Transferring assets to qualify for Medicaid can make you ineligible for benefits for a period of time. Before making any transfers, you need to be aware of the consequences.
Congress has established a period of ineligibility for Medicaid for those who transfer assets. The so-called "look-back" period for all transfers is 60 months, which means state Medicaid officials look at transfers made within the 60 months prior to the Medicaid application.
While the look-back period determines what transfers will be penalized, the length of the penalty depends on the amount transferred. The penalty period is determined by dividing the amount transferred by the average monthly cost of nursing home care in the state. For instance, if the nursing home resident transferred $100,000 in a state where the average monthly cost of care was $5,000, the penalty period would be 20 months ($100,000/$5,000 = 20). The 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer. Therefore, if an individual transfers $100,000 on April 1, 2017, moves to a nursing home on April 1, 2018 and spends down to Medicaid eligibility on April 1, 2019, that is when the 20-month penalty period will begin, and it will not end until December 1, 2020.
Transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year look-back period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the size of the transfer.
Be very, very careful before making transfers. Any transfer strategy must take into account the nursing home resident's income and all of his or her expenses, including the cost of the nursing home. Bear in mind that if you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce, or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.
In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren's eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.
As a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.
Remember: You do not have to save your estate for your children. The bumper sticker that reads "I'm spending my children's inheritance" is a perfectly appropriate approach to estate and Medicaid planning.
Even though a nursing home resident may receive Medicaid while owning a home, if the resident is married he or she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows the spouse to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at the community spouse's death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.
While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:
Your spouse (but this may not help you become eligible since the same limit on both spouse's assets will apply)
A trust for the sole benefit of your child who is blind or permanently disabled.
Into trust for the sole benefit of anyone under age 65 and permanently disabled.
In addition, you may transfer your home to the following individuals (as well as to those listed above):
A child who is under age 21
A child who is blind or disabled (the house does not have to be in a trust)
A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home
A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.
While the new tax law doubled the federal estate tax exemption, meaning the vast majority of estates will not have to pay any federal estate tax, it doesn't mean you should ignore its impact on your estate plan.
In December 2017, Republicans in Congress and President Trump increased the federal estate tax exemption to $11.18 million for individuals and $22.36 million for couples, indexed for inflation. (For 2019, the figures are $11.4 million and $22.8 million, respectively.) The tax rate for those few estates subject to taxation is 40 percent.
While most estates won't be subject to the federal estate tax, you should review your estate plan to make sure the changes won't have other negative consequences or to see if there is a better way to pass on your assets. One common estate planning technique when the estate tax exemption was smaller was to leave everything that could pass free of the estate tax to the decedent's children and the rest to the spouse. If you still have that provision in your will, your kids could inherit your entire estate while your spouse would be disinherited.
For example, as recently as 2001 the federal estate tax exemption was a mere $675,000. Someone with, say, an $800,000 estate who hasn’t changed their estate plan since then could see the entire estate go to their children and none to their spouse.
Another consideration is how the new tax law might affect capital gains taxes. When someone inherits property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If the beneficiary were to sell the property, there could be huge capital gains taxes. Fortunately, when someone inherits property, the property’s tax basis is "stepped up," which means the tax basis would be the current value of the property. If the same property is gifted, there is no "step up" in basis, so the gift recipient would have to pay capital gains taxes. Previously, in order to avoid the estate tax you might have given property to your children or to a trust, even though there would be capital gains consequences. Now, it might be better for your beneficiaries to inherit the property.
In addition, many states have their own estate tax laws with much lower exemptions, so it is important to consult with your attorney to make sure your estate plan still works for you.
“Unlike personal property, real property–such as real estate or automobiles–is titled to convey ownership.”
Title to real property must be transferred, when the asset is sold and must be cleared (free of liens or encumbrances) for the transfer to occur. Unlike other real property assets, real estate ownership can take several forms. Each of these forms has implications on how ownership can be transferred and can affect how they can be financed, improved or used as collateral.
Joint Tenancy. This is when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. When one dies, their rights of ownership pass to the surviving tenant(s). The parties in the ownership need not be married or related, but any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will after one passes. Another disadvantage is that a creditor with a legal judgment to collect a debt from one of the owners, can also petition the court to divide the property and force a sale in order to collect on the judgment.
