Kevin P. Courtney, Attorney at Law
Licensed to practice before the U.S. Tax Court

THE BUSINESS ADVANTAGE Issue 6

 LEGAL INFORMATION
 Estate Planning
 Business & Tax Law
 Contractors and  Construction

 LEGAL OVERVIEWS
 Family Limited Partnership
 IRS Restructuring Act
 Tax Deferred Annuities
 Qualified Personal Residence Trust
 Distribution Planning-IRA's

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Morgan Hill, CA

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OBRA Restricts Access to Medi-Cal Funds

In 1993, Congress enacted the Omnibus Budget Reconciliation Act of 1993 (OBRA). The legislation made significant changes in the eligibility rules for coverage of nursing home care under California's Medi-Cal program. The changes, primarily intended to deter popular asset protection strategies, increase penalties on impermissible gifts and revise the rules governing invasion of trust assets to meet medical needs.

This is the first of a 3-part series of articles provides an overview of the changes OBRA mandates in three basic areas. Part 1 focuses on asset / income eligibility limits and new restrictions on transfers. Part 2 details significant changes in the treatment of trusts. Part 3 reviews some of the tactics still available to protect assets in the wake of OBRA. California is still drafting the laws that will implement OBRA. Thus, it is impossible to fully explain the changes Medi-Cal faces in the near future. However, today's asset management decisions may be affected by those changes. An informed decision will require more detailed information than these articles can provide. You are encouraged to call our office for assistance with specific questions. 's Medi-Cal program.

Part 1: Income and Asset Limits on Medi-Cal Eligibility Under OBRA
Medi-Cal eligibility requirements place significant limits on the value of an applicant's countable, non-exempt assets. The total value of such assets cannot exceed $2000. Further, the assets of the applicant's spouse cannot exceed the Community Spouse Resource Allowance (CSRA), currently set at approximately $76,820.

The definition of countable, non-exempt assets has been expanded to include all income and resources of either the applicant or spouse, including income or resources which either individual is entitled to but does not receive because of action by

• the individual or spouse
• an entity with legal authority to act for either individual
• any person acting at the request of either individual

Presumably, this expanded definition was intended to tighten the rules relating to trusts and other asset protection devices. As a result, however, it appears that the transfer penalties, discussed below, now apply to transfers of income as well as assets.

Asset restrictions:
Not all assets are considered available for purposes of determining Medi-Cal eligibility. In particular, the applicant's primary residence, certain business properties, burial plots and irrevocable burial trusts are excluded. Personal effects, one motor vehicle and furniture, fixtures and equipment used in the personal residence are also exempted. Additionally, assets that are unavailable, such as certain IRAs, annuities and pension plans, and assets acquired by a spouse after the applicant qualifies for Medi-Cal are excluded from consideration. But virtually all other assets in excess of the CSRA, including savings accounts, stocks, bonds, insurance policies with cash surrender values, income properties, or other investments owned, either at the time of application or during the statutory "lookback period," will be considered available.

When individuals apply for long-term Medi-Cal, their countable assets are evaluated. Included in this eligibility evaluation are any assets transferred within the 36 months preceding application. Disqualification penalties are imposed on all transfers of otherwise countable, non-exempt assets during the lookback period. The length of the penalty is determined by dividing the fair market value of the asset by the state monthly average private rate for nursing facility care. The resulting number equals the number of months the applicant is disqualified as a result of the transfer. Penalties begin as of the date of asset transfer and, in the case of multiple or subsequently assessed penalties, run consecutively. There is no maximum length of disqualification under OBRA.

Income restrictions:
As noted above, income includes all income received by an applicant or spouse, as well as income to which either is entitled but does not receive as a result of their own action, the action of their legal representative, or any person who acts at their request. However, income that is clearly attributable to only a spouse is excluded from consideration. Additionally, a monthly spousal allowance is exempted from total income. In 1995, the spousal allowance was $1871 per month. Any remaining income in excess of the following personal exemptions, is considered available to pay medical expenses and reduces Medi-Cal benefits.

• $35/month for applicants residing in health care facilities
• $600/month for applicants living at home

The new, tougher restrictions on asset and income transfers imposed by OBRA have serious implications for individuals wishing to make gifts. The rules also substantially complicate the use of trusts to protect assets from gift and estate taxes. Future segments of this article will focus on OBRAs treatment of trusts and examine the tactics still available to individuals seeking to maximize and preserve wealth.

Issue 6

Gifts Made Under Power of Attorney Held Valid

A power of attorney is a critical tool in estate planning. It allows an individual (the principal) to nominate someone else, as "attorney-in-fact," to make financial decisions should the principal become incapacitated. Without an attorney- in-fact, disability may compromise an estate planning strategy.

In a recent Fourth Circuit case, Ridenour Estate v. Commissioner, Dad named Son as his attorney-in-fact in a broadly worded power of attorney. Dad had an established history of using his annual $10,000 exclusion to gift money to his son, his son's wife, his grandchildren and his great-grandchildren. When Dad became disabled, Son continued this pattern under the power of attorney and made gifts of $9,500 to himself, his wife, his children and grandchildren. Shortly thereafter, Dad died, and the IRS maintained that the gifts were part of Dad's estate.

The IRS relied upon a factually similar 1991 decision in which the court ruled that, where a power of attorney omits mention of any specific gifting power, the gifts are revocable and must be included in the Decedent's taxable estate. In Ridenour, however, a federal court of appeals panel rejected this rationale. Instead found that the principal intended to authorize the gifts, and therefore the gifts were irrevocable and not includable in Dad's gross estate. Of course, the safest way to avoid litigation of this sort is to expressly grant gift giving power to the attorney-in- fact.

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