The Attorney’s Role in Medicaid Planning

Do you need an attorney for even “simple” Medicaid planning? This depends on your situation, but in most cases, the prudent answer would be “yes.”

The social worker at your mother’s nursing home assigned to assist in preparing a Medicaid application for your mother knows a lot about the program, but maybe not the particular rule that applies in your case or the newest changes in the law. In addition, by the time you’re applying for Medicaid, you may have missed out on significant planning opportunities.

The best bet is to consult with a qualified professional who can advise you on the entire situation. At the very least, the price of the consultation should purchase some peace of mind. And what you learn can mean significant financial savings or better care for you or your loved one. This may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.

If you are going to consult with a qualified professional, the sooner the better. If you wait, it may be too late to take some steps available to preserve your assets.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

Watch Out for These Potential Problems with Life Estates

Life estates can be an excellent tool for Medicaid planning, probate avoidance and tax efficiency, but there are potential problems to look out for. Knowing the implications and risks of a life estate is essential in determining whether it is appropriate for your situation.

In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

Life estates are excellent planning techniques in many circumstances. They permit parents to pass ownership in their homes to their children while retaining absolute possession of the property during their lives. By executing a life estate deed, the property avoids probate at the parents’ deaths, is protected from a Medicaid lien, and receives a step-up in tax basis.

However, there are potential issues that may arise with life estates and it’s important to fully understand the following risks:

  • As a life tenant, you may not easily sell or mortgage property with a life estate interest. The remaindermen must all agree if you decide to sell or borrow against the property. One thing that can help is a testamentary power of appointment in the deed. This is a mechanism that permits the life tenants to change who ultimately receives the property by directing its disposition in their wills. It won’t allow the life tenant to sell the property, but it does give the life tenant more bargaining power with the remaindermen. Another option is a nominee realty trust. This type of trust permits one or more children to act as trustee or trustees for all the children, and provides that they must follow the direction of a majority of the beneficiaries. So, if there are four children and one child objects to the sale or mortgage of the property, but the other three are on board, the majority can direct the trustee to sign the papers necessary to facilitate the sale or borrowing.
  • If the property is sold, the remaindermen are entitled to a share of the proceeds equal to what their interest is determined to be at that time.
  • It is not as easy to remove or change a name once it is on a deed to real estate as it is to change the beneficiary on a life insurance policy or bank account.
  • Once a remainderman is named on the deed to your house, he or she has an interest in the home and his or her legal problems could become yours. For example, if your child, who is a remainderman, is sued or owes taxes, a lien could be filed against your home. Your child’s interest in the home is not protected if he or she files for bankruptcy. If your child gets a divorce, his or her spouse could claim all or part of your child’s interest in your home. Should your child die before you do, the child’s estate would have to go through probate unless at least one other remainderman was listed as a joint tenant. However, while these claims may be made against the property, no one can kick you out of it during your life.
  • Giving away an interest in property could disqualify you from receiving assistance from Medicaid, should you require long-term care within five years of the transfer. In addition, if you and the remaindermen were to sell the property while you were in a nursing home, the state could have a claim against your share of the proceeds for payments it has made on your behalf, but the share of the proceeds allocated to your children would be protected.

As with most planning tools, a life estate can be very useful with valuable benefits, but it is not for everyone. In many cases, the potential problems outweigh the benefits. As the law in this area is complex, it’s important to talk to a lawyer who knows about this in-depth.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

Medicare Premiums to Increase Slightly in 2021

Medicare premiums are set to rise a modest amount next year, but still cut into any Social Security gains. The basic monthly premium will increase $3.90, from $144.60 a month to $148.50.

The Centers for Medicare and Medicaid Services (CMS) announced the premium and other Medicare cost increases on November 6, 2020. The hike could have been much worse due to rising costs during the coronavirus pandemic, but the bipartisan budget bill passed in October capped the increase. While the majority of beneficiaries will pay the added amount, a “hold harmless” rule prevents Medicare recipients’ premiums from increasing more than Social Security benefits, which are going up only 1.3 percent in 2021. This “hold harmless” provision does not apply to Medicare beneficiaries who are enrolled in Medicare but who are not yet receiving Social Security, new Medicare beneficiaries, seniors earning more than $88,000 a year, and “dual eligibles” who get both Medicare and Medicaid benefits.

