Archive for the ‘Nursing Homes’ Category

A scam common in many parts of the country has come to central North Carolina. Veterans (and widows of veterans) are being duped into funneling hundreds of thousands of dollars into totally inappropriate (even disastrous) annuities. The come on? “I can qualify Mom for another $1,056 a month in veterans benefits and you’ll be able to afford the assisted living facility.”

Often a seminar is hosted by an assisted living facility and led by a “veterans’ benefits specialist” who is nothing more than annuity salesman (and usually from out of town). Sometimes the family of someone recently admitted to a facility will receive a telephone call with the enticement of another $1,056 or more monthly.

Some of the folks I have spoken to tell me that the annuities being offered have 10 or more years of substantial surrender charges. Often the sales people (er . . . “specialists”) are quite aggressive (understandable given the HUGE commissions they make).

A Few Plain Facts About Veterans Benefits

• Veterans benefits impose NO transfer penalties like Medicaid does.
• A veteran must not have assets in excess of certain levels.
• A veteran can actually transfer the excess assets to another person and instantly qualify for benefits.
  • Transferring to another person might not be too smart, though.
  • What if that person dies, divorces, gets sued, goes bankrupt?
  • What if the veteran later needs Medicaid (which DOES impose transfer sanctions)?
• There are a number of different strategies involving how assets are titled, or perhaps the use of a trust, that do NOT involve an inappropriate annuity!

The worst cases involve the veteran (or widow) being counseled to transfer most of his or her money to a child (at this point the veteran is qualified for benefits, but he or she won’t be told that) and THEN having the child purchase the “special” annuity. Buried in the fine print, the annuity will have huge surrender charges for many years.

I have nothing against appropriate use of annuities. I have everything against the use of a totally unnecessary annuity that will tie up a great deal of a veteran’s money (nearly all, in fact) for many years, and pay an annuity sales person tens of thousands of dollars in commissions.

I am also bothered by assisted living facilities that host these seminars and give sales people access to their residents. I hope that the involvement of the assisted living facility is simply misguided, but well-meaning. In any event, there are plenty of knowledgeable sources who would be happy to present at a facility without trying to steer the attendees into an expensive and unnecessary annuity.

AARP has an excellent article on this. I don’t always agree with “Everything AARP,” but I agree with almost everything they have written regarding veterans annuity scams in assisted living facilities. I take some exception to the article’s condemnation of trusts, because the use of a trust might be totally appropriate. Their point about a trust causing potential Medicaid problems is very well taken, however. The important take away is to make sure that anyone recommending and preparing a trust understands the complex trust rules of BOTH the VA and Medicaid.

Again, I have nothing against wise use of annuities. If you are thinking of buying one, buy from someone locally who you know and trust. You’ll know where to find them if things go wrong. Meanwhile, the presenter who sells the annuities as part of the traveling road show will be back in Vegas!

According to conventional wisdom you should always name your spouse as beneficiary of an IRA. Let’s smash some traditional pumpkins (I am writing this in October, after all). Read on to understand why it might be a great idea to name a trust as the beneficiary of an IRA and what some of the trade-offs of doing so are.

Standing on Tradition: Naming The Spouse As IRA Beneficiary

There really is a good reason for naming the spouse as IRA beneficiary . . . much of the time. As I have written, the beauty of an IRA is that the longer money can be allowed to languish in an IRA, the more it will grow without being burdened by taxes. Because of that, the usual thinking is to try and take out as little as possible. On the other hand, there are all sorts of tax rules about when someone MUST take distributions and how much those distributions must be. Remember the rule:

SOMEDAY, SOMEHOW, SOMEONE WILL PAY TAXES ON THE IRA.

Why Naming A Spouse The IRA Beneficiary Is So Slick (Usually)

If a spouse “inherits” an IRA, she can treat it as her own. This means she does not have to begin distributions until she is 70 ½. When she does begin taking distributions she can use a special table that assumes she has a husband 10 years younger (heh, heh, heh) even though she may have just become a widow. That means MUCH smaller mandatory distributions because they are being spread out over her life and the life of Mister-Make-Believe-Ten-Years-Younger-Romeo.

