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protect assets from creditors

Make Your Estate Creditor-Proof

Make Your Estate Creditor-Proof

Here’s how to ensure assets go to your heirs

Ensure your assets go to directly to your loved ones instead of through probate.

When you pass away, the tax man isn’t the only one who can take a bite out of the assets that you leave behind for your loved ones.

Whether it is cash, real estate, retirement money or other funds, inherited assets can suddenly come up for grabs in a number of scenarios when creditors and others come calling.

Experts say you can often make your estate creditor-proof by avoiding probate, which is designed to pay off creditors. Here’s a primer on four ways to avoid probate and prevent outsiders from snatching the money you’ve left for your heirs. These measures protect your relatives if they ever get sued, file for bankruptcy or go through a nasty divorce after you’ve died.

 

1. Create a trust

Establishing a trust is not only a key way to skip probate court, it can also prevent the assets you’ve spent a lifetime accumulating from going to predators who might slap your heirs with lawsuits.

Scenario: A 77-year-old man died of cancer. He had a will that left $250,000 to his 26-year-old granddaughter, whom he intended to help buy her first home. Two years after her grandfather’s death, the granddaughter got into a minor car accident. The other driver wasn’t hurt but sued anyway, eventually winning a big chunk of the young woman’s $250,000 inheritance.

How to prevent this: Establish a trust instead of passing money via a will, recommends Elise Gross, an attorney with the Presser Law Firm P.A., a Boca Raton, Fla.-based company that operates nationwide.

“The trust can specify that the money only be used for certain purposes, like the education, care or support of a specific beneficiary. This way, there can be no payout to creditors,” Gross says.

In some states, such as Florida, living trusts are commonly used. These trusts are called “revocable” because you control them and can change them at any time while you are alive. Once you die, however, your living trust becomes irrevocable (since you aren’t alive to revoke it), and the trust is a separate legal entity.

In New York and New Jersey, people typically create testamentary trusts, Gross says. This type of trust is created by the terms of a will, and the trust only takes effect upon a person’s death.

Both types of trusts can contain specific language and provisions that prevent your beneficiaries’ creditors from seizing any trust assets.

Unlike wills, “trusts are not a matter of public record. They’re a tool for maintaining privacy,” says Reid Abedeen, a partner at Safeguard Investment Advisory Group LLC. “In addition, trusts are much more difficult to contest than a will.”

A final advantage of a trust over a will is that a will has to go through probate, which is expensive and time-consuming. Probate costs can eat up more than 3 percent of an estate. So if you bequeath $1 million through your will, your heirs could pay more than $30,000 in probate expenses and wait a year or more for their inheritances.

2. Handle retirement assets appropriately

Be careful with how you pass along retirement assets such as IRAs and 401(k) plans. Creditors can sometimes go after those monies if one of your loved ones winds up in bankruptcy court.

Scenario: A 62-year-old mom died of diabetes and left her $100,000 IRA to her only daughter. Five years after receiving the inheritance, the daughter ran up a lot of credit card debt and filed for bankruptcy. She claimed the inherited IRA was exempt from her creditors, but the bankruptcy court disagreed and that money was used to pay off the debt.

How to prevent this: Leave IRAs to beneficiaries in a separate IRA trust to keep the funds away from creditors.

“The Supreme Court ruled in 2014 that any time a child or grandchild inherits an IRA, it’s no longer protected from creditors,” says Pat Simasko, head of Simasko Law and Simasko Financial in Mount Clemens, Mich.

By creating a stand-alone IRA trust for children or grandchildren to inherit an IRA, your offspring “will have access to the money, but creditors won’t,” he says.

Fortunately, married couples don’t have to worry about this problem. Under current law, if Mom dies with an IRA, Dad is allowed to receive her IRA assets as a “spousal rollover” and the funds are protected from outsiders.

3. Safeguard life insurance proceeds

Money held in a life insurance policy is protected from creditors, so any death benefit or cash value is protected and will go directly only to the individuals or organizations you name as beneficiaries.

But once life insurance proceeds are distributed as cash to your beneficiaries, the funds are open to attack from anyone, including your child’s conniving ex-spouse.

Scenario: A couple in their mid-80s has spent a lifetime together working hard and saving money. They have $1.5 million in life insurance and have told their three sons that each of them will receive $500,000 in insurance payouts. The youngest of the three sons is going through a bitter divorce with his estranged wife. The soon-to-be ex-wife has already told her lawyer about her spouse’s anticipated inheritance, and she feels entitled to a piece of it.

How to prevent this: To thwart a bitter ex from trying to lay claim to your kid’s inheritance, safeguard the life insurance by putting it an irrevocable life insurance trust (ILIT).

An ILIT is a tool specifically designed to own life insurance. Just like other trusts, the ILIT has a trustee, beneficiaries and precise terms for distributions.

“You can add protective provisions, like a spendthrift clause and a discretionary distribution clause, to keep the insurance proceeds from your beneficiaries’ creditors,” Gross says.

A spendthrift clause prohibits the trustee from transferring trust assets to anyone other than the beneficiaries. That includes an ex-spouse, creditors or even the IRS. “A spendthrift clause also says no beneficiary is permitted to assign, pledge or sell any interest in the trust — whether trust principal or income,” Gross adds.

If the trustee believes the distribution would be wasted or claimed by the beneficiaries’ creditors, a discretionary distribution clause gives your trustee the right to withhold income and principal distributions that would otherwise be payable to the beneficiaries.

4. Title bank accounts and assets properly

If you own joint assets or name beneficiaries on your accounts and assets, a creditor cannot seize what you leave behind after you die. Instead, the money will go directly to the person(s) listed on the accounts. But for the unsuspecting who haven’t titled their assets properly, there are pitfalls.

