Posts Tagged ‘north carolina’

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.

Coastal Senior is a monthly periodical covering the South Carolina and Georgia low country.  Bob Mason is its legal columnist.

[Note:  The Georgia annuity rules described below are very similar to the North Carolina annuity rules - see discussion of annuities at Basic North Carolina Medicaid Nursing Home Rules]

The Georgia Department of Community Health recently changed Medicaid annuity rules to allow the use of some (not all!) annuities by someone entering a nursing home.

The Basic weight loss med Concept

First, understand the basic concept of an annuity. Someone pays money to a company. The company promises to pay the money back either in a lump sum in the future, or over time in regular installments. The payments could begin immediately (an “immediate annuity”) or start in the future (a “deferred annuity”).

The payments from the company will include a return of what was paid, plus some interest. Meanwhile, the company is taking the money and (it hopes) making more with it than it will have to pay back to the buyer.

There are many and complex reasons that such an arrangement might make sense with respect to a realistic portion of one’s nest egg (remember the old adage “don’t put all your eggs in one basket”).

The New Rules

If an annuity fits the new requirements, it will not count as an asset for Medicaid purposes (although the income will count). To be “noncountable” the annuity must be nonassignable, irrevocable, and have a steady stream of payments that will not extend beyond the life expectancy of the annuitant (the person receiving the payments).

Further, the annuity must name the State of Georgia as the remainder beneficiary to the extent the state has paid out Medicaid benefits. A spouse and a disabled child may take first place ahead of the state.

So?

Many seniors have a modest nest egg meant to sustain retirement. The problem is the egg may be too big for Medicaid. Most people entering their senior years understandably panic when a spouse goes into a nursing home to the tune of $5,500 or so a month.

A “new” annuity can take “excess” cash (which was an excess asset for Medicaid purposes) and put it into an annuity (the shorter time frame the better) to immediately begin paying the stay-at-home spouse income.

Voila! The excess asset (cash) is converted into income that is not counted for Medicaid purposes (the state would count the income of the spouse in the nursing home only).

On The Other Hand . . .

Any person who thinks he or she (or his or her spouse) might end up in a nursing home within several years and have a tough time paying for it better be very careful before buying an annuity.

Buy an annuity that is not designed correctly and Mom and Dad could have an expensive mess. If the annuity has substantial surrender charges the unfortunate buyer has a choice: Hang on to the annuity and never qualify for Medicaid or dump the annuity and take a bath.

Buy an annuity that is designed correctly and it could be part of a well-conceived plan.

There are plenty of great financial advisors out there who either know these rules or at least understand that this is an issue and will seek additional help.

A Special Needs Trust, also referred to as a Supplemental Needs Trust, is a trust specially designed to hold assets on behalf of a disabled individual in a manner that will benefit the individual without jeopardizing SSI, Medicaid or other government benefits. Further, transfers in to a properly designed Special Needs Trust (also referred to as an “SNT”) will not be a disqualifying or sanctionable transfer for the person transferring assets in to the trust.

Before discussing SNTs further, however, having a basic understanding of what a trust is will be helpful.

What is a Trust?

A trust is a separate legal entity that results from an agreement between someone who sets up the trust (variously called a settlor, donor, or grantor) and a trustee who administers (conserves, invests and expends) the property in the trust for the benefit of a third party (called the beneficiary.

Almost any sort of property can be held in trust. This includes real estate, stocks, bonds, cash, mutual funds or insurance policies. In order to get the property in to the trust, however, someone must transfer the property to the trustee. In the case of real estate, for example, the settlor (or other property owner) simply prepares a deed naming the trustee as the grantee (and legal owner) of the property. Similarly, the settlor can change the name of the ownership on a bank or investment account. Finally, the trustee establishes a checking account to which parties can make deposits and from which the trustee can make distributions. In summary, one client asked me how to transfer assets to a trust, and I told her that basically it was done in the same way she would transfer assets to an individual.

While the trustee becomes the legal owner of the property, the law holds the trustee accountable for the property and the trustee must hold (or distribute) the property according to the terms originally put in the trust agreement by the settlor.

A trustee is what is known as a fiduciary. This means the trustee must use the property only for the beneficiary. The trust agreement (or trust document) should explain how the settlor wants the trustee to use the property for the beneficiary. Sometimes the trustee is given discretion to make decisions as to how the trust fund should be used.

Trusts may be either revocable or irrevocable. If the trust is revocable, it means that the trust may be amended, changed or revoked by the settlor. If the trust is irrevocable, it means that the settlor cannot revoke or modify the trust. Some trusts, especially SNTs, can contain language that allows the trustee or some other special person known as a “trust advisor” to amend the trust if it becomes necessary to do so because of changed circumstances. Nevertheless, the settlor would not be able to make those changes. For example, it might be necessary to amend the trust to comply with changes in state or federal law.

Why a Special Needs Trust?

