Posts Tagged ‘Medicaid’

Understanding life estates may be essential if protecting the home (or other real property) is an important goal. Getting the concept down, however, can be a bit confusing. Confusion be gone! Read on!

Blame the English for our confusing real property law. I am convinced that the concepts involved in this article were invented in 1095 at Ye Whyte Horse on Thames Taverne four hours after closing time and some of the barristers had gotten a bit into their cups.

Lately, many have been asking about so-called “Lady Bird Deeds.” I’ll explain below . . . but you are going to have to read the whole article in order to understand.

First, take a look at other types of ownership . . . it might make understanding life estates easier.

Fee Simple

Most people think of real property ownership as fee simple. Someone with fee simple title completely owns the property. She can sell it, give it away, rent it, use it as security on a loan and do pretty much anything she wants with it (that isn’t otherwise illegal, of course). She is also responsible for paying the taxes on the property and any debts encumbering the property. The property is subject to the claims of her creditors. When the owner dies, the property passes through her estate (as directed by either a will or the state laws of intestacy).

Tenancy in Common

If two or more people own property the property is likely tenancy in common. Think of it something like a partnership among the owners. Each can use the property (unless they have a contract to the contrary). Each can sell his share, give it away, and use it as security for a loan. If one owner dies, his share passes as directed by his will or the laws of intestacy. Creditors can claim against his share. InGeorgia, a married couple is presumed to own property as tenants in common, although they can make other arrangements in a deed.

Joint Tenancy With Rights of Survivorship

This type of ownership might seem similar to tenancy in common, but it isn’t. Initially it looks like a tenancy in common, but if one owner

dies, the other owners take his share (divided among themselves). Sort of a “Last Man Standing” game because the property may end up completely owned (in fee simple) by the last surviving owner. Incidentally, in North Carolina, a married couple is presumed to own property as “tenants by the entireties” . . . which for purposes of this discussion acts the same as a joint tenancy with rights of survivorship (although they can opt out).

Now For Life Estates . . .

If one person owns the right to occupy and use property for her remaining life (she is called the “life tenant”) and the title specifies that the property passes automatically at the instant of the life tenant’s death (these folks are called the remainder interests . . . in the less gentle times of about 15 years ago they were called the remaindermen) the result is a life estate. Many folks call it “life time rights.”

While the life tenant has a right to live on the property or perhaps to collect rent on the property, she also has the responsibility of keeping it up and paying taxes on it.

Although theoretically a life tenant can encumber her life estate or sell her life estate, all she can do is dispose of or restrict whatever it is she owns . . . a life estate. No banker in his right mind will lend against a life estate because when the borrow dies . . . poof! . . . so does the banker’s security. The property passes free to the remainder interests. Same thing happens with respect to the life tenant’s creditors. Poof! Gone. Now don’t get excited . . . if the life tenant owned the property in fee simple and encumbered it before setting up the life estate the creditor isn’t going anywhere until someone pays up!

How To Set Up A Life Estate

Two ways. A fee simple property owner can set up a life estate for himself by conveying a remainder interest in the property to the intended remainder interests. The deed may say something like “I, Falstaff, the Grantor give Blackacre to Prince Hal, but retain a life estate in Blackacre.”

A way to set up a life estate for another person is for a fee simple property owner to convey property to another person as the life tenant and to yet another person as the remainder interest owner.  The deed may look like this: “I, Hotspur, convey Blackacre to Falstaff for life, with a remainder interest to Prince Hal.”

Will Medicaid Count a Life Estate for Eligibility Purposes?

In Georgia a life estate interest is a Medicaid-countable asset unless the property itself is not countable for some other reason (probably because it is the primary residence). In North Carolina a life estate is not countable . . . it simply renders the property regardless of value or size or type as a noncountable asset for Medicaid purposes.

Can the State Collect On Life Estate Property?

No. That is the beauty of a life estate. North Carolina only collects against probate property (and a life estate is not probate property . . . remember, it passes automatically at the life tenant’s death). The Georgia Department of Community Health says they can do it, but they never have and, unless the General Assembly drastically changes the law, they never will (Hint: read above about how a creditor goes “Poof!”).

Are There Other Medicaid Problems?

