Raleigh Estate Planning and Corporate Law Attorneys

Estates and Trusts

Gifting, Taxes, and Long Term Care

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One of the more common concepts that clients get confused about is taxes on gifts to children or grandchildren, and how it all works together when you’re thinking about planning for Medicaid or long-term care.  This normally happens with our older clients who are getting to a point where paying for care is a concern.  The conversation normally goes something like this:

Client: “I want to give my kids $50,000.00 each.  I know I can give some amount away each year to my kids and the government won’t count it, right?”

Me: “You’re allowed to give $14,000 to an individual without incurring any gift tax liability.”

Client: “So they can’t come back and get it if I need to go into the nursing home?”

And this is where the confusion begins.  Many clients confuse the rules related to taxes on gifts with the rules related to gifts related to the Medicaid lookback, or they assume that one rule covers everything.  Unfortunately, this isn’t the case.

The website “The Motley Fool” has a good, succinct article about when a person should consider making gifts to heirs.  The article, which can be found here, has as straightforward an explanation of gifts and taxes as I’ve seen.  It also raises a good point, namely, have you considered how you are going to pay for long-term care after you’ve made these gifts?

The important points to remember are:

  1. Gifts made for tax purposes are not always protected from the Medicaid lookback rules, if such gifts are made within five years of applying for Medicaid assistance.  This five year period is also called the “lookback” period, and it is what it says.  Social Services is looking back through your financial history to determine whether you have made gifts of assets that should have instead been used to pay for your long-term care.  There are certain situations in which you may be able to overcome this presumption, but the safe rule of thumb is that Social Services will count those gifts against you.
  2. If you have your cost of care covered, either with long-term care insurance, or with other assets, remember to take into consideration the assets you are gifting.  Gifts of stocks or real property can result in adverse tax consequences down the road for the recipient.  Why?  Because generally speaking, gifts during the life of the donor (donor is the person making the gift) retain the basis of the donor in the hands of the donee (the person receiving the gift).  In English?  OK, OK.  Let’s say I bought 5,000 shares of stock in ABC Corporation for $1.00 each 20 years ago.  My basis in these shares is $5,000.00.  If today they are worth $10.00 per share, and I sold them, I would have a taxable gain of $45,000.00.

If I give the shares away to my sister when they are worth $10.00 per share, my sister’s basis would not be $50,000.00, it would be what I paid for them: $5,000.00, meaning that if my sister were to sell the shares, she would be taxed on the $45,000.00.

If I retained my shares, and gave them to my sister via my Will when I died, she would receive the shares with the basis “stepped up” to the value of the shares the day I died.  So if when I died, the shares were worth $100 per share, my sister’s basis would be $100 per share.  If she sold the stock that same day, she would owe no taxes on the money received from the sale.

So what does this mean?  If you’re going to make gifts, think about the type of asset you’re giving.  If it’s something you didn’t pay much for but is worth an awful lot now, consider holding onto that asset and passing it at death, or consulting with us regarding better ways to plan for tax consequences.

Where does this tie in with the Medicaid lookback rules?  If you’re worried about protecting assets for long-term care and/or Medicaid eligibility, but want to make sure that your beneficiaries retain the advantages of a stepped-up basis in the asset, consider estate planning that will do both.  There are several different ways to ensure that assets will not be subject to estate recovery should you need Medicaid assistance, while retaining the step-up in basis provided by an on-death transfer.  Irrevocable trusts and gift deeds reserving life estate are one common way of doing this, but it needs to be done properly, and it needs to be part of an overall plan that will leave you with the assets you need and access you need to be able to live comfortably during retirement.

If you have questions about these issues, or need advice about planning for long-term care, talk to an attorney who deals specifically with these matters.

Is the Medicaid Look Back Period Five Years or Seven?

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This is another question that’s started cropping up lately in client meetings.  We’ve had many clients come in under the impression that the look back period for transfer of assets under the Medicaid rules is now seven years.  Much to their relief, this is not the case.

The last change related to an increase in the look back period came in 2005 with the Deficit Reduction Act.  Provisions in that Federal law required the look back period to move from three years to five years for all transfers, beginning in 2007.  That transition was not fully implemented until 2012.  Which is to say, changes to the look back period don’t happen overnight.

So don’t fret.  If you hear someone say the look back period is seven years, let them know they’ve obtained some incorrect information, and tell them to consult with an Elder Law attorney familiar with Medicaid and the look back period before they make a mistake.

Do You Need Long Term Care Insurance?

