Protecting the Family Cottage from a Medicaid (MassHealth) Spend Down through an Irrevocable Trust

An irrevocable trust is an excellent tool when preplanning for Medicaid benefits.  Anything that is put into the irrevocable trust is protected from a Medicaid spend-down if five years pass from the date of the transfer.

For example, Alice Smith, a 77-year-old widow, wants to protect her family cottage from potential long-term care nursing home bills and preserve it for the benefit of her four children and their immediate families.  To do so she would need to establish an irrevocable trust, fund it with the cottage property, and have five years pass from the date of the transfer.  Additionally, to ensure her children have sufficient funds to maintain the family cottage, Alice also simultaneously transferred $250,000 of cash assets into the trust.  Finally, in order to bullet-proof the plan in the event of an accident, Alice purchased a traditional long-term care insurance policy which will provide her with five years worth of long-term care benefits, including home health, assisted living, and nursing home care.  The long-term care insurance policy also offered a full return of premium rider in the event that she passed away without using any of the coverage.  After such an event, the annual premiums would be refunded to her revocable living trust.

With the above plan in place, Alice was confident that her wish to have the family cottage remain in the family for many years to come would be long lasting.  Notwithstanding the above, Alice understood that when the maintenance funds ran out that a financial problem may soon develop.  However, to avoid a point of impasse among her children, Alice designed the trust so that if a financial problem persisted for more than 90 days, the trustee was directed to sell the property, giving each child an equal share of the sale proceeds.

This week’s blog originally appeared in a blog from Kraus Financial Services and can be viewed here.

Can I Contest My Sister’s Will?

In the coming years we will see a  marked increase in the number of cases challenging the legality of a will on the grounds of mental incapacitation of the person making the will. Though the reason for the increase in will contests is debatable, the growing number of elders with medical issues affecting their cognition; the transfer of wealth between World War II and baby boomer generations; and the change in the traditional nuclear family certainly play a role.

Mary lived alone on a large estate for fifteen years following her wealthy second husband’s death. Her only living relative was her sister, Louise. The two have been close since childhood, but in recent times the frailty of both women has led to fewer and fewer visits. Mary passed away in January after a three-year battle with endometrial cancer. Although weakened by age and sickness, often delusional and dependent on prescription medication, Mary executed a second version of her will in 2010 (unbeknownst to Louise) with the assistance of her live-in caregiver, Kate. When the terms of Mary’s will are administered, Louise discovers that she is to receive just $1,000 while Kate is the primary benefactor of Mary’s $450,000 estate.

Many times, the relative of one who has recently passed believes that they were unjustly left out of a will. Perhaps due to the mental state of the deceased, the relative might believe that the deceased was delusional in granting a non-relative a financial windfall. In the above example, Louise would like to know whether she has any legal recourse to challenge Kate’s award. She feels that Kate knew about Mary’s delusional capabilities and possibly took advantage of Mary in receiving the majority of Mary’s estate, and finds it hard to believe that her sister would not have left her more. However, it is also reasonable to see that Mary might have felt indebted to Kate and wanted to provide her with a genuine token of appreciation for her services.

In order to create a valid will in Massachusetts a person must possess “testamentary capacity”. In most states, this means that the person creating the will understands the nature of the document, the worth of her assets, and her relationship with whomever she is transferring them to. Testamentary capacity requires freedom from delusion which is the effect of disease or weakness and which might influence the disposition of her property. The person executing the will needs only to be aware of her actions during the period of time she is making the will. The fact that he or she doesn’t remember it the day after does not invalidate a will.

Although wills contests arise frequently, proving that a person is without testamentary capacity is difficult because signing a will does not require a great deal of coherence nor consistency. Louise would have be allowed to contest Mary’s will in the probate court, but it likely would lead to a lot of costly litigation. Most often the disagreeing parties will negotiate a settlement to mitigate the litigation.

If a relative finds themselves in a similar position, they should contact an attorney experienced in Estate Administration to discuss the possibility of a legal claim. If you considering disinheriting an heir who might attempt to challenge a will’s provisions, speak to an experienced Estate Planning attorney about avoiding the probate process altogether through the use revocable or irrevocable trust planning.

Contesting a will is a procedural and difficult process. Yet, if you feel that a loved one lacked the mental capacity to transfer his or her estate, contact our office to discuss your options.

Joint Bank Accounts for Seniors: Yay or Nay?

Many seniors currently need assistance paying their bills and managing their finances, or may need help sometime in the future.  It’s important to have a trustworthy person authorized to manage your finances should you be unable to do so yourself.  Are joint bank accounts a good option?

Here’s a common  scenario

Florence, an 86-year-old widower, decided to have her eldest daughter, Marie, listed on all her bank accounts after her husband’s passing. She needed some help getting to the bank and figured it was easier to have Marie do it for her. Sometimes, Florence needed Marie to help her write out the monthly bills because she was also starting to have memory issues.

