A Medicaid Planning Case Study and Personal Service Contracts: A Radio Interview of Attorney John R. Frazier by Attorney Joseph Pippen
A complete transcript of the program giving a Medicaid planning case study begins below:
Attorney Pippen:
Attorney John Frazier will be on the line here in just a second, and I will take your question while talking to him and letting him give us the Medicaid tip of the week. So, John, are you there?
Attorney Frazier:
Hey, Joe. How are you doing today?
Attorney Pippen:
Good. Can you hear me now?
Attorney Frazier:
Yeah, I can hear you perfectly.
Attorney Pippen:
Oh, great. Hey John, I know we’re going to talk about personal service contracts, but I’m going to ask you a question. I’m going to give you a fact pattern of a new case that you’ll be working on very soon. But I just find it interesting, and I think it’d be a great listening thing for people who might be in a similar circumstance. A Medicaid planning case study if you will.
Generally, the fact pattern of this case is a daughter whose mother was not doing very well in New Jersey, not taking care of herself very well at all. Winds up, let’s say, in a hospital and then the daughter goes up to save her, let’s say. Brings her back to Florida. Now she’s a New Jersey resident, just currently arrived in Florida under daughter’s care. Daughter has power of attorney that I’ve not seen yet. I haven’t seen the document yet. That’s going to be faxed to the office on Tuesday. So I’m not quite sure what that’s going to say. I know that’s probably a concern for a Medicaid planning attorney like yourself.
Attorney Frazier:
Yep.
Attorney Pippen:
But mother has, let’s say, mother has a $600,000. I don’t know the value of the house. I know it’s a fairly nice house though. So suppose she has a $600,000 house in New Jersey, and let’s suppose she has $700,000 in liquid assets, cash, pension, and so forth. So the question that you’re going to be tackling is how to get this person on Medicaid.
So just pretend I’m the daughter, and I’m going to answer your questions. I’m going to kind of make up the answers though because I don’t know. But I’m going to make up answers. Let’s go through the fact pattern. If someone calls you under similar circumstances, what questions would you ask, and then what would your initial thoughts be on a suggestion on how to get mother, even with these assets on Medicaid? I think that’d be a very interesting conversation for you and I to have for the benefit of listeners.
Attorney Frazier:
Well, I’ve certainly had very similar fact patterns before. The very first thing that I would do is review the power of attorney to make sure that it doesn’t have any problems. That’s going to be the first step. I’ve also had a situation where someone was here on vacation from a state up north, had a stroke, could not go back to their state. We were able to get them on Medicaid. So there’s really just a one day in the month rule. Medicaid is based in federal law, although it’s administered through state agencies. So there is no long-term requirement of residency here in Florida in order to become eligible. So it’s certainly possible under those circumstances to move someone here. I’ve had that happen a number of times, and captured Medicaid benefits as long as the person is qualified.
As a general rule, the house in the other state is going to be exempt for an unmarried person up to $603,000, so that’s going to be okay. We don’t need to worry about that. As far as the $700,000 is concerned, we’re definitely going to want to see if there’s any IRA or 401k money because that’s treated differently. Let’s say that we have $400,000 in IRA money and $200,000 in non-IRA money. We’re going to take that $400,000, and we are going to set up a monthly payout according to a formula that the state of Florida has, and the state of Florida is then going to treat that $400,000 IRA as exempt. With the remaining $200,000, we have a whole variety of strategies. One of those strategies is a personal services contract where we can pay a lump sum of money to a family member caregiver or more than one family member caregiver.
It really depends on the person’s age and life expectancy. The younger a person is, if you have a Medicaid applicant, who’s 65 years old, we can do a much longer-term contract for a person who’s younger. If the person is 90 years old, they have a much shorter life expectancy under the actuarial tables, so we would have to do a smaller personal services contract for an individual who’s older.
