Paul O. Dillon, Attorney at Law

Estate Planning for the Family Vacation Home

Many families enjoy owning a vacation home, where generations gather, and memories are made. The second home is part of the family’s legacy, and the hope is that it will continue over many years. Making this happen is the subject of a recent article, “Legal East: Legacy planning for your shore house,” from Daily Local News.

Let’s say the house is to be left to more than one heir. How will the expenses for maintenance be paid? How will the heirs devise a schedule for all owners to use the house? What would happen if the house needs major work and only one owner has the money to pay for it?

Discussing how to structure the ownership of the home with an experienced estate planning attorney is important, as there are many options. The home could be owned in a trust, as a business entity like an LLC, or owned outright by one or more family members. Determining which type of ownership to use becomes important as the owner's age.

If one of the vacation homeowners is elderly and needs long-term care, the home’s ownership may become problematic if they need to apply for Medicaid. Most people don’t think about this until they are faced with the problem. The vacation property will be a countable resource unless ownership is structured correctly before applying for Medicaid. Transferring ownership to a Medicaid Asset Protection Trust may make sense.

Another question is raised when considering applying for Medicaid: is there a primary residence, and is it exempt from being considered a countable asset? Most primary homes are, but this should also be explored with an estate planning attorney.

A Medicaid Asset Protection Trust is an irrevocable trust, but in this case, it’s created with certain features to allow someone to qualify for long-term benefits from Medicaid. A grantor establishes the trust, so the trust itself owns the home (or other assets placed in the trust), and the trustee manages the assets in the trust. The person creating the trust determines the trustee and successor trustees. In most cases, the trust terminates at the grantor's death, and the trust's assets are distributed to beneficiaries.

The MAPT is still subject to Medicaid’s five-year look-back. If the vacation home is transferred into the trust and an application is made to Medicaid within five years, the person won’t be eligible.

An elder law attorney can help you plan to protect your assets from the cost of long-term care through Medicaid, insurance, and trusts. Many strategies exist, but they all take some time to create and execute and need to be crafted for your unique situation.

Reference: Daily Local News (Sep. 4, 2024) “Legal East: Legacy planning for your shore house”

Do You Need a Medicaid Asset Protection Trust?

The numbers are clear: 70% of Americans expect to need long-term care at some point in their retirement. Many people aren’t aware of the importance of long-term care until they are uninsurable because of health conditions or can’t afford the premiums. How can you plan?

Depending upon where you live and the type of care needed, long-term care costs anywhere from $50,000 to $100,000 per year. With an average stay of two to five years, it’s a hefty financial burden without long-term care insurance, a MAPT, and good planning.

Creating a Medicaid Asset Protection Trust requires the help of an experienced estate planning attorney to be sure you obtain all of the benefits of such a trust. Long-term care costs are one of the biggest financial worries for retirees, as noted in a recent article, “This Trust Can Protect Your Assets From Long-Term Care Costs,” from Kiplinger.

The Medicaid Asset Protection Trust (MAPT) moves money out of your estate into a trust, so it becomes uncountable for Medicaid means-testing purposes. It has to be created and funded at least five years before the applicant can be deemed eligible for Medicaid funding, known as the “Medicaid look-back.”

The trust needs to be set up by an experienced estate planning attorney because there are many fine points to consider. The MAPT won’t serve its intended purpose if it's not set up correctly.

The MAPT must be an irrevocable trust, meaning the grantor (who set up the trust) no longer has access to those assets. This can be a little unnerving. You’ll also want to speak with your estate planning attorney about your plans for the near and distant future. How will you access funds if you’re putting funds into the trust? Who will be able to access them?

This trust will also benefit families with assets closer to the old estate tax levels. In 2024, the gift and estate tax exemptions are still very high—$13.61 million. However, if the law sunsets without Congress acting, the estate tax could revert to around $5 million or lower if the federal government decides more wealth needs to be taxed. Assets in a trust are not part of the taxable estate, so having a trust also protects assets from federal and state estate taxes.

Trusts are also powerful means of controlling asset distribution. Your MAPT could distribute a set amount of money to a beneficiary throughout their lifetime, or a minor grandchild could be given a certain amount after they’ve completed four years of college or achieved a particular goal.

Consult an estate planning attorney to learn how MAPTs work, if they’re right for you, and how to get started.

Reference: Kiplinger (July 11, 2024) “This Trust Can Protect Your Assets From Long-Term Care Costs”

Can You Protect Property and Qualify for Long-Term Care with Medicaid?