Yep. Remember that if you transfer something valuable it will not count as an asset for Medicaid (you don’t own it anymore, after all!). However, the transfer will raise issues of whether a transfer penalty should apply. If Falstaff transfers $100,000 cash it will not count because he does not own it; however . . . in Georgia it will count as a transfer penalty of about 20 months and in North Carolina about 16 months if Falstaff applies for Medicaid within five years of the transfer.

The problem with setting up a life estate is that most of the time something valuable is being conveyed. For example, if Falstaff is 70 years old, Medicaid uses an actuarial chart that shows Falstaff’s life estate to be worth about 70% of the value of the property, and Prince Hal’s remainder interest to be worth 30% of the property value.

If Blackacre is worth $100,000 and Falstaff sets up the life estate by transferring the remainder interest to Prince Hal, then Falstaff has transferred property worth about $30,000 (assuming Blackacre is worth $100,000). If Falstaff applies for Medicaid within five years he has a $30,000 transfer issue to deal with.

On the other hand, Falstaff could have sold Prince Hal the remainder interest and there would be no problem.

One planning strategy that is occasionally used is for Falstaff to buy a life estate. If he pays $70,000 for the life estate in Blackacre, he will pay fair market value so there will be no transfer penalty. Further, in North Carolina the life estate won’t be countable as an asset (it will be in Georgia unless it is his residence).

A Final Life Estate Problem

The last paragraph sounded pretty neat, hunh? Not so fast. The rules slow that up a bit by saying that if the life estate purchased was in property that was “the home of another person” then Falstaff would actually have to live in the property for at least 12 continuous months. If he doesn’t live there 12 months or more, there will be a transfer penalty on the purchase even though he may have paid fair market value. If the property was not the home of another person, Falstaff should be OK.

Flying to the Rescue (From Texas?): Lady Bird Deeds

I have no idea why they’re called Lady Bird Deeds or if Lady Bird Johnson used them (although her husband was one of Medicaid’s Founding Fathers).

A Lady Bird deed looks like a standard life estate deed at first glance, except that the Grantor retains the right to change his mind or give the remainder interest to someone else. “I, Falstaff, give Backacre to Prince Hal, but I retain a life estate in Blackacre and further retain the right to cancel this deed or to give the remainder interest to any other person so named.”

Would you pay Falstaff money for the remainder interest? Of course you wouldn’t. The remainder interest is worthless because Falstaff could always change his mind. On the other hand, if Falstaff dies without changing his mind, Prince Hal will automatically take Blackacre.

In North Carolina, because the remainder interest has no value Falstaff has not made a valuable transfer and there is no penalty. Further, on his death the property should pass free of estate recovery. Lady Bird deeds have worked fine for years. They do make me a bit nervous . . . they seem just . . . too easy. I’ll use them, but only if nothing else will work.

Georgia has an open season on Lady Birds. They don’t work. Period.

You have that uneasy feeling that you ought to be doing something . . . just not sure what. Perhaps Mom or Dad has been exhibiting some troubling health symptoms. As the oldest/only/closest child you know that it will be up to you to come up with a solution.

You’ve also been reading the news.

Once the 2012 elections are over and a new Congress is seated, Medicaid rules may likely tighten. It really will not matter which party comes out on top: It will become ever more difficult to qualify for this program as Congress authorizes and directs the states to revise rules.

The Forecast

Social Security, Medicare, and Medicaid are in trouble. Across the political spectrum, from secretaries Geithner and Sebelius to Mitt Romney and Paul Ryan, the alarm is being raised. The only thing the politicos disagree on is what to do. On April 24 the trustees of the Medicare program released their annual report with 3 different sets of numbers (“bleak, bleaker, and bleakest” according to Medscape Medical News).

So desperate is the government getting for money that cuts in Medicare reimbursements to nursing homes, aggravated by Medicaid cuts, will likely cause as much as 35% of nursing homes to reduce staffing – and North Carolina is the third hardest hit state (according to a study by the Alliance for Quality Nursing Home Care).

The financial crisis has set the stage for the problems, but all social programs directed to older population will feel intense pressure from the Boomers “coming of age” and having the nerve to live longer.

