Within the past month, a financial planner at a Plymouth bank suggested that one of my clients, a married person who has been diagnosed with Alzheimer’s disease, buy an immediate annuity with the funds in his IRA. This pressurized sales attempt occurred after his wife explained that she had met with me and that the plan was to be moving funds to her name.

The relentless selling of annuities at that bank appears to have no bounds. The clients involved in this situation were initially pressured by other people at the bank to meet with the financial consultant, then tried to cancel and received further pressure to keep the appointment.

Here’s why that financial consultant’s annuity idea was atrocious: When one member of a married couple buys an immediate annuity (which can be similar to buying a short-term pension) and soon thereafter needs nursing home care, that check will continue to be received by the institutionalized spouse, and will be treated as the institutionalized spouse’s income for MassHealth purposes.  Therefore, the funds that were invested into that immediate annuity, which could have been preserved for the at-home spouse if sensible financial planning had been done, usually are essentially lost. (For further explanation, see Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts)

You might think that someone who claims to have been an investment advisor for many years would have learned in detail about how annuities are treated by MassHealth, but you should not ever make that assumption when you are dealing with a bank. That is yet another reason not to be buying annuities at banks, where they may not even realize that they are causing financial harm to some married senior citizens.

Elderly clients trust the bank, and do not realize that the “investment advisors” and the bank will receive a healthy commission for making the annuity sale. Elderly clients who are sold deferred annuities often do not understand that if they want their money back, surrender charges will apply. That means they can lose a substantial amount of the original money placed into the annuity.

When one member of a married couple buys a deferred annuity and soon thereafter needs nursing home care, to obtain MassHealth coverage we often have no choice but to surrender the annuity and get stuck with the surrender charges. That is a reason not to be buying annuities at banks, where just about the only point they tell you about is that you’ll receive a higher interest rate.

I recently met with an older client who had no home and an investment portfolio of less than $300,000, including a speculative penny stock she had recently bought for $80,000 that was now worth only $20,000. It was apparent to me that her stock broker lacked any common sense and was putting her into gambles, so I referred her to a financial adviser that I trust. We have since learned that the failed stock broker has now been hired to be a “financial advisor” at a large bank. The fact that he is still in the financial business and will no doubt be convincing older people to purchase annuities that they do not need is one more reason not to be buying annuities at banks.

For older married couples, the correct first move if one of them enters a nursing home is to move all assets into the name of the healthy one. (See Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts.)  That means the ownership of any annuity in the name of the institutionalized spouse has to be changed to the name of the at-home spouse; unfortunately, if that move is not allowed, the annuity has to be surrendered, and the surrender charges have to be paid. In particular, an annuity owned by the IRA of the institutionalized spouse always has to be surrendered, as there is no other way to transfer that asset directly to the name of the at-home spouse.

There is another type of annuity that can sometimes help preserve assets upon a nursing home stay and a MassHealth application, but that annuity (known as an immediate annuity) is a lousy investment and does not have to be purchased — and usually should not be purchased — until around the time of a MassHealth application.

Where a deferred annuity is never the right type of annuity for MassHealth purposes, why should anybody ever be buying it or selling it in the first place if the elderly person has future MassHealth concerns?  (See Is It a Good Idea for an Elderly Person to Purchase a Deferred Annuity? )

One of my clients has even told me he considered the annuity salesperson to be his friend because he never saw any commission and didn’t get charged for the annuity.

A deferred annuity is an insurance product that receives special treatment under federal income tax law.  The income generated by the annuity is only taxable when the funds are accessed.  After death, the beneficiary of the deferred annuity receives the proceeds free of probate, so the annuity owner’s will has no effect on the annuity (unless the annuity has no beneficiary).

Sometimes from a pure income tax standpoint, buying an annuity is a mistake.  I am seeing that some clients who barely have enough income to pay income tax are being sold deferred annuities.  What then happens is the income is accumulated on a tax-deferred basis, then at death that income ends up going out to beneficiaries who are in a much higher income bracket.   The proceeds are not being taxed at the older client’s lower income tax rate, and end up being on the tax return of beneficiaries at a higher tax bracket, so, overall, from a family standpoint, extra income taxes end up being paid on the annuity income.  (In many cases, if the deceased client had made a different type of investment, it is possible that all of that income could have gone to the beneficiaries free of income tax.)

Often, on deferred annuities sold to elders, the annuity ends up being a blunder for MassHealth or Medicaid purposes.   A deferred annuity is considered an available asset by MassHealth and is never a helpful investment in case of a long-term nursing home stay.  Some of my clients who were sold deferred annuities believe they were told that the deferred annuity is not considered an asset if the client ended up in a nursing home and applied for MassHealth to pay for the nursing home costs.  Unfortunately, a deferred annuity is considered just another asset in the MassHealth application process, and it has to be spent on nursing home care just like any other asset.

There are different layers in MassHealth law, and many persons only seem to know about the bottom layer, so let’s go over that one first. Under 2013 law, just about everything other than the home and car are totaled, and the community spouse supposedly can keep only the first $115,920. (The rest of the assets are effectively owned by the spouse in the nursing home, and supposedly have to be spent on the nursing home bills of the institutionalized spouse; but note that I intentionally wrote the word “supposedly.”)  Unfortunately, this lower layer is where the knowledge of many persons ends, and two other upper layers of the law effectively override the lower layer. One upper layer is that the community spouse can enter into certain types of immediate annuity contracts with the spenddown (i.e., excess) assets.

Before even thinking about buying an annuity, the community spouse should keep three things in mind: (1) not every immediate annuity will work, where Massachusetts law makes most annuities assignable and the annuity has to be nonassignable under federal Medicaid law and MassHealth regulations; (2) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased until the institutionalized spouse’s nursing home stay has already begun; and most importantly (3) some community spouses can keep everything without needing an annuity, and are better off without an annuity, due to the other upper layer of MassHealth law that protects income for the community spouse.

At present, the community spouse has the absolute right to an income of at least 1,891 per month. (Further, if shelter expenses exceed 30% of this figure, or $567, or if a disabled child lives at home, the community spouse is often entitled to keep much more than $1,891 per month.) If the Social Security and pension payable in the name of the community spouse is less than the $1,891 figure, at the end of the MassHealth application process the community spouse is allowed to keep some or all of the institutionalized spouse’s income.  Because the monthly payment from an immediate annuity is considered to be the community spouse’s income, buying an annuity before the basic numbers have been analyzed by an elder law attorney could prevent the community spouse from receiving income from the institutionalized spouse. (That means the annuity payments in some cases would be simply replacing income that the community spouse was already entitled to have, and the annuity ends up not benefiting the community spouse.)

If the needs of the community spouse are greater than $2,898 per month, a higher amount of income can sometimes be preserved for the community spouse via the fair hearing appeal process, where the need to keep the other assets has to be proved to maintain the financial ability to remain in the community.  A common situation where need can be fairly easily proved is where the community spouse is living in an assisted living facility and needs to be there due to frailty, medical condition or other special needs.   Once the need to be in assisted living is established, the appeal is primarily about numbers and prevailing CD and money market interest rates, so the community spouse need not go to the hearing, and the elder law attorney can often handle it alone.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer to represent the interests of the institutionalized spouse.

When spenddown and appeal options are determined by an elder law attorney as potentially unsuccessful, the community spouse can often purchase certain types of immediate annuities, which should always be the last resort due to the manner in which the institutionalized spouse’s income ca be allocated to the community spouse for MassHealth purposes.

A warning to the trusting and the gullible:  There are elder law “attorneys” and MassHealth application services who profit from selling annuities, so it is important to have the entire picture reviewed, and often to get a second opinion, before rushing into purchasing an immediate annuity from somebody who claims to be helping you; they may instead be helping themselves (to a healthy commission).

A final note :  Maintaining the maximum retroactivity of the original MassHealth application is vital to preserve assets for the community spouse and to ensure that the nursing home will be paid by MassHealth, so the MassHealth fair hearing appeal process should never be overlooked if any type of notice of denial is ever received along the way.  A community spouse can be (and has been) successfully sued by the nursing home if timely MassHealth benefits are not obtained; see Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?

If the application is filed in the Taunton office, use this form:   http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-taunton.pdf

If the application is filed in the Chelsea office, use this form:   http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-chelsea.pdf

If the application is filed in the Tewksbury office, use this form:   http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-tewksbury.pdf

If the application is filed in the Springfield office, use this form:   http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-springfield.pdf

It appears to be a requirement of these letters that a MassHealth application be already filed.  In that situation, time is usually very limited to comply with MassHealth’s written requests for verifications of banking transactions.  Since you wouldn’t know whether the bank had complied with the request unless you received the bank records yourself, it is probably not a good move to request that the records be sent directly to the MassHealth Enrollment Center.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,841 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,841 of the married couple’s total income.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2012 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts.

A member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys recently reported via email on its listserv a cautionary tale about why a MassHealth applicant should not allow the nursing home’s lawyer to be directly involved in or take over the MassHealth application and appeal processes.  In that case, an out-of-state law firm representing a Massachusetts nursing home is now suing an elderly nursing home resident and members of his family, and using information the law firm had gathered while supposedly helping the elder.

The elder had applied for MassHealth and was denied on the basis that $100,000 in caregiver contract payments were disqualifying transfers. The daughter (who is attorney-in-fact under the elder’s durable power of attorney) appealed and the hearing officer in February 2012 upheld the validity of the contract and approved the $60,000 of the payments that were rendered prior to the elder’s admission to the nursing home. The hearing officer decided that the remaining $40,000, which was paid after the nursing home stay had begun, was a disqualifying transfer, resulting in a MassHealth disqualification period of approximately 5 months.

The elder’s current lawyer reported:  “Prior to the hearing date, the nursing home law firm had the elder assign his rights to the MassHealth benefits, to allow the firm access to his financial records and to cooperate with the law firm to secure MassHealth benefits. The law firm stated that, although they were not representing the elder, the firm would handle the administrative appeal on his behalf.”  

The elder’s current lawyer also noted: “MassHealth’s lawyers refused to respond to the firm’s request for documents.  MassHealth stated in its appeal memo that they felt the attorney was fishing for information that he could then use to sue the elder!  The hearing officer refused to allow the attorney to participate in the fair hearing because the firm hadn’t filed the necessary paperwork.”

It seems to me that after the partial victory at the fair hearing, a competent elder law attorney representing the elder then would have explained to the family (1) that it would be a steep uphill battle to appeal a factual decision to Superior Court, (2) how a “cure” works in the MassHealth application process, (3) who would have potential personal liability for the elder’s unpaid nursing home bills, and (4) that a return of $40,000 to the elder within 60 days would have resolved the MassHealth problem.  It does not appear that the law firm representing the nursing home did any of these things. 