Meanwhile, the Part B deductible will rise from $198 to $203 in 2021, while the Part A deductible will go up by $76, to $1,484. For beneficiaries receiving skilled care in a nursing home, Medicare’s coinsurance for days 21-100 will increase from $176 to $185.50. Medicare coverage ends after day 100.

Here are all the new Medicare payment figures:
•    Part B premium: $148.50 (was $144.60)
•    Part B deductible: $203 (was $198)
•    Part A deductible: $1,484 (was $1,408)
•    Co-payment for hospital stay days 61-90: $371/day (was $352)
•    Co-payment for hospital stay days 91 and beyond: $742/day (was $704)
•    Skilled nursing facility co-payment, days 21-100: $185.50/day (was $176)

So-called “Medigap” policies can cover some of these costs.

Premiums for higher-income beneficiaries ($88,000 and above) are as follows:

  • Individuals with annual incomes between $88,000 and $111,000 and married couples with annual incomes between $176,000 and $222,000 will pay a monthly premium of $207.90.
  • Individuals with annual incomes between $111,000 and $138,000 and married couples with annual incomes between $222,000 and $276,000 will pay a monthly premium of $297.
  • Individuals with annual incomes between $138,000 and $165,000 and married couples with annual incomes between $276,000 and $330,000 will pay a monthly premium of $386.10.
  • Individuals with annual incomes above $165,000 and less than $500,000 and married couples with annual incomes above $330,000 and less than $750,000 will pay a monthly premium of $475.20.
  • Individuals with annual incomes above $500,000 and married couples with annual incomes above $750,000 will pay a monthly premium of $504.90.

Rates differ for beneficiaries who are married but file a separate tax return from their spouse. Those with incomes greater than $88,000 and less than $412,000 will pay a monthly premium of $475.20. Those with incomes greater than $412,000 will pay a monthly premium of $504.90.

The Social Security Administration uses the income reported two years ago to determine a Part B beneficiary’s premium. So the income reported on a beneficiary’s 2019 tax return is used to determine whether the beneficiary must pay a higher monthly Part B premium in 2021. Income is calculated by taking a beneficiary’s adjusted gross income and adding back in some normally excluded income, such as tax-exempt interest, U.S. savings bond interest used to pay tuition, and certain income from foreign sources. This is called modified adjusted gross income (MAGI). If a beneficiary’s MAGI decreased significantly in the past two years, she may request that information from more recent years be used to calculate the premium. You can also request to reverse a surcharge if your income changes.

Those who enroll in Medicare Advantage plans may have different cost-sharing arrangements. CMS estimates that the Medicare Advantage average monthly premium will decrease by 11 percent in 2021, from an average of $23.63 in 2020 to $21 in 2021.

For Medicare’s press release announcing the new premium, co-payment and deductible amounts, click here.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

Annuities and Medicaid Planning

In some circumstances, immediate annuities can be ideal Medicaid planning tools for spouses of nursing home residents. Careful planning is needed to make sure an annuity will work for you or your spouse.

An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life.

In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem.

In order for the annuity purchase not to be considered a transfer, it must meet the following basic requirements:

  1. It must be irrevocable–you cannot have the right to take the funds out of the annuity except through the monthly payments.
  2. You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000).
  3. If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy.
  4. The state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf.

Example: Mrs. Jones, the community spouse, lives in a state where the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $128,640 (in 2020). However, Mrs. Jones has $238,640 in countable assets. She can take the difference of $110,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.

In most instances, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain — a guaranteed number of payments no matter the lifespan of the annuitant — the term must be shorter than the life expectancy of the healthy spouse. Further, if the community spouse does die with guaranteed payments remaining on the annuity, they must be payable to the state for reimbursement up to the amount of the Medicaid paid for either spouse.

All annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility.

Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home. However, in some states immediate annuities may have a place for single individuals who are considering transferring assets. Income from an annuity can be used to help pay for long-term care during the Medicaid penalty period that results from the transfer. In such cases, the annuity is usually short-term, just long enough to cover the penalty period.

In short, immediate annuities are a very powerful tool in the right circumstances. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose. The use of immediate annuities as a Medicaid planning tool is under attack in some states, so be sure to consult with a your attorney before pursuing the strategy described above.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

 

Special Tax Deduction for 2020 Allows Donations of $300 to Charity Without Itemizing

As we enter the giving season, there is an additional reason to be charitable. Congress enacted a special provision that allows more people to easily deduct up to $300 in donations to qualifying charities this year.

Since the increase in the standard income tax deduction in 2018, only 11 percent of taxpayers itemize deductions, so fewer taxpayers take advantage of the charitable deduction. But to both encourage and reward giving in this difficult year, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act Congress created a one-time $300 charitable deduction for people who do not itemize on their tax returns. To qualify, you must give cash (including paying by check or credit card) to a 501(c)(3) charity. Gifts of goods or stock do not qualify.

While $300 may not seem like much, it can make a big difference to smaller charities. And a lot of $300 gifts can add up.  One thing that’s not clear is whether a married couple filing jointly can deduct $600. While it’s logical that they should be able to do so, the IRS has not clarified this yet. With just four weeks left in the year, time is a-wasting.

Here are some places you might take a look at to determine which charity you would like to support before the end of the year:

For more information from the IRS about the tax deduction, click here.

Or, contact Amy Stratton or Kristen Prull Moonan.

Don’t Forget to Fund Your Revocable Trust

Revocable trusts are a very popular and useful estate planning tool. But the trust will be ineffective if you do not actually place your assets in the trust.

Revocable trusts are an effective way to avoid probate and provide for asset management in the event of incapacity. In addition, revocable trusts — sometimes called “living” trusts — are incredibly flexible and can achieve many other goals, including tax, long-term care, and asset-protection planning.

However, you can’t take advantage of what the trust has to offer if you don’t place your assets into it. If you don’t fund the trust, your assets may have to go through a costly probate proceeding or be distributed to beneficiaries you did not intend. Not funding your trust can undermine your whole estate plan.

To transfer assets to the trust, whether real estate, bank accounts, or investment accounts, you need to retitle the assets in the name of the trust. To place bank and investment accounts into your trust, you need to retitle them as follows: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].” Depending on the institution, you might be able to change the name on an existing account. Otherwise you will need to open a new account in the name of the trust and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as signatures of all the trustees. As long as you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income and the trust will pay no separate tax.

If you are placing real estate into the trust, you should consult with your attorney to ensure it is done correctly. You should also consult with your attorney before placing life insurance or annuities into a revocable trust. And consult with your attorney before naming the trust as the beneficiary of your IRAs or 401(k) because that could have tax consequence.

Once your trust is fully funded, don’t forget about it. When you acquire new assets, do not forget to add them to the trust. You should review your trust annually to make sure everything is titled properly.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

 

The Hazards of Do-it-Yourself Estate Planning

Many websites offer customized, do-it-yourself wills and other estate planning documents.  Although such products are convenient, using them could create serious and expensive legal problems for heirs.

These digital services appear to offer a cost-effective and easy alternative to visiting an estate planning or elder law attorney. But is online estate planning worth the convenience and initial savings? While online services might work fine if you have little or no property, small savings or investments, and a traditional family tree, anyone whose needs are not simple should not try to create an estate plan without the help of an attorney.

And you’ll likely need a lawyer to definitively determine whether or not your needs are indeed simple. Do you have an estate that is taxable under state or federal law? Do you own significant amounts of tax-deferred retirement plans? Do you know how to fund a revocable trust? Is there anything about your estate that is unusual, such as having children from a previous marriage or a disabled child? If you have any questions about your estate plan, you need to see a professional.

