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.
Last-Minute Medicaid Planning in Massachusetts
Even After a Nursing Home Stay Has Begun, Some Asset Protection Planning Can Still Be Done
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.
The Massachusetts law regarding Declarations of Homestead has never been very clear. Having already answered some typical questions in http://elderlawblog.info/2010/04/20/questions-and-answers-about-declarations-of-homestead-in-massachusetts, here are some other questions I’ve been asked by clients during our conferences.
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.
[tweetmeme http://elderlawblog.info]
Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Stays Unchanged through June 30, 2011
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 is supposed to change based on federal poverty level guidelines, but the U.S. Department of Health and Human Services did not revise the guidelines this year, so the MMMNA will remain $1,821 through June 30, 2011.
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.
[tweetmeme http://elderlawblog.info]
Challenging Wills, Trusts and Other Transactions Caused by Undue Influence of Other Persons
The 2008 Massachusetts case of Germain v. Girard has made it easier to challenge gifts, joint accounts, wills, trusts, beneficiary designations and other estate plan changes on the grounds of undue influence.
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.
[tweetmeme http://elderlawblog.info]
Internal Revenue Code Section 2511(c) Affects Charitable Remainder Trusts Funded During 2010
Unfortunately, the tax law known as EGGSTRA passed by the Republican-controlled Congress in 2001 and signed into law by President George W. Bush has made intelligent estate planning difficult for quite some time, and the 2010 estate and gift tax law is a mess. Unintended consequences may have resulted, and Internal Revenue Code Section 2511(c), effective only 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, 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.
[tweetmeme http://elderlawblog.info]
Charitable Remainder Trust Allows Sale of Appreciated Assets Without Immediate Capital Gains Tax
Many older persons own appreciated assets that yield little or no income. These same clients eventually experience the need for an increase in their monthly cash flow as their deteriorating health prompts them to hire caregivers whose assistance will allow them to remain in their homes. Selling low yield but highly appreciated assets in order to reinvest the proceeds at a higher rate of return usually means that the seller will have to pay substantial capital gains taxes on the appreciation in the assets, thus reducing the amount of principal remaining available for reinvestment. The depletion of principal caused by the payment of income taxes may not leave the seller with much, if any, in the way of increased income.
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.
[tweetmeme http://elderlawblog.info]
Appealing Medicare Denials Caused by “Plateauing”
Under Medicare law, a person is entitled to continue to receive physical therapy or other medical rehabilitative care even after reaching a so-called “plateau.” Many rehabilitation centers and nursing homes refuse to continue to give physical therapy or other medical rehabilitative care unless the patient shows the ability to continue to improve, but what is routinely going on is a denial of the patient’s rights under Medicare law. Medicare regulations at 42 CFR 409.32(c) specifically state: “The restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.” http://edocket.access.gpo.gov/cfr_2002/octqtr/pdf/42cfr409.33.pdf
The need for continued therapy is especially important for those persons whose quality of life would decline without it, especially those with degenerative diseases. See How the “Improvement Standard” Improperly Denies Coverage to Medicare Patients with Chronic Conditions.
Fortunately, the Center for Medicare Advocacy, Inc., of Willimantic, Connecticut, has initiated a national campaign to change this mentality that is so engrained in the health care system. http://www.medicareadvocacy.org/Projects/Improvement/ImprovementMain.htm
[tweetmeme http://elderlawblog.info]
What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal Revenue Code Section 1022?
To obtain a step-up in basis for appreciated assets, it appears that a Federal Estate Tax Return must be filed for any decedent who dies during 2010. Internal Revenue Code Section 1022(d)(3) states that basis increases must be allocated “on the return required by Section 6018.” Internal Revenue Code Section 6018 pertains to the filing of Federal Estate Tax Returns, but, unfortunately, no such return is actually required for anybody who dies during 2010.
A Federal Estate Tax Return is due 9 months after a decedent’s death, and can normally be placed on extension for no more than 6 months, but a temporary amendment to Internal Revenue Code Section 6075 provides that the Federal Estate Tax Return will normally be due (unless Internal Revenue regulations provide otherwise) when the decedent’s final federal income tax return is due. The requirement in Internal Revenue Code Section 1022 that basis increases be allocated on a Federal Estate Tax Return poses a potentially huge tax trap for the unwary, as Section 1022 does not state whether a basis increase can be allocated on a late-filed return. Unfortunately, many persons may not even become aware of this basis issue until they have sold appreciated assets that they inherited and are preparing to file their income tax returns, and, if assets had been inherited in any year before the sale, the deadline for the executor of the decedent’s estate to allocate the basis increase may well have passed by then.
