This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 118 Long Pond Road, Suite 206, Plymouth, Massachusetts. Brian has been named a Massachusetts Super Lawyer® in Boston Magazine during 2009-2023, is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate, and is the Editor of Massachusetts Continuing Legal Education's best-selling Elder and Disability Law in Massachusetts, where he is the co-author of the "Trusts in the MassHealth Context" and "Taxation of Trusts" chapters. Brian also has a webinar series on his youtube channel, https://www.youtube.com/@elderlawwebinar6980.Brian's biographical website, including a webinar registration link and information for new clients, can be found at SouthShoreElderLaw.com
Nothing on this blog should be considered to be legal advice or tax advice.
One of the biggest mistakes that many spouses make when the other spouse enters a nursing home is not getting legal advice from an elder law attorney about Medicaid, known in Massachusetts as “MassHealth.” The “free” information that many community spouses (which under MassHealth law means any spouse who is not in a nursing home) often rely on can turn out to be quite costly to them.
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has to be nonassignable under federal Medicaid law and MassHealth regulations; (2) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased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?
Obtaining Free Banking Information for MassHealth Applications
When applying for MassHealth long-term care benefits to pay for nursing home care in Massachusetts, it can be expensive to obtain copies of up to 5 years of banking information. Under Massachusetts General Laws, Chapter 118E, Section 23A , banks are required to provide this information free of charge if the information has been requested by a representative of MassHealth. In order to comply with this law, the Executive Office of Health and Human Services of the Commonwealth of Massachusetts has prepared pre-signed letters that can be completed by or on behalf of the MassHealth applicant.
If the application has been filed, use this form:
https://www.mass.gov/doc/financial-information-request-0/download
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.
When one spouse is living in a nursing home and the other spouse is living anywhere else, the spouse who is not living in the nursing home (known under Medicaid and MassHealth law as the “community spouse”) is allowed by Medicaid or MassHealth to keep some (or sometimes all) of the nursing home resident’s income through an income allowance known as the Minimum Monthly Maintenance Needs Allowance (MMMNA). Every July 1st, this figure changes based on federal poverty level guidelines, and the MMMNA will increase from $1,839 to $1,891 from July 1, 2012 through June 30, 2013.
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.
Should a MassHealth Applicant Accept Help from the Nursing Home’s Lawyer to Appeal a MassHealth Denial?
Many nursing homes offer help to families who need to apply for MassHealth to help pay for the elder’s nursing home bills. In simple financial situations, that help is beneficial to both the elder and the nursing home. In more complicated situations, however, it can often make more sense to handle the process without involvement by the nursing home, especially if the nursing home’s lawyer is involved.
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.”
When a surviving spouse is the beneficiary of the deceased spouse’s IRA, the surviving spouse has the option of stretching out distributions from the IRA over the surviving spouse’s life expectancy, as determined by Internal Revenue Service tables. When the surviving spouse is much younger than the deceased spouse, getting such a fresh start on required minimum distributions from the IRA can allow the IRA to compound free of income tax for a longer period of time. If there is no beneficiary on the IRA (perhaps due to an error by the deceased spouse, or sometimes due to lost paperwork by the IRA custodian), the ability of the surviving spouse to stretch the IRA, however, would appear to be lost.
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.
Should You Place Restrictions on the Organ Donation Process (in Case Pain Can Still Be Felt)?
A Massachusetts resident can become an organ donor by simply signing a donor card or having a donor symbol affixed to the person’s driver’s license. Many citizens sign up to be an organ donor in this way without placing restrictions on the process of removing the organs (which is known as “harvesting”). More details about the organ donation process in Massachusetts can be found in Massachusetts General Laws, Chapter 113A, the Uniform Anatomical Gift Act, which was signed into law by Massachusetts Governor Deval Patrick on February 22, 2012.
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.
A Massachusetts elder law attorney recently posed an issue on an elder law listserv. He was hired to file a MassHealth application. He was hired by the appointed agent (or attorney-in-fact) in a durable power of attorney drafted by another lawyer, and the other lawyer was telling him that t the agent could not hire a lawyer that the elder had never met. Since the elder is now marginally competent at best, what the drafting lawyer was essentially stating was that he is the only lawyer who can no represent the agent who stands in the shoes of the elder through the durable power of attorney.
My opinion is that the drafting lawyer is simply wrong. The elder signed a durable power of attorney so that the agent could handle future financial affairs for the elder. Under principal-agency law, whenever the agent is hiring anybody to help with the elder’s financial affairs, the person who is hired is not being hired to represent the agent, but rather is being hired to represent the elder. One major reason the elder executed the durable power of attorney was to avoid the need for conservatorship proceedings in Probate Court. Nowhere in the Massachusetts Uniform Probate Code, which established both the new durable power of attorney laws and the new conservatorship laws in 2009, is there any restriction on who can be hired by an agent under a durable power of attorney or by conservator.
