When Your Most Valued Assets Are Not Covered by Your Will
May 21, 2013
Q. My wife and I hold title to her home as joint tenants, and most of our cash assets are in the form of two large IRA accounts and one big annuity. We have basic wills which leaves everything to the other and then on to our children. Our son suggested that our wills may not control what happens to our assets when one of us dies. Should we be concerned?
A. Perhaps, in the sense that you wills will not control what happens to your assets when one of you dies. Rather, the form of title will control as to your home, and the beneficiary designations on your IRA’s and annuity will control what happens to those assets.
Here is the way it works:
Your Home: Since you and your wife hold title to your home in joint tenancy, when one of you dies the other will automatically become the owner by right of survivorship. The right of survivorship is the primary feature of joint tenancy. In essence, the form of title overrides your wills. It is only when the survivor later dies that his or her will may control who ultimately gets the home. While many couples in California do hold their home in joint tenancy, it is often not the best form of co-ownership. One principal reason: it does not optimize the tax benefits that go along with holding title as ”community property” where the home has appreciated significantly in value since the time of purchase.
Your IRA Accounts: Each of your IRA accounts will, upon the death of the IRA owner, go to the primary beneficiary named in the account agreement signed when you created your IRA’s. Presumably, the primary beneficiary for each of you is the other spouse and, if deceased, your children. However, the pattern of distribution very much depends upon who you designated as primary and contingent beneficiaries when you created your accounts. It is always wise to review these designations and retain in your permanent file a copy of the documentation you signed when you created your accounts. As a lawyer, I have been involved in at least one case where the IRA custodian lost the paperwork on a very large IRA account, almost costing the designated beneficiary a six-figure tax bill because of the resulting delay in distribution. The IRS has strict rules about handling inherited IRA accounts, and these must be observed on a timely basis to avoid unnecessary tax.
Your Annuity: the person or persons to receive your annuity would, just like the IRA, depend upon who was named as the primary beneficiary and contingent beneficiaries on the annuity contract, itself. The same would be true if you owned any other insurance products or policies. Where you have designated named individuals to be primary or contingent beneficiaries, the contract or policy controls and not your will.
In view of the above, whenever clients come in to see us for estate planning, we always urge a review of all beneficiary designations associated with IRA and other retirement accounts, as well as annuities and other insurance products. Where appropriate, the beneficiary designations can then be modified, so that the plan design accomplishes the clients’ goals and everything works together. In many cases, the clients choose to name their Living Trust as the contingent beneficiary of these contracts and policies, so that the plan of distribution integrates with that created in their trust.
Understand Medi-Cal Recovery and Avoid an Unpleasant Surprise
May 4, 2013
Q. Mother recently died after spending two years in a nursing home on Medi-Cal. Medi-Cal just sent us a bill for about $150,000 and says it will file a claim against her home. Yikes! We thought her home was an exempt asset. What do we do about the bill?
A. Unfortunately, your situation is all too common: families often confuse the Medi-Cal “eligibility” rules with the “recovery” rules. Her home was, indeed, exempt for eligibility purposes, but that exemption expired upon your mother’s death. Her home and most other exempt assets then became exposed to a Medi-Cal “payback” claim. This is called “estate recovery”. Let’s review the basic rules to see if any might apply and give you some relief:
1) You and your siblings do not have a personal obligation to pay back Medi-Cal from your own assets. Only your mother’s assets, including her home, are subject to recovery, whether held in her own name, in her Living Trust, or in joint tenancy. However, you cannot transfer her home or other assets to her beneficiaries until the recovery claim is satisfied. Exception: her IRA, if left to named persons, is not subject to recovery.
2) If your mother were survived by a spouse, then her Medi-Cal recovery claim would be deferred until the death of her surviving spouse.
3) Medi-Cal will withdraw its claim entirely upon proof that your mother was survived by a blind, minor or disabled child, usually established by proof that the child is receiving Social Security disability benefits. Here, it does not matter whether the disabled child is an adult, nor whether he/she lived in your mother’s home or even relied upon her for support.
4) Medi-Cal will waive its claim if the surviving family members can prove “hardship”, based on any of six specific grounds. One ground is a showing that a child lived in the parent’s home and provided care for at least two years, thereby delaying the parent’s entry into a nursing home; it helps to think of this ground as recognition that the caregiver child saved Medi-Cal money. Another is a claim that allowing the surviving child or other beneficiary to receive his inheritance would enable him to go off public benefits and be self-supporting. Unfortunately, Medi-Cal construes the hardship claims strictly and has turned down most of them. Still, it is an option to pursue and, upon a timely request, you do have a right to a hearing to make your case before an Administrative Law Judge.
(5) If there is no basis to seek waiver or deferment of the claim, you might seek a “Voluntary Post-Death Lien”. This lien allows the survivors to continue to reside in the home while paying an agreed monthly installment against the amount of the Medi-Cal claim, which accrues interest at 7% per year. The balance of the claim would be paid when the home is sold. To qualify, the survivors must be residing in the home, be unable to pay the claim in full, and be unable to obtain financing to do so.
