The Impact of Spousal Elective Share
on Medicaid Planning
The Spousal Elective Share
If there was any doubt concerning a Medicaid recipient's or applicant's obligation to pursue a claim under New Jersey's Spousal Elective Share Statute (N.J.S.A. 3B:8-l et. seq.) those doubts have been laid to rest by N.J.A.C. l0:71-410(b)3 which became effective June 18, 2001 as a part of the new Medicaid regulations. However, as with many other provisions of the new regulations, N.J.A.C. 10:71-4.10(b)3 raises more issues than it answers. It provides that in the context of a transfer, assets include:
"...income and resources which the individual or the individual spouse is entitled to but does not receive because of action or inaction by the individual or the individual spouse; or by any person, including a Court or administrative body with the legal authority to act in place of or on behalf of the indIvidual or the individual spouse; or any person including the Court or administrative body, acting at the direction of or at the request of the individual or the individual spouse. "(emphasis added)
This section goes on to provide examples of actions that would cause resources not to be received. These examples include:
"...waiving the right to receive an inheritance, including spousal elective shares pursuant to N.J.S.A. 3B:8-10."
While N.J.S.A. 38:8-10 refers to the right of a spouse to waive an elective share interest by written agreement before or after the marriage after fair disclosure, it clearly deals with the waiver prior to the death of one spouse. A fair reading of the N.J.A.C. 10:71-4.10(b)3, however, suggests that the new rule contemplates the situation where the surviving spouse's inheritance does not equal the statutory elective share s/he does not make a claim against the estate.
In discussing the spousal elective share in the context of Medicaid eligibility, it is important to remember that N.J.A.C. l0:71-4.l0(b)3 presents a transfer of assets issue. While it can become an "availability issue" during the pendency of a elective share claim, our concern as practitioners will for the most part be with the transfer issues presented by this provision which applies to those individuals seeking eligibility and to recipients.
Key Issues Presented By N.J.A.C. 1O:71-4..1O(b)3
The presenter has identified the following issues which he believes will cause the most concern to the Elder Law practitioner in planning, and in challenging denial of benefits:
- Statutory grounds to defeat a claim for elective share
- Capacity and right of surviving spouse to pursue elective share
- Valuing the elective share
- Date the waiver (transfer) occurs
- Potential and actual conflict between the surviving spouse's fiduciary (agent under a Power of Attorney or Guardian) when the fiduciary is the Executor or Beneficiary under the Will being challenged
Statutory Grounds to Defeat a Claim for Elective Share
N.J.S.A. 3B:8-1 confers the right of an elective share on a surviving spouse provided that:
"...at the time of death decedent and the surviving spouse had not been living separate and apart in different habitations or had not ceased to cohabit as man and wife, either as the result of a Judgment of Divorce from bed and board, or under circumstances which would have given rise to an action for divorce or nullity of the marriage to the decedent prior to his death under the laws of this state."
The statute seems to provide three grounds to defeat the elective share:
- If the decedent and the surviving spouse were living separate and apart at the time of death;
- If the decedent and the surviving spouse had ceased to cohabit as man and wife, either as a result of a Judgment of Divorce from bed and board; or
- If the decedent and the surviving spouse lived together under circumstances which would have given rise to a cause of action for divorce or nullity prior to the decedent's death.
