th month a $200,000 transfer was made. The maximum disqualification penalty period would be assed from the date of the gift, which in this case is 100 months. OAC 317:35-9-67(4) provides:
(4) Transfer of assets on or after August 11, 1993. An institutionalized individual…who disposes of assets on or after August 11, 1993 for less than fair market value on or after the look-back date specified in (A) of this paragraph subjects the individual to a penalty period for the disposal of such assets.
(A) For an institutionalized individual, the look-back date is 36 months before the first day the individual is both institutionalized and has applied for medical assistance. However, in the case of payments from a trust or portions of a trust that are treated as transfers of assets, the look-back date is 60 months…
(D)… There is no limit to the length of the penalty period for these transfers.[In other words for any transfer caught by the look-back, the maximum penalty for that transfer will apply.]
6. THE PROBLEM OF THE REVOCABLE TRUST
While a fully funded revocable trust is a wonderful tool to avoid probate and guardianship, itis not useful for Medicaid planning. A transfer from a trust is subject to a 60 month look-back period. This is a disaster for any transfer above $72,000. The 60 month penalty period can be avoided by not making a gift from a trust. That means if assets which are to be gifted are held in a revocable trust, they must first be transferred out of trust to the Settlors of the Trust. Then a gift can be made from the individual.
Take care if the Settlor is incompetent. Does the trust or durable power of attorney itself contain Medicaid enabling language permitting the trustee to transfer property out of trust? A revocable trust can be revoked or amended by the Settlor. Trust property can be withdrawn from trust by the Settlor. But if the Settlor becomes incapacitated, someone else must act for him. This would be the successor trustee of the trust and the attorney-in-fact under a durable power of attorney. Upon the incapacity of the Settlor, a revocable trust becomes irrevocable. The attorney-in-fact does not have authority to amend or revoke an incompetent Settlor’s trust, absent specific written authorization. A successor trustee cannot legally act outside the trustee powers under the trust instrument. It is possible that a title attorney could reject a conveyance from a trust without consideration, absent specific authorization in the trust itself. Guardianship of Lee, In re, 982 P.2d 539, 541-542 (Okla.Civ.App. Div. 3 1999) held: considering the Trust document together with Settlor’s appointment of Appellee as her attorney-in-fact, it appears clear to us that Settlor in the present case, by omission of any reference to the Trust in the appointment of her attorney-in-fact, intended to reserve solely unto herself the power to revoke the Trust. Further, and under the above-cited authorities, upon adjudication of Settlor’s incapacity to manage her own affairs and appointment of Appellee as her guardian, it appears equally clear that the Trust became irrevocable. In this respect, we are unwilling to hold that 58 O.S. § 1074(A) extends to permit a guardian to amend or modify the power of attorney to grant the power to revoke a trust where the Settlor/ward has expressly reserved the power of revocation. To hold otherwise would allow a guardian and attorney-in-fact to frustrate the intent of the Settlor/ward, who in “a scheme of testamentary disposition” contemporaneously executes a trust and pour-over will, first by amendment of the granted powers to accord the attorney-in-fact the power to revoke the trust withheld by the Settlor, and second by exercise of the power to revoke the trust …Â” You may want to consider adding a Medicaid enabling clause in your revocable trusts, if you have not already done so. This is a clause that I sometimes will use in the appropriate case: [In the event that it is ever necessary to apply for Medicaid for the Settlor, the Trustee shall have the power to gift or otherwise transfer assets from this Trust as may be required or recommended to assist in qualifying for Medicaid. The Settlors directs the Trustee to seek the advice of an attorney skilled in elder law and Medicaid qualification for advice.] In the appropriate case, you may also want to consider adding a power permitting the attorney-in-fact to make demand of the Trustee to pay out trust property to the principal, if that is necessary for Medicaid planning.
7. PROBLEMS WITH JOINT OWNERSHIP
Laymen believe that joint ownership is the answer to all succession and incapacity issues. How many times has a client told you, we own everything in joint names.
Joint ownership is not a problem when there is a first marriage and children of only one marriage who all get along. No one is going to complain when money or property is transferred from one spouse to the other, or joint property is transferred by one spouse from a joint account to the children of that marriage.
But joint ownership becomes more complex in other situations. The equities will change when there is a second marriage, or the couple is not a traditional heterosexual couple. Great caution must be exercised.