Unfortunately, all of the above exceptions and limits to Medi-Cal recovery require specific fact patterns, and many families will not qualify. However, if these same families had taken steps during the parent’s lifetime, in many cases lawful steps could have then been taken to protect the parent’s entire estate from Medi-Cal recovery. Once the parent dies, it is often too late and the survivors must rely upon the limited options discussed above.
For families with a loved one currently on Medi-Cal, we urge seeking the advice of an elder law attorney to determine whether steps can be taken now to avoid a later Medi-Cal recovery claim and thereby preserve assets for the benefit of surviving family members. An ounce of prevention is worth a pound of cure.
Protecting Your Partner When You Choose Not to Marry
April 4, 2013
According to the U.S. Census Bureau the number of senior couples choosing to cohabitate instead of marry (or remarry) has risen significantly. There are quite a few reasons why senior couples might choose not to tie the knot:
* Tax disincentives
* Loss of military and pension benefits
* Keeping medical expenses separate
* Keeping any current debt separate
* Asset protection for the benefit of children or grandchildren
If you decide against marriage, you will need to take extra steps to protect your partner and preserve spousal privileges that you would like your partner to have. For example, in case of accident or emergency, do you want your partner to have the same access to medical information that a spouse would have? Do you want your partner to a voice in making medical decisions if you are unable to do so?
Seniors will also want to consider the subject of real property and living arrangements. If something were to happen to you or your partner, would your surviving partner be able to remain in the home? Would he or she at least have time to find another living situation? Most people would like to think that relatives who inherit shared property will be compassionate toward their surviving partner, but this is not always the case.
Fortunately, there are ways for seniors who choose to cohabitate without marrying to arrange their affairs in such a way that they preserve the benefits of staying legally single, but provide their partner with some spousal benefits. The best way to do this is by creating an estate plan that recognizes your partner as your agent and/or beneficiary. Whether your partner is opposite sex or same sex, creating appropriate estate planning documents is the way to go.
Has the Bypass Trust Gone The Way of the Dinosaur?
February 17, 2013
Q. My wife and I had our Living Trust prepared about 8 years ago. I hear there’s a new tax law which just went into effect. Is it time to have our trust reviewed?
A. You refer to the recently enacted “American Taxpayer Relief Act,” which has permanently enlarged the estate tax exemption to $5,250,000 per person (for 2013). It also permits a married couple to effectively double their exemption even without special estate tax planning.
By comparison, when you created your trust the estate tax exemption was much smaller, and special tax planning was required to minimize estate taxes. At that time, your attorney probably recommended a form of trust which was tailored to the lower estate tax exemption, namely a Living Trust with a Bypass Sub-Trust built into it. This Bypass Sub-Trust is also known as a “B Trust,” an Exemption Trust, a Family Trust, and a Credit Shelter Trust.
Bypass Trusts typically require that, on the death of the first spouse, a share of the couple’s assets be transferred into an irrevocable sub-trust called the “Bypass Trust”, rather than to the survivor directly. This is to preserve the first spouse’s estate tax exemption for later use at the survivor’s death. Without the Bypass, the first spouse’s exemption would be lost and all trust assets at the survivor’s death would be sheltered by only the survivor’s one exemption and the excess (if any) was exposed to an estate tax at a rate as high as 55%. Understandably, couples went to great lengths to avoid that tax.
The typical Bypass Trust was not, however, without its problems: (1) the survivor typically lost the right to make any changes in the Bypass portion even if family circumstances changed, (2) the survivor’s access to the Bypass assets was usually restricted, (3) it interfered with applying for a Medi-Cal long-term care subsidy, and (4) it usually required the preparation of separate accounting and income tax returns during the life time of the survivor. Surviving spouses usually found the restrictions burdensome.
Two important new developments arrived with the new law: (a) as of 2013, the amount of the estate tax exemption has now permanently increased to $5,250,000 per person, to be annually adjusted for inflation, and (b) the unused portion of the first spouse’s full exemption is now preserved for use by the second spouse even without the use of the restrictive Bypass Trust, effectively doubling the exemption for most couples.
In view of these new developments, couples with Bypass Trusts created for estate tax purposes under the old law should have their trusts reviewed and, where appropriate, consider eliminating the mandatory funding feature at the first spouse’s death. Instead, they might now consider plans which give the survivor the option of doing postmortem planning after the first death, e.g. by funding a portion of trust assets into an optional Disclaimer Trust. The Disclaimer Trust would then operate as a tax-saving Bypass Trust if that later appeared necessary due to the increase in value of the couple’s estate.
In that sense, I suppose you could say that the Bypass Trust has gone the way of the Dinosaur for most middle income estate plans, where it is unlikely that the couple’s estate would ever exceed two exemptions, i.e. $10,500,000 (for persons dying in 2013), and inflation indexed thereafter.
An exception to the above recommendation: The use of the mandatory Bypass Trust is still useful for non-tax purposes, e.g. in situations involving second marriages. Here, each spouse usually wishes to provide financial security for the survivor, but also wishes to preserve a portion of assets for his/her own children. Under these circumstances, a Bypass Trust can still help these couples achieve their estate planning goals.