Reportedly, the Internal Revenue Service is working on a new version of the Federal Estate Tax Return. Estate planning professionals should soon begin the process of informing the executors of the estates of all 2010 decedents about the need to file this return, and accountants should revise their annual questionnaires to ask about assets that were inherited during 2010.
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 Federal Estate Tax Returns with different basis adjustments.
EDIT: See 9/14/2010 update: http://elderlawblog.info/2010/09/14/more-about-the-mechanics-of-obtaining-a-step-up-in-basis-in-2010-under-internal-revenue-code-section-1022
EDIT:
Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified Carryover Basis Rules?
It looks like the political tax games in the Senate aren’t going to end soon, and we’ll be stuck with Internal Revenue Code Section 1022 and the modified carryover basis rules for most if not all of 2010. Senate Continues to Procrastinate Under Section 1022, which is effective only during 2010, the Executor or Personal Representative of an estate may increase the basis of certain assets up to $60,000 for nonresident aliens, and up to $1,300,000 for unmarried decedents who are not nonresident aliens.
Having already looked at Section 1022 and dealt with life estates ( Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022? and More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010) and powers of appointment (Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?), I figured revocable trusts would be an easy topic, but it isn’t, and the more I look at this statute the more illogical it appears.
To qualify for the step-up in basis under 2010 tax law, an asset must be considered to be owned by the decedent under Section 1022(d) and considered to be acquired from the decedent under Section 1022(e). Anything owned by a revocable trust established by the decedent would seem to be acquired from the decedent as a result of the decedent’s death, but are those assets considered “owned” by the decedent? For some reason, Congress took pains to include “qualified revocable trusts” in Section 1022(d)(1)(B)(i) in the list of assets deemed owned by the decedent, and also in Section 1022(e)(2)(A) in the list of assets passing from the decedent. (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).) It seems that assets in all revocable trusts would qualify as an “inheritance” under Section 1022(e)(1), and also under Section 1022(e)(2)(B) where the decedent had reserved rights to “alter or amend,” so why would Congress have specifically mentioned qualified revocable trusts? Would that be because only an executor can allocate the basis increase? Is it possible that the specific inclusion of qualified revocable trusts in Section 1022(e)(2)(A) means that Congress didn’t want other revocable trusts to be eligible for a step-up in basis?
The more logical conclusion is that Congress wanted Section 1022(e)(2)(B) to be a catch-all provision for trusts for purposes of the step-up, and that all revocable trusts are eligible for a step-up in basis. That conclusion leads to the further conclusion that Congress meant Section 1022(d)(1)(A) to be broadly interpreted, as qualified revocable trusts are mentioned in both Section 1022(d) and Secton 1022(e), and if Congress had meant the special rules in Section 1022(d) to be an exhaustive list, then there would have been no reason for Congress to have included other trusts in Section 1022(e)(2)(B).
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 or Personal Representative 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. There is the possible risk that a failure to do so would result in no step-up, and the election provides a safe harbor for the step-up.
The same sloppy “thinking” in 2001 that caused this one-year tax law to take effect in 2010 is evident throughout Internal Revenue Code Section 1022. Who knows what other ideas Congress is working on that would affect estate planning; maybe we would all be better off if the Senate continues to procrastinate.
[tweetmeme http://elderlawblog.info]
Taking Control of the Hospital Discharge Process
It’s stressful enough to have a family member hospitalized, but hospitals seem to move patients out so quickly that the stress is intensified.
A hospital discharge does not mean that the patient has recovered fully. Rather, it means that a physician has decided that the patient has reached a stable condition and doesn’t need to be hospitalized any longer. Discharge planning is defined by Medicare as a “process used to decide what a patient needs for a smooth move from one level of care to another.” Medicare requires that the discharge plan be “safe and adequate,” and if you don’t agree with the plan, you can appeal it. Until the appeal is decided, your family member can remain in the hospital.
Make sure there aren’t any inaccurate assumptions in the discharge plan, especially about what family caregivers are expected to do. If the discharge is to home, make sure the home care services have actually been set up before the discharge (not just a phone call made by the discharge planner), as any gaps in coverage will immediately fall on family caregivers once your family member has left the hospital. In a difficult situation involving a senior citizen, getting a geriatric care manager involved can often remove a great deal of stress from you. (If you’re in need of one, a Certified Elder law Attorney (www.nelf.org) can provide you with a referral.)