The are only two case in New Jersey that examine these statutory grounds to defeat the elective share. In Estate of Louis McKay, Deceased, 205 N.J. Super. 609 (Ch. Div. 1984), the Court took a more narrow view. After reviewing the legislative history of N.J.S.A. 3B:8-l, Judge Lario concluded that the legislature did not intend to permit one spouse to cut off the surviving spouse "by merely separating." He concluded that the legislature intended that the clause "under circumstances which would have given rise to a cause of action for divorce..." modifies the clause "at the time of death the decedent and the surviving spouse had not been living separate and apart In different habitations." The presenter suggests that this ignores the use of the disjunctive "or" used in the statute and that a fair reading of the legislative history could lead to the opposite conclusion. In the Matter of Estate of Herbert J-fersh, 195 N.J Super. 74 (App.Div.1984) the court noted that the legislative history of N.J.S.A. 3B:8-l is sparse. In Hersh, the Court dealt with a thirty year separation and found there to be no dispute that the decedent had a cause of action for divorce at the time of death which it found to be sufficient reason to defeat the elective share claim. It did not discuss the "living separate and apart at the time of death" clause as an independent ground for defeating an elective share claim. It is interesting to note that the Court in McKay found that the decedent had moved from the marital apartment ten months prior to his death as a result of "disharmony" and that the decedent had sought legal advice concerning a divorce, but had not initiated divorce proceedings.
Are parties "living separate and apart at the time of death" where the surviving spouse is a resident of a nursing home? Does it make a difference if the surviving spouse was a resident of a nursing home for more than 18 months? There is no doubt that the cause of action would lie for no fault divorce under N.J.S.A. 2A:34-2. Morrison v. Morrison, 122 N.J Super. 277 (Ch. Div. 1972), and Albrandt v. Albrandt, 129 N.J Super. 235 (Ch.Div.1974), both hold that an 18 month separation gives rise to grounds for divorce regardless of whether the separation was the result of a voluntary or involuntary action. Indeed, Albrandt was more emphatic, stating that the "no fault" provision in the statute "does not require a voluntary act." (Id. at 238). Thus, neither incapacity nor the reason for a spouse being in a nursing home would be a defense to a "no fault" divorce.
If an Appellate Court eventually endorses Judge Lana's reasoning in McKay, namely, that the "or" provisions of N.J.S.A. 3B:8-1 should be read as conjunctive rather than as a disjunctive, obviously it would be necessary to tie cause of action to the "separate and apart" requirement, and therefore the reader is referred to the presenter's outline on matrimonial law in the context of Medicaid. Suffice to say at this point that intent of the defendant spouse is not an element of the extreme cruelty ground for divorce. That test is the effect of the conduct on the spouse seeking the divorce. Gazzillo v. Gazzillo, 153 NJ. Super. 159 (Ch. Div. 1997).
Capacity and Right of Surviving Spouse to Pursue Elective Share
N.3.S.A. 38:8-11 provides that the right to the elective share can be exercised by the surviving spouse only during his/her lifetime. See also Aragon v. Estate of Snyder, 134 NJ Super. 635 (Ch. Div. 1998). N.J.S.A. 3B:8-l 1 goes on to provide that in the case of a surviving spouse who has been adjudicated an incapacitated person, the Guardian may exercise the right of election only by an Order of the Court that made the adjudication of incapacity after a finding that the election is necessary "...to provide adequate support of the surviving spouse during his probable life expectancy."
Is an elective share necessary "to provide adequate support" to a surviving spouse who is receiving Medicaid benefits or who would otherwise receive benefits but for the elective share?
What of an incapacitated surviving spouse who has not been adjudicated to be such? Clearly such an individual does not have the capacity to prosecute a claim for an elective share and indeed, may not have the funds with which to pursue a claim.
N.J.S.A. 30:4B-7.la provides that:
The Commissioner [Division of Institutions and Agencies] may request the Attorney General to enforce any rights against any third party, initiate legal proceedings against any third party, or intervene in any pending proceeding against a third party initiated by the recipient,.. .either in the Commissioner's own name, as subrogee of the rights of the recipient, or to enforce the Commissioner's rights as assignee of the recipient established by this section.
N.J.S.A. 30:4-B-7. la clearly gives the Commissioner the right to pursue a claim on behalf of a recipient. The question remains what is to be done for an applicant who is incapacitated but has not been adjudicated as such. Such an applicant will not have assets with which to pursue the elective share. Even if the applicant has a Durable Power of Attorney, the agent is not obligated to expend his or her own funds to pursue the claim. It is suggested that in such a case, the potential claim should be made known on the application for benefits. Without the funds or ability to pursue the claim, it could be argued that the elective share is an unavailable resource and that the applicant should not be denied eligibility. Once eligibility is established, the Commissioner has the statutory authority to pursue the elective share under N.J.S.A. 30:4-B-7.1 a.