Scenario: A 58-year-old married traveling salesman died of a sudden heart attack. There was an $80,000 bank account in his name alone that had to be probated. His wife later discovered a $60,000 credit card balance, about which she knew nothing. It turns out the husband had a girlfriend on the side. After he died and the bank account went through probate, the wife was forced to use those bank funds to pay off the credit card bills.

How to prevent this: Make sure the spouse is named as a beneficiary on the bank account, which keeps the asset from having to go through probate. “If Dad dies and Mom is on the [bank] account, it’s hers,” Simasko says.

Adding beneficiaries to financial accounts is another creditor-busting move, since those assets avoid probate upon the death of the first account owner. But in this instance, it’s the deceased person’s creditors that won’t get access to the money, not the creditors of the beneficiaries.

Instead of having a joint owner listed on the title of certain accounts, a variation on this technique is to have a named beneficiary listed on your accounts, such as a 529 plan that may be for the benefit of a grandchild’s college education.

Another way to bypass probate and pass along the money to your heirs is to choose a payable-on-death (POD) or transfer-on-death (TOD) account designation. This differs from a joint tenant or co-owner arrangement because your heirs only have access to the fund after your death. Joint tenant and co-owners have access to the funds while you are alive.

“You deserve the peace of mind in knowing that your life’s economic work will be executed as specified, and your family will be grateful to you for not leaving them with the headache of trying to sort out your estate,” Abedeen says.

Read more related articles at:

How To Protect Your Assets From Lawsuits Or Creditors

Protecting Your Assets from Lawsuits and Judgments: Are You a Target?

Protecting Assets from Lawsuits and Creditors: Part 2

Also, read one of our previous Blogs at:

Do You Need An Asset Protection Plan?

Click here to check out our On Demand Video about Estate Planning.

Click here for a short informative video from our own Attorney Bill O’Leary.

Life Insurance and taxes

How to Avoid Taxation on Life Insurance Proceeds

How to Avoid Taxation on Life Insurance Proceeds

By BRIAN BEERSUpdated December 12, 2021

Reviewed by

Here, we show you some ways to reduce the taxes on your estate and ensure that your heirs will benefit from it as much as possible.

One of the benefits of owning lifee insurance is the ability to generate a large sum of money payable to your heirs upon your death. An even greater advantage is the federal income-tax-free benefit that life insurance proceeds receive when they are paid to your beneficiary. However, while the proceeds are income-tax-free, they may still be included as part of your taxable estate for estate tax purposes.

Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life are included in your gross estate if the proceeds are payable: (1) to your estate, either directly or indirectly, or (2) to named beneficiaries if you possessed any incidents of ownership in the policy at the time of your death.1

Using an Ownership Transfer to Avoid Taxation

For those estates that will owe taxes, whether life insurance proceeds are included as part of the taxable estate depends on the ownership of the policy at the time of the insured’s death. If you want your life insurance proceeds to avoid federal taxation, you’ll need to transfer ownership of your policy to another person or entity.

Here are a few guidelines to remember when considering an ownership transfer:

  1. Choose a competent adult/entity to be the new owner (it may be the policy beneficiary), then call your insurance company for the proper assignment, or transfer of ownership, forms.
  2. New owners must pay the premiums on the policy. However, you can gift up to $15,000 per person in 2021 ($16,000 for 2022), so the recipient could use some of this gift to pay premiums.4
  3. You will give up all rights to make changes to this policy in the future. However, if a child, family member, or friend is named the new owner, changes can be made by the new owner at your request.
  4. Because ownership transfer is an irrevocable event, beware of divorce situations when planning to name the new owner.
  5. Obtain written confirmation from your life insurance company as proof of the ownership change.

Using Life Insurance Trusts to Avoid Taxation

A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust (ILIT). To complete an ownership transfer, you cannot be the trustee of the trust and you may not retain any rights to revoke the trust. In this case, the policy is held in trust and you will no longer be considered the owner. Therefore, the proceeds are not included as part of your estate.

Why choose trust ownership rather than transferring ownership to another person? One reason might be that you still wish to maintain some legal control over the policy. Or perhaps you are afraid that an individual owner may fail to pay premiums, whereas in the trust you can ensure that all premiums are paid promptly.

If the beneficiaries of the proceeds are minor children from a previous marriage, an ILIT will allow you to name a trusted family member as trustee to handle the money for the children under the terms of the trust document.

Regulations on Life Insurance Policy Ownership

The IRS has developed rules that help to determine who owns a life insurance policy when an insured person dies. The primary regulation overseeing proper ownership is known in the financial world as the three-year rule, which states that any gifts of life insurance policies made within three years of death are still subject to federal estate tax.5

This applies to both a transfer of ownership to another individual and the establishment of an ILIT. So, if you die within three years of the transfer, the full amount of the proceeds is included in your estate as though you still owned the policy.5

The IRS will also look for any incidents of ownership by the person who transfers the policy. In transferring the policy, the original owner must forfeit any legal rights to change beneficiaries, borrow against the policy, surrender or cancel the policy, or select beneficiary payment options.

Furthermore, the original owner must not pay the premiums to keep the policy in force. These actions are considered to be a part of the ownership of the assets and if any of them are carried out, they can negate the tax advantage of transferring them.

However, even if a policy transfer meets all of the requirements, some of the transferred assets may still be subject to taxation. If the policy’s current cash value exceeds the $15,000 gift tax exclusion for 2021 ($16,000 for 2022), gift taxes will be assessed and will be due at the time of the original policyholder’s death.6

The Bottom Line

It’s not uncommon for individuals to be insured under a life insurance policy for $500,000 to several million in death benefits. Once you add in the value of your home, your retirement accounts, savings, and other belongings, you may be surprised by the size of your estate. If you factor in more years of growth, some individuals may be facing an estate tax issue.