Long-term care costs keep many seniors and their adult children up at night, with good reason. However, with the right long-term care and asset protection plan, you can protect your home and other assets so you can pay for any supplemental needs and protect a well spouse. A recent article from The National Law Review, “Protecting and Preserving Property When Paying for Long-Term Care” provides details.

Your primary residence remains an exempt asset if you plan to return home. An exempt asset is the term used to describe any asset not countable by Medicaid when considering your eligibility. The property is also exempt if your spouse, minor child, or disabled child lives in the home.

If you have a child who has lived at home with you for at least two years and has provided care that allowed you to remain home, as opposed to being in a nursing home, the property may be transferred to the child, who is then considered a “caregiver child.”

Another permitted transfer of the primary home is to a disabled child. This transfer is allowed by Medicaid and doesn’t lead to any penalty period for Medicaid. Check with your estate planning attorney to ensure that this asset's transfer doesn’t conflict with any Special Needs planning or make the child ineligible for any means-tested government benefits.

Medicaid has a five-year look-back period, when any transfers of any property, as noted above, are not allowed and result in your being ineligible for Medicaid benefits. Many people think Medicaid won’t find out about moving assets, including retitling homes or accounts. However, this is not a good idea in this age of data connectivity.

A Medicaid Asset Protection Trust is commonly used if created five years before applying for Medicaid benefits. The family home, investment accounts and other assets are retitled to be transferred into the trust. The assets within the trust are protected and exempt from Medicaid. This allows the well spouse to continue to live in their home and enjoy using the assets saved for retirement or plan for these assets to be passed to the next generation.

Suppose the need for Medicaid benefits arises and no planning has been done. In that case, some home sale proceeds can be protected by using Medicaid Compliant Annuities and creating supplemental needs trusts. An estate planning attorney will review your situation and determine the best options for each situation.

Reference: The National Law Review (June 20, 2024) “Protecting and Preserving Property When Paying for Long-Term Care”

Is a Medicaid Annuity a Good Idea?

What happens when one spouse needs nursing home care? Medicare typically does not cover long-term care.  The current median monthly cost of a private room at a nursing home is about $8,000, according to the recent article “A ‘Medicaid annuity’ may be a useful option when your spouse needs nursing home care” from CNBC. For people with limited assets and income, Medicaid will pay.

However, what about families who have some assets but are not wealthy enough to be able to pay for their care without leaving the well spouse impoverished? It is a common situation, which requires advance planning. Elder law attorneys work with families to determine what options are available.

For some families, spending down assets by paying off debt or making purchases to qualify is one way. For others, buying a Medicaid Compliant Immediate Annuity is another. This allows the couple to convert countable assets for Medicaid purposes into an income stream for the well spouse.

Medicaid Compliant Annuities are complex financial instruments and are not for everyone. They are often used in a crisis situation, when there are no other options.

Medicaid has a five-year look-back period in most states. The program reviews all assets and transactions from the prior five years to make sure assets were not transferred out of ownership solely so the person can qualify for Medicaid.

All assets are counted, whether they are owned by the ill spouse or the well spouse. The limits on assets, which include cash, investments and bank accounts, among others, vary slightly by state. However, they can be as low as $2,000. An experienced elder law attorney helps to navigate this process.

For a married couple, in some states, the healthy spouse may have up to $137,400 in total assets. Anything above that is considered available to use for long-term care. Some states have limits on income, while other states do not count the healthy spouse’s income.

If a couple has $100,000 above the state’s asset cap, they can purchase an annuity payable to the well spouse, based on their own life expectancy. For the annuity to be Medicaid compliant, it must meet several requirements. The state has to be named the remainder beneficiary for at least the amount Medicaid paid for the sick spouse’s nursing home care. The annuity must be an immediate annuity, meaning the income stream begins immediately, and it must be irrevocable.

Medicaid programs are run by the state, so each state has its own rules, asset limits, etc. A detailed conversation with a local elder law attorney with experience with Medicaid will be necessary. There are some states that do not allow the use of annuities for Medicaid planning.

Reference: CNBC (Jan. 26, 2022) “A ‘Medicaid annuity’ may be a useful option when your spouse needs nursing home care”

Do People Get Divorced after Age 65?

Known as a “Gray” or “Silver” divorce, a couple who divorces in their 60s, 70s and beyond, faces different issues than a divorce earlier in life. Child custody and support are no longer an issue, but dividing up a lifetime of assets, while planning for long-term care in the midst of a divorce, can create its own complications, according to a recent article titled “How Silver Divorce adds a Wrinkle to your Estate Plan” from Westchester Business News.