The elder’s current lawyer also reported:  “Within 30 days of the decision, the nursing home lawyer filed a 30A appeal in Superior Court, purportedly acting on behalf of my client under the assignment of rights. They did not notify the client that they had done so. They also filed a hardship waiver appeal administratively on behalf of the nursing home. Again, the client was not informed. Then in March, with both cases pending, the nursing home law firm filed a lawsuit against the elder and his kids in Superior Court, alleging that the caregiver contract payment was a fraudulent transfer, a breach of the nursing home admission contract, and a breach of fiduciary duty. The suit neglected to mention the valid caregiver contract or the favorable appeal decision.  The nursing home filed an emergency motion for an injunction requiring the kids to turn over the entire $100,000 they earned under the contract.”

Obviously, the family has had to hire a lawyer to defend against the nursing home lawyer’s questionable tactics.  The “free” help offered by the nursing home on the fair hearing appeal process has now resulted in family members incurring the cost of a lawyer to defend themselves personally against the nursing home’s lawsuit.

The elder’s current lawyer concluded: “The law firm essentially tried to bully the client into paying them the entire $100,000, when they have no claim to the $60,000 that was a non-disqualifying transfer and a tenuous claim on the $40,000. … Bottom line, this is a case which highlights how clients need to be on their guard when the nursing home offers to assist them.”

If the surviving spouse is the sole beneficiary of the deceased spouse’s estate, however, the Internal Revenue Service may allow the surviving spouse to transfer the IRA into the surviving spouse’s IRA.  In Private Letter Ruling 201211034, which cannot be used as a precedent in any other case but which shows the lenient attitude of the Internal Revenue Service towards helping the surviving spouse in that case, the Internal Revenue Service concluded that the surviving spouse could transfer the proceeds tax-free into the surviving spouse’s IRA in two different ways.

One way authorized  in Private Letter Ruling 201211034 for the surviving spouse to receive the IRA and stretch it out was to engage in a trustee-to-trustee transfer from the deceased spouse’s IRA directly to the surviving spouse’s IRA.  According to the Internal Revenue Service, such a rollover would be exempt from the withholding requirement in Internal Revenue Code Section 3405(c)(2).  Because such a  move would require direct participation by both of the IRA custodians, the surviving spouse and the Executor or Personal Representative of the deceased’s spouse’s estate could be forced to jump though hoops before obtaining approval of the process by the IRA custodians.

The other way authorized by the Internal Revenue Service in Private Letter Ruling 201211034 for the surviving spouse to receive the IRA and stretch it out was for the estate to claim the IRA proceeds, then, within 60 days, roll over those proceeds into the surviving spouse’s IRA.  The IRS ruled that such a rollover would also be exempt from the withholding requirement in Internal Revenue Code Section 3405(c)(2). This two-step approach, from the decedent’s IRA to the decedent’s estate then to the surviving spouse’s IRA, may be the more practical way of handling the situation where an IRA has no beneficiary designation and the surviving spouse is the sole beneficiary of the deceased spouse’s estate.

Is it possible that, without anesthesia or other restrictions, you could feel pain during the harvesting process?  A recent article in the Wall Street Journal, entitled What You Lose When You Sign That Organ Donor Card, raises this concern.  Once you are considered to be brain dead, you no longer have any legal rights, and the medical doctrine of informed consent no longer applies.  At that point, the Health Care Agent named in your Massachusetts Health Care Proxy would no longer have any say about the organ donation process.

What is troubling is that the organ harvesting process, where you would be known as a beating-heart cadaver, can sometimes result in an increase in the “deceased” person’s blood pressure, which could possibly mean that the organ donor feels pain during the process (although many doctors dismiss this possibility).  Some doctors use a local anesthetic, which doesn’t affect the organs, but others do not use any anesthetic at all.

To allow more control over how the organ donor will be treated during the harvesting process, it may be better not to sign a donor card or have anything affixed to your driver’s license, but rather to give your Health Care Agent complete authority to make decisions regarding all organ donation issues.  The Health Care Agent could then insist that the organ donations be conditioned on proof that pain cannot be felt or conditioned on local anesthetics being used during the organ harvesting process.

The author of a new book entitled The Undead: Organ Harvesting, the Ice-Water Test, Beating Heart Cadavers — How Medicine Is Blurring the Line Between Life and Death and an organ transplant surgeon were interviewed on March 19, 2012 on National Public Radio; a recording and transcript of the interviews can be found at http://www.npr.org/2012/03/19/148296627/blurring-the-line-between-life-and-death.  Although the surgeon stated definitively that there is no pain when there is no upper-level brain function, the interviewer did not seem to delve very deeply into the issue, and unfortunately did not ask about why there have been reports of increases in blood pressure during the organ harvesting process.

Some income tax planning for a person’s final income tax returns can be done not only immediately prior to the person’s death, but also after the person’s death. The following items should be considered.

(1) Pre-Death Capital Losses

The date of death of a client establishes a new basis in the client’s assets for capital gains tax purposes. Thus, pre-death sales of appreciated assets should be avoided if possible. On the other hand, capital losses are lost when someone dies (due to a step-down in basis), so a pre-death sale of such assets could end up being good income tax planning if the decedent’s final return would otherwise show significant taxable income. Whenever in doubt, capital losses should be recognized, as they will be lost upon death.

(2) Accrued Income on U.S. Savings Bonds

Accrued income on U.S. Savings Bonds, Series E, EE, H and HH can be included by the executor on the decedent’s final income tax returns. See Rev. Rul. 68-145, 1968-1 CB 203.

It may be beneficial for a surviving joint tenant on such bonds to execute a qualified disclaimer of the survivorship interest if the decedent would have been in a lower bracket. If a disclaimer may be advisable, it can be done within nine months of the decedent’s death, but note that the ability to do so could be tainted by any acceptance of its interest by the surviving joint tenant. A warning to surviving joint tenants not to take any action that would cause deemed acceptance of the interest is advisable in many circumstances.

(3) Medical Expenses Paid by Executor

Private payment of nursing home expenses in the client’s final year could result in a large itemized deduction that can offset a significant amount of income. Any medical expenses paid within one year of death by the executor can be elected either as estate tax deductions or as income tax deductions on the decedent’s final income tax returns.

(4) Qualified Plans and IRAs

Upon the death of an unmarried client who has attained the required beginning date and has opted to recalculate his/her life expectancy on IRAs or qualified plans, distribution must take place before the last day of the calendar year immediately after the year of the decedent’s death. It could be advisable to make a pre-death withdrawal from such IRAs and qualified plans in order to recognize the income on the client’s income tax returns, as well as to cause the resulting income taxes to be estate tax deductions. A conversion to a Roth IRA would have the same result, yet allow the beneficiary the option of future tax-free accumulations, and may well be advisable in such situations.

It may be advisable to include in clients’ durable powers of attorney the power to convert an IRA to a Roth IRA.

(5) Pre-1977 Spousal Joint Tenancies and Tenancies By the Entirety

The presumption that each spouse contributed 50% does not apply to joint tenancies and tenancies by the entirety created before 1977, under the holding of Gallenstein, 975 F.2d 286 (6th Cir. 1992) and its progeny. Thus, if the non-contributory spouse is terminally ill, a division of jointly-held assets into tenancy in common may be advisable to obtain a step-up in basis of 50% of the assets and for the proper funding of the estate plan.

(6) Using Discretionary Testamentary Trusts

Even if the couple has a significant amount of assets for federal tax planning purposes, for long-term care planning purposes it may be advisable to have the dying spouse execute a will containing a discretionary trust for the benefit of the surviving spouse. This technique has the benefit of shielding the assets from any possible nursing home costs of the survivor under the definition of trusts under federal law (42 U.S.C. Section 1396p(d)(2)(A)) and concomitant state regulations in Massachusetts and many other states.

It also appears that the loss in basis adjustment referenced in Internal Revenue Code Section 1014(e) would not apply if the trust were discretionary; thus, even assets transferred into the decedent’s name shortly before death would appear to attain a stepped-up basis. Under a specific prohibition in Section 1014(e), assets transferred to a person who dies within one year of receipt of the gift do not receive a step-up in basis only if there is a requirement that the assets be distributed to the prior owner; while there are no cases or regulations on point, the use of a discretionary trust appears to circumvent this prohibition.

(7) Granting General Power of Appointment to Dying Spouse

It has been suggested by at least one commentator that granting a general power of appointment to a spouse, even within one year of death, can result in a complete step-up in basis on the assets affected thereby. (See The Tax Basis Revocable Trust: New Concepts in Estate Planning, by Paul M. Fletcher, The Covercroft-Twigmore Group.) The method is to make the surviving spouse’s trust property subject to a limited, general power of appointment for debt payment during administration of the deceased spouse’s estate. Because of this general power of appointment, the surviving spouse’s appreciated trust property is included in the gross estate of the first spouse to die. While Internal Revenue Code Section 1014(e) disallows a step-up in basis on a gift made to the decedent within one year of death, the author suggests that the language of that provision does not apply to inclusion of someone else’s property in the decedent’s gross estate. To draw your own conclusion, see not only the Code section, but also PLR 9308002, where a step-up in basis was disallowed. For an article on the subject, see Melinda S. Merk, “Joint Revocable Trusts for Married Couples Domiciled in Common-Law Property States,” Real Property, Probate and Trust Journal, Vol. 22, No. 2, p. 345 (Summer 1997).

Note that the Court did not invalidate the preferred method under previous law, which was to file a Declaration of Homestead individually, then reserve the homestead rights when deeding the home to a trust.

Anybody who before March 16, 2011 attempted to file a Declaration of Homestead for a trust should consider filing a new one under the present law, but note that a beneficiary of a trust still cannot file a Declaration of Homestead under the new version of Massachusetts General Laws, Chapter 188.  Instead, the Trustee must do so on behalf of the trust’s beneficiary and must identify the beneficiary in the legal instrument.

The current wife of a fairly young mentally disabled man (who I’ll refer to as Craig) recently came in to see me about his situation.  Craig had suffered a traumatic brain injury a few years ago, and his mental condition had been in decline.  Fortunately, he had signed a Massachusetts Health Care Proxy, so his wife was able to make appropriate health care decisions for him.  The hospital was trying out various antipsychotic medications to attempt to stabilize him mentally, and his wife had the authority as his Health Care Agent to consent to the medication treatment plan.  It was anticipated that Craig would not be able to return home, and that he would need to be placed in a nursing home once his mood swings had been stabilized.

To get Craig moved to an appropriate nursing home, his wife needs to prove to nursing homes that there is a payment source.  This married couple, like most others, doesn’t have the funds to be able to afford nursing home bills out of their private funds, so they need to apply for MassHealth for him.  Unfortunately, Craig has a bank account in his own name, and his wife has no access to those funds and cannot request the 5 years of bank statements that are required for the MassHealth application.  If Craig had executed a durable power of attorney, his wife (or someone else who was appointed) would have been able to take these actions, but without it, she needed to petition the Probate Court to be appointed Conservator.  Unfortunately, the basic conservatorship process can take 2-3 months, and there was an immediate need to handle Craig’s financial affairs, so we needed to add an expensive lawyer onto the process and have his wife appointed Temporary Conservator.

