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.
Adding someone’s name to an asset of yours can be done all too easily, without your realizing all of the ramifications. There are many issues that come into play when deciding whether making an asset jointly-held is the right move. Among those issues are the common issues raised in any estate plan: creditor protection; family harmony; probate avoidance; estate, gift and capital gains taxation; and long-term care and governmental benefits (especially Medicaid, currently known in the Commonwealth of Massachusetts as MassHealth). Some of the ramifications of jointly-held assets are good, some are bad, and others are downright ugly.
The Good
— Jointly-held property is inherited by the surviving joint tenant(s), and thereby avoids the need for that asset to go through the probate process. (Probate, however, is often blown way out of proportion as a legal issue, often by those who stand to gain from selling an alternative, such as a revocable “living” trust or an annuity.)
— Any joint holder can write checks on a jointly-held bank account, even after the death or disability of one of them.
— Tenancy by the entirety (which is a special type of joint ownership available only to a married couple) can protect the home against the creditors of one spouse.
— A surviving joint tenant who had provided no financial contribution on assets that had appreciated in value often ends up with a new adjusted basis for capital gains tax and depreciation purposes.
— While estate tax and capital gains tax laws usually presume that a married couple each owned one-half of a jointly-held asset, the holding of the Gallenstein Tax Court case (and several cases which have followed it) can be used to justify avoidance of capital gains taxes for many surviving spouses, especially those who were not the primary breadwinners of the household.
— Assets other than bank accounts that are held in joint names can sometimes be considered inaccessible by Medicaid, and therefore not subject to the spenddown process. This possible exception does not apply if the joint owners of the asset are married.
— Under recent changes in Internal Revenue regulations, a surviving owner of an asset held in joint names or as tenants by the entirety can now execute a qualified disclaimer within nine (9) months of the decedent’s death, and thereby refuse to accept the one-half interest of the deceased spouse, but unfortunately the Massachusetts disclaimer statute may prevent full use of this opportunity. By taking no steps to accept the survivorship interest and executing a disclaimer, the surviving owner has at least some opportunity to do estate tax planning in a situation where proper advance planning was not done.
The Bad
— Jointly-held assets are inherited directly by the surviving joint tenant, yet a Will usually does not take those jointly-held assets into account when the total inheritance is divided into shares. For this reason, inheritances are often skewed toward surviving joint tenants, who inherit more than they would have if the jointly-held asset had passed through the probate process.
— On many bank accounts, each joint holder has the power to withdraw everything from the account. Thus, the accounts could be cleaned out without notice to the person who originally placed all the funds into the accounts.
— The incapacity of one person can cause a jointly-held asset to be frozen, resulting in the need for guardianship or conservatorship. The one exception is where an effective durable power of attorney exists.
— On the federal estate tax return for a decedent who owned assets in joint names with right of survivorship, the contribution of the parties must be traced. The only exception to this rule is a tenancy by the entirety or joint tenancy created after 1976 between spouses. The exception does not apply if either spouse is not a U.S. citizen, or if the jointly-held asset contains a third name.
— Jointly-held assets are exposed to lawsuits by creditors and divorcing spouses of each joint tenant.
— A decedent’s will is ineffective to control the ultimate disposition of jointly-held assets. The surviving owner can ignore the decedent’s wishes in the absence of a specific provision in a prenuptial agreement or will contract.
— Adding another name to a deed can negatively impact your ability to sell your home and pay no capital gains taxes on the first $250,000 (or $500,000 for married couples) of appreciation. The only persons eligible for this exclusion are those who owned the home and lived in it for two (2) of the five (5) years prior to the sale.
— By itself, adding a name to an asset often does not protect the asset from being considered countable by Medicaid, especially in the case of bank accounts. Thus, jointly-held assets often are considered available by Medicaid to pay for nursing home care, unless the healthy joint tenant can establish that the asset is inaccessible or did not belong to the Medicaid applicant.
— Spouses who have children from prior marriages and hold their assets in joint names run the risk that the surviving spouse will inherit everything, then disinherit the children of the first spouse to die. (If a prenuptial agreement or will contract had been executed, however, that risk would have been eliminated or at least minimized.)