Dividing Assets. With more assets, but little or no future earning capacity for either party, there’s more at stake in a silver divorce. How will retirement accounts be allocated, and will one spouse need to receive maintenance? A spouse may need to be kept on a life insurance or retirement account to protect them from poverty. Spouses with pensions need to investigate the rules for survivor benefits. It’s possible that a divorced spouse may not have access to survivor benefits, or one of the spouses doesn’t want the other to have access. This is all part of the negotiations.

Couples in their senior years are more likely to have comingled assets, including inheritances. This can create an issue, especially if the inherited assets have high value.

Taxing Matters. Transitioning from filing married jointly to filing single can have a big impact on annual income tax filing. The primary residence exclusion will also be impacted. This exclusion provides a tax exclusion from the sale of a primary residence of up to $250,000 for individuals filing single and $500,000 for those filing jointly.

The primary residence is often a couple’s largest asset, and if it was purchased 40 years ago at a lower cost than its present value, tax issues must be thoroughly evaluated. If the property is transferred to one of the spouses prior to the divorce, this may have a negative impact on the capital gains tax, if the property is sold. The $500,000 exclusion will drop to $250,000.

If the couple has a large estate exceeding their state’s estate tax exemption or the federal estate exemption, tax planning needs to change. The couple would lose the unlimited marital deduction, portability elections and the ability to utilize Disclaimer and Credit Shelter Trusts.

Planning for Long Term Care. If the couple has created a plan with their estate planning attorney for long-term care, it needs to be reviewed in light of the divorce. If the plan involved assets to be transferred to avoid the five-year look back period for Medicaid, those assets may be transferred to adult children or to an Irrevocable Medicaid Asset Protection Trust.

Estate Planning. Depending upon the state of residence, the final judgment of a divorce may revoke provisions and bequests in a Last Will and Testament—but it may not, so an estate planning attorney needs to be consulted. The same should be considered for the health care proxy, power of attorney or any similar documents.

Another fine point to be considered: divorces almost always take longer than anticipated. If one of the spouses should die or become incapacitated during the process, what would happen to the surviving spouse?

Reference: Westchester Business Journal (Oct. 4, 2021) “How Silver Divorce adds a Wrinkle to your Estate Plan”

Gift-Tax Exemptions are Treated Differently by IRS and Medicaid

Different government agencies have different rules for the same things. It’s a hard lesson, especially for those who try to use their $15,000 annual gift tax exclusion for asset protection for long term care. The results are not good.

A recent article from The News Enterprise makes it clear: “Medicaid and IRS don’t view gift-tax-exemption in same way.”

To understand the exclusion better, let’s start by looking at what the amount is being excluded from. The IRS generally allows each person to gift a total of $11.7 million in gifts during their lifetime and after death without incurring a gift tax. There are exceptions, but this is true in most cases. However, that first $15,000 given to each person within each calendar year is excluded from the total amount.

If a woman gives her three children $15,000 each per year for five years, she has given away a total of $225,000. However, this amount is not deducted from the $11.7 million that she is allowed within her lifetime non-taxable gift amount.

However, if the same woman gave her children $16,000 each for five years, the extra $3,000 per year must be deducted from her lifetime non-taxable gift limit. Unless she reaches the $11.7 million after her death, her estate will still not pay taxes on the gifts. She will be required to file a form every year letting the IRS know that she is reducing her limit.

The $15,000 exclusion each year simplifies the ability to give gifts without cumbersome reporting requirements. However, it creates huge—and costly—problems when used in an attempt to become eligible for Medicaid. This federally funded program was created to help low-income people pay for medical and nursing home care. A person’s assets and any financial transactions made within a five-year lookback period are considered when determining eligibility.

What most people don’t know is that Medicaid does not allow the gift tax exclusion to be used for the lookback period.

Remember the woman who gave her three children $15,000 each year for five years? If she goes into a nursing facility in the fifth year, after giving her final set of gifts, the IRS won’t count any of those gifts made against her lifetime gift tax exemption. However, Medicaid will count the full amount—$225,000—as if those assets were available to pay for her care. The penalty period will make it necessary for her or her family to pay for care, possibly for five years.

To take advantage of the annual gift tax exclusion safely when Medicaid may be in the future, an estate planning attorney can create an Intentionally Defective Grantor Trust to hold assets. This is a hybrid trust used to separate assets from the grantor just enough to begin the five-year lookback period while holding property within the grantor’s taxable estate, allowing for a continuing opportunity to take advantage of the annual gift tax exclusion without triggering a new five-year look back at each gift.

