Poorly Designed Medicaid & Estate Plans Can Harm Divorced Children

May 29th, 2012

Recent New Jersey cases illustrate that poorly drawn Medicaid planning and estate planning gifts actuallly can harm divorced children at times.  In New Jersey, New York, and other states, spouses’ rights to receive or pay alimony and child support depend in part on relative income and assets.  Thus, the custodial parent’s child support might fall if his/her income rises while the non-custodial parent may have to pay more if his/her income rises.  By the same token increases in income may lead to correspondng changes in alimony rights and obligations.  Therefore, estate and Medicaid planning should take a child’s divorce or shaky marriage into account.

The New Jersey Appellate Division just ruled that a family court must consider whether the ex-wife’s alimonly and child support should be cut due to her mother’s Medicaid planning gift of the mother’s home.  Maybury v. Maybury (unpublished A4338-10, May 25, 2012).  The former husband argued that an unencumbered home is a valuable asset that should lead to income being imputed to the former wife.  Although the Appellate Division remanded the case for further fact finding, they agreed with the husband’s argument that receipt of a high value gift like an unencumbered home can be taken into account in fixing alimony and child support obligations.  The Appellate Division also directed the family court to consider whether the transfer satisfied Medicaid requirements in evaluating the divorce impact.  Thus, from a divorce perspective, it would have been desirable for the Medicaid planning gifts to leave the former wife off the list of donees.

A New Jersey Supreme Court decision late last year similarly confirms that estate planning gifts can impact a divorced spouse’s  alimony and child support rights and obligations.  Tannen v. Tannen, 208 N.J. 409 (2011).   Here, the husband sought to limit his child support and alimony obligation to take account of income the ex-wife could expect to receive from a trust established by the former wife’s parents.  The Court ultimately held that the trust at issue shouldn’t impact divorce rights and obligations because the trust didn’t give the ex-wife any right to force the trust to distribute.  However, it is equally clear that a trust that does give a spouse distribution rights could be taken into account in fixing alimony and child support.

In a slightly different vein, Medicaid or estate planning gifts also can impact a recipient’s higher education obligations and financial aid.  In short, when developing and drafting Medicaid and estate plans, it is important to keep the overall picture in mind and avoid tunnel vision.

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