— One of the most argued-about and litigated issues after someone’s death involves whether a bank account was held in joint names with someone else for purposes of convenience or for purposes of inheritance.
The Ugly
A married couple that owns everything in joint names can end up causing their heirs to pay more Massachusetts estate taxes than necessary. Under the law in effect in 2010, the sum of $1,000,000 can be given or left to your heirs free of Massachusetts estate and gift taxation. A married couple can give or leave to their heirs double that amount, for a total of $2,000,000. If the surviving spouse ends up with everything, however, the $1,000,000 exemption of the deceased spouse ends up being wasted (unless a qualified disclaimer is executed within 9 months of the death of the first spouse).
Uglier yet, if the IRS turns the tables on taxpayers and begins to use the Gallenstein case’s reasoning to its advantage, then some surviving spouses could end up with severe problems with capital gains taxes when selling appreciated assets.
For these reasons, a married couple with a net worth in excess of $1,000,000.00 (including life insurance that is not owned by an irrevocable trust) should often divide their jointly-held assets and establish “credit shelter” trusts, also known as “bypass” trusts. It is possible for the surviving spouse to be in charge of the trust, and to be able to dip into the trust for the spouse’s own health, education, maintenance and support, as well as to be able to make payments to or for others.
Further, there may be a good reason not to use the trust to avoid probate. If the credit shelter trust remains unfunded until death, it is possible that the trust can remain available to pay privately for the spouse’s home care or assisted living, yet be considered by MassHealth (i.e., Medicaid) regulations in Massachusetts to be considered an asset unavailable to pay for the surviving spouse’s nursing home costs.
Buying Insurance for Temporary Reasons Can Keep a Disqualifying Transfer from Becoming a Problem
Many persons do not become aware of long-term care financing issues (including Medicaid transfer restrictions and the lack of coverage of long-term health care by Medicare and other health insurance) until it is too late to engage in anything other than choosing among bad options. Some persons, however, have the foresight to engage in advance planning, but cannot afford long-term care insurance, so that need to resort to Medicaid planning. They typically are middle-class persons who own a home and limited funds that they need to live on, so their primary concern in engaging in Medicaid planning is to preserve their home for eventual inheritance by their children without losing the right to occupy their home.
Long-term care insurance is often the best solution to the long-term care problem, but if it cannot be afforded on a long-term basis, the only way to preserve the home is to transfer it. If the home is not transferred, it can still be deemed exempt upon a Medicaid application, but only during the applicant’s lifetime. After the death of a Medicaid recipient who was a homeowner, however, an estate recovery claim for reimbursement can be made by the state Medicaid program.
No matter how the transfer is structured, unless it is made to one of the limited number of permissible transfers under federal Medicaid law and state Medicaid regulations, a 5-year (or, in some cases, greater) period of Medicaid disqualification will result, beginning in the month of the transfer.
For example, suppose an unmarried person transfers a home worth $630,000.00 in a state where the average nursing home cost is $7,000.00. If a Medicaid application is made within 5 years of the transfer, the disqualification period would be 90 months, beginning at the time of the application. If the application is made more than 5 years after the transfer, under federal Medicaid law no disqualification period would exist.
If the need for a nursing home stay became necessary during the Medicaid disqualification period, private payment of nursing home costs will be necessary, unless the transaction is undone at that point; this process is known in Medicaid parlance as a “cure.” Since a cure will sometimes result in gift tax complications, it may not be advisable from a tax standpoint. Further, unless a cure is made, the spouse of an institutionalized person may end up spending more than he or she would have had to in the absence of the transfer, and thereby become impoverished.
For example, suppose an unmarried person transfers a home worth $270,000.00 in a state where the average nursing home cost is $9,000.00. Medicaid law would then provide for a maximum disqualification period of 30 months if a Medicaid application were filed within 5 years of the transfer. If the transferor needs nursing home care after 5 years have passed, the transferor will be eligible for Medicaid. If the transferor required a nursing home stay after 50 months had passed, he or she would be disqualified for the remaining 10 months of the lookback period. The transferor’s monthly income would pay for part of each month’s cost during the lookback period, but the transferees would have to either undo the transaction or pay for the remaining 10 months, an amount of $50,000.00 in this example.