Marie took this responsibility very seriously and made weekly trips to the bank for her mother. A few times Marie helped herself to $200 here and there, just to get her through to her next paycheck. She always put it back… except for the last three times. She just can’t seem to get caught up. Maybe Marie would be able to take on more hours at work but she is very stressed about her 16-year-old son who just severely injured someone in a car accident. She’s thinking about filing for bankruptcy to ease the financial situation.

Be sure to properly assess potential risks

For Florence, adding Marie, or another other loved one, as co-owner on bank and brokerage accounts seemed to be an easy and convenient way of managing her assets and making sure her bills are paid on time.  However, many seniors do not take into account the risks and potential consequences of joint ownership, and the alternatives that can mitigate those risks.

First,  a joint owner has complete access to your accounts and make unlimited withdrawals without your approval. Marie has been helping herself to a little bit here and little bit there for a while now. Florence never knew about it and when she did find out she didn’t ask for it back because she felt bad for Marie. Unfortunately, these were considered disqualifying transfers or “gifts” when Florence applied for MassHealth. She was denied coverage for her nursing home stay because to qualify for MassHealth (Medicaid) you can’t give gifts (or other disqualifying transfers) for five years.

Your co-signer’s liabilities could now be your responsibility

Second, a joint owner is considered owning 100% of the assets, just as you are, regardless of who contributed them in the first place. This leaves your assets vulnerable to their debts and liabilities. If Marie is sued because of her minor son’s  accident, Florence’s bank accounts are at risk. Florence’s bank accounts could also be at risk if Marie files for bankruptcy. If your co-owner goes through a divorce, has a business failure, or gets sued for any other reason, your money could also be exposed to those claims.

Your estate plan could be undermined

Third, when you die, the assets in a jointly-owned account will automatically become the property of the surviving owner.  Florence’s Will directed her estate to be split equally amongst her three children when she died. When she died she only had a few personal effects and a few bank accounts with roughly $10,000. Since Marie was listed as joint owner on all accounts, the funds became legally hers when her mother passed. She knows she has a moral obligation to follow what the Will says, but nobody can make her do it. After all, her brother hasn’t bothered to see her mother in two years and her sister is pretty well-off; she needs the money more than they do anyways. 

Protect your assets

One simple alternative is to have a Durable Power of Attorney prepared by an Elder Law Attorney. Your agent under your Power of Attorney would be able to manage your finances on your behalf, including making withdrawals and writing checks without your permission, but the assets would be owned by you alone. 

Your agent would have a legal duty to manage your finances on your behalf and in your best interest; your assets would not be subject to your agent’s liabilities; and your assets would not automatically pass to your agent upon your death.

It’s important that you speak to an Elder Law attorney about planning for a time when you may be incapable of managing your own affairs.

Estate Planning Myths Explained

Occasionally, I run across a great article written by someone else. Today is one of those days and I just had to share it with you. Clients are often confused when they come in for initial consultations and have preconceived notions about planning their estates based on things that they’ve heard from their friends, neighbors, hairdresser, etc. Most of the time the information shared is incorrect, or at least incorrectly applied to their situation. This article does a great job of debunking the most popular “myths” of estate planning.  I only added one little thought in bold below. Thank you to my colleague, Attorney Gina Barry, from Bacon & Wilson in Springfield for putting this article together…. and as far as I know unicorns are still mythical creatures.  

Certain ideas with respect to estate planning are widely accepted, yet unfortunately, inaccurate. This article will reveal and explain the most commonly stated estate planning myths. 

Myth No. 1: ‘If I have a valid will, my estate does not have to go through probate.’

Many people believe that having a will means that their estate will not have to be probated when they pass away. A will is a document that, in part, gives instructions as to the distribution of the assets in the decedent’s probate estate. The assets in the probate estate are those assets that are held in the decedent’s name alone that do not have a designated beneficiary. Thus, whether or not probate is needed is not based upon whether or not the decedent had a will; rather, it is based upon how the assets are owned by the decedent.

If the decedent left probate assets, then in order for their will to ‘speak,’ a probate estate must be opened. If all the assets held in the decedent’s name are jointly owned with a right of survivorship or have named beneficiaries, then there is no need for probate.

Myth No. 2: ‘I can give away $10,000 to as many people as I want each year, but if I give more, then I have to pay gift tax.’

This myth emanates from the gift-tax system. In 2010, the rule with respect to gift tax is that you may give up to $13,000 to as many people as you want without having to file a gift-tax return. Note that the amount that can be gifted is stated incorrectly in the myth because most people remain unaware of the ongoing increases to the allowable gift amount.