If the discharge is to a nursing home, make sure that you feel that the nursing home is located in an appropriate place for visits from family and friends, as a lack of visits may result in corners getting cut and less than adequate care. While the hospital discharge planner may be able to locate a nursing home that has an available bed, there may be a good reason that beds are available at that nursing home, so you should make your own decision about whether the nursing home is appropriate. You should personally visit the nursing home. Print out the Nursing Home Facility Checklist at http://nursinghomeadmission.com/findahome.php, and through the same page on that website you can check out the Massachusetts and federal ratings of any nursing homes that you are considering. Don’t feel pressured to make a too-quick decision; again, getting a geriatric care manager involved can reduce your stress level.
Above all else, trust your common sense and don’t let the hospital discharge planner steamroll over you. If you feel your family member is being pushed out of the hospital too soon, you may be right: based on the way health insurance works, hospitals make money by refilling beds, not by having existing patients linger in the hospital.
[tweetmeme http://elderlawblog.info]
What’s So Bad about Probate?
A company named Schumacher Publishing owns and runs www.estateplanning.com and licenses articles on various estate planning topics; lawyers and financial planners can pay to use some of Schumacher’s articles on their websites. The company recently contacted me to try to get me to purchase one of their packages, and earlier today I looked at some of their articles, which are generally accurate and very well-written. (No, I won’t be buying, because I like writing my own articles and blog posts.) One of Schumacher’s articles, “Understanding Living Trusts,” asks the question “What’s so bad about probate?” I don’t quite agree with Schumacher’s 4-part answer. In fairness to Schumacher, I point out that every state has its own probate and trust laws, so it is difficult to write a short summary that applies accurately to all 50 states,but here are Schumacher’s points about what’s so bad about probate and my rebuttal about Massachusetts probate.
Schumacher’s point: “It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.”
Brian’s response: I agree with the point about the multi-state estate being complicated, and it is often a good idea to use a trust to avoid probate if you own real estate in other states. Schumacher’s point about probate being expensive, however, is twisted to make a trust sound like it is always preferable; a trust can also be expensive for the same reasons listed above, as legal fees, Trustee’s fees and other costs must be paid before the assets can be fully distributed to your heirs.
Schumacher’s point: “It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.”
Brian’s response: It’s not so much the probate process itself that takes time, but rather the processes of selling or otherwise dealing with real estate and other assets, and filing income tax returns and estate tax returns, that take time. Those are all matters that would have to get done even if you had a trust. The issue that probably is the main reason for any estate to be held open for over 18 months is final clearance from estate tax authorities, and that delay has nothing at all to do with the probate process; a trust would also have to be held open while waiting to receive written approval of estate tax returns from the Internal Revenue Service or the Massachusetts Department of Revenue. Schumacher’s other points about probate are also invalid and are twisted to make a trust sound like it is always preferable. Assets are not frozen in Massachusetts, and, similar to probate, with a trust nothing can be distributed or sold without the Trustee’s approval. Similar to probate, if the family needs money to live on, they can make a request to the Trustee, and the Trustee can deny it.
Schumacher’s point: “Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.”
Brian’s response: I agree that a disgruntled heir can contest your will, and in Massachusetts that person may even be given basic instructions early in the probate process on how to do it, so I often suggest a trust to avoid probate if a will contest is thought to be a real possibility. I generally disagree, however, about how public the Massachusetts probate process is, since the only way for anybody, including an unscrupulous solicitor, to learn what you owned or owed, or who received what from your estate, is to go to the Probate Court during its business hours and to ask to see the probate file; the information being sought may not even be in the file yet, so return trips to the Probate Court could well be needed to get to see that information. It therefore can take a lot of time and effort on somebody’s part to get to see details in the probate file, even though it can technically be categorized as public.
Schumacher’s point: “Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.”
Brian’s response: Your family also has no control over the Trustee, and the Trustee’s processes will determine how much the trust administration will cost and how long it will take. The probate process in Massachusetts is fairly simple, and will become simpler on July 1, 2011, when the Massachusetts Uniform Probate Code is scheduled to be fully implemented. With proper guidance, the executor or personal representative of an estate can handle many tasks without incurring large costs, having lengthy delays, or needing to rely much on a lawyer. In fact, many of the probate estates I’ve handled have cost less than the cost of a living trust.