The banking law on jointly owned accounts is very misleading. It permits the bank to pay out the money to either joint owner. The law is designed to protect the bank. 6 OS§ 901(A) provides: ” When a deposit has been made … in any bank in the names of two or more persons, payable to any of them or payable to any of them or the survivor, such deposit, or any part thereof, or any interest thereon, may be paid to either of the persons, whether one of such persons shall be a minor or not, and whether the other be living or not; and the receipt or acquittance of the person so paid shall be valid and sufficient release and discharge to the bank for any payment so made.”
The general rule in Oklahoma is that a joint tenancy bank account establishes a present estate in which both joint tenants are seized of the whole account. Under this rule one joint tenant is presumptively entitled to the entire amount in the account. Baker v. Baker, 710 P.2d 129,132 (Okla.App. Div. 2 1985). The joint ownership will continue until death or until the joint owners sever the tenancy. Matter of Estate of Steen, 909 P2d 63, 67 (Okla. App. 1992). But what happens when a joint owner becomes incompetent?
A joint owner who becomes incompetent cannot alter a joint account that was established when he or she was competent. Even a guardian of an incompetent joint owner is not permitted to withdraw from a joint account except for the necessity of the ward. Hendricks v. Grant County Bank, 379 P.2d 693,696 (Okla. 1963). The reasoning is that even though the guardian is empowered to manage the property of the ward, the guardian is not the ward’s alter ego and cannot exercise personal discretion to change an act previously performed by the incompetent while mentally normal.
What about the other joint owner? Assuming that individual is competent, can he or she withdraw more than ½ up to all of the funds from a joint account when their co-owner becomes incompetent? How about opening a new account with new POD beneficiaries? What if the new POD beneficiaries are children of the competent joint owner’s prior marriage?
In Watkins v. McComber, 256 P.2d 158 (Okla. 1952) a grandmother had set up a joint tenancy bank account for the benefit of her grandchild pursuant to an oral agreement made with the child’s father. Later the grandmother changed her mind and without the knowledge of her co-owner [the grandchild], withdrew the funds and opened another joint account in her and her child’s name. The Syllabus by the Court at 159 held: “2. The appropriation or transfer of a joint tenancy estate in its entirety by one of two joint tenants without the other’s knowledge, or consent, and for the manifest purpose of defeating the cotenant’s survivorship right, is a violation of the joint tenancy agreement and is therefore void.” The grandmother subsequently died. The court held that the grandchild, who was the original joint owner, was entitled to 100% of the funds as the surviving joint tenant. The court ignored the subsequent joint account.
In Gatewood v. Griffin, 549 P.2d 829 (Okla.App. Div. 1 1976) Mr. Gatewood and Mrs. Gatewood were married at the date of death for Mr. Gatewood. Two months before his death, Mr. Gatewood closed a joint checking account which was in the names of Mr. and Mrs. Gatewood as joint tenants with the right of survivorship, and used the funds of said account to immediately open a new checking account in his and his sister’s names. Gatewood stated: 48 C.J.S. Joint Tenancys 4, page 929, reads: ‘Bank accounts. A joint tenancy of a bank account may be terminated by the conduct or agreement of the parties. . . . a withdrawal of the entire account without the other’s consent does not effect a termination of the joint tenancy, but only a change in the form of the property, . . ..’ In Wallace v. Riley, 23 Cal.App.2d 669, 74 P.2d 800 (1938), the court said: ‘Contrary to the canon of the common law, our courts have established the rule that, when money is taken from a joint tenancy account during the joint lives of the depositors, property acquired by the money so withdrawn, or another account into which the money is traced, will retain its character as property held in joint tenancy like the original fund, unless a change in the character has been effected by some agreement between the parties.’ In Re Will of Filfiley, 63 Misc.2d 824, 313 N.Y.S.2d 793 (1970), involved a bank account which a wife had opened in her name and her daughter’s name, as joint tenants. The daughter withdrew the whole of the account on the day before the wife’s death. The surviving husband sought to bring the joint bank account into the estate. In the opinion, the court said: ‘A joint tenant may unilaterally ‘sever’ the joint tenancy to the extent of withdrawing his moiety or less than a moiety. When he does so he does not ‘terminate’ the joint tenancy in the sense that he does not affect the right of survivorship. The survivor, whether the withdrawer or the other joint tenant will be entitled to the remainder upon the death of either joint tenant. ‘But a joint tenant may not unilaterally withdraw more than his moiety or, as usually happens, the whole fund. Such a withdrawal has no effect whatsoever.