Tenancy In Common. In this situation, two or more persons hold title to real estate jointly with equal rights to enjoy the property during their lives. However, unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber as they chose. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner's heirs undivided. An owner can use the wealth created by their portion of the property, as collateral for financial transactions, and creditors can place liens only against one owner's specific portion of the property. Any liens must be cleared for a total transfer of ownership to take place.
Tenants by Entirety. This can only be used, when the owners are legally married. This is ownership in real estate under the assumption that the couple is one person for legal purposes. The title transfers to the other in entirety, if one of the couple dies. The advantage is that no legal action is required at the death of a spouse. There’s no need for a will, and probate or other legal action isn't necessary. Conveyance of the property must be done in total, and the property can’t be subdivided. In the case of divorce, the property converts to a tenancy in common, and one owner can transfer ownership of their respective part of the property to whomever they want.
Sole Ownership. This is ownership by an individual or entity legally capable of holding title. The main advantage to holding title as a sole owner, is the ease with which transactions can be accomplished, since no other party needs to authorize the transaction. The disadvantage is the potential for legal issues regarding the transfer of ownership, if the sole owner dies or become incapacitated. Unless there’s a will, the transfer of ownership upon death can be an issue.
Community Property. This form of ownership is by husband and wife during their marriage for property they intend to own together. Under community property, either spouse has the right to dispose of one half of the property or will it to another party. Anyone who’s lived with another person as a common-law spouse and doesn't specifically change title to the property as sole ownership (which is legally transacted with approval by the significant other) takes the risk of having to share ownership of the property, in the absence of a legal marriage.
Community Property With the Right of Survivorship. This is a way for married couples to hold title to property. However, it is only available in Arizona, California, Nevada, Texas, and Wisconsin. It lets one spouse's interest in community-property assets pass probate-free to the surviving spouse, in the event of death.
Entities other than individuals can hold title to real estate in its entirety. Ownership in real estate can be done as a corporation. The legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders. Real estate can also be owned as a partnership, which is an association of two or more people to carry on business for profit as co-owners. Real estate also can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the beneficiaries. There are many benefits, such as managerial influence, financial and legal liability and tax considerations.
“Wicked stepmothers are the stuff of Grimm’s fairy tales. Widowed stepmothers are the root of real-life inheritance wars.”
The biggest issues in inheritance battles stem from Alzheimer’s disease, widowed stepmothers and estate crime. Certain issues, like signs of dementia, questionable asset transfers and sudden changes in investment risk profiles are sure signals that something is going on, reports Think Advisor in the article “What the Nastiest Celebrity Estate Battles Can Teach Advisors.”
If regular family fights feel like civil wars, then celebrity battles elevate the conflicts into global meltdowns. Showbiz legends like Tony Curtis, Mickey Rooney and Jerry Lee Lewis serve as perfect examples.
Rock and roll legend Jerry Lee Lewis’s seventh wife (yes, seventh) and his third wife’s daughter have been in court for nearly two years. The wife has charged her stepdaughter with financial and physically abusing the singer, who is now 83. The daughter countersued, alleging that her stepmother was drugging her father into an incoherent state. Lewis recently had a stroke, and he was admitted to a rehab facility.
What can families do about elder abuse, which the American Bar Association has called the “crime of the 21st century?”
Pay attention. Over the next 30 years, as much as $30 trillion in Baby Boomer assets will be transferred to the next generation. The number of people getting older is taking a huge leap and so will the number of people who suffer from cognitive-related diseases.
Know what an “estate crime” is. This is the term to describe the unauthorized, unlawful taking of someone’s assets, while they are alive. It’s what happens when a personal representative, such as a trustee, suppresses assets and takes them. It’s more likely to occur when an entrepreneur or business owner keeps a lot of cash in the safe. That money mysteriously vanishes at their death. Therefore, if anyone has a lot of cash around, they need to be able to prove it and give that documentation to someone they trust.
What happens when a person’s family is involved in litigation and they are incapacitated? Attorneys will look for transfers that occurred just prior to the time the person became incapacitated. Would they be the result of undue influence or pressure? What about their estate documents — were they changed near the time the person became seriously ill or when they were near to death? Medical records and doctors’ reports become important in these cases.