Brian’s conclusion: As you can see, a writer who is looking to promote trusts can twist everything to make probate sound bad, and to make trusts seem like magic. As I’ve pointed out in an earlier blog post, a choice sometimes has to be made in Massachusetts between avoiding probate and protecting your home from creditors. http://elderlawblog.info/2010/04/02/protecting-your-home-from-creditors-in-massachusetts There is no significant reason to fear probate in Massachusetts, and there are far more costly estate planning issues to deal with, such as (1) On a Massachusetts estate of $1,000,000+, the minimum Massachusetts estate tax is $33,200. (2) An elderly person has a roughly 10% chance of spending 5 years in a nursing home, at an average total cost in Massachusetts of over $580,000. (3) A disabled person on SSI who inherits assets directly, instead of through a special needs trust, loses SSI benefits and is required to spend everything all the way down to $2,000 before getting back on SSI.
[tweetmeme http://elderlawblog.info]
When an ambulance is called for, the crew must often make split-second decisions about treatment, especially when a patient is not breathing or has no pulse. In Massachusetts, ambulance services, EMTs and paramedics are required to resuscitate a person who has undergone cardiac or respiratory arrest unless they are immediately made aware that the person does not want to be resuscitated. Because of the urgent nature of their tasks, they are not permitted to receive verbal information, and they need to see a specific form. A validly-completed Comfort Care/Do Not Resuscitate (CC/DNR) form is the only way that ambulance services, EMTs and paramedics are allowed to verify that a patient has a valid DNR. The form is available at https://www.mass.gov/lists/molst-and-comfort-care-dnr-verification. If a properly executed CC/DNR Order Verification Form is not seen by the responding ambulance services, EMTs and paramedics, they are required to resuscitate the patient, even if the patient’s wishes are in some other written form or told to them. If ambulance services, EMTs and paramedics are shown a properly executed CC/DNR form for the patient, they will provide only palliative care (oxygen and medication to relieve pain) to the patient during transportation to the hospital.
The form must be completed in its entirety and signed by an attending physician, authorized physician’s assistant or authorized nurse practitioner, in accordance with the instructions on the form. If a physician’s assistant or nurse practitioner signs the form, the name of the supervising physician must be on the form for it to be validly executed.
[tweetmeme http://elderlawblog.info]
Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?
If you look at Internal Revenue Code Section 1022 too quickly, you may conclude that a decedent’s estate in 2010 cannot ever receive any step-up in basis by virtue of any power of appointment. After all, Section 1022(d)(1)(B)(iii) specifically states: “The decedent shall not be treated as owning any property by reason of holding a power of appointment with respect to such property.” A deeper look into Section 1022, however, can reveal step-up opportunities.
Perhaps what Congress was trying to do with 1022(d)(1)(B)(iii) was eliminate certain tax games with powers of appointment. One such game was to grant a general power of appointment to a spouse to attempt to receive a complete step-up in basis on the assets affected by it. By making 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, the surviving spouse’s appreciated trust property would be included in the gross estate of the first spouse to die. Section 1022(d)(1)(B)(iii) would kill this abusive tax game.
Under Section 1022(e)(2)(A), the step-up in basis is available in 2010 to a 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.” That language, in part, describes a power of appointment that is reserved (as opposed to one that is granted to another person). Thus, a trust with a reserved power of appointment seems to be deemed “acquired” from the decedent under Section 1022(e). The problem is that to qualify for the step-up in basis under 2010 tax law, an asset must also be considered to be owned by the decedent under Section 1022(d), and powers of appointment are generally excluded, but if Congress didn’t already believe that a decedent with a reserved power of appointment over a trust owned the trust’s assets at the time of death for purposes of Section 1022(d), then why would Congress have included Section 1022(e)(2)(A)? Congress is deemed to know that a reserved power of appointment causes the powerholder to be treated during lifetime as the owner of the trust for income tax and capital gains tax purposes under the grantor trust rules in Sections 671-679. I conclude that a reserved power of appointment in a trust allows the opportunity for a step-up in basis.