A viable solution to this is to maximize your gifting potential and to transfer policy ownership whenever possible at little or no gift-tax cost. As long as you live another three years after the transfer, your estate could save a significant amount of tax.

Read more related articles here:

Are Life Insurance Proceeds Taxable? Cases in Which Life Insurance is Taxed

Myth: Life Insurance is NOT Taxable

Also, Read one of our previous blogs here:

Is Life Insurance Taxable?

Click here to check out our On Demand Video about Estate Planning.

 

Medicaid Benefits

Showing Transfers Were for Purposes Other Than to Qualify for Medicaid Benefits

Showing Transfers Were for Purposes Other Than to Qualify for Medicaid Benefits

When someone needs long-term care and applies for Medicaid benefits, there is a look-back period. The Medicaid agency will look back a number of months immediately preceding the otherwise eligible date, which is usually when the applicant is institutionalized and has submitted a Medicaid application. For California, the look-back period is thirty months; for all other states, the look-back period is sixty months.

If the applicant made transfers for less than fair market value during the look-back period, then the assumption is that the transfers were made in order to qualify for Medicaid services by getting the applicant’s resources down to the pertinent individual resource allowance. Then, the applicant would be assessed a penalty period, where they would not be eligible for benefits for a certain period of time. However, the applicant can rebut this assumption by showing the assets were transferred for some other purpose than to qualify for Medicaid long-term care services. One way the applicant can try and rebut the assumption is to show that they were not sick and in need of care when the transfers were made, thus they were not contemplating Medicaid eligibility. Another way would be to show a habit of gifting before Medicaid was needed.

In a recent case, Victoria had made various transfers to her children before she was diagnosed with Parkinson’s Disease in 2016 and needed care in 2018. After being assessed penalties for all the transfers, the first step in her case to rebut the assumption was to show that she was not ill before the 2016 diagnosis. Victoria presented medical documentation and testimonial evidence. The state tried to argue that Victoria’s dementia symptoms began in the years before 2016. However, the court was unmoved by that argument, stating “The fact that a future need for nursing home care may be foreseeable for a person of advanced age with chronic medical conditions is not dispositive of the question whether a transfer by such a person was made for the purpose of qualifying for such assistance.” (Matter of Collins v Zucker, 144 AD3d 1441, 1444 [3d Dept 2016])

The court next looked at each transfer to determine whether it was made in contemplation of Medicaid eligibility or not. Victoria had a long history of giving her daughter money. The court found that transfers to the daughter before the Parkinson’s diagnosis were not made in order to qualify for Medicaid benefits. This is because Victoria had a “consistent pattern of gift-giving to her daughter, were made at a time when petitioner was financially solvent and were made before the sudden deterioration of her health.”

Victoria had also made a transfer of $10,000 in 2014 to one of her sons. He had borrowed the money from Victoria in order to purchase a car. The court found that this transfer should not be penalized because a note was executed and it complied with Medicaid rules. “Assets conveyed through a note or a mortgage during the look-back period are considered to be transfers for full market value when the underlying loan is actuarially sound based upon the lender’s life expectancy, provides for equal payments throughout the life of the loan—with no deferrals or balloon payments—and includes a provision prohibiting cancellation upon the lender’s death.” (Social Services Law § 366(5)(e)(3)(iii); and 42 USC § 1396p(c)(1)(I)) However, the son failed to make payments on the note after the 2016 Parkinson’s Disease diagnosis. The court ruled that the remaining balance was forgiven by a motivation to qualify for Medicaid, so that amount of the transfer was penalized.

A second son was loaned $150,000 to start up a yogurt business. However, the business failed. The son executed an asset sale agreement where Victoria’s husband received about $55,000 from equipment sale. Since the business had no other assets, there was no way to seek repayment for the remainder of the loan. The court ruled that the loan document complied with Medicaid rules and laws. Also, the loan was made long before her medical diagnosis, so this transfer was not penalized.

Another loan was made to both sons. The court did conclude that this transfer would be penalized as it was made after her diagnosis and the loan terms did not comply with Medicaid laws. Namely, the note called for balloon payments.

 

Read more related articles at:

Proving That a Transfer Was Not Made in Order to Qualify for Medicaid

SSA Policy — Effect On Medicaid

Also, read one of our previous Blogs at:

WHAT IS MEDICAID’S 5 YEAR LOOK BACK, AND HOW CAN IT AFFECT ME?

Click here to check out our On Demand Video about Estate Planning.

Elder Law

Elder Law Can Be Scary, But It Doesn’t Have To Be!

Elder Law Can Be Scary, But It Doesn’t Have To Be!

Aging is something we all must go through. As our bodies and minds decline, so do our decision-making powers. Unfortunately, some of us can become incapacitated and no longer be able to make decisions for ourselves. This is a difficult situation for both us, and our loved ones. There may come a time when you need an Elder Law Attorney.

Elder law is another aspect of estate planning, focusing primarily on the needs of families and individuals as they age. Issues of aging include senior housing and home care, long-term (or nursing home) care, guardianships and health care documents, Medicare, and Medicaid.

Planning to protect your nest egg for when, not if, a long-term care event strikes your family may make all the difference in the world when it comes to your ability to leave a Legacy. With a dedicated team and trusted legal counsel, Legacy Planning Law Group knows that the best way to help our clients is to understand their planning needs.