* * *
‘What is meant is that the whole fund withdrawn not just the excess over the moiety keeps its character as a joint tenancy no matter into what form it is converted. The ultimate survivor whether he be the withdrawer or the other joint tenant will be entitled to the whole fund withdrawn not just the excess over the moiety.
* * *
‘. . . The whole transaction is simply treated as a nullity.
‘This is the legal nature of the joint tenancy. In the main the cases follow the joint tenancy concept. ‘Before discussing the cases, two things should be noted.
‘First, the cases concerning depositor-bank relationships are not pertinent. The provision in the statute authorizing the bank to pay ‘to either during the lifetime of both’ is for the protection of the bank and irrelevant to the rights of the depositors between themselves. Such a right to withdraw the whole fund is patently inconsistent with the incidents of a joint tenancy.
* * *
‘Second, a true joint tenancy like any other status created by agreement may be altered, terminated or destroyed by agreement of both joint tenants.
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‘As has been discussed, under the joint tenancy concept the survivor necessarily takes all no matter what the circumstances. If the decedent joint tenant was the ‘wrongful’ withdrawer, the survivor takes the whole fund by reason of the nullity of the transaction.
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‘In short, after a right of survivorship has vested, there should in legal theory never be a recovery of half the fund or the excess over the moiety. The survivor must take all.’ (Emphasis theirs.)
The Gatewood court at 832 held: We conclude … that Mrs. Gatewood as the survivor on the first joint account is entitled to take all funds that Mr. Gatewood put or caused to be placed in the second joint account with his sister; and that the trust impressed on the second joint account should be for the benefit of [Mrs.] Gatewood, individually, as the surviving joint tenant on the first joint account.
Therefore, the withdrawal by a competent joint owner of more that his or her moiety of jointly held funds does not destroy the joint tenancy right of survivorship in those funds. It also does not sever the ownership interest of the incompetent joint owner.
In Matter of Guardianship of Randolph, 828 P2d 451 (Okla. App. 1992) a husband and wife owned real property as joint tenants. The husband was the guardian of his wife. Some joint property was sold and the proceeds were held in a joint account. Other property needed to be sold. The husband sought to partition the remaining real property and the joint funds from the earlier sale. The court held that a competent cotenant has the absolute right to partition. The court further held that: “The more significant public policy concern in our view would be the chilling effect on guardianships, if married joint tenants found their assets effectively frozen in the guardianship estate.” The key here is the court permits the competent joint owner to withdraw his share or moiety only.
Therefore, under Oklahoma law, the competent joint owner, be it in land or a bank account, may withdraw their share. The remaining share belongs to the incompetent joint owner.
What about the incompetent joint owner’s remaining ½ ? Under Gatewood those funds remain subject to the right of survivorship. It would seem to follow that those funds would continue to be held for the benefit of the incompetent joint owner?
What are the consequences if a competent joint owner withdraws all of the funds? The funds would remain subject to joint tenancy survivorship. A constructive trust could be applied to trace the funds. Estate of Ingram, Matter of, 874 P.2d 1282, 1287 (Okla. 1994) held that a constructive trust was imposed against an individual when the individual obtains legal right to property through fraudulent, abusive means, or by means against equity and good conscience. Litigation could come from the incompetent joint owner, or more likely, by his heirs-at-law after death. These questions are not yet answered by the appellant courts. In all of the cited cases, the funds withdrawn were still intact. If funds belonging to an incompetent joint owner are transferred and then spent by the donees, wouldn’t a suit seeking damages for fraud and conversion together with a constructive trust be possible. Would the lawyer also be a target of such a suit?
The key for the Medicaid planner is the language in the holdings that gives deference to any agreement among the joint tenants. If there was a joint tenancy agreement in place, these issues could be addressed. It would also be beneficial if the durable power of attorney contained authorization for the attorney-in-fact to modify the joint tenancy agreement and consent to the withdrawal of funds.
The above paper is a general explanation of how the Medicaid laws might apply in the State of Oklahoma during 2002 as the result of gifting of resources. It is not intended as legal advice, except of a general informational nature only and should not be relied upon for legal planning without doing additional research of your own or seeking legal advice from an attorney. This paper does not explain every rule and ever exception to the rule. The federal and state Medicaid rules change often. They are sometimes applied differently from county to county. Medicaid qualification is very fact sensitive. What might apply in one case may not be applicable to all cases with similar but not identical facts. Any example of language from a form used by the author is not an endorsement by the author that such language is suitable for use in legal documents.