What about a reserved power of appointment in a deed? Back in 1990-1992, when the field of elder law was young, I proposed in several articles (including in Estate Planning, NAELA Quarterly and The ElderLaw Report) that a power of appointment could be reserved in a deed to avoid treatment as a completed gift and cause a step-up in basis. Many of such deeds may now be in existence. Where the gift was incomplete when the deed was recorded, and is not completed until the powerholder’s death, the property is still owned by the decedent for estate and gift tax purposes at the time of death, and passes without consideration at that time, so such a deed may be eligible for the step-up in basis. Still, due to the literal language in Section 1022(d)(1)(B)(iii), it may be considered a stretch to obtain the step-up in basis in 2010, but if all of the parties involved in the deed were to transfer their interests to an irrevocable trust that mirrors the terms in the deed, the step-up possibility would be strengthened. If the holder of the reserved power of appointment in the deed also reserved a life estate, however, the step-up could be obtained via the reserved life estate. See Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022? and More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010
[tweetmeme http://elderlawblog.info]
I had asked for feedback on elder law listservs about my position that a life estate may be eligible for a step-up in basis in 2010. One disagreeing commentator wrote:
“The basis step up is limited to property that passes by reason of death. When a life estate is established the legal ownership of the property is separated into 2 fee interests, the life estate and the remainder. Each can be leased, mortgaged and are subject to foreclosure. Therefore, the remainder interest did not pass by reason of death. The passing of title took place when the life estate was retained. All that happened is the remainder interest VESTED upon death. As a result, no step up.”
These points are well-taken. Our disagreement is zeroed in on the attributes of a life estate. My point remains that the life tenant has exclusive possession during lifetime, and the home that is the subject of the reserved life estate remains completely controlled by the life tenant. Use and possession by the remainderpersons is prevented until the life tenant’s death. While theoretical separation of the interests may occur, no actual separation occurs, and the theoretical separation does not give a present, usable benefit to the remainderpersons, as the life tenant controls whether the actual separation can occur by sale or partition. The remainderpersons don’t have anything real until the death occurs, and they receive their usable interest without consideration only as a result of the life tenant’s death.
Section 1022(e)(1-3) covers bequests, devises, inheritances, revocable trusts and many irrevocable trusts, so there isn’t much left to be covered by Section 1022(e)(4), which includes “Any other property passing from the decedent by reason of death to the extent that such property passed without consideration.” What type of ownership interest would Section 1022(e)(4) be covering that isn’t already covered by (1), (2) and (3)? If life estates were meant to be excluded, perhaps Section 1022(e)(4) would only cover assets held jointly or subject to a transfer-on-death designation, but if Congress was intending to create such strict limitations, those interests could have been specifically mentioned. The language of Section 1022(e)(4) seems to indicate that Congress intended it to be a broad category.
I did state that my position is not a slam dunk, but I’m still not buying that life estates were intended to be excluded from the possibility of a step-up in basis.
[tweetmeme http://elderlawblog.info]
Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?
I’ve seen several blog posts this year that state the conclusion that a life estate is not entitled to obtain a step-up in basis upon the life tenant’s death in 2010, but I have yet to see any analysis on how those lawyers got to their conclusion. Congress is well aware of the existence of life estates, as Internal Revenue Code Section 2036 specifically addresses them; if Congress intended to exclude life estates from receiving a step-up in basis under Internal Revenue Code Section 1022, it seems that Congress would have specifically mentioned them, as it did with several other common estate planning techniques.
To qualify for the step-up in basis under 2010 tax law, an asset must be considered to be owned by the decedent under Section 1022(d) and considered to be acquired from the decedent under Section 1022(e). To determine whether a reserved life estate is entitled to a step-up in basis, the issue needs to be broken down into 2 questions.
Question 1: At the time of death, does a decedent “own” the property which is the subject of a reserved life estate?
It is true that Section 1022(d) does not include life estates in its description of special rules on what is considered owned by the decedent, but life estates could be covered by the general rule. Powers of appointment are less commonly utilized and not as well-known, but were expressly excluded under Section 1022(d)(1)(B)(iii), so Congress knew how to exclude certain planning techniques when it wanted to do so. If life estates were intended to be excluded, why were they not specifically mentioned? A power of appointment is not a possessory interest, yet Congress took pains to exclude it from the possibility of a step-up in basis. It seems illogical for Congress to have specifically excluded a nonpossessory interest but to be silent if it also intended to exclude a possessory interest such as a life estate. Further, it is possible that the phrase “at the time of death” could be interpreted to exclude a life estate, because death terminates the interest, but since a reserved power of appointment was specifically mentioned and would also terminate at death, it doesn’t appear that the “at the time of death” phrase was intended by Congress to mean “after” death. I therefore conclude that Congress must not have intended to exclude reserved life estates from the definition of what is owned by a decedent at the time of death.