We have a whole variety of strategies to restructure those $200,000, the personal services contract. We could actually do repairs on the house up north. The person is actually allowed to own a car here in Florida so we could actually go out and buy a car even though that person may not be driving. We have something called a special needs pooled trust, which we spoke about last week. We have income-producing property. So let’s say that the family wanted to purchase a $200,000 rental property. That would also shelter that extra $200,000. We could also go out and buy a funeral service contract or a cremation contract. That would also be exempt. So there’s a whole variety of ways that we could restructure those assets and obtain Florida Medicaid benefits.
Attorney Pippen:
All right. So a couple of questions come to mind that the listener probably wouldn’t think to ask, so I think this would be very educational for them during the process. Suppose the house in New Jersey is worth 700,000.
Attorney Frazier:
Okay. There’s a cap of 603,000, so one-
Attorney Pippen:
Yeah, I heard that in your answer. That’s why I jumped it to 700,000 just in case that would be the case.
Attorney Frazier:
Exactly. So that’s why I wanted to mention that because a lot of times with new clients, it’s helpful to reiterate things because it’s so much new information all at once.
What we would need to do with that extra equity, we could actually take a loan out on the property. Let’s say we take out $100,000 loan and put a $100,000 mortgage on the property. That would take care of that. We would then have $100,000 more to shelter, so it would give us extra assets to shelter. But that’s one way it could be dealt with.
Another way we could actually deal with it is by listing that property for sale. The state of Florida says that if you have a written listing agreement with a good faith effort to sell, that’s going to make that piece of real estate exempt. So there’s a couple of different ways that we could deal with that.
Attorney Pippen:
All right, now also let’s suppose in this case, which I don’t know the answer to this either, I’m just making up a question for you that could be a factor. Let’s suppose the social security check, the pension check, investments from the interest and talk about the qualified income trust is where I’m going with that.
Attorney Frazier:
Okay. The state of Florida has an income cap or an income limit. This year the limit is $2,382 a month in gross monthly income. As long as that social security and pension and IRA payment exceed that amount, we’re going to need to set up what is called a qualified income trust. I do them all the time. Literally every week I’m doing them. This is where the power of attorney becomes critically important, because what happens in a case where you have a qualified income trust, DCF legal counsel for the region that we’re applying in gets involved. Now, I handle cases all across the state of Florida, and there are different legal offices throughout the state of Florida, but here, our DCF legal counsel for the state of Florida is over in Tampa. She’s going to closely review that power of attorney so we’re going to really need to take a close look at this power of attorney.
If it’s a New Jersey power of attorney, we’re going to need to get a letter from the attorney who drafted that power of attorney up in the other state, stating that under New Jersey law the document is legally sufficient to establish a trust or from another attorney in New Jersey. As long as we get that letter, the DCF legal office will accept that, and we will be able to proceed with our qualified income trust.
If the power of attorney is deficient in any way, we would do a new power of attorney, a Florida power of attorney, once the person arrives here in Florida. That is assuming that the person can understand a power of attorney document. So that’s always a question mark when you’re dealing with someone who’s having medical and other health problems. Whether or not they can sign and understand a power of attorney document.
Attorney Pippen:
All right, let’s pick the worst scenario that the person’s not competent to sign a new power of attorney, and the one they have is not sufficient to do Medicaid planning. What’s the step then or is there a step?
Attorney Frazier:
Yeah, that’s a very, very unfortunate problem that I unfortunately have to deal with. If we have a situation where you have an unmarried person, no power of attorney or a defective power of attorney, the only thing that we can do at that point is to set up an expensive court-ordered guardianship and have the guardianship judge sign off on the qualified income trust. Now, there is an abbreviated procedure. It’s called basically a court order just to establish a qualified income trust. So if you’ve got an existing power of attorney and it’s deficient, we can submit that to the guardianship court and see if we can get an order from the judge to proceed with that power of attorney. Some judges will do that, some judges will not do that. It’s my understanding here in the Tampa Bay area, the judges will order that limited proceeding to set up the qualified income trust using the defective power of attorney. So here in the Tampa Bay area, we can do that. In some parts of the state, we may have to establish a complete guardianship.