There is a complicated wrinkle in this case, as several years ago Craig’s mother set up a trust for him and his children from a prior marriage, and Craig is the trustee; at some point, his mother also added his name as a joint tenant on her CDs and bank accounts.  All of what Craig’s mother had done affects his MassHealth application and the conservatorship .  Once the judge learned about these complexities, a Guardian ad Litem was appointed for him to file a written report with recommendations with the Probate Court, and Craig also had a lawyer appointed to represent him.

Therefore, at some point in the near future there will likely be a meeting involving (1) me, representing the wife not individually but in her capacity as Temporary Conservator; (2) the lawyer appointed to represent her husband’s interests aggressively; (3) the lawyer who was appointed Guardian ad Litem, and (4) a lawyer representing the children from his previous marriage.  Just imagine how expensive that meeting will be, and how expensive the overall conservatorship will eventually be if all of us don’t completely agree on a plan.  Even if we all come to a quick agreement, the fact that there are four lawyers, along with the need to get Probate Court approval, still means that the process will cost thousands of dollars.

All of the conservatorship complexities of this case could have been avoided if Craig had executed a detailed durable power of attorney.  (I don’t mean a generic form that can be found on the internet, but rather a durable power of attorney that deals with the document signer’s specific assets and issues.)  This case is a great lesson on why a detailed durable power of attorney drafted by an experienced elder law attorney can often be the most important document in a person’s estate plan.

There are different layers in MassHealth law, and many persons only seem to know about the bottom layer, so let’s go over that one first. Under 2012 law, just about everything other than the home and car are totaled, and the community spouse supposedly can keep only the first $113,640. (The rest of the assets are effectively owned by the spouse in the nursing home, and supposedly have to be spent on the nursing home bills of the institutionalized spouse; but note that I intentionally wrote the word “supposedly.”)  Unfortunately, this lower layer is where the knowledge of many persons ends, and two other upper layers of the law effectively override the lower layer. One upper layer is that the community spouse can enter into certain types of immediate annuity contracts with the spenddown (i.e., excess) assets.

Before even thinking about buying an annuity, the community spouse should keep three things in mind: (1) not every immediate annuity will work, where Massachusetts law makes most annuities assignable and the annuity has to be nonassignable under federal Medicaid law and MassHealth regulations; (2) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased until the institutionalized spouse’s nursing home stay has already begun; and most importantly (3) some community spouses can keep everything without needing an annuity, and are better off without an annuity, due to the other upper layer of MassHealth law that protects income for the community spouse.

At present, the community spouse has the absolute right to an income of at least 1,839 per month. (Further, if shelter expenses exceed 30% of this figure, or $552, or if a disabled child lives at home, the community spouse is often entitled to keep much more than $1,839 per month.) If the Social Security and pension payable in the name of the community spouse is less than the $1,839 figure, at the end of the MassHealth application process the community spouse is allowed to keep some or all of the institutionalized spouse’s income.  Because the monthly payment from an immediate annuity is considered to be the community spouse’s income, buying an annuity before the basic numbers have been analyzed by an elder law attorney could prevent the community spouse from receiving income from the institutionalized spouse. (That means the annuity payments in some cases would be simply replacing income that the community spouse was already entitled to have, and the annuity ends up not benefiting the community spouse.)

If the needs of the community spouse are greater than $2,841 per month, a higher amount of income can sometimes be preserved for the community spouse via the fair hearing appeal process, where the need to keep the other assets has to be proved to maintain the financial ability to remain in the community.  A common situation where need can be fairly easily proved is where the community spouse is living in an assisted living facility and needs to be there due to frailty, medical condition or other special needs.   Once the need to be in assisted living is established, the appeal is primarily about numbers and prevailing CD and money market interest rates, so the community spouse need not go to the hearing, and the elder law attorney can often handle it alone.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer to represent the interests of the institutionalized spouse.

When spenddown and appeal options are determined by an elder law attorney as potentially unsuccessful, the community spouse can often purchase certain types of immediate annuities, which should always be the last resort due to the manner in which the institutionalized spouse’s income ca be allocated to the community spouse for MassHealth purposes.

A warning to the trusting and the gullible:  There are elder law “attorneys” and MassHealth application services who profit from selling annuities, so it is important to have the entire picture reviewed, and often to get a second opinion, before rushing into purchasing an immediate annuity from somebody who claims to be helping you; they may instead be helping themselves (to a healthy commission).

A final note :  Maintaining the maximum retroactivity of the original MassHealth application is vital to preserve assets for the community spouse and to ensure that the nursing home will be paid by MassHealth, so the MassHealth fair hearing appeal process should never be overlooked if any type of notice of denial is ever received along the way.  A community spouse can be (and has been) successfully sued by the nursing home if timely MassHealth benefits are not obtained; see Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?

The Massachusetts “durable” power of attorney is similar to a power of attorney that is not durable, but there is one huge difference between the two types.  The difference involves whether the agent or attorney-in-fact continues to be empowered to take action for you once you have become disabled.  A power of attorney that is not durable is no longer effective if you become disabled, whereas a “durable” power of attorney continues to be effective even after your disability.

Under the English common law upon which Massachusetts law is based, if you signed a power of attorney naming someone to act on your behalf, the person would have authority only for as long as you remained competent.  If you later became disabled or incompetent, the power of attorney became null and void.  That would mean a court process would then be required for someone to be able to step in and handle your financial affairs upon your disability.  To minimize the need for court involvement by allowing a power of attorney to remain effective after disability or incapacity, decades ago the Massachusetts legislature passed a law (Massachusetts General Laws, Chapter 201B) to allow for the creation of a “durable” power of attorney.  The way to make a power of attorney become durable is to add a phrase that makes it clear that the powers detailed in it remain effective even after disability.

That Massachusetts durable power of attorney laws were changed when part of the Massachusetts Uniform Probate Code took effect on July 1, 2009, and, as I’ve reported in a previous post, Chapter 201B was repealed. (See Is Your Massachusetts Durable Power of Attorney Still Valid?)  Unfortunately, when a law is replaced, actions taken under it are still effective, but when a law is repealed, those actions are treated as though the law was never there. Therefore, any durable power of attorney executed before July 1, 2009 may be invalid, especially if it makes specific reference to Chapter 201B.

The major problem with any durable power of attorney is that it is only as good as the respect it receives from a self-serving bureaucrat. (If you bring money to a bank using a durable power of attorney, you may be greeted with open arms; if you try to take money out of a bank using a durable power of attorney, often you’ll hear that it needs to be reviewed by the bank’s lawyer.) There is never any guarantee that third parties, such as banks or insurance companies, will honor a power of attorney even if it is durable. Such problems often arise when there has been a long passage of time since the power of attorney was executed and it is thought to be “stale.”  Fortunately, the current Massachusetts law addresses this problem by stating that no durable power of attorney ever become stale, and that  if you rely on a power of attorney in good faith, you will not incur any liability if you follow the instructions of the agent or attorney-in-fact.

Unfortunately, the other reason a durable power of attorney may be rejected is based on the specific powers granted to the agent or attorney-in-fact. While theoretically the document need only state that you want to give the power to do absolutely anything, many financial institutions want to see specific powers that pertain to them before they are willing to respect a durable power of attorney.  Therefore, a well-drafted Massachusetts durable power of attorney is often several pages long.

To the extent that a power of attorney is not effective when needed, the only alternative would be to file for conservatorship under the Massachusetts Uniform Probate Code, and that process is time-consuming, detailed, subject to challenge by well-meaning and not-so-well-meaning relatives, and, as you might expect, expensive.  For those reasons, a well-drafted durable power of attorney is often the most important document that a person could execute.

A person who lives is a nursing home is known as a “resident,” not a patient, and it is important to note that the resident is in a nursing “home,” not a nursing “institution.”  Federal law requires that a nursing facility provide “services and activities to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident.”  Federal law also requires that a facility must ensure that a resident’s “abilities in activities of daily living do not diminish unless circumstances of the individual’s clinical condition demonstrate that diminution was unavoidable.”  Thus, maintaining a condition, or moderating the rate of decline, should always be a goal of therapy services, even if the resident is not making progress.

Federal Medicaid law requires that a nursing facility “must establish and maintain identical policies and practices regarding transfer, discharge, and the provision of services required under the state plan for all individuals regardless of source of payment.”  Thus, a resident should never be denied the continuation of physical therapy based on the excuse that Medicare will no longer cover it.

Nursing facility residents often are susceptible to transfer trauma in being moved from place to place.  Federal law gives every resident the right to veto any intra-facility transfer.  Medicare certification of a room does not prevent that room from being used for the care of a resident who pays privately or has payment through the MassHealth (i.e., Medicaid) program.

Immediate family or other relatives are not subject to visiting hour limitations or other restrictions unless imposed by the resident.  Federal law requires that a resident’s “immediate family or other relatives” have the right to visit at any time if the resident consents to the visit.  Under federal law, non-family visitors must also be granted “immediate access” to the resident.

Federal law requires that a nursing facility must care for its residents in such a manner and in such an environment as will promote maintenance or enhancement of the quality of life of each resident.”  Federal law also requires that a resident has the right “to reside and receive services with reasonable accommodation of individual needs and preferences, except where the health or safety of the individual or other residents would be endangered.”  A resident has the right to choose activities, schedules, and health care consistent with his or her interests, assessments, and plans of care.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,841 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,841 of the married couple’s total income.  All of these figures remain unchanged through June 30, 2012.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.

I have established a blog to deal solely with Massachusetts pet trust issues. You can find it at http://pettrust.info There are already several posts there about the basic components of an effective Massachusetts Pet Trust, including appointing Trustees, Caretakers (sometimes referred to by others as guardians or caregivers) and Monitors (sometimes referred to by others as pet panels), as well as other basic issues to consider.

Text of the New Massachusetts Law Allowing Establishment of Pet Trusts

Can You Leave a Sum of Money Directly to Your Pet in Your Will?

What Are the Reasons to Establish a Massachusetts Pet Trust?

What Are the Basic Components of a Massachusetts Pet Trust?

With Whom Should You Discuss Your Plans for Your Massachusetts Pet Trust?

Should You Have a Discussion with Your Veterinarian about Your Plan to Establish a Massachusetts Pet Trust?

What are the Key Issues to Consider When Appointing the Trustee of a Massachusetts Pet Trust?

Choosing a Caretaker for Your Pet in Your Massachusetts Pet Trust

Who Should Be the Monitor in Your Massachusetts Pet Trust?