I cannot speak for all 50 states, but under Massachusetts law, the life tenant has exclusive possession of the entire property during the life tenant’s lifetime. The life tenant is entitled to all the rents and profits from the property and pays all current real estate taxes. Remainderpersons do not have the right to petition for partition because they do not have a present possessory interest in the premises. At the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the remainderpersons, and a reserved life estate may therefore fit the ownership test in Section 1022(d).
Question 2: Does a remainderperson “acquire” from the decedent the property which is the subject of a reserved life estate?
If you agree with the analysis in Question 1, then this question probably poses little obstacle to the step-up in basis. The language in Section 1022(e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainderpersons without consideration upon the life tenant’s death, that description could easily include a reserved life estate. A question could arise on whether they received it “from” the decedent, but the possession does transfer based on the decedent’s actions. The open issue on the step-up in basis would be whether, since the remainder interest was already vested, it was the entire value of the property that was “acquired,” or merely the actuarial value of the life estate at death; still, since the entire possession transfers upon the life tenant’s death, a strong argument could be made for the full step-up in basis (subject to the other limitations in the law of a total of $1,300,000 for most estates).
Conclusion: It’s not an absolute slam dunk that life estates are entitled to a step-up in basis under Internal Revenue Code Section 1022, but there is at least a solid argument that they weren’t excluded and that they fit the definition of what is entitled to a step-up.
[tweetmeme http://elderlawblog.info]
Having written and spoken quite a bit in the past 20 years about how to transfer a person’s home for Medicaid and tax planning purposes, I’ve been getting calls and emails about how the new 2010 tax law affects common lifetime transfers of a senior citizen’s home. Thanks to political games played during the first year George W. Bush’s presidency, we now have a tax law that only affects the estates of persons who die during 2010. Under pre-2010 law, which comes back into effect after 2010, the tax goal in Medicaid planning was usually to render the home includable in the decedent’s gross estate for federal estate tax purposes. Some of the methods used by estate planning and elder law attorneys may not be eligible in 2010 for a post-death adjustment in the basis for capital gains tax purposes, so some persons are trying to determine whether a change should be made in the ownership of the home.
Unless a person who made a transfer of the home is expected to die well before the end of 2010, it may be that the best course of action would be to do nothing. We’re going through a temporary change in the law, and there have been indications from Congress that the federal estate tax laws and accompanying capital gains tax laws may be returned to 2009 law and made retroactive to the beginning of 2010. For someone is expected to die soon, however, perhaps a change should be made. (Clients of mine in this situation should contact me immediately.)
Under the applicable 2010 tax law, known as the modified carryover basis rules, an estate can opt for a step-up in basis for certain assets, and to see whether these are eligible, Internal Revenue Code section 1022 applies. The most common types of transfers of the home that were made for Medicaid planning purposes in the past were (1) joint tenancy with right of survivorship, (2) a reserved power of appointment in a deed, (3) an irrevocable income-only trust, which often includes a reserved power of appointment, and (4) a reserved life estate, use-and-occupancy agreement or informal understanding. To qualify for the step-up in basis, an asset must be owned under Section 1022(d) and acquired under Section 1022(e), so each type of transfer must be analyzed.
Internal Revenue Code section 1022 (d)(1)(B)(i) allows at least a partial step-up for some joint tenancies; (d)(1)(B)(iii) denies the step-up for a reserved power of appointment, presumably only in a deed. Section 1022(e)(2)(B) allows the step-up for some irrevocable trusts, including a power to alter or terminate the trust, which would seem to include a reserved power of appointment in an irrevocable trust.
It has been questioned whether a life estate is entitled to a step-up in basis. Several blog commentators have written that a life estate is not eligible for the step-up, but many of them seem to be parroting each other and not displaying their analysis. Section 1022(e)(3) seems to include a reserved life estate but not a use-and-occupancy agreement or informal understanding. The language in (e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainderpersons upon the life tenant’s death, that description could include a reserved life estate. Further, under Massachusetts law, the life tenant has exclusive possession of the entire property during the life tenant’s lifetime, and may therefore fit the ownership test in Section 1022(d). Thus, it appears to me that a Massachusetts life estate can be eligible for a step-up in basis.
The National Academy of Elder Law Attorneys has written to the IRS for clarification about whether a life estate or an income-only irrevocable trust is entitled to a step-up in basis under Section 1022. http://www.naela.org/MemberPages/documents/IRC_1022_letter_3_31_10.pdf It’ll be interesting to see if NAELA receives an answer, but my general feeling is that Congress will eventually act, and that this modified carryover basis issue will eventually become a non-issue.
