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A Wold in Sheep's Clothing
Vets Beware!

Are you a veteran interested in VA benefits . . . but worried about being taken for an “annuity ride”? Want to know the best way to use annuities if you are looking at VA benefits? Read on!

The problem:  Some unscrupulous annuity sales people use VA benefits as an opportunity to sell unsuspecting veterans totally unnecessary and inappropriate annuities. A few months ago those practices triggered close and heated Congressional inquiry that will probably lead to a new federal statute.

It does not follow, however, that all annuities are inappropriate or that anyone who may recommend an annuity is out to scam some poor and unsuspecting veteran. Read this article and you’ll understand the difference between “appropriate” and “inappropriate.”

In fact, annuities can be an extremely attractive VA benefits strategy because they can be used to reduce the amount of otherwise countable assets by converting some of those assets into an income stream.

Medicaid has specific, detailed rules that apply to annuities when determining whether they are countable or non-countable. You may wish to review the Medicaid treatment of annuities in an earlier article in this series. Under the VA rules, on the other hand, an immediate annuity that provides an income stream is not countable. Fairly simple, that . . . at least for now . . . we’ll see what new regulations look like in a year or so.

First, pound into your head a few basic rules of VA benefits.

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 retitling assets, or perhaps using trusts, that do NOT involve an inappropriate annuity!

Bad/Abusive Advice

Ya Wanna 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. And, of course, the annuity sales person will collect a hefty commission.

Stuffing the money in such an annuity will subject the transferred money to a Medicaid transfer sanction and lock it up where it will be difficult to get to the money if Medicaid becomes necessary and the family tries to “undo” the annuity.

If the veteran insists on transferring money to someone else (maybe a child) perhaps the safer course is to have the child drop the funds into a trust. After the child funds the trust there may be a measure of protection for those assets. I say a “measure of protection” because if the child has creditor problems at the time the money is transferred, the funds are subject to being snapped up immediately by those creditors.

The veteran could set-up and fund the trust himself, but there is a high likelihood the trust will then be countable to the veteran for VA benefit purposes. IF an advisor suggests that the veteran set up and fund a trust, please be sure the advisor knows what he or she is doing. The strategy has to be pursued very carefully by a practitioner who thoroughly understands the legal issues involved.

Convert Assets To Income

Perhaps the better approach is for the veteran to use excess assets to purchase an immediate annuity (you should go back and review the first article in this series if you don’t recall what an “immediate annuity” is).

Also recall, the actual benefit payable to a veteran is the difference between his ADJUSTED income and the maximum VA benefit level available for his situation. His total income is adjusted downward by the total of his (or a spouse’s) medical expenses. For example, if a married veteran is entitled to a maximum monthly benefit of $2,019, and his and his wife’s total monthly income is $3,100, he will not be entitled to any benefits unless he has some medical expenses that will adjust his income to less than $2,019. If he is in an assisted living facility and is paying $2,600 a month and has $600 of other medical expenses, his adjusted income is ZERO (actually, he is “$100 in the hole”) and he’ll be entitled to the maximum of $2,019.

Be careful: If he purchases an immediate annuity that will pay $600 a month, then his gross income will be $3,700, and after subtracting $3,200 in medical expenses, his adjusted income will be $500 and he’ll be entitled to only $1,519 ($2,019 minus $500).

Here Is What The Pros Know

A Balloon Payment

An immediate annuity does not necessarily mean an annuity that pays equal periodic payments for the life of the annuity. An annuity can be structured with a Big, Fat, Balloon at the end. A $100,000 annuity that pays $100 monthly for 60 months and then pays a lump sum of over $90,000 in 5 years will not be countable and will only add $100 to the monthly income calculation. If medical expenses are high enough, it will not affect the VA benefits (and, in fact, it may come in handy).

The annuity can also be structured to “roll it out” further as the veteran nears the sixtieth month anniversary or term date.

It can be even fancier. Such an annuity can be structured to be revocable in the event that Medicaid becomes a necessity. Obviously an annuity structured along these lines will be countable for Medicaid purposes . . . so the ability to “bail out” and restructure the annuity to be Medicaid compliant is attractive.