Click here for more information from our website about Elder Law:

https://www.legacyplanninglawgroup.com/elder-law/

Here is also an article that explains elder Law in detail:

What Is Elder Law?

We are here to help you with all your Elder Law needs. We are compassionate, understanding, and empathetic to your needs because we know what it is like to go through this process.

If you are in need of an Elder Law Attorney, or if you are ready to plan for your future, we would love the opportunity to help.

Call us at 904-880-5554 or Book a call here:

https://www.legacyplanninglawgroup.com/book-a-call/

Where you can choose a day and time that is convenient for you.

Also, read one of our previous blogs here:

5 SMART TIPS FOR HIRING AN ELDER LAW ATTORNEY

Don’t wait until it is too late, and it is harder for your loved ones to now give you the loving care you gave them.

Be proactive, plan ahead. Aging is inevitable, why not do it intelligently and gracefully.

 

Unfunded trust

The Dangers of Not Funding a Trust, could be the Trick to your Treat!

The Dangers of Not Funding a Trust, could be the Trick to your Treat!

 A failure to fund a trust can result in costly probate proceedings or worse—a transfer of your estate to the wrong beneficiaries. Rather than undermining the very purposes of the trust by failing to fund, individuals should take concrete steps in order to ensure complete trust funding.

A Trust is a very uniquely personalized set of documents. A good Trust outlines your wishes and your needs, it also aligns your assets into your Trust, hence funding. Here at Legacy Planning Law Group, we specialize in Trusts. Our Attorney Bill O’Leary has been practicing Estate Planning Law for over 20 years.

We know the importance of aligning assets into your Trust. Most of our Trust Plan’s come with Asset Alignment absolutely free. We have an Asset Alignment Coordinator: Courtney Roka, dedicated to Asset Alignment. She works with you to align your assets into your trust so that you have peace of mind. We call this our” Done with You” program. When choosing to obtain a Trust making sure it is properly funded is crucial.

In a lot of instances our individualized Asset Alignment program is what sets us apart from other Estate Planning Law Firms.

So, don’t get tricked by choosing a Trust without an asset alignment or funding plan included.

Call us today at 904-880-5554

Visit our Website at:

https://www.legacyplanninglawgroup.com/

To learn more about us.

You can even Book a Call which allows you to pick the day and time that is most convenient for you!

Click here:

https://www.legacyplanninglawgroup.com/book-a-call/

When you create a Trust with Legacy Planning Law Group it’s a real Treat!

Read more related articles here:

Creating a Trust is the first step, but what if the fund isn’t funded?

What does it mean to fund a Trust?

What happens to assets left out of your Trust?

Also, Read one of our previous blogs at:

An Unfunded Trust is a Useless Trust.

Click here to check out our On Demand Video about Estate Planning.

 

 

 

 

medicaid trust

How Medicaid Planning Trusts Protect Assets and Homes from Estate Recovery

How Medicaid Planning Trusts Protect Assets and Homes from Estate Recovery

Last updated: January 04, 2021

What are Medicaid Asset Protection Trusts (MAPT)?

Medicaid Asset Protection Trusts (MAPT) can be a valuable planning strategy to meet Medicaid’s asset limit when an applicant has excess assets. Simply stated, these trusts protect a Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant. MAPTs also protect assets for one’s children and other relatives, which is a win-win for Medicaid applicants and their families. Medicaid Asset Protection Trusts are also referred to as Medicaid Planning Trusts, Medicaid Trusts, or less formally, Home Protection Trusts.

It is important to understand that there are many different types of trusts and not all of them are Medicaid compliant. For instance, family trusts, commonly called revocable living trusts, are different from MAPTs. Generally, family trusts are not adequate in protecting money and assets from Medicaid because the language of the trust makes it revocable (meaning the trust can be cancelled or altered) or allows for money in the trust to be used for the Medicaid applicant’s long-term care costs. Therefore, assets in this type of trust would have to be “spent down” to meet Medicaid’s asset limit in order for one to qualify for Medicaid.

This page is about Medicaid Asset Protection Trusts. There are several other types of trusts that are relevant to Medicaid eligibility, but will not be covered in this article. Irrevocable funeral trusts, also known as burial trusts, are used to protect small amounts of assets specifically for funeral and burial costs. There are also qualifying income trusts (or qualified income trusts, abbreviated as QITs). This is important to mention because one might find it easy to confuse MAPTs and QITs. While MAPTs protect one’s assets and allow one to meet the asset limit, QITs (also called Miller Trusts) allow one who is over the income limit to become income eligible for Medicaid purposes. Unfortunately, not all states allow QITs.

Did You Know? If you transfer your home to a Medicaid asset protection trust, you can reserve the right to live there for as long as you live.

Why Are Medicaid Asset Protection Trusts Important?

While each state runs its Medicaid program within federally set guidelines, there is “wiggle” room for each state to set its own rules within those larger guidelines. Generally speaking, the asset limit for eligibility purposes for an elderly individual applying for long-term care Medicaid is $2,000. However, this asset limit can be lower or higher depending on the state in which one resides. (For state specific asset limits, click here). While some higher value assets are usually considered exempt (uncountable), such as one’s primary residence, a vehicle, and wedding rings, too often applicants are still over the asset limit but still cannot afford their cost of care. Therefore, any assets that exceed the asset limit need to be “spent down” or a planning strategy, such as a Medicaid Asset Protection Trust, needs to be put into place to help the applicant qualify for the care they require. One can determine how much of their assets must be spent down to become Medicaid eligible using our Calculator.

How Do Medicaid Asset Protection Trusts Work?