Some states are squeezing now. An excellent Wall Street Journal describes this in some detail.

Although the numbers discussed show the programs becoming insolvent at current levels within 10 to 15 years, do not be lulled into complacency:  Action will need to be taken very soon to begin to turn the tide.

While I have real misgivings about the way long term Medicaid is currently designed and believe that there are rational approaches to saving huge amounts, the current program and rules are all I have to use for the benefit of my clients.

So . . . What To Do?

Plan early. When the rules change, they almost always change prospectively, not retroactively. In other words, harsher rules will likely apply to planning strategies implemented after the new rules become effective.

Failure to adequately plan early runs not only the risk of being hit with higher rules hurdles, but leaving a family with fewer options if a parent’s health suddenly declines. There is a medical analogy here: The longer a bothersome problem is left untreated, the more intensive will be the final remedy (if one is even available).

So where does planning start?

Get educated!

First, become familiar with Medicaid. There are all sorts of resources online. I have written a “Plain English” guide to North Carolina Nursing Home Medicaid that is available online (fill out the online request form and I’ll even send you a paper copy – which also contains a valuable planning offer).

Learn about trusts. I have a number of informative articles posted on the Mason Law, PC website. There are also hundreds of articles on the web.

If you’re looking for something more comprehensive with planning guides and forms, tryElderLawUniversity. It is not free, but it is not too expensive either. Fair disclosure:ElderLawUniversityis my brainchild.

In May the Friends of the Asheboro Library and I will be hosting a series of three seminars that might get you started on planning. Click HERE for more details on these three seminars.

Get qualified help. Many of the news outlet articles I mentioned above urge people to get the help of a qualified elder law attorney. I know of at least one! On the other hand, there are other sources to find qualified help.

A good elder law attorney need not be certified, but a certified elder law attorney will be good. Check the North Carolina Board of Legal Specialization for board certified elder law attorneys.

The National Academy of Elder Law Attorneys (NAELA) is an organization representing almost all elder law attorneys in the US. The NAELA website has a geographically searchable directory. In fact, if an attorney is not a member of NAELA, he or she likely is not serious about practicing in the elder law specialty.

To recap:

• Don’t dither!
• Get educated!
• Get help!

Recent Question: Bob, is it OK for the trustee of a special needs trust to purchase a $2,000 pure bred spaniel for the trust beneficiary, Edwina?

Recent Answer: Only if Edwina is not planning on eating the dog. I’ll explain. First, you’ll need to understand the SSI income rules and what In Kind Support and Maintenance (ISM) is. Distributions from a special needs trust might be income! The trick is in understanding how income is counted and what it does.

What is SSI?

Supplemental Security Income, or SSI, supplements the income of disabled persons or those aged 65 and over who meet certain low asset tests and have countable income from all sources less than $698 monthly. SSI will insure that a person’s countable income from all sources, when combined with an SSI benefit, will equal the Federal Benefit Rate or “FBR” (which for a single person is $698). See the complete FBR chart elsewhere on this website. For example, if a single person’s countable income is $500, then SSI will pay $198.

Usually the amount of SSI is not as important as the fact that someone is eligible to receive any SSI. In most states (including North Carolina and Georgia) receiving even $1 SSI will entitle the person to Medicaid (which for a disabled individual can be a life saver).

How Income Counts in SSI

An SSI eligible individual may not have countable income in excess of the FBR. Countable income will reduce the amount, dollar-for-dollar, that SSI pays. Income includes all amounts received from wages, other public benefits, annuities, gifts (in the month of receipt) and other noncash items such as food and shelter (or payments made for those expenses).

When calculating countable income, the first $20 of income from all sources is disregarded. Thereafter, the first $65 of earned income is disregarded, and after that one-half of earned income in excess of $65.

SSI Earned Income: Can Edwina Work A Little?

Maybe a little. For example, if Edwina, a disabled individual, occasionally answers phones at a local charity and earns $1,200, she will be eligible for $55.50 monthly SSI payments. Let’s do the math: Edwina earns (meaning she works for it) $1,200. Subtract $20 from $1,200 to get $1,180. Subtract the first $65 of earned income from $1,180 to arrive at $1,115. One-half of $1,115 will be the income excluded ($557.50). So, in other words, Edwina’s countable income is $642.50 ($1,200 minus $557.50). Accordingly, Edwina’s SSI benefit is $698 (the maximum SSI benefit) less $642.50 (countable income). She will receive a monthly SSI check equal to $55.50.