Valuing the Elective Share
The surviving spouse is entitled to one-third of the augmented estate, which is defined by N.J.S.A. 3B:8-3 as the probate estate:
...reduced by funeral and administration expenses, and enforceable claims, to which is added the value of property transferred by the decedent at any time during the marriage, to or for the benefit of any person other than the surviving spouse, to the extent that the decedent did not receive adequate and full consideration in money or monies worth for the transfer, if the transfer [was made after May 28, 1998] and is any of the following types:
- Any transfer under which the decedent retained at the time of his death the possession and enjoyment of, or right to income from, the property;
- Any transfer to the extent that the decedent retained at the time of his death a power, either a loan or in conjunction with any person, to revoke or to consume, invade or dispose of the principle for his own benefit;
- Any transfer whereby property is held at the time of decedent's death by decedent and another with right of survivorship;
- Any transfer if made within two years of death of the decedent, to the extent that the aggregate transfers to any one donee in either of the years exceeded $3,000."
Thus, for our purposes as Elder Law practitioners, the augmented estate includes all transfers made for asset preservation purposes where the decedent retained any interest as well as all outright gifts in excess of $3,000.00 to any one donee within two years of death. However, N.J. S .A. 3B:8-5 excludes any of the foregoing transfers from the augmented estate if the transfers were made with the written consent for joinder of the surviving spouse.
N.J.S.A. 3B:8-6 also includes in the augmented estate:
- The value of property owned by the surviving spouse at the time of, or as a result of the decedent's death to the extent that the properly is derived from the decedent by means other than by testate or intestate succession without full consideration in money or monies worth; and (emphasis added)
- The value of the property described in subsection a hereof which has been transferred by the surviving spouse at any time during the marriage without full consideration in money or monies worth to any person other than the decedent which would have been includable in the spouse's augmented estate if the surviving spouse had predeceased the decedent.
N.J.S.A. 3B:8-9 creates a presumption that all property owned by the surviving spouse was derived from the decedent except to the extent that any party in interest establishes that it was derived from another source.
N.J.S.A. 3B:8-7 provides that property derived from the decedent includes any interest in an inter vivos trust created by the decedent, the proceeds of life insurance on the life of the decedent, annuity payments on contracts where the decedent was the annuitant, pensions, disability compensation and retirement plan payments to the surviving spouse and the value of any community property rights possessed by the surviving spouse.
Satisfying the Elective Share
After determining the value of the augmented estate the next step is to determine whether the surviving spouse is entitled to a part of the decedent's estate. To understand the rational of this provision of the statute, it helps to recall that the N.J.S.A 3B:8-1 et seq. is intended to prevent impoverishment of the surviving spouse by testamentary exclusion. Thus, N.J.S.A. 3B:8-l 8 provides that the surviving spouse is entitled to the difference between the value of the augmented estate and the 3 categories of assets defined by N.J.S.A. 3B:8-18:
- The value of the surviving spouse's own assets at the time of the decedent's death from whatever source acquired.
- The value of assets succeeded to by the surviving spouse as a result of the decedent's death, notwithstanding that such property may have been renounced by the surviving spouse.
- The value of any property transferred by the surviving spouse which would have been included in the surviving spouse's estate had the surviving spouse predeceased the decedent. In other words, gifts made by the surviving spouse of assets in his or her name is added to the value of the elective share.
Marshaling assets of the estate that may be necessary to satisfy the elective share is beyond the scope of this presentation. Thus, we simply make reference to N.J.S.A. 3B:8-l 5 and 19 which are the enforcement provisions of the statutory scheme.