[tweetmeme http://elderlawblog.info]
In Temporary Guardianship of Kenneth Simon, a Barnstable County, Massachusetts case, a Probate Court judge presided over a lengthy trial on the fees in the Temporary Guardian’s First and Final Account and ruled that the two attorneys involved in the case must reimburse the sum of $328,770.97 to the estate. The 32-page judgment can be read here: Judgment_on_Temporary_Guardian’s_First_and_Final_Account_ The Temporary Guardian had been in charge of Kenneth Simon’s personal and financial affairs for a mere 83 days before his death, yet the accounting showed legal and fiduciary fees of well over $500,000.00, including fees claimed for services after Kenneth Simon’s death, at which time the Temporary Guardianship would automatically have ended.
I was the expert witness hired by the persons who were challenging these fees on the First and Final Account. My opinion was that what they needed to do on the temporary guardianship should have amounted to $20,000-40,000, and I spent nearly 3 full days on the witness stand being cross-examined. The Temporary Guardian and his lawyers had initiated divorce, annulment and estate planning actions without even attempting to determine whether Kenneth Simon would have wanted these actions. In fact, the divorce action was filed on the very day that the Temporary Guardian was appointed, and the Temporary Guardian had admitted at trial that Kenneth Simon had told him when they first met that everything was fine between himself and his wife. The judge agreed with my opinion that Kenneth Simon’s preferences should have been first and foremost, and that the doctrine of substituted judgment (not the best interests standard) should apply because marriage and estate planning issues involved Kenneth Simon’s personal rights.
What is important about this case is that it confirms substituted judgment as the proper legal standard to be applied in Massachusetts whenever a Guardian or Conservator is making any type of personal decision for a person who has any history of making decisions or expressing preferences. Without delving into what a person would want, you cannot change somebody’s estate plan, force a Christian Scientist to undergo routine medical treatment, change somebody’s religion, or, as happened here, force a dying man to divorce the convicted prostitute he knowingly and willingly had married a year earlier.
The judge’s decision has been appealed, so we will undoubtedly be hearing much more about this case in the future.
[tweetmeme http://elderlawblog.info]
As a result of a silly political game played by the U.S. Senate shortly after President George W. Bush took office, in 2009 there was no federal estate tax on the first $3,500,000 of a person’s net worth at death, and, right now, there is no federal estate tax if somebody dies, no matter how wealthy the person is, yet in 2011 the federal estate tax exemption goes all the way back down to $1,000,000. Over the past several months, the Senate has been the obstacle to stabilizing the estate tax, and apparently the Senate plans on continuing its silly political tax games. The Senate Budget Panel voted on April 22, 2010 to continue the federal estate tax uncertainty by extending the 2009 exemption of $3,500,000 through 2010 and 2011, and not making a permanent change. Presumably, if no further action gets completed, the federal estate tax exemption would drop down to $1,000,000 in 2013. http://www.reuters.com/article/idUSTRE63L5V420100422?feedType=RSS
In a joint letter dated April 15, 2010, the Chairs of the ABA Tax Section and the ABA Real Property, Trust and Estate Section had requested that the Senate Committee on Finance hold a hearing on federal wealth transfer taxation. Given the possibility that the federal estate, gift, generation-skipping transfer and adjusted basis tax laws may be repaired retroactive to the beginning of 2010, serious attention by the U.S. Senate is already long overdue.
[tweetmeme http://elderlawblog.info]
The Home Can Sometimes Be Given Away Without Penalty Even After a Nursing Home Stay Has Begun
While many transfers of the home are subject to a period of disqualification from payment of nursing home costs by the state Medicaid program, some transfers can be made even after a nursing home stay has begun, and are immediately safe under federal law. (Other exceptions, especially in California, may apply under state interpretations of the federal law.)
One such permissible transfer is to the elder’s spouse. If one spouse becomes institutionalized, the home could probably be deeded to the spouse remaining in the couple’s home. This plan may not be very helpful to the family if the spouse who is institutionalized later receives the home back by will. Married couples that wish to have such action taken in case one of them becomes incompetent should have durable powers of attorney empowering each other to transfer the home.
Another permissible transfer is to (presumably reward) a child who spent no less than the 2 years immediately prior to the client’s institutionalization living in the client’s home and who took care of the client in the client’s home. The care must have been of the type which kept the client out of a nursing home. Since the state Medicaid program makes the decision as to whether these requirements were met, the child would be well-advised to keep detailed records during this period.
