Medicaid Asset Preservation with IRAs

 

Spousal Protection Trusts  A very powerful asset preservation tool William M. Gatesman employs with married couples are Wills with Spousal Protection Trusts, a planning tool developed by Mr. Gatesman. With this tool, both spouses prepare a Will in which there is a trust for the benefit of the surviving spouse. Such trust is designed to be funded, not with assets passing through the estate, but with assets passing outside of probate, through pay on death accounts, beneficiary designations, life estate deeds, and by other means.

 

Protecting the Surviving Spouse  By using such a Spousal Protection Trust, spouses can set up their affairs such that, after the first of them dies, all the assets are set aside in the trust, available without restriction to the surviving spouse, but fully protected should the surviving spouse require long term care in a nursing home. Moreover, if such trust is properly implemented, the surviving spouse would be able to qualify for and obtain Medicaid benefits for long term care without delay if and when such spouse falls ill and requires nursing home care. In this way, all of the couple’s assets, to the extent not used by the surviving spouse prior to admission to a nursing home, would be preserved for future generations, and thereafter, all care costs would be covered by Medical Assistance. This is a very powerful planning strategy, but care must be taken to ensure that the plan is properly implemented.

 

Implementing the Plan with Tax Deferred Assets Often, when using this tool, the largest assets passing into such spousal protection trust are IRAs and other tax advantaged retirement plans. When this type of asset passes to a beneficiary – and the Spousal Protection Trust would be the beneficiary – special rules apply to continue the income tax deferral that is the hallmark of such investments. But the traditional method of preserving the tax deferred status of such accounts – by making regular required minimum distributions to the individual beneficiary – can reduce the primary benefit of using a Spousal Protection Trust, which is to protect all of the couple’s wealth if and when the surviving spouse requires long term care in a nursing home, which care could be paid for by the Medicaid program.

 

Asset Preservation with Tax Deferral  With proper guidance, however, a married couple can implement a plan that allows them to get the best of both worlds, that is, to prolong the income tax deferral on IRAs and qualified benefit plans for the longest time possible, on the one hand, and to prevent distributions of income and principal to the surviving spouse if and when such spouse might require long term care in a nursing home, on the other hand, thereby maximizing family wealth preservation.

 

Tax Planning Component of the Spousal Protection Trust  The key to obtaining “the best of both worlds” as discussed above is to structure the spousal protection trust as a retirement plan “accumulation trust.” Typically, estate planners will have clients utilize what is known as a “conduit trust” as the beneficiary of an IRA or other tax deferred retirement plan to ensure continued income tax deferral. However, while a properly drafted conduit trust will ensure continuing income tax deferral because such trust mandates that the retirement plan annual minimum distributions be paid from the trust to the surviving spouse, using a conduit trust for Medicaid asset preservation planning is counterproductive because all such minimum distributions received by the surviving spouse would be required to be paid to the nursing home as part of the surviving spouse’s contribution to her cost of care even after she would qualify for Medicaid benefits. [To be sure, the surviving spouse still could get Medicaid for nursing home care, however, the distribution of the required minimum distribution from the conduit trust to such spouse is a waste of assets because, with proper planning, such payments can be avoided.]

 

Putting it All Together  The way to continue the income tax deferral and to maximize income and asset preservation is to employ an accumulation trust in the Spousal Protection Trust. With an accumulation trust, the required minimum distribution from the retirement plan is distributed to the Trustee, but the Trustee is not required to pay such amount to the surviving spouse. Nevertheless because of the nature of the trust, the income tax deferral will continue to be allowed. This is easier said than done, however, because the tax law governing accumulation trusts for IRAs and other tax deferred retirement plans is intricate and complex.

 

Choosing the Right Advisor  Is it important, therefore, that the advocate you choose to assist you with your asset preservation estate planning be well versed in all aspects of law that would affect your situation, including estate planning, income tax planning, IRA planning, Medicaid planning, and other areas.