Date of Transfer (Waiver)
Because the waiver of elective share is a transfer issue, establishing the date of the transfer/waiver is essential to determine the beginning of the penalty period if it is determined that the surviving spouse is entitled to an elective share.
N.J.S.A. 3B:8-12 provides that a claim for elective share must be filed within six months of the appointment of the personal representative of the decedent's estate. The six months can be extended upon a good cause shown, however, the request for extension must be made within the six month time period.
Thus, in the case where there has not been a written waiver of the elective share prior to death pursuant to N.J.S.A. 38: 8-10, the issue becomes whether the transfer was made on the date of death, the date the personal representative of the estate was appointed, or the expiration of the six month statutory period. N.J.A.C. 10:71-4. 10(b)3 is silent on this issue.
In the case where the surviving spouse signed a waiver of the elective share prior to death pursuant to N.J.S.A. 3B: 8-10, the issue arises as to whether the date of the written waiver is the date of the transfer/waiver, or is it the date of death, etc.
The writer suggests that in the case of the written waiver, whether in a pre-nuptial agreement, post-nuptial agreement or as a part of an comprehensive estate plan with one's spouse, such an agreement is entered into for valuable consideration and thus, is a "transfer for value." This would presumably permit the applicant to rebut the presumption that the transfer/waiver was made for the purpose of establishing eligibility.
Conflict of Interest
In the context of the elective share issue and Medicaid eligibility, the Elder Law practitioner will be faced with the situation where the surviving spouse's claim for elective share may be in conflict the interests of his or her Guardian or Agent under a Power of Attorney. This person is more often than not a child who may also be the personal representative and/or a beneficiary of the estate. The practitioner must be aware of these conflicts and proceed accordingly. This may mean an application for the appointment of a Guardian ad Litem to prosecute an elective share claim. At the very least, separate counsel are required for all interested parties.
Medicaid Planning and Practice Suggestions
1. N.J.S.A. 38:8-17 provides that assets in a Trust for a surviving spouse are valued at half its total value. A Testamentary Supplemental Needs Trust for a spouse who may need nursing home in the future funded with 100% of the deceased community spouse's assets remains a viable planning option. It clearly would satisfy the elective share statute where the "well spouse" who predeceases the applicant did not makes gifts without the consent of the surviving spouse in amounts when added to the augmented estate would make half the value of the assets in the trust less than the elective share.
2. NJSA 3B:8-5 provides that property transferred with the "written consent or joinder of the surviving spouse" it is excluded from the augmented estate. Thus, in joint asset preservation planning, both spouses should execute written consents to transfers made by the other. Powers of Attorney should authorize the Agent to execute written consents or to join in transfers made by the spouse. It is unclear whether a "blanket" written consent to all transfers as opposed to a written consent for each transfer is sufficient to satisfy NJSA 3B:8-5.
3. NJSA 3B8-10 permits a waiver of elective share "in writing if made after "fair disclosure." It is critical, therefore, that written waivers made in the context of a mutual estate plan state be made with a full and fair disclosure of all assets owned individually and jointly and that the waiver itself recite the disclosure. The written waiver should also state the consideration for the waiver. In the writer's view, the consideration can be the mutual reliance on the other's estate plan intended to provide for the surviving spouse and children and to ensure the preservation of assets to the maximum extent allowable by law.
4. NJSA 3B:8-12 provides that the Complaint for the claim for elective share or the request to extend the time limit must be "filed"within six months of the appointment of a personal representative. Where the recipient or applicant (or his/her representative) intends to notify Medicaid of his or her inability of to pursue the elective share either by reason of incapacity or lack of funds to litigate the claim, consider giving the notification to the Division of Social Services with the least amount of "reasonable" time to make a timely claim within the statutory period.
5. If the community spouse wishes to exclude the institutionalized spouse, grounds for divorce should be documented in anticipation of a claim for the elective share. Consideration should also be given to a consultation with a matrimonial attorney whether or not divorce is to be pursued.