Attorney Pippen:
John, suppose someone listening to the show would think, and I know how people think because I answer questions all the time and so do you. So why would the government authorize a guardianship who could then make the appointment to maximize a person’s government benefits when they have assets that could pay for their own care?
Attorney Frazier:
Well, I do see situations where when we have a guardianship, the guardianship court is probably going to be much more restrictive in what they will allow. Historically, sometimes the only thing that they will allow is a special needs pooled trust. That’s a nice strategy, but the problem with that trust is that there’s estate recovery when the Medicaid recipient passes away. So with several hundred thousand dollars, it may not be something that the family would want to pursue. But that would be something that would need to be investigated on a case by case basis, depending on the guardianship judge, as to what they’ve allowed in the past to set up Medicaid planning for a person with assets. It just depends on the judge and what strategies they’ll allow. But historically the special needs pooled trust has been very popular, I think, with the guardianship courts.
Attorney Pippen:
Okay. Now, suppose in this case, the power of attorney doesn’t mention a person. I know your topic today was going to be personal service contract, and I kind of changed it up on you without telling you what I was going to do.
Attorney Frazier:
That’s okay.
Attorney Pippen:
I know a personal service contract is going to come into the next part of this. I want you to explain to everyone a personal service contract is, but my question before you do that. If suppose the power of attorney from New Jersey doesn’t authorize … I know we talked about you have to get DCF to approve the qualified income trust provisions in the power of attorney to create one of those … but suppose it also doesn’t go to the area of creating a personal service contract in the power of attorney?
Attorney Frazier:
There’s much less scrutiny regarding a personal services contract and the other strategies. I think technically the only reason DCF legal counsel has to get involved is if there is an establishment of a trust. I am not aware that DCF legal counsel actually has to review a power of attorney if there’s some other strategy used. The caseworker is the one who will be reviewing the power of attorney under those circumstances. As long as they properly drafted power of attorney, whatever state it was drafted in, and for example, let’s say it has the power to contract, that would be sufficient as a general rule.
Attorney Pippen:
Yeah. Most power of attorneys have a very general clause that basically the power to do anything the person could do, now they’re giving the power to whoever they were granting the power of attorney to, to have those same powers. So usually there’s a very general clause in there that probably could take care of that because usually they’ll mention contracts in there as well.
Attorney Frazier:
Exactly. What we’re looking for there is the power of attorney properly executed and properly drafted under the laws of the state where it was prepared. So in this situation, we may need to verify that it was done by if it was done by, if it was done by an attorney, I think we can generally assume, yes, it’s a properly drafted power of attorney under New Jersey law. Sometimes there can be some danger in making assumptions, but ultimately that liability would be for the attorney who drafted the power of attorney, I think, in the other state.
Attorney Pippen:
All right, John, before you tell us about personal service contracts, everyone listening should have two takeaways at least from this conversation. Number one, power of attorney is a very, very important document. The way we draw them, it’s like a 14-page document. There are two or three special provisions we get you to initial in the power of attorney document. They are very important under new Florida statute or fairly new statute that you have to grant these particular powers, like the qualified income trust. There’s also a personal service contract provision inside the power of attorney. It’s very important to have a fairly currently dated power of attorney that give you the power to do the Medicaid planning that would be necessary if the person that’s granting you the power of attorney ever goes into a nursing home. Power of attorneys are very, very important documents.
Power of attorneys deal with while you’re living and being able to take care of you. Wills, of course, and trusts take care of when you die. They’re both important, but if you want to do planning for while you’re living that you’re properly cared for, power of attorney is definitely important.
The second takeaway is don’t go online and try to do a power of attorney yourself because you can’t beat the value of an attorney advising you and preparing the document for you to make sure everything’s going to work properly in the future.
All right, John, those are my takeaways. So tell us all about a personal service contract.