When Mom and Dad Re-Marry: Caregiving Then Involves Extended Families
January 12, 2013
Our firm works frequently to help divorced or remarrying couples update their estate plans to protect their new blended families, so we know just how significantly the stress of divorce, family upheaval, and tighter finances can impact a family, and how those effects can last years into the future. We have seen firsthand how the effects divorce can continue to make waves 20 or even 30 years down the road—not just on the divorced couple, but on their grown children now acting as caregivers.
Adult children of divorced parents often find themselves caring not only for mom and dad when they get older, but also for stepmom, stepdad and sometimes even another stepparent from yet a third or current marriage. Dividing time (and often finances) between so many parents with new and special needs can quickly take its toll, as can the family politics that come with adult siblings, half siblings, and step siblings.
With all of this complexity and intermingling family ties, it is more important than ever to have conversations about estate planning and long-term care with parents and siblings before mom and dad (and stepmom and stepdad) get to an age where they need in-home or around the clock nursing care. This article in a recent issue of the CSA Journal (from the Society of Certified Senior Advisors) gives tips on how to conduct a meeting of blended families to discuss the care of parents and stepparents.
While open communication between blended family members is key, a good estate plan can also go a long way towards eliminating potential fighting and confusion by clearly defining who will be making financial decisions and who should be making health care decisions when mom or dad become incapacitated. A caregiver agreement can also provide clarity, as well as financial assistance to the one sibling who inevitably ends up shouldering most of the care giving burden.
If you are a part of a blended family talk to your parents and siblings now about any challenges the future may bring—and how to meet those challenges together.
Preserving Emotional Well-Being When Choosing a Long-Term Care Living Situation for Your Loved One
January 5, 2013
Choosing a long-term care living arrangement is one of the most difficult challenges faced by aging adults and their loved ones. Most families try to avoid the nursing home option to the very end, believing that assisted living or small residential care homes provide a better quality of life. But this may not necessarily be the case.
New research suggests that the type of living situation itself makes little difference in a resident’s emotional well-being. Instead, the happiness and contentment of the resident depends more on the characteristics of the specific environment they’re in, and of course in no small part on their own personal characteristics — how healthy they feel they are, their age, and even their marital status.
Logically enough, a resident of a long-term care facility of any kind is more likely to report satisfaction and comfort if they had a hand in choosing their living situation, if they were part of the decision making process. In fact, studies show that the process of finding and choosing a living situation—researching options, visiting facilities, considering current and future social and physical needs and how they will be met—plays a very important role in the beginning of acclimatization.
Whatever your choice, you’ll need to talk to your family and plan how to finance whichever choice is made for long-term care living. Medicare.gov has published a helpful chart summarizing and comparing the various options for long-term care financing. Remember: There may be ways that you can conserve savings and the home while still qualifying for government benefits. Many families are actually surprised to learn this. If nursing home care may be in the future, the best option is to plan now. See our “Consumer’s Guide to Medi-Cal Planning” available as a free download.
Your Estate Plan Can Share Your Passions As Well As Your Assets
December 30, 2012
Do you love reading and collecting books? Are you a rabid coin or stamp collector? Do you find peace and tranquility out tending your garden?
Whatever it is that you love doing; you can bet the people who love you are aware of it. These are the people who join you on your wilderness hikes; the one who might give you a rare baseball card for your birthday; or the friend who goes with you to the antique car show because he knows hobbies are better when you have someone to share them with. These friendships last a lifetime, and yet these friendships are often forgotten when people create their wills or estate plans.
Many people go to their estate planner with their descendents and their financial assets foremost in their minds, and that is as it should be; but your estate plan can be more than a just a way to distribute property to the next generation, it can also be an opportunity to say thank you to the people who have touched your life—by gifting to them meaningful representations of your hobbies and passions, and of shared experiences.
You can express how much you appreciate your best chess opponent by leaving her your favorite chess board, or encourage the interest of a young philatelist nephew by bequeathing to him your extensive stamp collection. All you need is an estate plan which includes a personal property memorandum—and which is correctly designed to recognize and refer to that memorandum.
Our office can help you create an estate plan that not only ensures the protection of your heirs and property; it also helps you leave a meaningful ‘thank you’ to the people who matter most.
News Flash! California Approves Medi-Cal for Same-Sex Couples and Registered Domestic Partners
December 15, 2012
In what may be the first state in the nation to do so, California has just approved Medi-Cal benefits for same-sex couples and Registered Domestic Partners ( “RDP’s”). Acting at the invitation of the federal Centers for Medicare and Medicaid Services (“CMS”) and pursuant to state Assembly Bill 641 (Feuer), the California Department Healthcare Services just released a directive to all California County Medi-Cal Directors, requiring that an applicant in a same-sex couple or RDP relationship be, for most purposes, treated as a spouse. The order is retroactive to January 1, 2012. This directive will now extend much-needed Medi-Cal benefits to the elderly and disabled who would otherwise be obliged to impoverish themselves or their partner in order to qualify. The directive is contained in All-County Welfare Directors Letter 12-36 issued December 10, 2012.
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