The following are some examples of what can happen if you try to create an estate plan without the help of an attorney:

  • Using an online generic will, a Florida woman listed several possessions and bank accounts that she intended to go to her brother. After writing the will, the woman inherited additional money and property. However, the woman did not have a “residuary clause” in the original will to say where additional assets should go, and she never revised the will to account for this new property. After she died, her brother argued he should be entitled to her entire estate, but her nieces argued the estate should pass intestate (under the laws of her state as if she had died without a will). The court ruled that because the will had no residuary clause or general bequests that could include the inherited property, the after-acquired property would pass under Florida’s laws of intestacy. This meant the brother was not the sole beneficiary. Aldrich v. Basile (Fla., No. SC11-2147, March 27, 2014)
  • A Massachusetts man used a pre-packaged will form to leave his home to his wife and his four grown children, the product of an earlier marriage. The problem was that the will didn’t give the wife the option to remain in the house for the rest of her life.  A court case ensued because the children, who possessed the majority interest in the property, could have legally forced the wife to move.
  • A Pennsylvania man wanted his estate to go to only two of his five children. He wrote his own will, giving his pickup truck to his daughter and his summer house to his son. He also wrote in the will that he was intentionally leaving out his other three children. The problem was that the man did not specify what to do with the remainder of his estate. He died leaving an estate of $217,000. While he probably intended for that money to go to the two children he didn’t disinherit, because the will had no residuary clause, the remainder of the man’s estate passed under the state law that specifies who inherits when there is no will. This meant the estate was divided between all five children. (In Re: Estate of George Zeevering, No. 316-2012, Nov. 7, 2012)
  • The company LegalZoom, one of the most prominent sellers of do-it-yourself wills and other estate planning documents, settled a class action lawsuit brought an unhappy customer in California. A niece helped her uncle prepare a will and trust using LegalZoom. The niece believed that the documents they created would be legally binding and that if they encountered any problems, the company’s customer service department would resolve them. The niece could not transfer any of her uncle’s assets into the trust because the financial institutions that held his money refused to accept the LegalZoom documents as valid. She had to hire an estate planning attorney to fix the problems, and the attorney also discovered that the will LegalZoom created had not been properly witnessed. All this cost the uncle’s estate thousands of dollars. (Webster v. LegalZoom Inc., No. BC438637, Oct. 1, 2014)

The irony is that using a boilerplate will form in these cases not only frustrated the decedents’ testamentary intent, but ultimately cost their estates far more than a simple consultation with an estate planning or elder law attorney would have.

To learn more, contact Amy Stratton or Kristen Prull Moonan.

 

A Modest Social Security Increase for 2021

The Social Security Administration has announced a 1.3 percent rise in benefits in 2021, an increase even smaller than last year’s.

Cost-of-living increases are tied to the consumer price index, and a modest upturn in inflation rates and gas prices means Social Security recipients will get only a slight boost in 2021. The 1.3 percent increase is similar to last year’s 1.6 percent increase, but much smaller than the 2.8 percent rise in 2019. The average monthly benefit of $1,523 in 2020 will go up by $20 a month to $1,543 a month for an individual beneficiary, or $240 yearly.

The cost-of-living change also affects the maximum amount of earnings subject to the Social Security tax, which will grow from $137,700 to $142,800.

For 2021, the monthly federal Supplemental Security Income (SSI) payment standard will be $794 for an individual and $1,191 for a couple.

Some years a small increase means that additional income will be entirely eaten up by higher Medicare Part B premiums. But this year, that shouldn’t be the case. The standard monthly premium for Medicare Part B enrollees is forecast to rise $8.70 a month to $153.30. However, due to the coronavirus pandemic, under the terms of the short-term spending bill the increase for 2021 will be limited to 25 percent of what it would otherwise have been.

Most beneficiaries will be able to find out their specific cost-of-living adjustment online by logging on to my Social Security in December 2020. While you can still receive your increase notice by mail, you have the option to choose whether to receive your notice online instead of on paper.

For more on the 2021 Social Security benefit levels, click here. Or, contact Amy Stratton or Kristen Prull Moonan.

How to Fix a Required Minimum Distribution Mistake

The rules around required minimum distributions from retirement accounts are confusing, and it’s easy to slip up. Fortunately, if you do make a mistake, there are steps you can take to fix the error and possibly avoid a stiff penalty.