If the transferees in this example were at all able to pay for the remaining disqualification period, they have a great deal to gain. If they were unable or unwilling to cover nursing home costs during this time and were required to make a full cure of the disqualifying transfer, the transferor would be revested with the $270,000.00 home, and a new plan would be needed to attempt to save something.
One way around these problems would be for the person to purchase long-term care insurance at the time of the transfer. While insurance premiums can be very expensive for people in their 70’s and 80’s, the policy could merely be purchased to eliminate the downside risk discussed above. Thus, the person would purchase the policy with short-term interests in mind, and obtain the smallest benefit necessary to cover nursing home care during the disqualification period.
The transferor’s income and other assets would factor into the determination of the amount of insurance to be purchased. As time went on, the transferor could drop the daily amount of the policy to fit his or her needs, and may even choose to get rid of the policy before the disqualification period expires. Once the disqualification period expires, however, the policy would likely be dropped (unless Medicaid laws had changed and it would be advisable to maintain the policy).
Many persons reject long-term care insurance as a long-term planning measure because the premiums are very expensive, and many persons reject the insurance as a short-term measure for the same reason. If someone is balking at the cost of the insurance, or if they are so concerned about the Medicaid disqualification period that they do not wish to make any transfer, it would perhaps be advisable to involve the transferees in the discussion, as it is their eventual inheritance that is at stake here. When the transferees learn how the Medicaid disqualification period works, they may find it is in their best interests to pay the premiums for the transferor. The transferor may not like the idea of others paying the premiums, but since without this insurance the purpose of the transfer can end up being frustrated by fate, transferee payment should at least be considered.
2009 Hernon v. Hernon Will Contest Case in Massachusetts
In the 2009 case of Hernon v. Hernon, a successful will contest was upheld by the Massachusetts Appeals Court. A nephew had moved in with the decedent, then the decedent had executed a new will 2 months before death that left his estate to the nephew’s children.
The court found that the elements of undue influence were present. A long-time friend of the decedent testified that (1) the will was not consistent with their many conversations; (2) the decedent had believed he had no other choice than to have the nephew move into his home to take care of him; (3) the decedent felt quite dependent on the nephew; (4) the nephew had driven the decedent to many of his appointments, including to the lawyer’s office to execute the will; (5) the nephew refused to put the decedent on the phone when some friends called the house; (6) the decedent had expressed fear of the nephew’s anger, and once had quickly hung up the phone when he heard the nephew approaching him.
What appears to be missing in this case is an analysis of the benefit provided by the nephew to the decedent. Where many elderly persons are living longer and moving in with relatives or having relatives move in with them when home care is needed, this case highlights the need for independent legal representation to explore health care and estate planning options. The decedent in this case may have wanted to benefit the nephew for his help, and there were other alternatives such as a Life Care Agreement, where the nephew would have been directly and appropriately compensated for his services.
What is evident is this case is that the compensation for the nephew was not well thought-out. On one hand, if the decedent had only lived for a short time, having a will that left the home to the nephew would have been far too much compensation for his help. On the other hand, if the nephew had provided care for years, then the decedent spent a long time in a nursing home, the nephew could have received nothing.
How could the nephew have been left with nothing after providing extensive care? The reason is that a will only gives away what you have left after you die, after all debts have first been paid. Most payments made on a person’s behalf by Medicaid or MassHealth are essentially loans that have to be repaid from your probate estate after you die. An eventual MassHealth estate recovery claim against the decedent’s estate always comes first, before inheritance provisions in the will. In this situation, after a lengthy stay in a nursing home, the home would have had to be sold to pay the MassHealth debt, and the nephew could then have been left with little or no compensation.