 

Qualifications  Before he studied law, William M. Gatesman obtained a Masters Degree in Accountancy with a focus on tax planning, and before becoming a lawyer, Mr. Gatesman worked as a tax consultant with a major CPA firm, and as a tax accountant in a major corporation. Mr. Gatesman has spent his career as a lawyer working in the area of estate planning and Medicaid planning, and related areas. Mr. Gatesman has the education, knowledge, and experience in all the areas of law that must be considered when doing asset preservation planning, and Mr. Gatesman relies on this background when he assist clients in employing Spousal Protection Trusts that include accumulation trusts as recipients of IRA and other retirement plan assets.

 

Maximizing Wealth Preservation  All of this knowledge and expertise enables William M. Gatesman to utilize sophisticated legal tools, such as the Spousal Protection Trust, which trust allows clients to maximize wealth preservation if a surviving spouse should require nursing home care in the future while still allowing such spouse to prolong the income tax deferral afforded by the inherited IRA or other retirement plan for as long as possible.

Applying for Medicaid Gives State Access to Bank Records

In order to combat fraud and abuse, Congress passed a law in 2008 (referred to in this article as the “Asset Verification Statute”), which law just now is being implemented in Maryland, directing States to impose an electronic asset verification process to facilitate asset disclosure relating to Medicaid applications for long term care.

When Disclosure is allowed.  In most instances, under Federal law, banks may not disclose one’s financial records to the government except where there is a valid law enforcement or judicial subpoena or summons, or a search warrant.  However, that same federal law allows the account holders themselves to authorize such disclosure through a written instrument.

The Asset Verification Statute directs that States that provide Medicaid benefits to aged, blind or disabled persons to cover the costs of long term care in a nursing home, or care in assisted living or at home, require the applicants for such benefit programs to provide written authorization to the State to obtain documentation from banks and other financial institutions for accounts owned by the applicant or by any other person (such as the applicant’s spouse) whose assets are considered when one applies for such benefits. Continue reading “Applying for Medicaid Gives State Access to Bank Records”

Sheltering Assets to Maintain Housing Benefits

Various articles on this website address ways in which aged or disabled persons may protect their assets and still get government benefits such as Medicaid for long term care in a nursing home, or Medicaid for health care in the community.  By retaining accumulated assets or protecting assets one is about to inherit, an individual can ensure for herself a better quality of life, especially when the only other alternative is to fully impoverish oneself to retain government benefits.

One tool lawyers utilize to enable clients to shelter assets is a trust.  There are various types of trusts that can be employed depending on the individual’s circumstances, and each type of trust has its advantages and disadvantages.

For example, the law will allow a disabled person to keep his or her accumulated wealth to allow for a higher quality of life and to still obtain Medicaid benefits.  [Such opportunity is separate and distinct from the benefit under the Affordable Care Act which allows non-disabled people with low incomes to obtain Medicaid health insurance.  Moreover, this long-standing opportunity afforded to disabled persons likely will persist even if the President and Congress were to repeal the Affordable Care Act as they have threatened to do.] Continue reading “Sheltering Assets to Maintain Housing Benefits”

Trustee’s Liability for Contractor’s Work

Whether you are a Trustee of a trust that owns real property, a Personal Representative of a decedent’s estate that holds real property, or simply a homeowner, it is important for you to know your potential liability when you engage a contractor to perform work on the property if an employee of the contractor gets hurt on the job.

Many home service contractors do not carry worker’s compensation insurance coverage for their employees.  This is especially notable with tree service contractors.  The same men who climb trees with powerful chain saws to cut limbs and tree trunks while hanging from a rope around their waists in one of the most dangerous home service professions often find it prohibitively expensive to pay the premiums for worker’s compensation insurance, and therefore do not obtain such coverage.

The problem with that is, if one of the workers is injured on the job, even if that person is an employee of the contractor, then the law may treat such injured worker as your employee for liability purposes.  And, unless you, as Trustee or homeowner, have worker’s compensation insurance to cover this particular type of worker – and obtaining such coverage for the once in a blue moon tree cutter or other home service contractor likely is not possible – then the potential liability is unlimited. Continue reading “Trustee’s Liability for Contractor’s Work”

Medicaid Updates Transfer Penalty Rule

If one applies for Medicaid to pay for long term care in a nursing home, the state will look to see if the applicant made any gifts in the five years preceding the Medicaid application. If so, then (with some exceptions addressed in various articles on this website) a period of Medicaid ineligibility will be imposed.