SSI Unearned Income: Can Edwina Receive Cash?

Maybe a little . . . a VERY little. Instead of working, say Edwina receives a $1,200 cash distribution from a special needs trust (or even from a well-meaning friend or relative). SSI considers this unearned income (after all, she didn’t earn it). That means there are no earned income exclusions. $1,200 cash distribution, less the general $20 disregard yields $1,180. That is Edwina’s countable income. $698 (maximum SSI benefit) less $1,180 yields . . . TOAST. Edwina is toast! No SSI benefit.

What happens if instead of cash, the trust pays for certain items for Edwina?  Say, for example, the trust pays for clothing, food, computer equipment, prescription drugs or therapy, entertainment, travel . . . or even a pet.

In-kind Support and Maintenance (ISM): Can Edwina Receive “Other Stuff”?

Now to the matter at hand: Can the trustee of the special needs trust buy the fancy dog for Edwina? It depends. Is Edwina planning on Fricasse of Fido (er . . . a feast) or is she planning for the emotional comfort that can only come from the unqualified love of a furry companion? The answer to those questions will determine whether Fido is In-Kind Support and Maintenance or ISM.

Sometimes trusts and other people give a disabled beneficiary certain non-cash items, or pay for non-cash items on behalf of the individual. If such an item is classified as ISM it will reduce SSI benefits. The amount of the reduction may not matter . . . or it could result in the beneficiary losing all SSI (and Medicaid). Of course, if the item is not ISM, it doesn’t matter how much it is worth as long as it is a non-countable asset for SSI purposes.

Items related to food and shelter are ISM. For example, rent or mortgage payments (shelter), utility expenses (shelter), groceries (food), restaurant food certificates (food), property taxes (shelter), or a Christmas gift from Omaha steaks (food) are all ISM. (Interesting side note: Cable, phone, and internet are not ISM).

If Edwina is planning on eating Fido, Fido’s value ($2,000) will be ISM. On the other hand, if Edwina does not intend to eat Fido, he is not ISM.

What Does ISM Do To SSI Benefits?

It depends. One of two rules could apply, depending upon the beneficiary’s living arrangement. If the beneficiary is living in the home of another for at least one continuous month and receiving both food and shelter without contributing her pro rata share of those costs, her SSI benefit is lowered by one-third of the FBR (or $232.67 in 2012). This is called the “value of the one-third reduction” or “VTR” rule (I have no idea where they get “VTR”).

The problem with the VTR rule is it is “all or nothing.” If the rule applies, the beneficiary’s SSI is reduced $232.67 regardless of the actual value of the food and shelter received. If someone is receiving $698 SSI, the reduction to $465.33 might be a good deal (especially if the food and shelter is high quality).

Two conditions must be met for the VTR rule even to apply: (1) living in another’s home rent free, and (2) receiving free food. If those conditions aren’t met, the rule doesn’t apply.

If the VTR rule doesn’t apply, then the “presumed maximum value” or “PMV” rule applies. Under this rule, if the beneficiary receives any ISM during the month, the value of the ISM is “presumed” to be $232.67. “Presumed” means that if the beneficiary can prove that the ISM wasn’t worth $232.67, the SSI benefit will be reduced only by the actual value of the ISM. On the other hand, if the ISM is worth more, the value is still “presumed” to be $232.67 and the SSI will be reduced accordingly.

As For Fido . . .

So . . . if Fido (worth $2,000) is meant for the dinner table (gross), he is ISM. If Edwina’s SSI is more than $232.67 and she doesn’t have other offsetting earned or unearned income, then she’ll be OK (other than, I presume, a bit of indigestion). On the other hand, if Edwina’s SSI is less than $232.67 and Fido is ISM (food), she is . . . . 

 

FOR FURTHER READING ON TYPES OF SPECIAL NEEDS TRUSTS, SEE A GOOD ARTICLE ON THIS WEBSITE.