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We don’t sell long-term care insurance through our office, but we’ve seen the difference it can make for clients who have it in place when they come into to see us about long-term care issues.  This article provides a good overview of the current state of long-term care insurance.  I’m not going to rehash the contents of the article in this post, because I think the article does a great job of explaining things.

What I do think is important (because it relates to what we do) is to elaborate on one of the points made towards the end of the article.  The idea of self-insurance — paying for care out of your own assets — is a prospect that many of our clients face.  The article seems to indicate that the only option for folks with modest assets is to spend down to the point you or your loved one qualify for Medicaid.

What people need to understand is that completely wiping out your assets is NOT the only way to qualify for Medicaid, and I want to illustrate this with a few points:

  1. If you are married, and your spouse is needing care, there are basic spousal protections built into the Medicaid regulations that absolutely should be taken advantage of by the healthy spouse.  In North Carolina, the healthy spouse (or community spouse, as they are called in the regulations), is allowed to keep one half of the couple’s assets, up to roughly $115,000.  This amount does not include the home, life insurance with a face value of $10,000 or less, and one vehicle.
  2. If you are single or widowed, and you have significant cash assets, there are ways to plan using gifting and annuity combinations to protect at least some of those assets.
  3. If all you have is your home, don’t assume that you have no choice but to expose it to estate recovery.  There are deeds that can be used to keep your home protected and leave something for your children.

There are a lot of other points related to crisis planning  that I could spend thousands of words discussing here.  But just remember, if you meet with a social worker and they tell you that you either don’t qualify because you have too many assets, or that what you do have will be subject to estate recovery after your death, that isn’t always the case.  The social worker’s job is to give you the rules.  Our job is to explain how the rules can still benefit you and your family.

How Does Estate Recovery Work?

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At least once a week, I have a Client that will ask about Medicaid’s Estate Recovery Program.  Admittedly, they don’t use those words.  It’s more commonly phrased in the way in which they’ve heard about it: the government selling the house or taking everything you’ve got.  This generalization isn’t necessarily incorrect, but it oversimplifies the issue.  Hopefully this post will provide some clarification.

Estate recovery is the law, and it’s codified in the North Carolina General Statutes in Chapter 108A.  A link to the statute is here.  What the statute says in simpler terms is that anyone who receives one of six types of medical care that is paid for by the North Carolina Medicaid Program will open themselves up to a claim being filed by the Program to recover the amount paid for those services on behalf of the individual.  This includes nursing home services and home and community-based services.

So how does this work in practice?  Once a person is approved for and begins receiving medical assistance that is paid for, in part, by the North Carolina Medicaid Program, they start running up a tab with the Program.  The program tracks expenditures made on behalf of the individual, and when the person receiving services dies, a letter is sent to the recipient or person responsible for the recipient that basically says “you were made aware that estate recovery was a possibility when you applied for services. Since you have passed away, your estate may be subject to estate recovery.”  That letter will also normally set out the amount paid on behalf of the recipient, and what the State believes is in the estate of the recipient.  This letter is not the actual claim, however.  The actual claim will follow, and will include a copy of the tab the recipient ran up during their time in care.

Now, there are a few key points to remember.

  1. If the deceased recipient’s estate has a value of less than $5,000.00, the State will waive its right to estate recovery.
  2. If the recipient’s tab is less than $5,000.00, the State will waive its right to estate recovery.
  3. If the recipient is survived by a spouse, a disabled child of any age, or a child under the age of 21, the State will waive its right to estate recovery.

If any of these situations applies, you do not need to be concerned about estate recovery.  It is important to send a response to the State, however, outlining why they should waive their claim if the reason is either 1 or 3 above.

If one of these exemptions does not apply, you will face an estate recovery claim that will have to be satisfied.  I will outline the process for satisfying those debts in a later post, but the final important point to remember about estate recovery is this: the state cannot get any more out of your estate than it paid on your behalf.  So if your home sells for $300,000 after your death, and the State paid $50,000 on your behalf for medical services, the State is only entitled to $50,000 — not the full amount.

So back to that oversimplification: the state will take your house, or the state will take everything you have.  The State will not take your house.  The State’s claim will likely result in it being sold (depending on the decision of your Executor — which will be discussed in my next post), but it cannot take the full amount of sale proceeds unless the sales price is only equal to or is less than the amount it paid on your behalf.

There are ways to avoid estate recovery completely with proper planning.  Call our office today and set up a time to discuss your options if you’re facing a long-term care situation.