For many years before 2014, the period of ineligibility was determined by dividing the amount of the gift by $6,800, which amount was supposed to be the average monthly cost of care in a nursing home. In July, 2014, that number was changed to $7,940. Medicaid has again updated the divisor to take into account Nursing Home care cost inflation.

Effective July 1, 2016, the divisor to determine the number of months of Medicaid ineligibility for gift transfers is $8,684, which means that one would be ineligible for one month for every $8,684 in gifts made during the five years preceding the Medicaid application. Please be aware that this number is revised from time to time. Please contact us to find out the current divisor amount.

Bear in mind that the term “gift” means any transfer of resources with respect to which the transferor did not receive full value. Thus, if a person sold her house for less than it’s fair market value (Medicaid uses assessed value or an appraisal to determine fair market value), then Medicaid will treat the difference between the sales price and the deemed fair market value to be a gift transfer even if such sale was made to a third party in a bona fide arms length transaction.

We at the Gatesman Law Office endeavor to stay at the cutting edge of new developments in Medicaid law and policy.

Should you have any questions as to how this new policy might affect you or a loved one, please contact us by clicking the Contact link on this website.

Bill Gatesman

New Procedure to Obtain Estate Tax Return Closing Letter

The Internal Revenue Service will no longer routinely issue estate tax closing letters when it finishes satisfactorily processing an estate tax return. In an online Notice published -HERE-, the IRS states that “estate tax closing letters will be issued only upon request by the taxpayer.” That Notice sets forth the procedure whereby a taxpayer or tax preparer may obtain a Transcript in lieu of a closing letter to ascertain that an estate tax return has been accepted by the IRS.

Medicaid Exclusion for Joint Assets Under Attack

It is a well established principle of the Maryland Medicaid rules that certain jointly owned assets such as stocks or real property will not be counted as available resources to a nursing home resident who applies for Medicaid benefits if the other joint owner refuses to participate in a sale of the property.

For decades, such assets have been disclosed by nursing home residents on their Medicaid applications and such assets have been valued at zero for purposes of determining Medicaid eligibility.

Recently, however, a Medicaid applicant was denied Medicaid coverage for nursing home care because the applicant owned stock, in certificate form, with her son in joint ownership, even though the son had refused to participate in a sale of the stock. Ordinarily, such a denial by a Medicaid caseworker would be overturned when the case was appealed to an Administrative Law Judge, but in this case, the Administrative Law Judge ignored the specific regulation in the Maryland Medicaid Manual that explicitly states that jointly owned stock should not be a countable asset where the joint owner refuses to sell.

Such denial has implications, not only for the particular individual whose Medicaid application was denied, but for Medicaid applicants statewide. Indeed, this case has been appealed to the Circuit Court of Maryland where a senior Assistant Attorney General, representing Maryland’s Medicaid authority, the Department of Health and Mental Hygiene, essentially has requested the Circuit Court to issue a decision that radically revises the long standing Medicaid policy concerning such jointly owned assets.

If the Circuit Court were to uphold the decision of the Administrative Law Judge in this particular case, then it would shroud the process of dealing with jointly owned assets in a cloud of uncertainty. No longer would Medicaid applicants and their advisers be able to act with certainty regarding jointly owned assets, as there would exist the possibility that Medicaid caseworkers could arbitrarily ignore the applicable rule on the strength of judicial precedent.

This is not the proper way for the Medicaid authorities to change their policy. The proper way is to propose rule changes, either by changing the Code of Maryland Regulations, or by changing the Maryland Medicaid manual. Simply leaving a rule in place that exempts joint assets from consideration, but then attacking such an arrangement by imposing Medicaid ineligibility on a case-by-case basis on unsuspecting Medicaid applicants is bad public policy.

The State’s efforts to deny benefits in the case under discussion in this article is an example of such bad public policy.

William M. Gatesman is following the progress of this case closely and will inform the readers of this website of any new developments as they arise.