Should Your Massachusetts Pet Trust Be a Provision in your Will, or Should It Be a Separate, Stand-alone Trust?

When Can the Amount in a Massachusetts Pet Trust Be Reduced by the Court?

What Are the Income Tax Issues for Massachusetts Pet Trusts?

Instead of Establishing a Pet Trust, Can You Leave Your Pet to Your Veterinarian or an Animal Shelter?

Establishing a Life Care Plan for Your Pet

To calculate the value of the life estate, you must first determine what the applicable interest rate is. The interest rate in the month of the sale can be found at http://www.tigertables.com/7520.htm. Once you have this figure, you then go to http://www.unclefed.com/IRS-Forms/2001/p1457.pdf and look in Table S for the page displaying tables with that interest rate. Looking up the life tenant’s age on that page will get you the breakdown between the life tenant’s percentage interest in the proceeds and the other parties, who on that page are referred to as the “Remainder.” For further explanation, including an example, see  MassHealth Eligibility Operations Memo 07-18 .

The life tenant’s share of the proceeds can be eligible for the $250,000 capital gains exclusion under Internal Revenue Code Section 121, but often the persons receiving the remainder do not live there and their proceeds are subject to capital gains taxation without the ability to use that exclusion. Thus, it can often be advisable to wait until the life tenant’s death before selling real estate.

Note that the failure of the life tenant to receive the life tenant’s full share of the proceeds is considered a disqualifying transfer of assets under federal Medicaid law and MassHealth regulations, and is subject to the 5-year lookback period.

It’s a good thing that the default provision for the estates of decedents  who died during 2010 is the 2011 federal estate tax law, with its $5,000,000 exemption and automatic step-up in basis for assets includible  in the federal gross estate.  Many estates under $5,000,000 will probably not want to elect to be treated under 2010 law and deal with the uncertainties of what assets are entitled to a step-up in basis, so the unavailability of Form 8939 won’t matter to them.  Unfortunately, estates that want to opt out of 2011 law and elect 2010 law still don’t have access to the form or instructions, or even an estimate from the IRS of when they will be completed.

It was once thought that Form 8939 would be due at the same time as the decedent’s 2010 federal income tax return.  The IRS has recently announced, however, that Form 8939 should not be filed with the decedent’s  final income tax return.  Filers of Form 8939 will be given at least 90 days after the form is eventually finalized to file it, and will have access to information about the form and Internal Revenue Code Section 1022 through future Publication 4895, entitled “Tax Treatment of Property Acquired from a Decedent Dying 2010.”

Currently, many elderly or aging persons do not buy long term care insurance because they feel that they cannot afford it.   Some of them feel that way because they consider their principal to be untouchable, and are concerned whenever any plan causes them to invade it.  A deeper inquiry into their finances often shows that much of their principal would not be needed for anything except paying for the costs of their long-term care.  (They could therefore be considered to be gambling with their principal by going without long term care insurance.)

Some elderly or aging persons would consider purchasing long term care insurance but want to evaluate its cost in today’s dollars.  Such clients would prefer to be shown a single premium long term care insurance policy.  For the many insurance companies that do not offer such a product, the use of an immediate annuity with a lifetime payout (or term certain payout equal to or exceeding the client’s life expectancy) to pay for the premium is one way to approximate such a policy.

Some elderly or aging persons would consider purchasing long term care insurance but feel that their principal is untouchable because it includes appreciated assets that would result in substantial capital gains taxes if sold.  They may view the appreciated asset as merely a stream of income that they receive.  Unlocking the equity in these appreciated assets can often provide the funds necessary to pay the premiums for long term care insurance.  Selling these assets, however, usually results in substantial capital gains taxes, thus reducing the amount remaining to pay for the insurance.  It is this author’s opinion that elder law attorneys and other estate planning professionals should be exploring with these clients the possible uses of a charitable remainder annuity trust (CRAT).

A CRAT is an irrevocable trust established pursuant to Internal Revenue Code section 664 that provides a payout to one or more individuals for their lives or a period of up to 20 years.  The payout must be at least 5%, and is based on the initial fair market value of the trust.  The payout that is selected by the client is payable each year without regard to the actual income of the trust.

The primary reason to consider the use of a CRAT in long-term care planning is that when a CRAT sells appreciated assets that had been donated to it, no capital gains taxes are immediately payable.  The CRAT can then invest the full amount of the proceeds in order to provide the payout, which in turn can be used to pay the long term care insurance premium.

The payout from the CRAT generally represents taxable income to the client. If the payout exceeds the current and accrued income of the trust, capital gain will be received by the client.  The type of taxable income should not be of much concern to the client,  since these taxes do not cause the principal of the CRAT to be diminished.  In fact, any long-term capital gain received from the CRAT could end up being taxed on the client’s income tax returns at a lower percentage than the trust’s income.

At the end of the payout period, any amount left in the CRAT must be paid to a charity selected by the client that is described in Internal Revenue Code section 170(c).  When establishing the CRAT, the client need not make an irrevocable decision about which charity will eventually benefit, as the client can reserve a special power of appointment and thereby preserve the right to change the charity receiving the remainder of the trust at the end of the payout period.

Although the remainder of the CRAT would be inherited by a charity instead of the client’s intended heirs, the existence of the long term care insurance would presumably ensure that the client’s other assets would be left behind as an inheritance to them.

A charitable remainder unitrust (CRUT), the other basic type of charitable remainder trust, is not as good a choice for this type of planning. First, the amount received from a CRUT is determined on an annual basis, and is dependent on the income generated by the CRUT’s investments.  If the investment performance in a CRUT were poor for a substantial period of time, the client would be required to invade the client’s remaining principal to pay the long term care insurance premiums.  Thus, the use of a CRUT is often rejected here because it does not provide the certain payout that a client would be looking for in order to pay the annual long term care insurance premium, which should remain level.

The client establishing the CRAT would be entitled to a charitable deduction on the client’s income tax return based on the present value of the charitable remainder.  It is assumed here, however, that the client would be focused primarily on eliminating capital gains taxes on the sale of appreciated assets and receiving the highest feasible payout in order to pay the long term care insurance premium rather than leaving a large amount to charity and receiving a large income tax deduction.

The difficult choice that a client must make on a CRAT is whether to establish a term certain payout or a lifetime payout.  It is this author’s experience that many elderly or aging persons do not wish to enter into a financial gamble that is based on their meeting or exceeding their life expectancy under an actuarial table.  They are concerned about having lost money if they die earlier than their projected life expectancy, and would prefer a payout for a term certain.  Upon the client’s death prior to the end of the term certain, the remaining payout would go to a beneficiary designated by the client.

Another argument in favor of a term certain payout in a CRAT is that the calculations to meet IRS scrutiny are simpler.  With a lifetime payout and a high payout percentage, the IRS could disqualify the CRAT if statistically there could possibly be no remainder to  be left to charity.  The IRS therefore requires that with a lifetime payout there be no greater than a 5% chance that the CRAT could be exhausted by the payout.  The result of the required calculation often is that for a lifetime payout the payout percentage must be smaller than the payout percentage on a term certain. To pay for the client’s long term care insurance premium with a lifetime payout, then, the CRAT would require a greater initial fair market value via more assets to make up for the lowered percentage payout.  Faced with these figures, the likelihood of needing a payout period of greater than 20 years should be considered.

Statatistically, a 20-year payout may be sufficient for most clients.  Under HCFA  Transmittal No. 64 (November 1994),  a female who is 64 years of age or older or a male who is 58 years of age or older has a life expectancy of less than 20 years.  Thus, for most clients purchasing long term care insurance a CRAT for a term certain of 20 years would be longer than needed.  (If the client wished to cover long term care insurance premiums only for the client’s average life expectancy, persons over these ages would require a shorter term certain for their CRAT, and it would therefore require a lower initial fair market value.)

Since the client’s taxable income will be increased by the CRAT, the client may wish to increase the initial funding and receive a payout in excess of the long term  care insurance premium in order to help pay the increased income taxes. The ability of many clients to deduct the premium as an itemized medical expense on Schedule A of their federal income tax return, however, could in many cases offset the taxable income caused by the CRAT.

Due to their concerns about possible impact of nursing home costs (and the Medicaid disqualification period) on their assets, many aging clients feel under pressure to make transfers of their assets earlier than may otherwise be advisable. One relatively simple way to make such a transfer more palatable to a client is to suggest that the client reserve a power which is known as a non-general power of appointment or a “special power of appointment” (SPA).

What is an SPA?

An SPA is a power which allows someone at a later date to alter the disposition planned under the original instrument of conveyance. This power can be reserved by the client in the original instrument making the transfer.

By virtue of the existence of the SPA, the disposition planned in the original instrument of conveyance amounts to nothing more than a vested or contingent interest subject to divestment. If the SPA is never exercised, however, the property will eventually be inherited by the persons or entities (and in the proportions) originally planned.

The possible alternate recipients of the property named or described in the SPA can be any person or entity. For tax reasons, it seems advisable that the SPA exclude the client, the client’s creditors, the client’s estate, and the creditors of the client’s estate. A power which includes any of this group could be treated as a general power of appointment under Internal Revenue Code sections 2041 and 2514 and saddle the holder of the power with unintended tax consequences. For Medicaid purposes, this group should be excluded, as well as the client’s spouse.

Why does a reserved SPA work?

Two key elements in Medicaid planning are that the property not be reachable by a creditor (such as the state Medicaid program), either (1) during the client’s lifetime or (2) after the client’s death. A transfer which is subject to a reserved SPA can meet both of these tests. As long as the property is vested, albeit defeasibly, in entities or persons other than the client and his spouse, and as long as neither of them have any power to revest the property in themselves, the property should be deemed transferred for purposes of beginning the running of the Medicaid disqualification period. If nursing home care is not needed during the disqualification period, the property is protected in case the need for nursing home care should subsequently arise (unless, of course, Medicaid laws change retroactively, an occurrence which is always a risk in Medicaid planning).

Since the Medicaid disqualification period would begin to run upon the original transfer, any later exercise of the SPA should not cause any additional period of Medicaid disqualification.

Non-tax benefits of reserved SPA to client.

One key benefit of a reserved SPA is that a client who holds such a power maintains a great deal of control over the asset despite the conveyance. An SPA reserved in a deed can amount to a power to change who will eventually inherit the real estate. An SPA reserved in an irrevocable trust can amount to a power not only to change who will eventually inherit the remaining assets of the trust fund, but also to make gifts out of the trust.

A reserved SPA in a deed or irrevocable trust allows an appreciative client the later opportunity to compensate or reward the members of his family who take care of the client and keep the client out of or postpone entry into a nursing home. For example, part or all of the assets of an irrevocable trust with a reserved SPA could be used to build an addition or otherwise revamp the caring child’s home.