Also under the current rules, even if a gift-tax return must be filed because more than $13,000 is given to one person, the giver of the gift will not pay any gift tax until he or she has gifted more than $1 million during their lifetime. Thus, if a person has $100,000 and gives all of it away in one year to one person, they will need to file a gift tax return, but they will not owe any gift tax because the gift does not exceed the lifetime threshold.

The estate tax system is NOT to be confused with MassHealth/Medicaid planning. If nursing home care is eminent and you intend on having MassHealth/Medicaid pay for your care, gifts of any size are not allowed and can lead to MassHealth/Medicaid disqualification.

Myth No. 3: ‘I can give away assets when I enter a nursing home and still obtain Medicaid benefits.’

When faced with a nursing home bill of approximately $8,000 per month, many people wish to obtain Medicaid benefits to pay for this care. In order to obtain Medicaid benefits, an asset limit must be met; therefore, assets valued above this amount must be reduced to the asset limit before benefits will be granted. In their efforts to reduce the excess assets, many people believe that they can gift the excess assets due to the gift-tax exclusion explained in Myth No. 2. While a person can make a gift of up to $13,000 per person in 2010 without filing a gift tax return, the Medicaid program is not governed by the gift tax rules.

The Medicaid program imposes a penalty when any assets are given away within five years of the application for benefits, except in very specific circumstances. This penalty results in being unable to obtain Medicaid benefits for at least five years after such a gift is made. Thus, a gift of any amount will typically result in a penalty being imposed even if the gift does not have to be reported on a gift-tax return.

Myth No. 4 – ‘If I need nursing home care, Medicare will pay for my care.’

In part, this myth is perpetuated due to the fact that “Medicare” sounds very much like “Medicaid,” which does pay benefits for nursing home care for approved applicants. Medicare Part A will pay for medically necessary inpatient care in a skilled nursing facility, but only following a three-day hospital stay. Medicare will pay for up to 100 days of skilled nursing care or rehabilitation services. The actual length of benefits could be much shorter than 100 days if those services are no longer required.

When Medicare benefits are paid, Medicare pays 100% of the cost for the first 20 days, but only 80% of the cost of the next 80 days. Most Medicare recipients also have Medigap insurance, which will pay the balance not paid by Medicare. When Medicare benefits are exhausted, an alternative payment source is needed to pay for ongoing nursing home care.

Questions? Wondering if something you’ve heard is a ‘myth?’

 This article was originally published in Business West.

When it Could be OK to Give Assets Away When Planning for Long Term Care (Nursing Home)

Not long ago, I posted a blog on gift transfers and their affect on qualification for MassHealth (Medicaid) for an institutionalized individual. Generally, transferring assets to dispose of property so that you qualify for MassHealth will not actually help you qualify because the state imposes a five-year “look-back” period, in which those assets are counted and used to assess eligibility for MassHealth. Fortunately, there are some exceptions to the general rule.

Under the Deficit Reduction Act of 2005, an individual may still be eligible for MassHealth if certain assets were transferred to specific individuals. One of your biggest assets is probably your home. You can transfer title to your home to the following individuals without it being counted and without subjecting you to the 5-year look-back period: (1) your spouse; (2) your child who is under age 21, or is blind or permanently disabled; (3) your brother or sister who has lived with you for at least one whole year prior to the day you entered an institution and holds an equity interest in the home; or (4) your “caregiver” child.

A “caregiver” child is a son or daughter that lived with you for the two whole years prior to the date you entered an institution and provided the care you needed to remain in your home. If you were healthy enough to live in your home without your child’s help, a transfer of your home to that child will not protect you from the transfer rules. All other assets can also be transferred without being counted or subjecting you to the 5-year look-back period if they are transferred correctly and fall within the other exceptions to the general rule.

Any and all assets can be transferred to your spouse or to someone else for the sole benefit of your spouse. Your spouse may also transfer any and all of the assets to someone else for the sole benefit of your spouse. This means that someone else would hold legal title to the property, but it would only be used for the needs and wishes of your spouse.

Assets may also be transferred to your child if he or she is blind or permanently disabled. You have the option of transferring such assets directly to your child or to a trust for the sole benefit of your child. Either way, these gifts would not be subject to the new transfer rules.

Finally, you may transfer any and all of your assets to a trust for the sole benefit of any disabled person under age 65. Under this exception, a disabled individual is someone whose mental or physical impairment is so severe that he or she will be unable to perform substantial gainful work in order to provide for him or herself. This mental or physical impairment must be expected either to result in death, or to last continuously for a period of at least one year. There is no statutory requirement that you be related to this disabled individual for your transfers to fall within the exception.

While exceptions to the general rule on transfers of gifts do exist, it is very important that you speak with an attorney before making any transfers to ensure that you will still qualify for MassHealth. The 5-year look-back period is a long time to wait to be eligible for the services you need.