Attorney Frazier:
Well, the personal services contract is a very common Medicaid planning strategy here in Florida. I’ve literally done thousands of them in the past 20 years. They can be used in two different ways. Most commonly for my typical client who needs Medicaid immediately and who’s in a nursing facility or an assisted living facility, we call that crisis Medicaid planning. The other type of Medicaid planning is Medicaid pre-planning. So this strategy can be used for both.
A personal services contract is authorized under a case, which is Thomas v. The Florida Department of Children and Families, a 1998 case. So it’s been something that’s been around for over 20 years. There are several different criteria that must be met under this case law and under DCF rules. The first criteria is that the payment under the contract, let’s say it’s $25 per hour. That would be a reasonable hourly rate. So the payment must be reasonable and based on fair market value of, for example, geriatric care managers in the general area. So if the average geriatric care manager charges $50 per month and your contract says $25 per month, then that’s definitely going to be deemed to be reasonable.
The contract must be for future services, so it’s a forward-looking contract. It cannot be used to pay for past services. Also very important, the term of the contract must be equal to or less than the life expectancy of the Medicaid applicant. So, as I had mentioned earlier, if you have a 65-year-old, the life expectancy under the actuarial tables is going to be much longer as compared to a 90-year-old where the life expectancy might just be three years. That would limit the term of the contract. The shorter the contract, the less money that you will be able to pay out under the contract. The contract must also be in writing. So it can’t just be a verbal arrangement.
I’ve got an example of two different scenarios involving similar payments. For example, based on the $25 per hour amount, let’s say we have a caregiver, have got a family member in the nursing facility. Let’s say we have about $80,000 or so that we need to shelter. Under this contract for an 85-year-old Medicaid applicant, the life expectancy under the actuarial tables would be 6.40 years. So we could set up a contract, let’s say for five years, $25 per hour, 12 hours per week. That payment would be $300 per week or $15,600 per year or a total contract price of $78,000. Under that fact pattern, we could pay the service provider $78,000 right now, and that would be a permissible transfer.
Very important to remember, though, that this is a payment, it’s not a gift. So under Section 61 of the Internal Revenue Code, basically says everything is income unless there’s an exception elsewhere in the Internal Revenue Code saying that it’s not income. So this is clearly income, and the person who receives that $78,000 must pay income taxes on that payment. We definitely need to be thinking about that, what marginal rate the person is in.
In the next scenario, we have exactly the same fact pattern, but let’s say that we have an 85-year-old still living in their house here in Florida, but the person needs care. We can set up exactly that same contract, and instead of paying a $78,000 lump sum right now, we could pay $1,300 a month over the five-year term, which would total $78,000. And then that person would pay income taxes on a yearly basis rather than right now based on a lump sum payment. That’s a basic overview of how we can use a personal services contract in Medicaid planning here in Florida. I think that pretty much covers a Medicaid planning case study.
Attorney Pippen:
All right. So John, give us all of your personal contact information where a person listening. I had an email come in that was addressed you, but I can’t get off of my Microsoft Teams program to look at emails while I’m on the show. So maybe the listener could just call you in a few minutes and ask you this question themselves, but go ahead and give us your cell number and the office number and maybe email address and how people can contact you if they’d like more information about qualifying for Medicaid. Or if they have a loved one and they want to do some planning, how they could reach you.
Attorney Frazier:
Okay. The office number is (727) 586-3306, extension 104. My cell phone number is (727) 748-5374. And my email address is John, J-O-H-N@attypip.com.
Attorney Pippen:
All right, John. That is a Medicaid planning case study for everyone to think about. Well, hope you have a great Memorial Day weekend, and I hope you do something special to honor, at least in your thought process, to honor our great country and the great people that have served our country and made the ultimate sacrifice.
Attorney Frazier:
Okay. Thank you very much. And you too, and have a great Sunday.
Attorney Pippen:
All right. Thanks, John.
A Medicaid planning case study was used to illustrate the process. You can learn more and read about more case studies in our free Medicaid planning and Elder Law eBooks.
You can learn more about John on the About John Frazier and why you might want to hire Attorney Frazier when you are ready to pick an attorney.