The special spousal rules for inherited IRAs also say that she can name the kids as beneficiaries and upon her death they will have separate IRAs they can take out over their life expectancies (although I have found – quite nonscientifically – that most IRAs inherited by adult children quickly become new cars or tuition payments!).

On The Other Hand . . .

Sometimes naming a spouse as IRA beneficiary is a bad idea. There may be reasons that outweigh the usual good tax reasons for naming a spouse. For example, I often encounter couples concerned about protecting assets for a surviving spouse in case he or she ever needs to go into a nursing home. An IRA left directly to a spouse will be a countable asset for Medicaid purposes. There may be other good asset protection motives involved, as well.

The solution may be to name a trust as the beneficiary of the IRA. That way, IRA assets may be protected while remaining available to benefit the surviving spouse.

There are a number of ways a trust can be designed, depending upon what the client and I are trying to accomplish. Much of how a trust will be treated depends upon whether it is something the IRS calls a “designated beneficiary.”

Is A Trust A Designated Beneficiary?

If a trust benefits only real live (as in “beating hearts living”) people then the trust will be a “designated beneficiary.” If a trust says “Mom is the primary beneficiary, then the kids” that will suffice. If the trust says “Mom may receive some, but not necessarily all benefits, then when Mom dies the North Carolina Zoo takes” the trust will not be a designated beneficiary.

If a trust is NOT a “designated beneficiary” of an IRA, then the IRA must be distributed within five years if the owner dies before 70 ½. If an IRA is not huge, being forced to completely distribute it within five years is not necessarily bad.

If the owner dies after age 70 ½, however, then the trust can take distributions over what would have been the deceased owner’s life expectancy had he been alive each year. That actually will be a bit faster than if he had been alive and married because the rules use different tables that calculate distributions as if the deceased owner were still alive and single. On the other hand, for older spouses about the same age, there may not be too much difference. The difference is if Mom had inherited directly she would have used a table that pretended there was the “Ten Year Younger Romeo” (slower distributions to account for the younger Romeo’s added life expectancy) but the trust is stuck with using a single person’s table (faster).

Bottom line: If a trust fails the “designated beneficiary” rule it means the IRA must be distributed over five years if the owner died before age 70 ½ and over the owner’s life expectancy (pretending he is alive and single) if he dies after age 70 ½.

Should Everything Be Distributed To Mom?

If we set up a trust to qualify as a “designated beneficiary” the next issue is to decide whether to make the trustee pay out to Mom all of the distributions the IRS says the trust MUST take from the IRA (this is called a “conduit trust”), or to let those IRA distributions accumulate inside the trust (where they are protected).

If the trust is a conduit trust, Mom gets all IRA distributions and she pays all income taxes (probably at her low tax rate). Also, if a trust is a conduit trust the IRA distributions can be stretched out a little bit more than if the trust was an accumulation trust. It also means that if Mom goes to the nursing home on Medicaid, all of those IRA distributions will be paid to the nursing home before Medicaid kicks in.

If the trust gives the trustee the right to accumulate IRA distributions and to decide whether to pay some, all, or none of the IRA distributions through to Mom, the IRA will be distributed to the trust slightly faster, but the assets will be safe from nursing home expenses. To the extent the trustee decides not to distribute to Mom (maybe she is in a nursing home on Medicaid) the IRA distributions being held in the trust will be subject to income taxation at much higher rates than Mom would have paid had the trustee passed the IRA distributions on to Mom. On the other had, if they were paid out to Mom, everything would be gone!

Get Help!

This is a complex topic. The purpose of this brief article was to give an overview of the possible advantages of naming a trust as IRA beneficiary. Sometimes it is a great idea, and other times it may be a really bad idea. Bring it up with your attorney or financial advisor and see what she says.