Medicaid Estate Recovery Claim Filed – Now What?

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What is the process when Medicaid Estate Recovery claim can’t be or isn’t waived? Once it is determined the claim can’t be waived, the estate of the deceased Medicaid recipient has a claim against it that the State of North Carolina would like to have satisfied.

However, just because they have a valid claim doesn’t necessarily mean that it’s going to get paid.  The same could be said of any claim made against an estate.  In order for claims to be paid, there must be assets in the estate with which to satisfy said claims.  No assets in the deceased recipient’s estate?  Then most likely, Medicaid (and any other creditor) won’t get paid back.

Let’s look at the process, but let me start by making an important point: estate recovery liability does not, in North Carolina, extend beyond the Medicaid recipient.  If your husband, mother, father, brother, or best friend was receiving Medicaid, and you are named as executor of their estate or get appointed as administrator, and you get an estate recovery notice, do not panic.  Medicaid will not be coming after you personally.  They are only coming after the estate.  Your job is to just make sure things get done correctly.

So what happens?  The deceased person’s estate is opened , and the executor or administrator takes stock of what the person owned.  If they were receiving Medicaid, chances are they didn’t own much, and if they owned anything of significant value, it was most likely real property.  Real property that passes to heirs by virtue of either a will or intestacy is considered part of a person’s estate, and can be claimed by creditors for payment of debts.  However, because of the way the law treats real property upon death, it must be “reclaimed” (for lack of a better term) by the estate to be sold to satisfy those claims.

The executor or administrator would therefore be responsible for filing the proper petitions and paperwork for reclaiming the real property so that it can be sold.  Once this process is complete, the real property is sold, the proceeds from the sale are added to the estate, and debts can be satisfied.

Quick example: Bob received Long Term Care Medicaid Assistance for three years prior to his death.  He is a widower, and his will names his two children, Lauren and William, as beneficiaries.  Lauren is the Executrix.  Bob passes away, and Lauren opens her father’s estate.  Her father’s estate consists solely of his home, valued at $125,000.00.  Not long after opening the estate, Lauren receives an Estate Recovery Claim in the amount of $70,000.00.  Her father also has a credit card bill totaling $12,000.00.

Lauren realizes she has $82,000.00 in debts that must be paid, and the only asset with which to pay those debts is the home.  Lauren hires an attorney, who files the necessary paperwork and follows the necessary process to reclaim her father’s home for the estate.  This means that the home, which was supposed to go to Lauren and William, no longer belongs to them, but rather belongs to the estate.

At this point, Lauren hires a realtor who lists the home for sale.  After a month or so, Lauren receives a couple of offers, the highest of which is for $80,000.00.  Lauren, on the advice of the realtor, accepts the offer.  The offer is approved by the court, and the sale takes place, meaning that Bob’s estate now has $80,000.00 in cash with which to pay debts.  As you can see, this isn’t enough money to pay both debts.  So what must Lauren do?

North Carolina’s General Statutes outline how debts are to be satisfied in situations where there isn’t enough money to pay them all in full (that statute can be found here).  I will try and cover priority in a later post, but under the law, the Estate Recovery Claim has priority over the unsecured claim of the credit card company.  When a claim has priority, it gets satisfied in full (if there are enough funds to fully satisfy it) before the claims over which it has priority get satisfied.

In this case, Medicaid’s Estate Recovery Claim would be satisfied in full, and the credit card company would receive the remaining $10,000.00.  The credit card company must take this amount in satisfaction of its claim in full — it has no other recourse.

There are ways to avoid the inclusion of real property in a decedent’s estate, even after a person has qualified for Medicaid.  Additionally, there are details related to the probate process that I either glossed over or skipped in the interest of making the post as brief as possible.  As always, consult with an attorney (like me!) if you are facing any of these situations.

 

How Does Estate Recovery Work?

At least once a week, I have a Client that will ask about Medicaid’s Estate Recovery Program.  Admittedly, they don’t use those words.  It’s more commonly phrased in the way in which they’ve heard about it: the government selling the house or taking everything you’ve got.  This generalization isn’t necessarily incorrect, but it oversimplifies the issue.  Hopefully this post will provide some clarification.

Estate recovery is the law, and it’s codified in the North Carolina General Statutes in Chapter 108A.  A link to the statute is here.  What the statute says in simpler terms is that anyone who receives one of six types of medical care that is paid for by the North Carolina Medicaid Program will open themselves up to a claim being filed by the Program to recover the amount paid for those services on behalf of the individual.  This includes nursing home services and home and community-based services.