If the reserved SPA were banned in the Medicaid planning context, clients would probably resort to making outright gifts, and would have no flexibility to deal with future changes in circumstances. A caring child could then be left in a much worse financial position than another child who takes a share of the client’s assets and later bears no responsibility for the client’s continuing care.

Tax benefits of reserved SPA to client.

The control afforded by the SPA has tax ramifications. For deaths before 2010 and after 2010, at the client’s death, Internal Revenue Code section 2038 will treat the transferred assets as if they had not been transferred, and the full fair market value of the assets as of the client’s date of death will be includible in his federal gross estate. If the assets had appreciated in value during the time of the client’s ownership, this result will often be advantageous to the transferees, as Internal Revenue Code section 1014 then gives each asset a “stepped-up basis.” This means that the value at which each asset is includible in the client’s federal gross estate will then become the asset’s new basis (i.e., the figure above which federal capital gains taxes would later be assessed upon a sale of the asset).

For deaths that occurred during 2010, there are two choices of law, with the default provision being 2011 law, so powers of appointment would receive the treatment described above.  If 2010 law is elected by the executor of the estate, the tax law is unclear, but my opinion is that a reserved power of appointment receives similar tax treatment.  See  my blog post Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?

In a Medicaid trust, a reserved SPA which allows the client and/or the client’s spouse to make lifetime gifts out of the trust fund invokes the grantor trust rules (found in Internal Revenue Code sections 671 through 678). Upon a future sale of the home, the use of the client’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121 may thus be preserved.

Example of use of reserved SPA in deed.

Consider the following use of a reserved SPA in a deed: “John Smith hereby grants to his daughters, Mary Smith, Jeanne Smith, and Cheryl Jones, as joint tenants with right of survivorship, the following premises……John Smith reserves the power, exercisable as often as he may choose, by an instrument recorded at this registry of deeds during his lifetime, to appoint these premises, outright or upon trusts, conditions or limitations, to any one or more of his issue or their then current or surviving spouses.”

If Mary, Jeanne or Cheryl are sued, file for bankruptcy, file for divorce, marry a man for whom John feels little affection, become disabled or incompetent, have a falling out with John, or undergo some other change in circumstances or character, John can eliminate the daughter’s interest, can set it up in trust for the daughter and/or her husband, widower or issue, or can make it subject to a right of first refusal.

The SPA may also be of great utility if a daughter predeceases John. By exercising the SPA he could eliminate her interest and the need for probate of her estate. If in the absence of the exercise of the SPA he were to inherit her share of the home, however, a new Medicaid disqualification period may thus begin to run. If this gift had been made to the daughters as tenants in common, upon a daughter’s death John could be revested with the daughter’s share, and an exercise of the SPA could thus begin the running of a new Medicaid disqualification period.

In the above example of a gift to Mary, Jeanne or Cheryl as joint tenants with a reserved SPA in John, the deed could be recorded and the running of the Medicaid disqualification period could begin without time being spent in reviewing or altering the estate plans of John’s daughters. Upon a daughter’s death where the daughters hold title as joint tenants, and upon John’s later exercise of his SPA, he would not begin the running of a new Medicaid disqualification period because he would not have inherited any interest. (If his testamentary wish were per stirpes, however, the possibility of his later becoming incompetent to exercise the SPA makes this maneuver risky, even if it were meant to be temporary.)

Example of use of reserved SPA in irrevocable trust.

Consider the following use of a reserved SPA in an irrevocable trust: “John Smith reserves the power, exercisable during his lifetime as often as he may choose, to appoint any part or all of the principal and income of the trust fund, outright or upon trusts, conditions, or limitations, to any one or more of his issue or their then current or surviving spouses, or to charitable organizations.”

Much of the above discussion regarding deeds also applies here, except that in a trust the remainder interest would not become vested until John’s death, so that a per stirpes testamentary disposition can be initially established without concern for any daughter’s estate plan, or lack thereof.

If changes in the law adversely affect the trust, it may then be advisable to place all of its assets directly into the hands of the daughters. To get assets out of the trust and into their hands, he could use the gifting aspect of the SPA to make outright gifts to them. The SPA thus can amount to a power to terminate the trust.

Can an SPA be used less aggressively?

Clients and their advisors may feel that a reserved SPA in an irrevocable trust as described above may be too aggressive an approach and may someday be deemed to cause Medicaid disqualification on the grounds of excessive control or indirect access to the trust fund. One less aggressive approach would be to eliminate the aspect of the reserved SPA which would allow the client to make lifetime gifts from the trust to other persons. Since a gifting aspect of the SPA may be required in order to activate the grantor trust rules as to principal, the client could instead reserve an SPA which allows him to make unlimited lifetime gifts to charitable organizations. Under this approach the client could not be deemed to have indirect access to the trust fund. In order to maintain the flexibility to terminate the trust in light of future changes in the law, someone other than the client and his/her spouse could be given an SPA under this less aggressive approach.

A future complication could be caused by use of a simple SPA, for a meticulous conveyancing lawyer may require proof that the SPA was not exercised by will. In such a case the transferor’s will may have to be probated, perhaps solely for this reason. This complication can be eliminated by language in the deed which causes a conclusion presumption of the failure to exercise the power by will or codicil if notice of the establishment of probate proceedings is not recorded in the chain of title within a certain time frame after the transferor’s death.

At the same time at which any such deed is executed, the transferor may also wish to execute a durable power of attorney under which one or more of the transferees could release the transferor’s life estate or SPA. Such a power would allow a transferee whom the transferor does not wish to favor financially, but upon whose judgment the transferor feels secure, to later step into the transferor’s shoes and take corrective action if necessary or desirable under future changes in family circumstances or in federal or state law.

By use of the SPA, each remainderperson would have a vested remainder subject to divestment. If a sibling has such an interest and lives in the home for one (1) year, it is possible that one of the permissible transfers under federal Medicaid law could be utilized. Thus, the transferor may wish to give a partial remainder interest to a sibling who could later be persuaded, if feasible, to live in the home for one year prior to the transferor’s institutionalization in order to preserve it for the transferor’s family. At the same time the deed is executed, or thereafter, the transferor could execute a will which exercises the SPA to remove the sibling’s interest; since such a testamentary exercise of the SPA would not be effective until the transferor’s death, the sibling’s “equity interest” would thus remain part of the record title and intact during the transferor’s lifetime.

It should be noted here that, despite the opinion of one legal commentator, any transfer described herein does not necessarily allow the transferor to make full use of the transferor’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121. If the transferor wishes to move in the future to a smaller, less expensive home, the lawyer should consider placing the home into an irrevocable grantor trust in order to preserve this exclusion.

For many elderly persons in the middle class, a key tax goal is to keep the home includible in the person’s gross estate for federal estate tax purposes. Doing so results in a step-up in the basis of the home under Internal Revenue Code Section 1014, and the persons inheriting the home essentially receive, free of any capital gains tax, the appreciation in value from the time of the initial purchase of the home.

For example, suppose a person who paid $10,000.00 for a home dies when it is worth $200,000.00. The appreciation of $190,000.00 escapes capital gains tax if the home is includible in the person’s gross estate for federal estate tax purposes.

For a person who wishes to give away the home, the most common method of doing so may be to give away the remainder interest while reserving a life estate. Internal Revenue Code Section 2036 states that “the gross estate shall include the value of all property… of which the decedent has at any time made a transfer… under which he has retained for his life… the possession or enjoyment, or the right to the income from, the property.” Thus, if the person deeds the home to others, yet explicitly reserves a life estate, the full fair market value of the home is includible in the client’s gross estate for federal estate tax purposes and the transferees thereby receive the desired step-up in basis.

Unfortunately, some persons deed away their homes without reserving a life estate. Arguably, the federal estate tax inclusion ends up being lost by such a maneuver, but the literal language of Section 2036 quoted above can salvage the step-up in basis: note that the word “retained” is used. The Internal Revenue Service has successfully argued in the past that a right can be retained without having been reserved, and that the continued occupancy of the home after the transfer of title, without paying fair market rent, is evidence of an implicit agreement, understanding or assumption of the parties of the transaction. (See Estate of Linderme v. Commissioner, 52 T.C. 305 (1969).)

For example, if a person deeds the same home described above but reserves a life estate, upon the person’s death the home is includible on the Federal Estate Tax Return and the transferees receive a stepped-up basis of $200,000.00. If the person making the transfer had not reserved the life estate, but continued to live there rent-free or for less than fair market rent, the home should be included on the Federal Estate Tax Return as a “retained life estate” if a step-up in basis is desired.

One final note: under Internal Revenue Code Section 2035, a release of a life estate is ineffective for federal estate tax purposes for three (3) years. This means that a life estate that is released within three (3) years of death is included in the gross estate and results in the desired step-up in basis. Thus, if a person insists on making an outright transfer (perhaps due to Medicaid estate recovery concerns), it may be better to structure the transaction as a deed with a reserved life estate, then have the person release the life estate at a later time.

One choice is the 2010 law under Internal Revenue Code Section 1022, which provides that there be no federal estate tax, but instead imposes modified carryover basis rules. For many assets includible in the estate, there would be no automatic step-up in basis, as there had been under the tax laws in effect before 2010. As has been discussed in several posts on this blog, there are a lot of questions about whether life estates, powers of appointment and irrevocable trusts can obtain a step-up in basis under Section 1022. (For my previous posts on what types of assets may be entitled to a step-up in basis, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2)

The other choice now available to executors of 2010 estates is to be subjected to the new 2011-2012 federal estate tax law, which provides for a federal estate tax for estates that exceed $5,000,000. For many estates under $5,000,000, choosing this law would be advantageous because there would be an automatic step-up in basis for assets includible in the gross estate, just as there had been under the tax laws in effect before 2010.

The default provision in Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is the 2011-2012 federal estate tax law. Executors of 2010 estates who want the automatic step-up in basis do not have to take any action at all. Executors of estates under $5,000,000 therefore may not have a difficult decision to make, as the default provision in the law could be the preferred choice for all of such estates.  The only complicating factor in favor of electing 2010 law would be Internal Revenue Code Section 121(d)(11), which allows the decedent’s estate, the decedent’s qualified revocable trust or the decedent’s beneficiary (as defined under Section 1022) to utilize the decedent’s $250,000 capital gains exclusion on a sale of the decedent’s principal residence.

Executors of estates that exceed $5,000,000 will have to calculate whether it would be preferable to make a special election to have Section 1022 apply. That election would be made under Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010:

SEC. 301. REINSTATEMENT OF ESTATE TAX; REPEAL OF CARRYOVER BASIS.
(a) In General- Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.
(b) Conforming Amendment- On and after January 1, 2011, paragraph (1) of section 2505(a) of the Internal Revenue Code of 1986 is amended to read as such paragraph would read if section 521(b)(2) of the Economic Growth and Tax Relief Reconciliation Act of 2001 had never been enacted.
(c) Special Election With Respect to Estates of Decedents Dying in 2010- Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary’s delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary’s delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.