Final Thoughts On VA Benefits and Annuities

  1. Do not try any of the foregoing without expert help.
  2. There are regulations incubating and I expect to see something in 12 to 18 months (the outcome of the November elections should not make a difference). What those regulations will look like is anybody’s guess.

Filed Under: Annuities, General, IRAs & Retirement Plans, Medicaid, Veterans Tagged With: , , ,

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You now understand the basics of annuities because you read Banish Annuity Confusion in 5 Minutes (If you haven’t read it and you aren’t an annuity expert, you better go back and read it now). But how can annuities help (or hurt!) you when considering either Medicaid or VA benefits? Let’s take Medicaid here . . . and next time we’ll look at VA benefits and annuities.

WARNING: This article will not be the easiest to read. I’m sorry. If you can’t sleep, keep this handy and it’ll do the trick. Take your time and do your best. And, of course, I’ll answer questions if you post them in the “Comments” area below.

Also, if some of the basic Medicaid concepts (like “countable versus noncountable” and “sanctionable transfers”) present a challenge, take a look at NC Nursing Home Medicaid Law Explained on this site. There is a good table of contents that is hot-linked to various topics.

Here We Go . . .

Annuity-Man!If properly annuitized, an otherwise countable asset for Medicaid purposes can become a noncountable asset. If the asset is sufficiently liquid (a farm is not “liquid” but cash is) it can be annuitized (OK . . . made into an annuity), and if properly structured the annuity will not be countable.

Caution: Most annuities sold on the open market are countable! To be “noncountable” an annuity must meet each of the following requirements:

  • *  The annuity must be irrevocable and nonassignable,
  • *  The annuity must have a fixed (or regular) income stream of equal payments,
  • *  The annuity cannot extend beyond the actuarial life expectancy of the annuitant (using approved life expectancy tables), and
  • *  The annuity must name the State as the remainder beneficiary.

One exception to the last requirement is that a spouse or a minor or disabled child may be named in first position ahead of the state.

What About An Annuity IN An IRA?

It depends . . .

IRA belonging to Institutionalized Spouse. If the IRA belongs to the institutionalized spouse, the IRA can be made noncountable but the income stream that it will throw off by being annuitized will be countable income to the institutionalized spouse and treated the same as any other income. If the income isn’t too high, the additional income may not provide any problem at all, but if the additional income causes the institutionalized spouse’s income to rise too high, there could be problems with qualifying for nursing home Medicaid.

Because an institutionalized spouse may never have more than $2,000 in noncountable assets, many people are tempted to immediately cash in the institutionalized spouse’s IRA and transfer the proceeds to the community spouse in a nonsanctioned transfer. The problem with that is depending upon the size of the cashed-in IRA there could be a hefty tax penalty because all of the IRA will be includable in gross income that year. Annuitizing the institutionalized spouse’s IRA provides an alternative to simply cashing in the IRA. If a nursing home stay is anticipated in the next few years, sometimes it may be a good idea to begin cashing in the IRA over a number of years to minimize the tax impact.

IRA belonging to the Community Spouse. If a particular state does not outright exempt a community spouse IRA (Georgia does, but North Carolina does not), then she could simply annuitize her IRA (according to the rules discussed above) and exempt the IRA.

What About An Annuity That Is NOT In An IRA?

There are strategies that may be pursued involving annuities that do not have anything to do with IRAs. A plain, “non-IRA” annuity structured to comply with the rules discussed above can be a convenient way of converting countable cash into a noncountable asset.

Annuities and a Single Guy. With this particular strategy assume that a single individual is a nursing home resident who is attempting to qualify for Medicaid. For this strategy bear in mind two rules. First, when the state files a Medicaid estate recovery claim, it will seek reimbursement only for what it actually paid out in Medicaid benefits. Second, the state Medicaid program will never pay as much per month to the nursing home as a private pay patient would pay. If you plan on an intentional estate recovery claim the amount recovered by the state will always be less than the amount that a private pay patient would have paid had she not qualified for Medicaid.