Medicare Will Benefit from the New Health Reform Law
Despite criticism that health reform legislation will result in cuts to Medicare, the bills passed by the House of Representatives and the Senate contain provisions that would strengthen the program by reducing costs for prescription drugs, expanding coverage for preventive care, providing more help for low-income beneficiaries, and supporting accessible, coordinated and comprehensive care that effectively responds to patients’ needs. The new law also would help to extend Medicare’s fiscal solvency for 9 years.
This report by The Commonwealth Fund, linked below, examines the provisions in the legislation and how each one would work to improve benefits, extend the fiscal solvency of the Medicare Hospital Insurance Trust Fund, reduce pressure on the federal budget, and contribute to moving the health care system toward better access to care, improved quality, and greater efficiency.
The Rise of Long Term Care Insurance and Decline of Trusts in Preventative Planning for Custodial Care
In general, the type of legal planning known as Medicaid planning can be effective to obtain governmental coverage of nursing home care. Home care or assisted living, however, usually remains unobtainable without resorting to private payment or long-term care insurance. Since an irrevocable trust is effective only if its principal cannot be distributed to the person who established it, attempting to reserve the use of the principal to pay for home care or assisted living is not possible. If an irrevocable trust is well-drafted, however, principal can be distributed from the trust to others who can opt to pay for the home care or assisted living.
If a person’s principal residence is transferred into an irrevocable trust and the trust triggers the grantor trust rules as to the trust principal, the ability of the donor to use the $250,000.00 capital gains exclusion upon a later sale can be maintained. One common way to trigger grantor trust treatment intentionally is for the donor to reserve a special power of appointment.
Under a 1999 Medicaid regulation promulgated in Massachusetts, a 2-year, $125.00 per day long-term care insurance policy can exempt the home from post-death estate recovery. This regulation replaced the prior requirement of $50.00 per day, which remains in effect for individual long-term care insurance policies issued before March 15, 1999.
The one area where irrevocable trusts pose a huge opportunity is where an elder has a disabled child, especially one who is already receiving SSI or Social Security Disability benefits. Even after a nursing home stay has begun for the parent, transferring assets into an irrevocable trust for such a disabled child does not cause any Medicaid disqualification period at all.
Beginning in 2010, the federal tax law allows all persons who have IRAs to convert them, in whole or in part, to Roth IRAs. A special 2010 rule allows taxpayers to divide the taxable income cause by the conversion between the 2011 and 2012 tax returns.
One reason for a retired person to consider converting an IRA to a Roth IRA is that the retired person may be in a lower income tax bracket than the eventual beneficiaries. For this reason, deferring income tax by keeping the IRA could cause overall higher taxes. Retired persons may want to consider converting just enough of their IRAs to use up their lower income tax brackets.
Another reason for a retired person to consider converting an IRA to a Roth IRA involves MassHealth or Medicaid planning for a married couple. If one spouse enters a nursing home, that spouse is allowed to keep only $2,000, and often the last-minute plan is to get all the other assets over into the name of the spouse who is still at home. To get the institutionalized spouse’s assets down to the $2,000 level can often mean closing out the IRA and incurring all of the income tax on the IRA in that calendar year. Rather than running the risk of having to transfer the IRA in one calendar year and cause the maximum amount of income taxes, some retired couples should consider whittling down their IRAs by making partial conversions to Roth IRAs while they are still healthy.
A third reason for Massachusetts residents to convert from an IRA to a Roth IRA is that there is a Massachusetts estate tax beginning at $1,000,000 of a person’s net worth at death, and no credit is given to the estate for the unpaid income taxes on the decedent’s IRA. The estate tax would be reduced or perhaps even eliminated if the IRA owner became responsible for paying the taxes on the IRA.
Attached Is 2008-2009 Newsletter on Changes in Estate Planning, Probate and Elder Law
This site is devoted to keeping my 3,000+ clients informed about important changes in federal and Massachusetts laws that may affect them. I’ve written many articles that have been published nationally in the past 20 years, and I’ll be updating some of them and placing them here.
Our newsletter on 2008-2009 changes in estate planning, probate and elder law can be found here: 2008-2009 newsletter
Massachusetts Estate Planning, Probate & Elder Law 