If  the above election is made, there would be no federal estate tax, but the modified carryover basis rules would have to be dealt with, and Form 8939 would have to be timely filed. Attached is the 12/16/2010 advance proof copy from the Internal Revenue Service of Form 8939, entitled “Allocation of Increase in Basis for Property Received from a Decedent.”

Schedule A pertains only to surviving spouses. For assets inherited by persons other than surviving spouses, Schedule B would be required. Note that on both of these schedules, the date that the decedent acquired the property is required, along with the decedent’s adjusted basis in the asset. While that information may be easy to determine for real estate, it may not be easy to determine for securities and mutual funds held in book entry for many years. Further, taxpayers and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

A positive note for taxpayers is that this latest draft of the form still does not require an explanation of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 are not flagged on the form except, perhaps, where an “[a]ccurate description of the property” is required. For my previous posts on Internal Revenue Code Section 1022, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2

Traps for the Unwary Regarding the Modified Carryover Basis Rules for 2010 Deaths

Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue
Code Section 1022?

More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010

Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the
Modified Carryover Basis Rules?

Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified
Carryover Basis Rules?

When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010
under the Modified Carryover Basis Rules?

Can a “Retained” Life Estate Be Eligible for a Step-up in Basis under Internal
Revenue Code Section 1022?

When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code
Section 1022?

What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal
Revenue Code Section 1022?

(1)  The law allows $1,300,000 of basis increase, plus an additional $3,000,000 for a surviving spouse. Increasing the decedent’s basis means somebody has to figure out the decedent’s exact basis in his/her assets. Old deeds and purchase-and-sale agreements may need to be tracked down, and a lot of tedious, time-consuming work will have to be put in on mutual funds and dividend reinvestment plans.

(2)  In addition to the $1,300,000 or $4,300,000 basis increase, additional increases are allowed if the decedent had capital loss carryovers or net operating loss carryovers. That means in some cases the decedent’s final income tax return will need to be prepared first.

(3) Assets with unrecognized capital losses as of the time of the decedent’s death cause the decedent’s estate to have additional basis increases equal to the amount of the unrecognized capital losses. There is no requirement in Section 1022 that this additional basis adjustment be utilized on the asset with the unrecognized capital loss.

(4) Internal Revenue Code Section 121(d)(11) allows the decedent’s estate, the decedent’s qualified revocable trust or the decedent’s beneficiary (as defined under Section 1022) to utilize the decedent’s $250,000 capital gains exclusion on a sale of the decedent’s principal residence. There does not appear to be any time limitation on the usage of this exclusion, so in some many cases it could be wasteful (and legally actionable) to use the Section 1022 basis increase on the decedent’s principal residence without taking Section 121 into account.  This means that the basis adjustment for many estates without surviving spouses under 2010 law can effectively be $1,550,000.

(5) Under Internal Revenue Code Section 6716, there is a $10,000 penalty for failure to file Form 8939 on a timely basis.

(6) Form 8939 is due at the time of the decedent’s final income tax return, so in many cases placing Form 1040 on extension may be advisable to give the Executor more time to gather all the necessary information for Form 8939.

(7) Beneficiaries are required to be sent information about the basis increase within 30 days after Form 8939 is filed. Failure to do so can result in a $50 penalty per beneficiary.

(8) Only an “executor” can allocate the basis increase, and that term is not defined within Section 1022, but under Treasury Regulation 20.2203-1, the term “executor” includes an executor or administrator, but if there is no executor or administrator, the term means “any person in actual or constructive possession of any property of the decedent, ” and the term can actually include “the decedent’s  agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent  in this country.”  Thus, the lack of an executor or administrator being appointed for a decedent’s estate can mean the possibility exists for different persons or entities to file competing Forms 8939 with different basis adjustments (and perhaps the first one filed wins).

(9) It is possible that the Executor’s basis allocation decisions on a timely-filed Form 8939 may be final, binding and unamendable even  if self-serving, biased or irrational.

(10) Where the date that the decedent acquired the property is required, Executors and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

(11) The first version of Form 8939 withdrawn by the IRS did not require an explanation of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 may not be flagged except, perhaps, where an “[a]ccurate description of the property” is required. Even though the basis of an asset is a question of fact that the IRS can later bring up, a decision will have to be made as to how much information to include on Form 8939.

(12) Filing Form 8939 may make sense even for smaller estates, to help the beneficiary prove to the IRS (when selling the asset received from the decedent) that the estate did not exceed $1,300,000.

(13) It is possible, but not certain, that filing Form 8939 will begin the 3-year clock against the IRS on valuation issues.

(14) Internal Revenue Code Section 1022 has specific safe harbor provision for qualified revocable trusts but not for revocable trusts. (A qualified revocable trust is simply a revocable trust that is elected to be treated as part of the decedent’s estate for income tax purposes under Section 645(b)(1).) To be conservative and assure the possibility of a step-up in basis for assets held in a revocable trust for someone who dies during 2010, it seems that the Executor of the decedent’s probate estate and the Trustee of the decedent’s revocable trust should make the election under Section 645(b)(1) to treat the trust as a qualified revocable trust for income tax purposes.

Hopefully, The Internal Revenue Service will complete its work soon, since the form will be due with the decedent’s final federal income tax return on April 15, 2011.  Once a new version of Form 8939 is made available, I’ll post it here.

12/16/2010 UPDATE: SEE Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

Schedule A pertains only to surviving spouses. For assets inherited by persons other than surviving spouses, Schedule B would be required. Note that on both of these schedules, the date that the decedent acquired the property is required. While that information may be easy to determine for real estate, it may not be easy to determine for securities and mutual funds held in book entry for many years. Further, taxpayers and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

A positive note for taxpayers is that this draft of the form does not require an explanation  of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 are not flagged on the form except, perhaps, where an “[a]ccurate description of the property” is required. For my previous posts on what types of assets may be entitled to a step-up in basis, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2

12/16/2010 EDIT:  Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?

More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010

Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the
Modified Carryover Basis Rules?

Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified
Carryover Basis Rules?

When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010
under the Modified Carryover Basis Rules?

Can a “Retained” Life Estate Be Eligible for a Step-up in Basis under Internal
Revenue Code Section 1022?

When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code
Section 1022?

What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal
Revenue Code Section 1022?

A postnuptial agreement is essentially a prenuptial agreement that is entered into after the marriage has taken place. Either of these agreements can completely ignore divorce and child support issues and be limited solely to estate planning issues. Where many married couples (especially those with children from prior marriages) are concerned about what might be done with their inheritance by the surviving spouse, this case makes it clear that under Massachusetts law they can enter into a limited postnuptial agreement, which I refer to as an Estate Planning Agreement, to prevent the surviving spouse from later disinheriting the family of the first spouse to die.

There are other ways to protect the children from the previous marriage, but those other ways have limitations. For example, under Massachusetts law, a will contract can be entered into by a married couple to prevent the surviving spouse from changing his/her will; unfortunately, a will contract would only cover assets passing through probate, yet many assets pass free of probate. Further, some spouses establish a so-called QTIP trust to provide income for life to the surviving spouse, with the eventual inheritance going to the previous family; unfortunately, the surviving spouse would have the right to make a statutory election against the decedent’s will and trust and could end up with a lot more assets than was planned.

A limited postnuptial agreement that covers estate planning issues is a document that more and more married couples may be entering into in future years, due to the great increase in blended families.

A lot of discussion has occurred among Massachusetts elder law attorneys about this case. While the decision appears to be justified based on the details of the trust, what is troubling is that the language in the decision was not as concise as one would expect from an appellate court. It is difficult to read the case and see exactly why the court made its decision, but perhaps the court simply didn’t see sufficient reason to overturn the decisions made below in the Superior Court and at the MassHealth fair hearing level.

The trust in Doherty had some fatal flaws. The person who established it had the authority to make decisions as to what constituted principal and income, and had the right to terminate the trust and make distributions to the “beneficiaries” (which was an undefined term). It appeared that the person who established the trust could be given the assets from the trust, and Medicaid would then be correct in treating the assets of the trust as countable assets, but because the court was not specific about what was wrong with this trust under Medicaid law, any trust under which too much control is reserved could eventually be under attack under Doherty’s poorly-written decision.

Fortunately, in the months since the Doherty decision was handed down, it does not appear that the case is being stretched by MassHealth lawyers to apply to other irrevocable trusts. Still, to be conservative, I have been suggesting to my clients who have established irrevocable trusts that a thorough review is necessary, and, in some cases, we have been releasing some of the powers and rights that were reserved when the trust was originally established. It may also be a good idea for the older person who established the trust to step down as trustee.

New MassHealth developments are reported by elder law attorneys through listservs to each other on a daily basis. We learn about new positions taken by MassHealth lawyers before those problems ever are in reported court cases, and change our strategies. Because of Doherty, irrevocable trusts should often be reevaluated. My suggestion to all persons who have established irrevocable trusts for Medicaid or long-term care planning purposes is that you have your irrevocable trust reviewed every 2 years.

Under pre-2010 law, an asset that was includible in the decedent’s gross estate for federal estate tax purposes always received a step-up in basis.  A retained life estate, includible under Internal Revenue Code Section 2036, was one of those assets, and a line of tax cases developed that defined the word “retained” as including not only a life estate that was explicitly reserved, but also life estates that were retained by agreement, understanding, assumption or conduct of the parties. That meant that under Internal Revenue Code Section 2036, the real estate of someone who had completely given it away could be pulled back into the decedent’s gross estate.  For pre-2010 deaths, Section 1014 allowed a step-up in basis for assets pulled back into the gross estate under section 2036, but, unfortunately, neither of those laws are in effect for decedents who die during 2010.

For 2010 deaths, Section 1022 requires that assets be owned by the decedent at the time of death and received from the decedent at that time, and those are much stricter standards than were required under Sections 2036 and 1014 in previous years.  Tax positions formerly available utilizing Section 2036 are irrelevant in 2010, as there is no language in Internal Revenue Code Section 1022 that would allow an argument that the conduct of the parties after the gift would be equivalent to the retention of ownership.  The retained life estate argument is an extreme stretch on the “owned by the decedent” test, but even if that argument were to pass muster, the argument in favor of the step-up would still fail on the “received from the decedent” requirement of the statute.  If full legal title to the real estate was already given away, at the time of death the donees of the lifetime gift cannot possibly receive from the decedent what they have already completely owned.

Claiming that assets that were given away during lifetime were nevertheless owned by the decedent and received from the decedent at the time of death, and receive a step-up in basis under Internal Reveue Code Section 1022, seems to me to be a frivolous tax argument.  We’ll know better how much leeway tax professionals will have to take such a position when we finally see the new tax return that is in the process of being created by the Internal Revenue Service for allocation of increased basis for 2010 deaths.