Take for example 70-year-old Ward Cleaver (yes, yes, I loved “Leave it to Beaver”), who has $200,000 cash and a $250,000 residence. In addition to his assets he has monthly social security income of $1,000. A nearby nursing home has a private pay rate of $6,000 a month, but a state Medicaid reimbursement rate of $4,500 a month. Ward has a life expectancy of 13.55 years. Ward uses his $200,000 cash to purchase a 10 year Medicaid compliant annuity that will pay approximately $2,000 a month. He will have converted the $200,000 countable cash assets into a noncountable annuity. With the annuity payments his monthly income will be $3,000 monthly. Now that Ward qualifies for Medicaid his income will be applied to the nursing home bill and the state Medicaid program will pay the $1,500 difference. In this example, assume that Ward dies after 48 months in the nursing home. In four years the remaining balance in Ward’s annuity should be approximately $100,000. In that 48 month period the state has paid $72,000 in benefits that will be subject to an estate recovery claim. If the state claims $72,000 of Ward’s remaining $100,000 annuity there will be a balance of $28,000. That amount will go to the other remainder beneficiaries of the annuity.

If Ward did not purchase an annuity his $200,000 cash would have been gone in 40 months because the private pay rate for the nursing home was $6,000. His income was simply $1,000 and he would have had to pay $5,000 monthly to make up the difference. If Ward’s $200,000 was gone in 40 months and he died after month 48, the state Medicaid program would have had benefit payments for 8 months. The state would have paid $3,500 a month because that was the difference between Ward’s $1,000 monthly income and the monthly Medicaid reimbursement rate of $4,500 for the nursing home. In other words, over 8 months Medicaid would have paid $28,000. In this particular case the entire $200,000 would be gone in 40 months, the state would pay out an additional $28,000 and have an estate recovery claim for that amount on Ward’s death (which they would collect against the house). Without an annuity the out of pocket cost of the family was $228,000. By purchasing an annuity the family saved $56,000.

A Slight Change of Facts. Assume here that Ward lived his entire life expectancy of 13.55 years (which is about 163 months). Let’s also assume that in that period of time his home appreciated in value to $350,000. If Ward does not purchase an annuity his cash will be gone in 40 months as explained above. If he goes on Medicaid after month 40 and lives another 123 months (that’s 40 months plus 123 = 163) Medicaid will pay out $430,500 which will be the subject of an estate recovery claim.

On the other hand, had Ward purchased an annuity the results, although not particularly impressive, would have been somewhat better (after all, we are simply trying to illustrate a concept here!). With a 10 year annuity paying $2,000 monthly, combined with Ward’s social security benefits of $1,000 monthly, the Medicaid program would pay $1,500 monthly. Over that 10 year period, Medicaid would pay $180,000. At the conclusion of month 120 Ward’s annuity will be exhausted which would leave another 43 months until Ward died at month 163. During that additional 43 months Medicaid would pay $3,500 monthly (the difference between the nursing home reimbursement rate of $4,500 and Ward’s social security of $1,000). Therefore during the remaining 43 months Medicaid would pay another $150,500. The total Medicaid had paid by Ward’s death would be $335,500. That amount would be the subject of an estate recovery claim against Ward’s home. In this case we said the home had appreciated in value to $350,000 (after all we wanted to make this example work for you!). In that case there would be almost $20,000 of equity left in the home to pass to the family.

Annuities for the Married Couple. When dealing with a married couple, annuities open up a completely new and attractive strategy. Let’s use the Ward Cleaver facts but assume that Ward is married to June.

If Ward and June live in a state (like Georgia) in which June is allowed to keep the maximum community spouse resource allowance of $113,640 and Ward is allowed to keep a maximum countable asset level for an individual of $2,000, Ward and June will have a spend down of approximately $90,000 (the amount of their $200,000 cash that they would need to spend down to get to acceptable Medicaid levels).

If Ward and June live in a state (like North Carolina) in which June is allowed to keep only half the countable assets (but in no event more than $113,640) and Ward is allowed to keep up to $2,000 then Ward and June will need to spend down approximately $100,000. (I said approximately to keep it easy . . . I promise someone will say to me, “Bob, your numbers don’t add up!”)

If June took $100,000 and purchased in her name a Medicaid compliant annuity (compliant with the four requirements outlined above) she would have a noncountable annuity and Ward would qualify for Medicaid. Bear in mind that there is no requirement (in all but four states) that the annuity extend to the complete life expectancy of the annuitant. In other words, the annuity could be much shorter.