As noted above, an SNT is a special type of trust designed to supplement benefits received by the beneficiary (such as SSI or Medicaid) without disqualifying the beneficiary for those benefits.

Disabled individuals often receive government assistance to help them maintain themselves. Of course, the most common of these programs are Supplemental Security Income (SSI) and Medicaid. Both of those programs require a person to be impoverished in order to receive benefits. If a person has too many assets or income that is too high, then he or she will not qualify for SSI benefits even if disabled. However, with an SNT, the assets being held in the trust will enable the person to continue to qualify for those programs.

Parents with disabled children also use SNTs to their advantage. Many are concerned that if they leave assets directly to their children who are disabled, the disabled children will fail to qualify for most government benefit programs and will quickly spend through whatever inheritance they receive. Some parents, often unwisely, try to work around this problem by leaving their entire estates to their non-disabled children with the hope that the non-disabled children will care for their disabled sibling. This does not always work.

An SNT can allow a person with disabilities to receive government benefits and continue to have a source of funds to pay for other goods and services that the government programs will not provide. Common examples are specially equipped vans with lifts, certain medical procedures that are not covered, travel to visit relatives in distant parts of the country, and various types of entertainment. These all enhance the quality of life of the disabled individual.

A disabled person can also fund an SNT for himself or herself. These sorts of trusts can hold a person’s assets (for example, an inheritance, a significant settlement from an injury or some sort of retroactive award of benefits). These will be discussed further below.

How Does an SNT Work?

As discussed above, the trustee is the person who makes distributions from the trust according to the instructions that are contained in the trust agreement. In the case of an SNT, the trust agreement must specify that distributions will be made in a way that does not jeopardize the beneficiary’s entitlement to SSI, Medicaid or other public benefits. All of these programs have stringent rules about how distributions from an SNT could affect the beneficiary’s eligibility for continuing benefits.

As discussed above, the assets contained in a properly drafted SNT will not “count against” the beneficiary for continuing benefit eligibility. On the other hand, if the trustee makes a cash distribution directly to the beneficiary, that payment will be considered income to the beneficiary which could jeopardize his or her continuing eligibility for benefits. Also, there are very complex rules regarding payments for food and shelter which are considered under SSI to be “in-kind support and maintenance”. This sort of income could reduce the beneficiary’s SSI benefits . . . or potentially eliminate them all together. Accordingly, it is extremely important the trustees be careful not to distribute any money in a way that will cause a problem with SSI or any benefit programs.  Read HERE for more on how SNT distributions could affect SSI benefits (HUMOR ALERT: Funny article).

Some SNTs, however, might be drafted in such a way that a trustee could distribute money even if it eliminates the beneficiary’s public benefits. For example, the trustee may determine that the beneficiary’s needs for housing outweigh his or her needs for continuing SSI. In any event, the importance of adequate advice available to the trustee cannot be stressed too much.

What are the Different Types of SNTs?

Generally, there are two basic types of SNTs. First, there are self-settled trusts, and second, there are third party trusts.

As the name implies, a self-settled trust is set up using the disabled beneficiary’s own assets. For example, a disabled person who receives an inheritance or has some other property that disqualifies him for public benefits might have the property transferred in to a self-settled trust for his own use. Of course, a self-settled trust established to obtain SSI must meet stringent requirements. First, it must be irrevocable. That means the settlor cannot cancel or amend it. Also, the trust must be established by a parent, grandparent, legal guardian or a court (don’t ask why, it is a strange quirk in the law and makes no sense). Notwithstanding the term “self-settled”, the beneficiary cannot establish the trust for himself. Quite often seeking the appointment of a guardian who can establish the trust becomes necessary. Finally, the trust must contain a Medicaid “payback” provision, which will be discussed further below.

The second type of SNT is a third party trust. As the name implies, these types of trusts contain assets that belonged to some other party at the time of transfer in to the trust. Of course, the main example of this type of trust is one established by a parent for a disabled child. A parent could establish such a trust either while alive or under his or her will or living trust. The main advantage to these types of trusts is that there is no requirement for a Medicaid “payback” provision. In other words, the trust may hold assets for the benefit of a disabled child until that child’s death or some future point in time whereupon the assets are distributed to the other children of the settlor.

For further reading on the differences between various types of SNTs, click HERE.

What are Medicaid “Payback” Provisions?

Medicaid payback provisions are those provisions in certain types of SNTs that require any remaining funds in the trust upon the death of the beneficiary to be distributed to the state. As mentioned above, not all trusts require these provisions.

Usually the funds remaining in a self-settled trust (the first type discussed above) upon the death of the beneficiary must be used to repay the state for benefits that the state had paid out while the beneficiary was alive. Any funds remaining in the trust after paying back the state, however, may be paid to other people specified in the trust document. These people are usually other family members. If a self-settled trust does not contain these Medicaid payback provisions, it will very likely be considered a “countable” asset for the beneficiary.

As mentioned above, funds contained in a third party trust do not have to go to the state.