Tying the Knot? Or Just Moving In?

Considering a second marriage? For terribly unromantic reasons (I guess I’m the anti-cupid . . . darn lawyer!) you should plan carefully – very carefully – before going into a later-in-life second marriage. The religious prescription not to enter a marriage “unadvisedly or lightly” applies in spades to a later marriage.

“Bob,” you may ask, “are you suggesting we see an attorney before the preacher?” And I would answer: “Yes.”

Here’s why.

Some of the biggest and most expensive messes (I like the term “elder law train wreck”) I have had to clean up have been after the death of a second spouse when there had been little or no advance planning. Adult step-siblings (who may not even know or like each other) can be counted on to be looking out for whatever it is that they believe their natural parents accumulated for them.

Most “planning” I have seen is a simple verbal agreement that “what is yours is yours, and what is mine is mine.” That won’t cut it. All couples are different, but here is a partial list of issues that may be important.

Estate Plans.

The worst plan might be simple “I love you wills” that leave everything to the surviving spouse with the understanding that she will “do right the right thing.” Even with wills that leave everything to the children of the deceased spouse, there may be problems with an “elective share” statute.

North Carolina has a mean “elective share” statute. The elective share statute enables a surviving spouse to “elect” a share of around 1/3 of the deceased spouse’s estate if he or she does not like what was left in a will.

In fact, one South Carolina case has been making waves. The deceased founder of Hooters (you know . . . the restaurant famous for . . . large burgers and chicken wings) left $1 million a year for 20 years to his fairly younger surviving spouse. She felt $20 mil wasn’t enough, so she elected for 1/3 of Mr. Hooter’s estate. Mr. Hooter’s son (not the widow Hooter’s son, by the way) objected and claimed the South Carolina elective share statute (which is very similar to North Carolina’s) is unconstitutional. Yours truly believes that argument had as much chance as a Hoot Owl in, well, Horry County. Hooter, Jr. and the widow Hooter settled for an undisclosed sum.

Get a prenuptial (or premarital) agreement. Those sorts of difficulties can be addressed in such an agreement.

The Family Home.

Naturally the newlyweds do not want to see the bride or groom evicted upon the death of the other. On the other hand, children can become quite emotional over what may be perceived as “their home.” Chances are putting the house in both spouse’s names is not a good idea. Try a life estate, or maybe a trust.

Social Security Benefits.

Remarriage can affect the Social Security benefits a newlywed had been receiving under a deceased or divorced spouse’s account. If you divorce after 10 years or more of marriage, you can collect retirement benefits on your former spouse’s Social Security record if you are at least age 62 and if your former spouse is entitled to or receiving benefits. If you remarry before age 60, however, you generally cannot collect benefits on your former spouse’s record unless your later marriage ends (whether by death, divorce, or annulment).

Annuities and Survivors Pension Payments.

You might be kissing a hefty survivor’s pension (corporate or military) goodbye when you kiss your new spouse. Check them all out before heading to the altar.

Income Taxes.

There may be some tax planning advantages to marrying if estate taxes are a concern because many planning techniques are available to married couples only. Income taxes might also drop if one spouse is earning significantly more than his or her new spouse. On the other hand, many income tax breaks phase out for couples at less than twice the phase-out level for a single person.

Long Term Care (Nursing Home) or Medicaid Planning.

A big consideration for older people considering remarriage. Medicaid rules and regulations do not care at all what sorts of plans or promises a couple has made when it comes to Medicaid and nursing home benefits. A carefully drafted prenuptial agreement is worthless. All Medicaid programs consider the assets of the couple. While rare, some couples have divorced within a few years of marriage when one spouse in declining health (usually the “poorer” spouse) has entered a nursing home.

It may be sad to see, but some couples are electing to do exactly what they would have DIED seeing their children do 30 years ago . . . moving in with a boyfriend or girlfriend!

Bob Spreads the Love