To get a better grasp of Medicaid asset protection trusts, it’s important to understand the terminology associated with them. First, there is the individual who creates the MAPT. This person may be referred to by a number of names, including grantor, trustmaker, and settlor. The trustee is the manager of the trust and controls the assets in the trust. While neither trustmakers nor their spouses can be trustees, adult children and other relatives can be named as trustees. They must adhere to the rules set forth by the trust, which are very specific as to how the money can be used. For instance, there should be a strict prohibition of using trust funds on the trustee. There is also a beneficiary or beneficiaries, who is / are the person(s) who benefits from the trust after the trustmaker passes away. In order for the trust to be Medicaid exempt, the principal beneficiary must be someone other than the trustmaker. This is because if the trustmaker were also the beneficiary, he or she would have access to the assets, and Medicaid would consider them available to pay for his or her care and supports.

In addition, the trust must be irrevocable in order to be exempt from Medicaid’s asset limit. This means that the trust cannot be cancelled or changed. Once the assets are transferred into the trust, they no longer belong to the trustmaker, nor can the trustmaker regain ownership of them. If the assets are in a revocable (can be changed or terminated) trust, Medicaid considers the assets to still be owned by the Medicaid applicant. This is because the person who created the trust still has control over the assets held in the trust. Therefore, the assets are counted towards Medicaid’s asset limit.

   MAPTs cannot be used to shelter or reduce assets if the applicant is immediately applying for Medicaid.

Planning well in advance of needing long-term care Medicaid is the best course of action when considering a Medicaid Asset Protection Trust. This type of trust is not suitable for persons who need Medicaid immediately or within a short period of time. This is because MAPTs are a violation of Medicaid’s look back period if not set up prior to 5 years (2.5 years in California) before one applies for Medicaid. That said, there are other planning strategies for those who need Medicaid currently or in the near future.

Benefits of a Medicaid Asset Protection Trust

The assets in a Medicaid asset protection trust not only allow one to meet Medicaid’s asset limit without “spending down” assets, but the assets are also protected for the beneficiaries listed by the trustee. This means the assets are safe from Medicaid estate recovery. In simplified terms, when a Medicaid recipient passes away, the state in which the individual lived and received Medicaid benefits, attempts to collect reimbursement for which it paid for long-term care. This is done via the deceased’s estate. However, if one’s home and other assets are in a MAPT, the state cannot come after those assets. Learn more about Medicaid estate recovery.

Shortcomings of a Medicaid Asset Protection Trust

Planning well in advance of the need for Medicaid, if at all possible, is the best course of action. Medicaid asset protection trusts are ideal for persons who are healthy and don’t foresee needing Medicaid in the near future. This is because MAPTs violate Medicaid’s look back period. This is a period of 60-months in all states, with the exception of California, which only looks back 30-months. (New York is in the process of implementing a 30-month look back period for long-term home and community based services). During the look back period, Medicaid checks to ensure no assets were sold or given away for less than they are worth in order for one to meet the asset eligibility limit. For Medicaid purposes, the transfer of assets to a Medicaid asset protection trust is seen as a gift. Therefore, it violates the look back rule. This can result in a period of Medicaid ineligibility. Therefore, a MAPT should be created with the idea that Medicaid will not be needed for a minimum of 2.5 years in California and 5 years in the rest of the states.

In addition, once the assets have been transferred to a MAPT, the trustee no longer has control or access to them. They no longer are considered owned by the individual.

Given the fairly expensive fees associated with the creation of a Medicaid Asset Protection Trust ($2,000 – $12,000), they are typically not used for assets less than $100,000. Should a family need to reduce one’s assets to qualify for Medicaid in amounts less than $100,000 there are other approaches.

Gifting Assets vs. Creating a Medicaid Asset Protection Trust

While there is more flexibility with gifting assets and it does not require any legal work, it also violates Medicaid’s look back rule. As previously mentioned, this results in a period of Medicaid ineligibility as a penalty. Therefore, like with MAPTS, gifting should occur 5 years (2.5 years in California) in advance of the need for Medicaid. In addition, capital gains taxes are a common concern with gifting.

What Type of Assets can go in an Asset Protection Trust?

A number of different types of assets can be put into a Medicaid Asset Protection Trust, including one’s home. When a trustee places his or her home in a MAPT, he or she can continue to live in the home. In fact, it is even possible to sell the home and for the trust to buy another one. However, there is one exception to this rule. In Michigan, a home is considered a countable asset when placed in a MAPT. Stated differently, the home is non-exempt and is counted towards Medicaid’s asset limit.

Other assets that are placed in MAPTS include real estate other than one’s primary home, checking and savings accounts, stocks and bonds, mutual funds, and CDs. In most cases, transferring retirement accounts (401k’s and IRAs) is not recommended due to tax implications with cashing out the plans and transferring them to a MAPT.

If assets that produce income are placed in the trust, the trustmaker is able to collect the income. Said differently, the principal is protected by the trust and the trustmaker receives the income produced by the principal. However, Medicaid also has income limits, so it’s important that this income does not cause one to have income over the limit. As of 2021, most states have an income limit of $2,382 / month for a single senior applying for long-term care. (To see income requirements in the state in which one resides, click here). In the situation where a Medicaid applicant is in a nursing home, income produced by the principal generally goes to the nursing home to help pay the cost of care.

How Do Medicaid Asset Protection Trust Rules Change by State?