If you have a tax-deferred retirement plan such as a traditional IRA or 401(k), you are required to begin taking distributions once you reach a certain age, with the withdrawn money taxed at your then-current tax rate. If you were age 70 1/2 before the end of 2019, you had to begin taking required minimum distributions (RMDs) in April of the year after you turned 70. But if you were not yet 70 1/2 by the end of 2019, you can wait to take RMDs until age 72. If you miss a withdrawal or take less than you were required to, you must pay a 50 percent excise tax on the amount that should have been distributed but was not.

It can be easy to miss a distribution or not withdraw the correct amount. If you make a mistake, the first step is to quickly correct the mistake and take the correct distribution. If you missed more than one distribution – either from multiple years or because you withdrew from several different accounts in the same year — it is better to take each distribution separately and for exactly the amount of the shortfall.

The next step is to file IRS form 5329. If you have more than one missed distribution, you can include them on one form as long as they all occurred in the same year. If you missed distributions in multiple years, you need to file a separate form for each year. And married couples who both miss a distribution need to each file their own forms. The form can be tricky, so follow the instructions closely to make sure you correctly fill it out.

In addition to completing form 5329, you should submit a letter, explaining why you missed the distribution and informing the IRS that you have now made the correct distributions. There is no clear definition of what the IRS will consider a reasonable explanation for missing a distribution. If the IRS does not waive the penalty, it will send you a notice.

For more detailed information on how to correct an RMD mistake, click here.  To learn more, contact Amy Stratton or Kristen Prull Moonan.

Thirteen Estate Planning Terms You Need to Know

Estate planning—it is an incredibly important tool, not just for the uber wealthy or those thinking about retirement. On the contrary, estate planning is something every adult should do.

Estate planning can help you accomplish any number of goals, including appointing guardians for minor children, choosing healthcare agents to make decisions for you should you become ill, minimizing taxes so you can pass more wealth onto your family members, and stating how and to whom you would like to pass your estate on to when you pass away.

While it should be at the top of everyone’s to-do list, it can be an overwhelming topic to dive into. To help you get situated, below are some important terms you should know as you think about your own estate plan.

Assets

Generally, anything a person owns, including a home and other real estate, bank accounts, life insurance, investments, furniture, jewelry, art, clothing, and collectibles.

Beneficiary

A person or entity (such as a charity) that receives a beneficial interest in something, such as an estate, trust, account, or insurance policy.

Distribution

A payment in cash or asset(s) to the beneficiary, individual, or entity who is entitled to receive it.

Estate

All assets and debts left by an individual at death.

Fiduciary

A person with a legal obligation (duty) to act primarily for another person’s benefit, e.g., a trustee or agent under a power of attorney. “Fiduciary” implies great confidence and trust, and a high degree of good faith.

Funding

The process of transferring (re-titling) assets to a living trust. A living trust will only avoid probate at the trustmaker’s death if it is fully funded, meaning it contains all of the decedent’s assets.

Incapacitated/Incompetent

Unable to manage one’s own affairs, either temporarily or permanently; often involves a lack of mental capacity.

Inheritance

The assets received from someone who has died.

Conservatorship

The court-supervised process of managing the assets of an incapacitated person.

Marital deduction

A deduction on the federal estate tax return, it lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of the surviving spouse’s death, estate taxes will be due at that time.

Settle an estate

The process of winding down the final affairs (valuation of assets, payment of debts and taxes, distribution of assets to beneficiaries) after someone dies.

Trust

A fiduciary relationship in which one party, known as the trustmaker or settlor, gives another party, known as the trustee, the right to hold property or assets for the benefit of another party, the beneficiary. The trust should be memorialized by a written trust agreement, outlining how the trust assets will be distributed to the beneficiary.

Will

A written document with instructions for disposing of assets after death. A will can only be enforced through a probate court. A will can also contain the nomination of guardian for minor children.

If you have any additional questions about estate planning, or would like to consult an estate planning professional, reach out to us at 401.272.6300 or via email at astratton@mswri.com or kmoonan@mswri.com.We can make sure you have a comprehensive plan that is tailored to your unique needs and goals.