So how does this work in practice?  Once a person is approved for and begins receiving medical assistance that is paid for, in part, by the North Carolina Medicaid Program, they start running up a tab with the Program.  The program tracks expenditures made on behalf of the individual, and when the person receiving services dies, a letter is sent to the recipient or person responsible for the recipient that basically says “you were made aware that estate recovery was a possibility when you applied for services. Since you have passed away, your estate may be subject to estate recovery.”  That letter will also normally set out the amount paid on behalf of the recipient, and what the State believes is in the estate of the recipient.  This letter is not the actual claim, however.  The actual claim will follow, and will include a copy of the tab the recipient ran up during their time in care.

Now, there are a few key points to remember.

  1. If the deceased recipient’s estate has a value of less than $5,000.00, the State will waive its right to estate recovery.
  2. If the recipient’s tab is less than $5,000.00, the State will waive its right to estate recovery.
  3. If the recipient is survived by a spouse, a disabled child of any age, or a child under the age of 21, the State will waive its right to estate recovery.

If any of these situations applies, you do not need to be concerned about estate recovery.  It is important to send a response to the State, however, outlining why they should waive their claim if the reason is either 1 or 3 above.

If one of these exemptions does not apply, you will face an estate recovery claim that will have to be satisfied.  I will outline the process for satisfying those debts in a later post, but the final important point to remember about estate recovery is this: the state cannot get any more out of your estate than it paid on your behalf.  So if your home sells for $300,000 after your death, and the State paid $50,000 on your behalf for medical services, the State is only entitled to $50,000 — not the full amount.

So back to that oversimplification: the state will take your house, or the state will take everything you have.  The State will not take your house.  The State’s claim will likely result in it being sold (depending on the decision of your Executor — which will be discussed in my next post), but it cannot take the full amount of sale proceeds unless the sales price is only equal to or is less than the amount it paid on your behalf.

There are ways to avoid estate recovery completely with proper planning.  Call our office today and set up a time to discuss your options if you’re facing a long-term care situation.

What is a “Year’s Allowance”?

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One of the really helpful estate administration forms that folks may not know about is what’s called a “Year’s Allowance”.

The “Year’s Allowance” form is something we use a lot when it comes to dealing with the estate of a spouse who has died and left a widow or widower.  In situations where the couple had most of their assets set up jointly or had named each other as beneficiary, there often is very little that needs to be transferred from the deceased spouse to the surviving spouse.  Most often, it’s things like vehicles or small checks made payable to the deceased spouse as reimbursement for insurance premiums.

The Year’s Allowance allows for the assignment of up to $30,000.00 in personal property (vehicles, money, etc.) from the deceased spouse to their surviving spouse, without having to go through probate.  To the extent that the value of the property in the name of the deceased spouse is $30,000.00 or less, it can be transferred to the surviving spouse by simply completing one form and having it certified by the Clerk of Court in your county.

An example: Joan dies in 2014, leaving her husband, Bill.  Joan had an IRA, of which Bill was the named beneficiary.  Joan and Bill had a checking and savings account, of which they were joint owners.  Joan had a 2010 Honda Accord (worth $12,000.00) that she owned solely.  Their home was owned as tenants by the entirety.

When Joan died, Bill was left wondering what would need to be done from a probate standpoint to transfer Joan’s assets to him.  Fortunately for Bill, out of all the things listed above, he only needs to worry about the 2010 Accord.  The IRA has Bill listed as beneficiary, meaning he need only file a death claim with the company managing the IRA.  The jointly-owned checking and savings accounts can be closed by Bill and reopened in his name alone without any legal authority.  Joan’s interest in the home automatically transferred to Bill upon Joan’s death because they owned it as tenants by the entirety.  The only thing that Bill can’t transfer without legal authority is the car.

Bill would simply fill out the Year’s Allowance form, sign it and have his signature notarized, and take it, along with Joan’s death certificate and her original will (if she had one) to the Clerk of Court.  (There is a fee associated with the Year’s Allowance — currently it is $8.00 — so Bill needs cash as well).  Once there, the Clerk will review the documentation, and assuming everything is complete, he or she will sign it, place a raised seal on it, and hand it back to Bill.

From there, Bill would take the certified Year’s Allowance, along with the title to the Accord, to the DMV, present both, and ask that title be transferred to him.

What this means is that Bill has completed the administration of his Wife’s estate with one form.

Behold, the magic of the Year’s Allowance!