What happened to Tony Curtis, romantic and comic leading man? A year before he died, Tony Curtis wrote a new will and revised his trust. He disinherited his five surviving children and left his entire estate worth $46 million to his sixth wife. The children, who include actress Jamie Lee Curtis, filed a suit claiming that their father was mentally impaired, but the case was dropped. It’s possible that the suit was settled confidentially. Any time there’s such a big change before death, expect litigation.
Why do so many famous people seem to die without a will? People don’t like to think about death, so they procrastinate. It’s that way for celebrities and for regular people. However, we read more about celebrities. Estate planning attorneys are the ones who see what happens, every day, when people don’t have wills and the family is faced with estate battles.
What’s the solution? It’s not that complicated. Find an estate planning attorney that you are comfortable with and draw up an estate plan. Make sure you have a will, power of attorney and health care power of attorney. Talk with your family about your intentions for distribution of your property and make sure that every few years, when events occur in your life or when laws change, you update your estate plan. That would save many people, famous and otherwise, from devoting time and money to cleaning up after their loved ones.
“If you were to receive a sizable inheritance, what should you do with it? This money could help you achieve some of your important financial goals , so you’ll want to think carefully about your choices.”
While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience.
Here are some ways to consider using an inheritance:
Get rid of your debt load. Car loans, credit cards and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash.
Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.
Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.
Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.
Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.
“A family from the United Kingdom has made international news, as a result of an alleged will forgery fueled by a mother-in-law’s disdain for her daughter’s husband.”
When Gillian Williams died in May 2017, it’s unlikely that she expected to be at the center of an international spotlight on her family’s life. She left behind a married daughter, Julie Fairs, who is accused, along with her husband Brian, of falsifying a signature on her mother’s last will and testament. The mother’s own sister testified that her sister would never have left her daughter anything, because of how much she disliked her son-in-law, reports Above the Law in the article “What To Do When You Hate Your Son-In-Law: A Practical Lesson in Estate Planning.”
The matter became public when it went to trial. There’s been a lot of nasty family business being shared. Most people avoid going to trial for will contests, since the underlying emotions come out in full view.
Not everyone has friendly family relationships with in-laws. Frequently, the in-law relationship is prickly at best. There is no law that you must like your son-in-law. However, the law presumes that you like your child enough to include her in your estate, regardless of how you feel about her spouse. That means that if there is no surviving spouse, children are permitted to be the “natural object of your bounty.” In other words, these are the individuals who will receive your assets when you die, based on social and public policy and the law.
There are issues in estate planning, when a person wants to exclude a child because of their dislike of the child’s spouse. You may want to exclude a child out of concern that the spouse will mishandle the money or benefit from the money in a divorce. Sometimes parents can’t get past their dismay over a child marrying against their wishes. Disinheritance is not an unusual punishment. However, increased scrutiny is going to be applied to the review of a will, when a child is excluded.
When one child is disinherited, it colors their relationship with their siblings. The beneficiaries and the executor are left to defend the decedent’s decision. That is not easy to do, unless an explanation of why this happened was done beforehand.
There are options to disinheritance, if the child’s spouse is an issue. A beneficiary’s share can be held in a continuing trust, so the spouse does not have access to the funds. The assets can be protected and preserved, in the event of a divorce or just for general money security. It should be recognized that while inheritances are generally protected in divorce, the second the monies are co-mingled, they become joint property. A trust is often the best way to protect an inheritance in this situation.
Another tactic is for the person to skip a generation and instead make a bequest to the grandchildren. The option works best when the funds are not significant, since the parent may be insulted by the decision to leave a bequest to their children and this could pit the child against their own child (the grandchild).
Dividing the estate among the children in unequal shares can be done so as not to completely disinherit a child, but to leave less money. This also holds the potential for creating bad feelings between family members.
The last will and testament is a very permanent document and may not be the right forum to be used to let feelings be expressed or take a stand about an unfavorable life decision by an adult child. The impact of this decision can also have long lasting effects, including lawsuits and family fighting. It is also likely to create a battle between the child and their spouse.
A conversation with an estate planning attorney, who has likely seen this situation hundreds of times in their practice, should be able to help sort out the best solution. There may be a way to avoid conflict, or at least to make sure everyone is clear from the get-go, as to what is going to happen in the future, and why.