Before the counseling meeting, the elder must be sent an information packet that includes detailed loan information with comparisons, a document entitled Preparing for Your Counseling Session, and a 28-page booklet entitled Use Your Home to Stay at Home – A Guide for Older Homeowners Who Need Help Now.

During the processing counselors must now gather information from the prospective reverse mortgage borrower to examine the elder’s ability to maintain the reverse mortgage, including taxes and insurance premiums. The point there is to attempt to prevent foreseeable foreclosures due to cash flow problems. 

As part of the process, counselors must ask 10 questions to ensure that the elder understands the reverse mortgage’s key elements. If the elder fails to give the correct answer at least 5 of the questions, or appears to be coerced or a possible victim of fraud, the counselor may withhold the counseling certificate. Thereafter, if the elder is insistent on proceeding, HUD states that “the counselor will issue a certificate and will flag the certificate in FHA Connection so the lender is aware that the client’s level of understanding of reverse mortgages is minimal.” Once that occurs, presumably it will be up to the lender and the lender’s counsel to decide whether to give the loan to the elder, especially where mental incapacity would then appear to be a possible problem.

It appears from the tax law that a tax return (which as of now doesn’t even have a number assigned to it) would be due at the same time as the decedent’s final income tax return (April 15, 2010, unless extended) and would only be required if the estate exceeded $1,300,000 in value or if the decedent received property via gift in the 3 years before death.  The recipients of property to which the step-up in basis is allocated would receive written proof of the step-up within 30 days after the return is filed (which may be too late for some early filers, and cause the need for amended returns.)  

It appears that an automatic basis increase would occur for smaller estates, but the question remains whether estates of less than $1,300,000 should also file the return.  My opinion is that the return should be filed, for how else would the IRS, many years down the road, be able to determine whether a legitimate step-up in basis is being claimed?  If the burden is someday placed back on the taxpayer to prove that the estate was less than $1,300,000, how would the taxpayer be able to prove that point?  In addition, it may make sense to file the return for smaller estates if attempting to achieve a step-up in basis on questionable items under Internal Revenue Code Section 1022, such as reserved life estates (see http://wp.me/pRFoy-8k), reserved powers of appointment (see http://wp.me/pRFoy-90) and irrevocable grantor trusts (see http://wp.me/pRFoy-fW).

Rumors abound that a political compromise may allow taxpayers have the option of using 2009 tax law for 2010 estates. If such a law change doesn’t occur soon, the executors, personal representatives and trustees of larger estates should soon begin the process of determining the adjusted basis in the 2010 decedent’s assets.  Busy accountants often have an available window of time from October 16 on through the end of the year, and larger estates should use that availability to begin dealing with this 2010 tax mess dumped on us all by the 2001 Republican Congress.

Even though Robert had no assets and even though Judith had not signed any contract or agreement accepting financial responsibility for his nursing home bills, she was successfully sued because she did not file for and obtain MassHealth (i.e. Medicaid) benefits for him on a timely basis.  On a motion for summary judgment, the Court found that under Massachusetts General Laws, Chapter 209, Section 1, she was liable as his wife for the full cost of necessaries furnished to Robert during his life.

This case highlights why anybody concerned about the costs of nursing home care should be sure to obtain legal advice about MassHealth.  If Judith had obtained legal advice from a Certified Elder Law Attorney promptly after Robert entered a nursing home, she would have learned how to apply for MassHealth for him on a timely basis.  MassHealth coverage could have been applied for as long as three months after his health insurance had stopped paying for his care.

For some basic information about the at-home spouse’s ability to retain assets under MassHealth (i.e., Medicaid) law, see http://elderlawblog.info/2010/04/05/preserving-all-assets-and-maximum-income-for-the-community-spouse-when-the-other-spouse-enters-a-nursing-home/

On July 1, 2009, the Uniform Probate Code became effective in Massachusetts, and it specifically states that a Durable Power of Attorney does not become ineffective due to a lapse of time.  That means that Durable Powers of Attorney executed on or after July 1, 2009 can remain in effect for as long as you want, including your entire life.

The legislation implementing the Uniform Probate Code in Massachusetts involved changing many different laws, and some were replaced or amended, and others were repealed. The Uniform Probate Code does not specifically protect Durable Powers of Attorney under the law in effect before July 1, 2009.  After a careful review of the law, it is my belief that all Durable Powers of Attorney executed under previous Massachusetts law may be invalid.  Where the previous Massachusetts durable power of attorney laws were repealed, not replaced, and where the state legislature had made choices in that legislation as to whether laws should be replaced or repealed, the effect is that the previous Massachusetts law,  Chapter 201B, was eliminated as of July 1, 2009 as if the law had never existed.  That means Durable Powers of Attorney which make reference to Massachusetts General Laws, Chapter 201B became invalid on July 1, 2009, and any persons who have such documents should arrange to re-execute new Durable Powers of Attorney effective under the Massachusetts Uniform Probate Code.

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-revere.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-springfield.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-taunton.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-tewksbury.pdf

Note that it appears to be a requirement of these letters that a MassHealth application be already filed.  In that situation, time is usually very limited to comply with MassHealth’s written requests for verifications of banking transactions.  Since you wouldn’t know whether the bank had complied with the request unless you received the bank records yourself, it is probably not a good move to request that the records be sent directly to the MassHealth Enrollment Center.

If the special needs trust had originally been made irrevocable (not revocable) with explicit provisions to supplement but not supplant governmental benefits, the trust would likely have been of greater long-term benefit to the disabled child.  To allow the child to be eligible for SSI, the trust would also have required restrictions on payments directly to the child and restrictions involving expenses for the child’s food and shelter.

1022(e) Property acquired from the decedent

    For purposes of this section, the following property shall be

considered to have been acquired from the decedent:

        (1) Property acquired by bequest, devise, or inheritance, or by

    the decedent’s estate from the decedent.

        (2) Property transferred by the decedent during his lifetime–

            (A) to a qualified revocable trust (as defined in section

        645(b)(1)), or

            (B) to any other trust with respect to which the decedent

        reserved the right to make any change in the enjoyment thereof

        through the exercise of a power to alter, amend, or terminate

        the trust.

        (3) Any other property passing from the decedent by reason of

    death to the extent that such property passed without consideration.

At first blush, it may appear that Congress meant for (e)(1) to deal with all estate issues, for (e)(2) to deal with all trust issues, and for (e)(3) to deal with anything else, but why in (e)(1) did Congress specifically reference bequests, devises and inheritances when it would have sufficed to mention the decedent’s estate?  The extra phrases must have been placed in the law for a reason, and the comma after the word inheritance is significant, in that it seems to separate (e)(1) into two sections: “bequest, devise, or inheritance” and “the decedent’s estate.”  Further, the definition of “inheritance” found at law.com is “whatever one receives upon the death of a relative due to the laws of descent and distribution, when there is no will. However, inheritance has come to mean anything received from the estate of a person who has died, whether by the laws of descent or as a beneficiary of a will or trust.”  Black’s Law Dictionary, Fifth Edition goes even further on the definition of inheritance and includes assets which pass “by operation of law.”  Based on this way of reading (e)(1), I conclude that Congress probably intended that the phrase “acquired from the decedent” include inheritances from trusts.

On the other hand, (e)(2) seems to suggest limited step-up opportunities for assets in trusts.  Under (e)(2)(B), the step-up would be limited to trusts established by the decedent with a reserved power to alter, amend or terminate, so many irrevocable trusts would not be eligible for a step-up in basis, but perhaps Congress, already having dealt with bequests, devises and inheritances in (e)(1), wanted to make sure that certain other grantor trusts not be eligible for a step-up in basis, and was expressing its intention to exclude powers that had been given to the decedent to attempt to obtain a step-up in basis. 

If (e)(1) and (e)(2) were meant to cover estate and trust issues, then (e)(3) was meant to cover any other types of transfers, such as jointly-held assets and transfer-on-death, pay-on-death and beneficiary designations.  It also seems that a so-called Ladybird deed, where the owner of real estate deeds it away but reserves the right to retrieve it, fits into the (e)(3) category, although it may be questioned whether the non-exercise of a reserved power could be considered passing “from” the decedent. 

Two other common types of transfers, a reserved power of appointment and a reserved life estate, are more problematic, but may also fit under (e)(3).  A reserved power of appointment in a deed is not a possessory interest but can also fit into the (e)(3) category because the real estate was a vested interest subject to divestment, and the real estate passes without consideration when the original owner dies and the divestment possibility is eliminated; until the power holder’s death, the person or entity to whom the real estate was deeded cannot sell or mortgage it, and is therefore not the owner in any significant economic sense. 

A reserved life estate may fit under (e)(3) because the person or trust to which the real estate was deeded does not have possession during the life tenant’s lifetime, and, at the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the holder of the remainder.  Under this type of analysis, even though title passed when the deed was recorded and the remainder interest became vested at that time, the real estate could still be viewed as passing “from” the decedent.

As I suggested in Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?, it appears that the assets in an irrevocable trust that contains a reserved special power of appointment can be eligible for a step-up in basis.  A deeper reading of Section 1022, however, reveals other step-up opportunities as long as the assets are deemed owned by the decedent under Section 1022(d) and received from the decedent under Section 1022(e).

The grantor trust rules in Internal Revenue Code Sections 671-679 have long determined whether someone should be treated as the owner of an irrevocable trust for income tax and capital gains tax purposes.  In particular, Internal Revenue Code Sections 673-678 all begin with the general rule that the “grantor shall be treated as the owner of any portion of a trust” described in that section.  Since none of those sections are specifically negated in Section 1022, it appears that ownership under the grantor trust rules should suffice as the decedent’s ownership under Section 1022.  While there are special rules about ownership under Section 1022(d), those rules do not appear to be an exhaustive list.  Further, when Congress intended to negate certain planning maneuvers being treated as ownership in Section 1022, such as powers of appointment given to a decedent, it specifically did so. 

Thus, it appears that grantor trusts meet the “owned by the decedent at the time of death” standard in Section 1022(d)(1).  It is not much of a stretch to state that assets that were deemed “owned” by the decedent during lifetime were then at the time of death ”received” from the decedent.  Assets in a grantor trust established and funded by the decedent would then fit into the category in Section 1022(e)(3) of “other property passing from the decedent by reason of death to the extent that such property passed without consideration.”

If you have already sold your stock from a demutualized life insurance company and your income tax returns showed the entire sale proceeds as taxable income, you should file amended returns and claim refunds as soon as possible.

Under Massachusetts General Laws, Chapter 201F, parents can give written authorization to allow their minor child’s caregiver to make educational and/or health care decisions.  The caregiver must certify that the child is living with the caregiver.  The authority given in the affidavit to the caregiver does not eliminate the parent’s legal right to make all final decisions, and the parent can override the decisions of the caregiver. 