Medicaid Asset Protection Trust rules are not only complicated and tend to change frequently, they also differ based on the state in which one resides. As mentioned above, Michigan considers a home in a trust, even if it is irrevocable, a countable asset. California Medicaid (Medi-Cal), on the other hand, has very lax rules in regards to transferring a home to a trust. In CA, a home, even in a revocable trust, is exempt from Medicaid’s asset limit and is safe from estate recovery. This is very unusual. In most circumstances, revocable trusts do not keep assets safe from Medicaid’s asset limit and estate recovery. In addition, in CA, the state can only seek reimbursement of long-term care costs from those assets that go through probate (a legal process where a deceased person’s assets are distributed). If assets have been transferred to a revocable living trust, it is safe from estate recovery. This means it will avoid probate and estate recovery and the need for MAPTs are not as great in the state of CA as in other states.

Wisconsin also stands apart from the other states. In WI, trusts that are irrevocable can generally be altered or cancelled if all parties (trustmaker, trustee, and beneficiaries) are in agreement.

Is an Attorney Needed to Set up a Medicaid Asset Protection Trust?

It is imperative that a Medicaid Asset Protection Trust be set up correctly in order to ensure the assets transferred into the trust are exempt from Medicaid’s asset limit. As previously mentioned, the rules change frequently, as well as vary by state. This makes it important to have the trust created by someone who is familiar with the MAPT laws in one’s specific state. Also, remember that this type of trust needs to be created well in advance of the need for Medicaid, so as to not violate Medicaid’s look back rule. Incorrectly setting up a MAPT can inadvertently cause one to be ineligible for Medicaid, defeating the purpose of creating one. Therefore, an attorney should be used to set up a Medicaid Asset Protection Trust. Private Medicaid Planners often work with attorneys to keep costs low for their clients.

How Much Does it Cost to Create a Medicaid Asset Protection Trust?

The cost of creating a Medicaid Asset Protection Trust varies significantly from a low of $2,000 to a high of $12,000. While the price might seem high, in reality, a MAPT ends up saving persons money in the long run. This is because the nationwide average cost of nursing home care is over $7,750 / month, and a MAPT prevents one from having to pay out of pocket for nursing home expenses (and other long-term care costs).

When considering the cost, there are a lot of variables. First, some attorneys don’t strictly do MAPTS. Rather they do a package of sorts. This may include a pour-over will, powers of attorney, advance health care directive (living will), and HIPAA medical information releases, in addition to the MAPT. Cost can be impacted by if the client is single or married, the assets being transferred into the trust, and if a crisis plan is needed. In addition, price varies by geographic location, with the price in urban areas generally costlier than in rural areas. The experience of the attorney can also impact the cost.

Alternatives to a Medicaid Asset Protection Trust

In addition to Medicaid asset protection trusts, there are other planning strategies to help lower one’s countable assets. These may include funeral trusts and annuities. In addition, there are also strategies to help lower one’s income to become eligible for Medicaid.

Read more related articles here:

How to Use a Trust in Medicaid Planning

Benefit or Backfire: Navigating the Irrevocable Medicaid Trust

Also, read one of our previous Blogs at:

WHAT IS MEDICAID’S 5 YEAR LOOK BACK, AND HOW CAN IT AFFECT ME?

Click here to check out our On Demand Video about Estate Planning.

EP and EL

Elder Law Versus Estate Planning: Not So Different After All

Elder Law Versus Estate Planning: Not So Different After All

How different is elder law from estate planning, really? Estate planning, in part, deals with helping clients plan for disability, minimize taxes at their death, and to help their estate pass to their desired beneficiaries under conditions set by the client. Estate planning can also involve asset protection, retirement planning, and business succession planning.

Elder law involves many of the same issues, but for an aging population. As we age, our needs change – both health and legal needs. For example, in elder law, attorneys often help clients plan for the possibility of needing long-term care and how to pay for it without depleting all of their savings. Elder law can also involve helping clients already receiving long-term care. Helping people with disabilities is also an important area of elder law, as is assisting wartime Veterans in obtaining care-related benefits.

What is estate planning?

Estate planning is a proactive task. It is all about preparing for the inevitable – death. Proper estate plans establish the who, what, and when of what happens to a client’s property after the client’s death. The plan provides a roadmap for families to follow when they can no longer look to the client for guidance.

A client will express his or her desires concerning the distribution of their property after their death, and the attorney will know the best strategies to obtain the desired outcome. This could include drafting one of the following for a client: last will and testament, revocable living trust, irrevocable trust, special needs trust, pour-over will, business formation documents, and documents to transfer assets.

Without a recognized estate plan, the court decides how to distribute the decedent’s property. The results can be devastating to families that have discussed informal arrangements that were not properly established through appropriate planning. Planning for where the client’s money goes, who will care for their children, what happens if they become disabled, whether trusts are in order, and avoiding probate are all important focal points for the estate planning attorney.

Estate planning is an ongoing task. Estate plans should be updated whenever the client experiences noteworthy life changes. Acquiring a rental house, selling an existing home, buying stocks, new children or grandchildren, marriage or divorce are all significant reasons for the estate planning lawyer to recommend revisiting the existing plan.

The estate planning lawyer’s purpose is to minimize estate taxes through trusts, establish caretakers for children, name executors, and identify beneficiaries for IRA’s, life insurance, and other financial assets. Plans also include funeral arrangements, charitable contributions, and personal property distributions. These lawyers commonly create wills and trusts to manage the needs of their clients.

An estate planning attorney will likely draft a durable power of attorney and medical power of attorney for their clients, as a part of their estate plan. These documents give a named person the authority to make medical or financial decisions for the client, should the client become incapacitated. Without these documents in place, a client’s family would have to file a lawsuit against the client in order for a judge to give someone the authority to make these decisions. Finally, an estate planning attorney will likely draft a living will or medical directive for each client. This document states the client’s wishes regarding life support and other medical care in the event the client is incapacitated or otherwise unable to state their wishes.