The IRS and Medicaid work under different rules and understanding what each agency requires can protect the family and those needing nursing home care without creating expensive and stressful results. In addition, some Medicaid planning techniques may work in some states but not in others.

Reference: The News Enterprise (Sep. 14, 2021) “Medicaid and IRS don’t view gift-tax-exemption in same way”

What Is a ‘Caregiver’ Agreement?

The idea that a family member or trusted friend may be paid to take care of an aging parent or sibling is a welcome one. However, most family members don’t understand the legal complexity involved in privately paying for care, says the recent article “Paying a family member for care” from The Times Herald. Payments made to a family caregiver or a private caregiver can lead to a world of trouble from Medicaid and the IRS.

This is why attorneys create caregiver agreements for clients. The concept is that the care and services provided by a relative or friend would otherwise be performed by an outside person at whatever the going rates are within the person’s community. The payment should be considered a fully compensated transfer for Medicaid eligibility purposes and should not result in any penalty being imposed if it is done correctly.

This is more likely to be avoided with a formal written caregiver agreement. In some states, like Pennsylvania, a caregiver agreement is required to be sure that the payments made to the caregiver are not deemed to be a gift under Medicare rules.

The caregiver agreement must outline the services that are being provided and the rate of pay, which can be in the form of weekly, monthly or a lump sum payment. This is where it gets sticky: that payment should not be higher than what an outside provider would be paid. An excessively high payment would trigger a red flag for Medicaid and could be viewed as a gift.

Medicaid has a five-year look back period, where the applicant’s finances are examined to see if there were efforts to minimize the person’s financial assets to qualify for Medicaid. If any transfers of property or assets are made that are higher than fair market value, it’s possible that it will be viewed as creating a period of ineligibility. That is why it’s so important to have a contract or written agreement in place, when a family member or other person is hired to provide those services and is paid privately.

There are also income tax consequences. The caregiver is considered a household employee by the IRS. They are not considered to be an independent contractor and should not be issued a 1099 to reflect their payment. If that is done, it could be considered to be tax evasion.

Speak with an estate planning attorney about crafting a caregiving agreement and how to handle the tax issue, when privately paying for care. They will help avoid putting Medicaid eligibility in jeopardy, as well as avoiding problems with the IRS.

Reference: The Times Herald (Aug. 13, 2020) “Paying a family member for care”

How Does the Medicaid Look-Back Work?

Say that an investment house in New Jersey worth $300,000 is passed from mother to daughter for sale of $1 today. Just two years later, the mother applies for Medicaid. (In Maine Medicaid is called MaineCare)  There’s a look-back penalty period that will apply, says nj.com in the recent article, “If mom sells her house for $1, what Medicaid penalty will apply?” The article explains that when someone applies for Medicaid, gifts create periods of Medicaid ineligibility.

A Medicaid applicant is required by the government to document all of her financial transactions during the "look-back period." That period is five years immediately prior to the date of application.

If the applicant’s financial records show a transfer of assets within that period, the Medicaid administrators will presume that the assets were transferred to promote eligibility for Medicaid benefits. This could be a check or withdrawal, for which there is no explanation other than a gift.

The value of the transfer will be divided by the statewide daily nursing home rate to get the number of months of the ineligibility, also known as the penalty period. In New Jersey, that rate is currently $343.85, or $10,459 per month.

The five-year year look-back period commences when the transfer is made. However, the penalty period of ineligibility starts on the date the applicant is otherwise eligible for medical assistance under the State plan, but for the application of the penalty period.

So, in our $1 house example, if the New Jersey Medicaid applicant transferred $300,000, the monthly penalty period of ineligibility for this transfer would be calculated by dividing $300,000 by $10,459, which equals 28.68 months of ineligibility. There is no rounding down, by the way.

The penalty period would start when the applicant medically needs an institutional level of care, has countable resources below $2,000 and has filed a Medicaid application to establish that she would have been otherwise eligible but for the asset transfer. Note: there’s no limit on the length of the penalty period.

Thus, assuming the applicant otherwise would have qualified for Medicaid but for the asset transfer, the applicant wouldn’t be eligible for Medicaid for an additional 28.68 months.

However, if the application was made more than 60 months after the transfer date, then the transfer would be outside of the 60-month lookback period and, if no other transfers were made, then no penalty period would be imposed, and the applicant would be eligible 61 months after the transfer date.

Contact an elder law attorney in your state to learn how the rules would apply under local law. There are a number of strategic asset protection tools available, but they must be completed in a timely fashion.

Reference: nj.com (December 25, 2018) “If mom sells her house for $1, what Medicaid penalty will apply?”