Under the drafting lawyer’s claims that the agent cannot hire a new lawyer now that the elder is perhaps incompetent, the elder would effectively be denied the right to hire, through the agent, a lawyer who practices in a more special area of law than that of the drafting lawyer and conservatorship proceedings would then be necessary for many elders, contrary to their intentions.
I have found no case that upholds the drafting lawyer’s statements, and cannot help but conclude that his claims were a shamelessly self-serving attempt to force the agent to hire him exclusively.
Income Tax Planning for the Terminally Ill or Recently Deceased Person
Notes for lawyers from the Massachusetts Bar Association’s program that I chaired entitled “Estate, Tax and Health Care Planning for the Terminally Ill Client”
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).
Supreme Judicial Court Rules That Trusts Were Ineligible for Homestead Protection Under Pre-March 25, 2011 Massachusetts Law
Before the new Massachusetts homestead law took effect on March 16, 2011, it was an unsettled question of law as to whether the Trustee or beneficiary of a trust was eligible to file a valid Declaration of Homestead. On February 6, 2012, the Supreme Judicial Court of Massachusetts decided in Boyle v. Weiss that the beneficiary of a trust could not file a valid Declaration of Homestead under pre-March 16, 2011 .
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.
Often, medical bills arrive after a MassHealth application has been approved, and the MassHealth applicant is out of funds to pay these bills. At that point, MassHealth should be asked to allow payment out of the MassHealth recipient’s income. In 2011, MassHealth (the Massachusetts Medicaid program) was criticized by the federal Centers for Medicare and Medicaid Services for its failure to follow federal law, which allows previous medical bills to be paid out of a MassHealth recipient’s income. See the CMS letter to Massachusetts re pre-eligibility medical expenses.
What Can Happen If You Become Mentally Incapacitated in Massachusetts But Have Not Executed a Durable Power of Attorney?
A new case that I am handling highlights why I often say that a durable power of attorney can be the most important document in a person’s estate plan.
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.
One of the biggest mistakes that many spouses make when the other spouse enters a nursing home is not getting legal advice from an elder law attorney about Medicaid, known in Massachusetts as “MassHealth.” The “free” information that many community spouses (which under MassHealth law means any spouse who is not in a nursing home) often rely on can turn out to be quite costly to them.
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?
Why Is It Important that a Massachusetts Power of Attorney Be “Durable” and Detailed?
A power of attorney is a written document through which you authorize someone (usually known as your agent or attorney-in-fact) to take actions for you. The powers that are given can be limited or quite broad. Unfortunately, if your power of attorney is not “durable,” your agent or attorney-in-fact may find that the power of attorney is useless when you are incapacitated and it is needed most.
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.
End-of-Life Care: Nursing Home Residents’ Rights
Approximately 20% of all persons who die every year are residents of nursing homes. Since a nursing home is the last place of residence for such a large percentage of our population, it is very important that all of the rights of nursing home residents be upheld.
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.
Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Increased to $1,839 during 7/1/2011-6/30/2012
When one spouse is living in a nursing home and the other spouse is living anywhere else, the spouse who is not living in the nursing home (known under Medicaid and MassHealth law as the “community spouse”) is allowed by Medicaid or MassHealth to keep some or all of the nursing home resident’s income through an income allowance known as the Minimum Monthly Maintenance Needs Allowance (MMMNA). Every July 1st, this figure changes based on federal poverty level guidelines, and the MMMNA will increase from $1,821 to $1,839 from July 1, 2011 through June 30, 2012.
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.
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Effective April 7, 2011, there is a new law in Massachusetts that allows a person to set up a trust for the benefit of a pet. In the past, pet owners were limited under Massachusetts law to leaving funds to a person and hoping those funds would be used to take care of the pet as a moral obligation, but not a legal one. Under this new law, a trust can be set up with the pet as beneficiary, with the toughest legal issue appearing to be how to protect the trust from being attacked from disgruntled heirs on the grounds of excessive funding.
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?
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?
When Can the Amount in a Massachusetts Pet Trust Be Reduced by the Court?
What Are the Income Tax Issues for Massachusetts Pet Trusts?
When a person who has a life estate wants to sell the real estate, the life tenant is legally entitled to a share of the proceeds. The amount of the proceeds the life tenant is supposed to receive is based on his/her life expectancy and interest rates at the time of sale.
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.
Form 8939 for estates and trusts of decedents who died during 2010 still hasn’t been finalized by the Internal Revenue Service. The last draft Form 8939 posted by the IRS was dated 12/16/2010.
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.”
Faced with the possibility of spending all of their savings on the costs of their long-term care, many elderly or aging persons recognize that covering the possible problem with long term care insurance is far and away their best choice, due to the changing nature of Medicare and Medicaid laws. With this problem hanging over their heads, elder law attorneys and other estate planning professionals are forced to consider long term care insurance first and foremost in long-range planning, and elderly or aging persons look to their advisors for creative ways to pay for the policy.
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.
Using Reserved Special Powers of Appointment in Medicaid Planning
(Note: this is an update of an article of mine published in NAELA Quarterly in 1992.)
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.
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.
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.
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.
Massachusetts Estate Planning, Probate & Elder Law 