In the meantime, Mr. Gatesman stands ready to assist clients with prudent Medicaid eligibility and asset protection planning in the context of a changing landscape.

How to Prevent The Never Ending Estate

Some workers who have received judgments in their favor from their former employers for work related disease or injury, such as asbestos related injuries or coal mining related diseases, find that the judgments are paid out over time, sometimes in the form of small amounts paid now and then over a period of many years. Some of these individuals have died and their probate estates have been wrapped up and closed. Then, out of the blue, another check arrives with a payment on the injury or disease settlement.

Once such check arrives, notice must be given to the Register of Wills in the county in which the estate had been opened, a supplemental inventory and account filed, and distribution made (with the payment of an additional probate fee in some circumstances). If a lawyer assists with this process, there will be legal fees as well. This is a cumbersome and costly endeavor, sometimes for a very small amount of money.

This continuous process of reopening the estate each time a settlement check arrives can be avoided with the proper assignment of future settlement payments to the beneficiaries of the estate when the final estate administration account is filed and the estate closed. Such assignment can grant the Personal Representative of the estate continuing authority to transact checks to make the distributions to the beneficiaries.

The Gatesman Law Office assists clients with the process of simplifying life for estate beneficiaries by arranging for the distribution of such settlement awards that might be received after an estate is closed without the necessity of continually filing supplemental inventories and accounts year after year.

Paying Legal Fees from a Probate Estate

In general, a Personal Representative of a decedent’s estate may not pay legal fees out of the probate estate without first getting approval from the Orphan’s Court overseeing the estate administration.  A Personal Representative has to be careful about this rule.  For example, if the Personal Representative hires a lawyer to prepare a deed, oftentimes, the deed preparer will simply send a bill for services without notifying the Personal Representative of his or her duty to get court authorization to pay that bill.  It would be improper for the Personal Representative to simply pay that bill without obtaining court authorization to do so.

Similarly, a Personal Representative should get court authorization to pay any legal fees incurred before death.  There are two exceptions to obtaining such prior authorization.  Some might argue that such authorization would not be required if the lawyer whose fees are being paid files a claim in the estate for such fees, and the Personal Representative pays the claim, which payment is reflected on an estate administration account (the argument being that such payment is the payment of a claim and not payment of legal fees, per se); however, the conservative way to do so would still be to obtain court authorization, or to pay such amount using the method discussed in the paragraph below.

Another method for paying legal fees incurred by the decedent before death is for the Personal Representative to provide all interested persons and all unpaid creditors with a Notice of the Personal Representative’s intention to pay such legal fees.  That notice will provide the interested persons and unpaid creditors with a time period in which such persons could object to such payment, and if such objection is properly and timely made, the Orphans Court will hold a hearing to determine how much of such fee is to be paid using estate funds.   If no objections are made within the allowable time, however, then the Personal Representative may pay such legal fees incurred before death with no further court action.  There is a particular rule of court that allows legal fees to be paid in this manner.

William M. Gatesman is skilled in the various methods of paying legal fees from a probate estate and assists clients with the proper administration of estates, including the payment of legal fees using estate assets.   As stated elsewhere on this website, these article are of general interest and readers should not consider these articles to constitute legal advice.   William M. Gatesman stands ready to give legal advice to particular clients in jurisdictions where he is licensed to practice law.  Please contact Mr. Gatesman if you would like to obtain legal advice regarding the matters addressed on this website.

Legislature Tinkers With Power of Attorney Law

The Maryland legislature once again has tinkered with the law governing powers of attorney in Maryland. That law includes Power of Attorney Forms, which if used, or if one’s power of attorney is “in substantially the same form” as one of the form documents, then the law bestows certain rights on the holder of the power of attorney, namely, the right to obtain payment of one’s legal fees from the person or institution who refuses to honor the power of attorney where a legal action is taken to compel acceptance. This right to legal fees differs from the general “American rule” of jurisprudence which holds that each litigant in a legal action must pay his own legal fees.

Unfortunately, the forms in the statute are generally not sufficiently comprehensive and lack certain important provisions.

Continue reading “Legislature Tinkers With Power of Attorney Law”