What is elder law?

Where estate plans lay the groundwork for a client’s desires for their family and their assets after their death, an elder law attorney focuses on the many needs of the senior population. This often includes focusing on preserving assets and obtaining medical care while the client is elderly or incapacitated.

Planning for long-term care, whether in advance of the need for it or when the need arises, is a difficult road to navigate. Qualifying for Medicaid or Veteran’s benefits can be a confusing and strategic process, especially when a client has assets in their name. An elder law attorney can advise a client how to protect these assets in the best manner while qualifying the client for medical benefits as soon as possible. Many elder law attorneys are experts at Medicaid planning for long-term care. Although Medicaid is a federal program, states vary on qualification criteria. An elder law attorney can help a client preserve assets, fill out and submit the Medicaid application, handle any Medicaid hearings or appeals, talk with Medicaid or nursing home employees, and ensure the client continues to qualify for Medicaid.

If an elderly client becomes incapacitated, planning is needed to protect their assets and obtain the necessary medical care. Hopefully the client had the proper estate planning in place and has written documentation of their wishes in the event of incapacitation. Then, the elder law attorney will help the client’s family carry out those wishes in the best manner possible. Does the client require a special needs trust? A conservatorship? How are they going to pay for their medical care? Do they have the proper support network in place to provide trusted and competent care? These are some questions an elder law attorney can help their clients answer.

An elder law attorney will also advise clients on senior rights, age discrimination, elder abuse, and other issues that impact the senior community. Seniors can be targets for crime and discrimination and some will need an elder law attorney to help battle these issues. Many states are recognizing the wide-spread and growing problem of elder abuse and are starting initiatives, such as crime units, to aid seniors in their struggle against crime and abuse. An elder law attorney can assist their senior client in recognizing abuse and crime, reporting it, and making sure their rights are protected.

Expanding Into the Elder Law Realm

Estate planning attorneys write the blueprints for a future event, the passing of his or her client, and help that client protect his or her assets along the way. Elder law attorneys help seniors navigate their changing needs as they age. Many lawyers find that these areas of law often overlap, both in skill and clientele. Because of this, many estate planning attorneys find it useful and beneficial to also offer elder law services. Their existing client-base likely needs elder law services now or in the future. Why not offer more services to existing clientele, with whom the attorney already has a good rapport? It would be advantageous to both the attorney and the client if these additional services were available. Attorneys could increase their workload while the client can stay with the same trusted attorney over their lifespan, as their needs change.

Skills used in estate planning can also be useful in elder law. For example, seniors will need to make sure they have their disability documents in place and have a plan for their assets after they pass. Seniors will have some of the same goals that a traditional estate planning client might have. An estate planning attorney can cross these estate planning skills over into a new area of law, elder law, pathing the way for additional revenue while offering a more comprehensive set of services.

In Sum

For an estate planning attorney, it would be a practical choice to expand their practice to include specialization in elder law areas. Estate planning clients will develop elder law needs at some point during their lifetime. Why not be ready to satisfy them? Even younger clients can succumb to illness or disability and the skills used in elder law could be helpful for their needs. Estate planning attorneys often find it easy to expand on their skills to include elder law, since there are similarities and overlapping between the two. Expanding to include elder law in an attorney’s practice can mean the difference between getting that additional business or the client being referred to someone else that does.

Read more related articles at: 

The Difference Between Elder Law and Estate Planning Attorneys

Do You or a Family Member Need to Hire an Elder Law Attorney?

Do you need an estate plan?

Also, read some of our previous Blogs here:

When Do I Need an Elder Law Attorney?

How Do I Find a Great Estate Planning Attorney?

Click here to check out our On Demand Video about Estate Planning.

GRAT and Estate Taxes

 Case Law: Grantor-retained Annuity Trust and Estate Taxes

Case Law: Grantor-retained Annuity Trust and Estate Taxes

In Badgley v. United States, the 9th Circuit upheld summary judgment in favor of the IRS in a case regarding the legality of including the entire Grantor-retained Annuity Trust (GRAT) value in a decedent’s estate for purposes of the estate tax under 26 U.S.C. § 2036(a)(1).

A GRAT is an irrevocable trust that meets the requirements of 26 U.S. Code § 2702. A GRAT is usually used to transfer appreciating assets to the next generation with minimal taxes due. When property is transferred to the GRAT, then such property is subject to gift taxes on the present value of the GRAT’s remainder interest, in accordance with 26 U.S. Code § 7520. A reduction in the gift value of trust property is permitted if the Grantor retains an annuity interest in the trust. However, if the beneficiary is a family member, then the annuity interest must be a qualified interest under §2702. Trust property can be transferred to the beneficiary without gift tax implications by modifying the trust term and annuity amount in a way as to zero out any remainder. But what about estate taxes if the Grantor dies during the annuity payout period?

In this case, the decedent created a GRAT to transfer her partnership interest in a family-run company to her daughters, while retaining a right to an annuity paid from it for 15 years. The decedent died before the end of the 15-year period, and the estate tax return included the GRAT’s assets as part of the gross total estate. The executor of the estate filed a tax refund action, arguing that the inclusion of the entire date-of-death value of the GRAT led to an overpayment and that only the net present value of the unpaid annuity payments should have been included. The district court held that the decedent’s annuity interest was both a right to income from and continued enjoyment of the property, and that thus the entire date-of-death value of the GRAT should be included in the gross estate.