Executing a Caregiver Authorization Affidavit appears to be an easy and effective way for a parent to give temporary decision-making authority to the person with whom their minor child will be staying during the parent’s absence.

Lookback and Disqualification Periods

Many persons, including some who are rendering advice about Medicaid law, seem to misunderstand the Medicaid lookback period. The lookback period is not the same as the disqualification period. When a Medicaid application is filed, the state Medicaid agency looks back five (5) years for gifts made and trusts established on or after February 8, 2006. Based on whatever the state Medicaid agency finds in the lookback period, a disqualification period can be imposed.

A thorough understanding of the interaction between the lookback and disqualification periods is needed before deciding whether a gift can be made, or whether the filing of a Medicaid application should be delayed.

Last-Minute MassHealth (i.e., Medicaid) Planning for Married Couples

The community spouse (A) can keep all assets automatically in some cases; (B) can spenddown excess assets in some cases; and (C) can keep all assets in many other cases through a fair hearing process. All protected assets must be transferred into the community spouse’s name, and the 5-year lookback period does not apply to this allowable transfer of assets.

When all else is determined by an elder law attorney as potentially unsuccessful, the community spouse can purchase an immediate annuity, which is essentially like buying a short-term pension.  There is no current regulation requiring that the annuity extend for the community spouse’s life expectancy or that the institutionalized spouse be the post-death beneficiary.

To allow extra items to be bought for the institutionalized spouse without causing the loss of MassHealth benefits that an outright inheritance would cause, after the gifts are made to the community spouse, the community spouse should often execute a will containing a testamentary trust for the institutionalized spouse’s benefir.

Last-Minute MassHealth (i.e., Medicaid) Planning for an Unmarried Person

Long-term care insurance protects the home from a MassHealth estate recovery claim for long-term care (but not community care) benefits if questions on the application are answered correctly.

Partial gifts of real estate and other assets can still be advisable, even after a nursing home stay has begun, if sufficient assets are retained to pay for the disqualification period caused by the gifts, or the remainder of the lookback period.

For a person whose realistic life expectancy is far less than average, an immediate annuity may, even under the 2006 law, be a way to minimize nursing home payments and preserve funds for the eventual post-death beneficiary of the annuity.

Can I file more than one type of homestead?

Through a process known as stacking, it is possible to file more than one type of homestead.  Under current law, each one would protect $500,000 of the value of the primary residence.

What happens to my Declaration of Homestead after I die?

What happens to your homestead when you die can vary based on the homestead type. The Elderly and Disabled types do not allow any protection to anyone after your death, so a creditor can sue your estate without concern for an Elderly or Disabled Declaration of Homestead. The regular type, however, continues after your death to protect your spouse and minor children. If you have minor children, the problem with the regular Declaration of Homestead (unless special language is added) is that their right to live there can complicate a sale or refinance.

My husband is in a nursing home, so should he file a Declaration of Homestead? As described in the previous answer, a regular Declaration of Homestead would protect your right to continue to live in the home after his death.  The better move in many situations, however, may be for him to deed the home to your name, since transfers between spouses are allowed under Medicaid and MassHealth laws and regulations.  If he keeps the home in his name but you die first, he’ll end up being the sole owner of the home, and after he dies MassHealth would have an estate recovery claim against his estate for repayment.

What’s better, a Declaration of Homestead or an umbrella policy?

I’d say an umbrella policy is more important to a typical person than a Declaration of Homestead.  For a Declaration of Homestead to have any value for you, you’ve been sued and you’ve essentially lost everything else and have ended up in bankruptcy.  An umbrella policy has the potential to protect all of your assets against major claims and to keep you away from bankruptcy.

Can a person whose home is in a trust file a Declaration of Homestead?

Ambiguities in Massachusetts law are supposed to be decided by Massachusetts courts, but no case regarding the homestead law has yet been decided by the top court, the Supreme Judicial Court of Massachusetts.  Lower Massachusetts courts have held that a home in a trust is not protected by a Declaration of Homestead.  A 2010 case in federal Bankruptcy Court, however, has interpreted Massachusetts homestead law as allowing a person whose home is in trust to file a Declaration of Homestead, so at this point it appears that a person whose home is in a trust can protect the home by filing a Declaration of Homestead.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,739 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,739 of the married couple’s total income.  All of these figures remain unchanged through June 30, 2011.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.

For undue influence to exist, a previous court had concluded in Heinrich v. Silvernail:  “Four considerations are usually present in a case in which a supportable finding of undue influence has been made. These involve showings that an (1) unnatural disposition has been made (2) by a person susceptible to undue influence to the advantage of someone  (3) with an opportunity to exercise undue influence and (4) who in fact has used that opportunity to procure the contested disposition through improper means.” 

In Germain v. Girard, the person guilty of undue influence had received only an indirect benefit, as it was his wife who eventually received a larger inheritance. Since she had benefitted from his actions, and he would indirectly receive a financial benefit by being married to her, the court invalidated the trust amendment that the husband had directed a lawyer to prepare for his father-in-law shortly before death.  That lawyer had represented the husband in prior cases and did not even meet his new “client” until he brought the trust amendment to the hospital to be signed.

Because of Germain and other recent Massachusetts case law developments, the burden of proof when arguing the existence of undue influence is no longer on the person challenging gifts, joint accounts and estate plan changes.  If a person who was in a fiduciary role or other position of responsibility received a direct or indirect benefit from a transaction, that person will now be in the position of defending the transaction.  If a person who relies on you for help in their everyday life is making any type of change that could possibly benefit you financially, that financial transaction or legal document can later be reversed or undone by the court if somebody else objects to it.

A large part of the court’s concern in Germain was that the lawyer drafting the new trust provisions was taking instructions from someone other than the person who was eventually going to sign the document.  Therefore, lawyers who prepare documents are now being held to higher standards to make sure elderly and disabled persons are being protected.  When an elderly or disabled person makes a gift, creates a joint account or makes changes to an estate plan (including wills, trusts, beneficiary designations and other probate-avoidance techniques), it is important that the elderly or disabled person receive independent legal advice, or else the transaction could later be declared null and void after an expensive legal battle.

The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c).  IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.  Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”

Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not, and that there’s nothing in between? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s $1,000,000 lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.

For another opinion on this topic, see Section 2511(c) and Charitable Gift Planning.

If, however, instead of selling the assets the person were to donate them to a charitable remainder trust, the assets can then be sold by the trust.  Because it is the charitable trust, and not the former individual owner, who is selling the property, no immediate capital gains tax is payable.  The trust can reinvest all of the proceeds, with no reduction in principal for the payment of capital gains tax.

For example, an elderly person with highly appreciated but non-income-producing land might consider donating that land to a charitable remainder trust.  The trust would then sell the land, invest all of the proceeds in incoming-producing investments, and pay to the elderly person whatever income stream he or she has selected.

A charitable remainder trust is an irrevocable trust established pursuant to Internal Revenue Code Section 664.  The donor or other person can receive an income interest for life or for a period of up to 20 years.  A charity described in IRC section 170(c) must receive whatever is left in the trust at the end of the period.  It is not necessary for the donor to make an irrevocable decision as to the identity of the ultimate charitable beneficiaries at the time the trust is established.  He or she can reserve a power to redesignate the charity or charities that will receive the remainder interest.

Many older persons may have charitable intentions and desire a higher level of income, but would reject a charitable remainder trust on the grounds that, since the trust remainder is distributed to charity at their death, they would be disinheriting their families.  If the older person is insurable, there is a possible solution to this problem.  With part of the increased income, the older person can purchase a life insurance policy and pay the premiums from the increased income.  Alternatively, the client can establish an irrevocable life insurance trust and use part of the income from the charitable trust to make gifts to the insurance trust, which then would use the funds to purchase and maintain the policy.  Upon the older person’s death, the assets in the charitable remainder trust are distributed to charity, and the life insurance proceeds provide an inheritance for the donor’s family.

The donor of a charitable remainder trust is entitled to an income, gift, or estate tax charitable deduction based on the present value of the charitable remainder interest.  See Regs. 1.664-2(c), 1.664-(b)(5) and 20.2031-7.  Thus, in addition to avoiding capital gains taxes, the donor receives the additional advantage of a charitable deduction on his or her income tax return.  Further, since estate or inheritance taxes (which would reduce the ultimate amount inherited) may be eliminated by this planning, the face amount of a life insurance policy that is meant to “replace” the lost inheritance need not be for the full amount of the assets transferred to the trust.

Under very specific IRS rules, a charitable remainder trust must be established in the form of either an annuity trust or a unitrust.

Charitable Remainder Annuity Trust (CRAT)

An annuity trust is a charitable remainder trust that pays the income beneficiary a specified sum, which must be not less than five percent of the initial net fair-market value of all property placed in the trust.  See Section 664(d).  Under this type of trust, the beneficiary receives a specified amount each year, without regard to the actual income of the trust.  After the annuity trust is established, no additional contributions may be made to it.  Because the amount of annual income payable to the noncharitable beneficiary of an annuity trust is fixed, inflation inures to the benefit of the remainder beneficiary (i.e., the charity).

One important requirement for an annuity trust is that there must be at least a five percent (5%) likelihood that there will in fact be a charitable remainder – that is, that the annuity income beneficiary will not use up the entire trust corpus.  This raises a concern in establishing the trust, since the Code and Regulations specify five percent as the noncharitable beneficiary’s minimum interest but do not specify any maximum percentage.  Actuarial tables used by the Internal Revenue Service must therefore be reviewed while drafting an annuity trust in order to ensure that the percentage being used is low enough, when viewed against the expected rate of return or investments, so that a charitable remainder will theoretically exist.

Charitable Remainder Unitrust (CRUT)

A unitrust is a charitable remainder trust in which a fixed percentage of not less than five percent (5%) of the fair market of the trust assets valued annually is distributed to the noncharitable beneficiary.  See Section 664(d)(2).  A type of unitrust known as a NIMCRUT may provide that the trustee is to pay the income beneficiary only the amount of trust income, even if that is less than the amount required to be distributed.  If the trustee paid less than that amount in earlier years, because, for example, real property had not yet been sold, the trustee can “make up” the difference by later paying a larger amount to the income beneficiary.

Unlike the annuity trust, additional contributions may be made to a unitrust either during the lifetime of the income beneficiary or by a testamentary addition by the donor.  If the trust permits these additional contributions the trust document must provide that, for the taxable year of the trust in which an addition is made, the unitrust amount must be computed by a formula set out in Reg. 1.664-3(b).  Because the annuity amount is not fixed, a unitrust protects the income beneficiary against the ravages of inflation.

Internal Revenue Code Section 2511(c)

Unfortunately, the 2010 estate and gift tax law is a mess, and Internal Revenue Code Section 2511(c), effective for gifts made during 2010, may significantly affect charitable remainder trusts.

The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c).  IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.  Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”

Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.