Another permissible transfer is to a child who is a minor or who is blind or disabled, or to an irrevocable for the benefit of a disabled child.
Finally, a transfer could also be made to a sibling who has an equity interest in the home and who has lived there for no less than one year prior to the client’s institutionalization; this exception could arguably apply if the client and sibling were co-owners of a multi-family home.
Even if the exceptions outlined above do not apply to the situation, in some cases there may be other steps that can be taken even after a nursing home stay has begun.
In Medicaid Planning, Some Trusts Can Put Elderly Persons in a Worse Position Than If They Had Taken No Action At All
If Assets Can Be Given Back to or Taken Back by the Original Owner, the Assets of the Trust Are Not Protected for MassHealth Purposes If a Nursing Home Stay Becomes Necessary
In trust law, there is no such thing as “one-size-fits-all.” Trusts must be designed to meet the particular concerns of the person whose assets will be placed there. Two of the major non-tax concerns of many elderly persons in Massachusetts are probate avoidance and Medicaid (known in Massachusetts as MassHealth).
Revocable Trusts
Although the assets of just about any revocable trust will avoid probate, the assets of these trusts are never preserved for Medicaid purposes if a nursing home stay eventually becomes necessary and a MassHealth (i.e., Medicaid) application is filed. All of the assets of a revocable trust are deemed countable, which in MassHealth jargon means the assets must be spent for the care of the nursing home resident.
The home of a MassHealth applicant is usually considered noncountable, but if it is in a revocable trust, in Massachusetts it is treated the same as any other asset. The home of a MassHealth applicant that is in a revocable trust must be sold and the proceeds spent on the care of the nursing home resident. Any exemptions that the home might have received, such as for the MassHealth applicant’s spouse and certain children or siblings, is lost by having the home in a revocable trust.
Many elderly persons go to free living trust seminars, and are “sold” the benefits of probate avoidance. In my opinion, what goes on at those seminars (and the free hour with the lawyer afterwards) is nothing more than a sale. The sale is often a reddish binder that contains documents that include a revocable trust. In my recent experience, both spouses are co-Trustees of each other’s revocable trusts. The problem is that if one of them becomes mentally incapacitated, we’re stuck with 2 trusts that each have an incompetent co-Trustee, and have to go through extensive steps to get the incompetent Trustee removed from the position. In my experience, the married couple was not informed during the sale process about what would happen if one of the spouses eventually needed nursing home care.
The bottom line is that revocable “living” trusts are easy sales to be made to elderly persons by inept, one-size-fits-all planners or online document banks, but do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.
Irrevocable Trusts
Although the assets of just about any irrevocable trust will avoid probate, the assets of these trusts are often not preserved for MassHealth purposes in Massachusetts if a nursing home stay eventually becomes necessary and a MassHealth application is filed.
Since April 1, 1990, MassHealth regulations have provided that if a Trustee of an irrevocable trust can give assets back to the original owner, and if a MassHealth application is filed by or on behalf of the original owner, the assets of the trust are deemed available to the nursing home resident, and render the elderly person ineligible for MassHealth. This law applies retroactively to irrevocable trusts created before the Massachusetts regulation was adopted. The impact of this law on irrevocable trusts means that many older irrevocable trusts do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.
Fixing Bad Trusts
In attempting to fix any MassHealth problem caused by a trust, a transfer of the assets causes a 5-year MassHealth lookback period unless the transfer of the assets goes back to the original owner. It can be fairly simple to fix the problem if a revocable trust is the cause of MassHealth ineligibility, since the original owner can revoke the trust and get the assets placed back into his/her name, but if the original owner is mentally incapacitated at that time, revoking the trust might not be so easy
It is often difficult to fix the problem if an irrevocable trust is the cause of MassHealth ineligibility. The MassHealth problem caused by any irrevocable trust is completely dependent on the provisions of the trust, and the method of fixing the problem varies from trust to trust. Usually the elderly person is not the sole Trustee, and neither the Trustee nor the elderly person has the power to get the assets placed back into the elderly person’s name. In many cases, a Massachusetts Probate Court proceeding known as a trust reformation is needed, and in other cases, a Probate Court petition to terminate the trust due to frustration of purpose is the better procedural move.
[tweetmeme http://elderlawblog.info]
Massachusetts Estate Planning, Probate & Elder Law 