The court here agreed and ruled that the IRS properly included the entire date-of-death value of the GRAT in the gross estate. The court stated “At the most colloquial level, § 2036(a) stands for the proposition that if the taxpayer does not let property go, neither will the taxman.” While 26 U.S.C. § 2036(a)(1) does not expressly mention annuities, in that section Congress established three ways of tying a grantor to property, a string, that would require the possessor to include the property interest in the grantor’s gross estate for estate tax purposes: possession, enjoyment, or a right to income therefrom. The form of that string is not what matters – just that the string exists from one type of property to the Grantor.

In addition, the court ruled that the annuity from a GRAT should be treated as a substitute for wills under § 2036(a), because the grantor did not fail to completely divest herself of possession, enjoyment, and income from the property, and the beneficiaries’ interest did not take effect prior to the grantor’s death. Here, the grantor derived substantial present economic benefit from the property, meaning she retained enjoyment of the property for the purposes of § 2036(a)(1).

The executor argues that the right to income string means a distinction should be made whether the Grantor had a right to trust income or trust principal. The court here was not convinced, saying that the analysis depends on substance rather than formalities. The court declined to speculate about which part of the of trust property the annuity was drawn from. The business interest was the only property funded into the GRAT, and so the annuity stemmed from that property interest. The Grantor “died before the termination of the GRAT, the property was not transferred to its beneficiaries before her death—and remained tied to her by the string she created.”

Because the grantor retained strings to the property used to fund the GRAT, the Court determined that it should be included in the gross estate. Accordingly, the Circuit Court upheld the district court’s grant of summary judgment in favor of the IRS in Badgley v. United States.

ElderCounsel is here to keep you up-to-date on cases throughout the country. Contact us today to learn about all of the benefits of membership. If you’re interested in learning more about estate planning or support and documents for estate planning, visit our partners at wealthcounsel.com.

Read more related articles at:

What Is a GRAT—And What Are Its Benefits for Estate Planning?

Great time for a GRAT

Also, read one of our previous Blogs at:

What is a GRAT and Does Your Family Need One?

Click here to check out our On Demand Video about Estate Planning.

Medicaid Crisis

Medicaid “Crisis” Planning

Medicaid “Crisis” Planning

Medicaid “Crisis” Planning is defined as when an individual is already in a skilled nursing facility or will be entering within a short time-period and needs to qualify for Medicaid benefits immediately. This event may also involve failing to qualify for Medicaid benefits because of either too much income or too many assets, or both.

In the case of a married couple, an applicant may be able to also increase the well spouse’s Community Spouse Resource Allowance or redirect some of the nursing home spouse’s income away from nursing home costs, and back towards the well spouse, using the Minimum Monthly Maintenance Income Allowance.

A large percentage of Florida seniors will require long-term care at some point in their lives.  To be able to pay the enormous expense, most will need to rely on Medicaid for help. Unfortunately, many residents in this state did not take prior steps to ensure they will qualify for the program. In such cases, there are some Medicaid “Crisis” solutions that can be used even at the last minute to help seniors become eligible.

Nursing homes in Florida can cost up to $10,000 per month or more. And typically, Medicare will not pay for it. For most families, this means they need to either qualify for Medicaid or try to come up with the money out of their own pocket

 

Medicaid Crisis Planning Strategies

When a senior has an immediate need for long-term care, the government does not intend for you to transfer your assets one day, enter the nursing home the next day, and apply for Medicaid benefits the following day. Therefore, there is a five-year “look back” period for most asset transfers. If you transfer assets within the “look back” period, you are subject to a penalty.

Fortunately, there are certain types of asset transfers that are exempt from the “look back” period, and thus can be employed as last-minute solutions to qualify for Medicaid. These include assets transferred to:

  • Your spouse (or another person if it is for your spouse’s benefit)
  • A child who is blind or disabled
  • A trust for the benefit of a child who is blind or disabled
  • A trust for the sole benefit of someone who is disabled and under age 65

If the asset you are transferring is your home, there are a few added exemptions in addition to those mentioned above, including transfers to:

  • A child who is under age 21
  • A sibling who has equity in the home and has lived in it at least a year prior to the applicant entering a nursing facility
  • A child who lived in the home at least two years prior to the applicant entering a nursing facility, and who provided care that helped keep the applicant living at home

If any of these situations apply to you, it may be possible to transfer your assets and qualify for Medicaid without penalty.

Qualified Income Trusts

Also known as a Florida Medicaid trust, Miller trust, or d4B trust, a qualified income trust is an irrevocable living trust that is set up to divert excess income and allow the creator to qualify for Medicaid. While the Medicaid recipient is alive, assets in the trust can be accumulated, invested, or spent.

Upon death, any remaining assets in the trust must be paid back to the state up to the total amount the state paid the recipient for long-term care (minus applicable taxes and trust administration fees). While this is a less than ideal scenario, a qualified income trust can help you qualify for Medicaid while giving you control of your assets while you are alive.

Other strategies that can be taken last-minute to help qualify for Medicaid include:

  • “Spend downs” of excess countable assets into exempt assets such as home improvements and automobiles
  • Medicaid pooled trusts in which excess funds are put into a group trust with leftover funds remaining in the trust after you die and being used to help others in the pool
  • Medicaid-compliant annuities that irrevocably convert countable assets into an income stream

There are several other strategies that may be available depending on your situation. A qualified Elder Law Attorney can fully review your needs to determine the best solutions for your specific circumstance.

Read more related articles at:

Florida Medicaid (SMMC-LTC) Income & Assets Limits for Nursing Homes & Long Term Care

Medicaid Eligibility Test / Pre-Screen for Long Term Care

Also, read one of our previous Blogs at:

WHAT IS MEDICAID’S 5 YEAR LOOK BACK, AND HOW CAN IT AFFECT ME?

Click here to check out our On Demand Video about Estate Planning.

 

 

 

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