If June purchased a 10 month annuity with the $100,000 that paid $10,000 monthly she would have a complete return of the amount invested in the annuity by the end of that nine month period. Recall also that while the annuity payments would count as income to June (for Medicaid purposes) during that 10 month term, the community spouse’s income has no bearing on whether the institutionalized spouse continued to qualify for Medicaid. At the end of ten months June is in the financial position she was in before Ward went into the nursing home.

Point to ponder: Timing is everything in the foregoing strategy. If the annuity is purchased too soon and the first annuity payment of $10,000 arrives before Ward is in the nursing home or Ward has been determined to be qualified for Medicaid, the first annuity payment of $10,000 will put Ward and June, once again, over the Medicaid asset threshold (they will be at slightly over $120,000). In this particular case they may wish to consider purchasing a slightly larger annuity (perhaps $110,000 or more) or be very careful that the annuity is purchased close to the time that the application has been submitted so that the first annuity payment will not arrive before Ward has been determined to be qualified for Medicaid.

Another point to ponder: The foregoing strategy does have a drawback. If the community spouse’s income was below the monthly maintenance needs allowance she would have received an allowance out of the institutionalized spouse’s income. The annuity payments, however, will almost certainly put the community spouse’s income over the minimum monthly maintenance needs allowance and she will not be entitled to any allowance from her spouse’s income during the term of the annuity. On the other hand, once the annuity has completed all payments the community spouse would be eligible to apply for the allowance from the institutionalized spouse’s income.

Another point to ponder: The foregoing income dilemma illustrates one good reason for attempting to purchase an annuity that is as short in term as possible (simply to “get the annuity payments over with”). Also recall that a Medicaid qualified annuity must name the state Medicaid program as the remainder beneficiary (which could be in second position behind a surviving spouse) in order to qualify. If the community spouse dies during the term of the annuity the remaining amount will go to the institutionalized spouse and disqualify him for Medicaid. That is yet another good reason for a short term annuity combined with instructions to the community spouse to remain alive during the term of the annuity (relax, this was our stab at a bit of humor!).

A Note on Medicaid Compliant Annuities. There are hundreds of fine annuity providers in the United States. Nevertheless, most of those providers do not offer extremely short term annuities. In fact, finding a well-known annuity provider that will issue an annuity shorter than 36 months is extremely difficult. There are, however, specialty annuity providers that issue extremely short term annuities. These companies market their services to elder law attorneys. Accordingly, a competent elder law attorney will be able to refer you to one of these companies.

Finally . . . structuring any of these transactions is quite tricky . . . you really shouldn’t try this alone. Get help.

Congratulations! You made it. Next we’ll discuss annuities and VA benefits.

Filed Under: Annuities, General, IRAs & Retirement Plans, Medicaid, Nursing Homes Tagged With: , , , , ,

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Tales From The Mason Law Horror Files . . .

Once Upon A Time . . .

Your Host to the Mason Law, PC Horror Files

Margaret and Jim Anderson raised their three children, Princess, Bud and Kitten in the 1950’s and 1960’s in the Greystone area of Asheboro, North Carolina (a leafy post-WW II neighborhood of 3 and 4 bedroom homes). The three kids grew up. Bud moved to Charleston, and Kitten moved to Atlanta. Princess stayed on in Asheboro.

In 1995 Margaret suddenly died. Although Jim was bereaved, wedding bells rang in 2003 when he married Eloise Haskell, a widow from nearby Mayfield. Eloise had an only child, Eddie Haskell, who lived in Oregon. The Anderson kids had a difficult time with Eddie on the rare occasions they saw him (Eddie had a difficult time concealing his manipulative and greedy nature).

Eloise and Jim’s children maintained a friendly, but never-too-close, relationship. Things became a bit strained, especially between Eloise and Princess, when Eloise began to show some early signs of dementia in 2005 (some forgetfulness, a bit of paranoia . . . but nothing too alarming). Jim remained active and vigorous, continuing with volunteer work at a variety of charities. Then, in 2010, disaster: Jim suddenly died.

After the funeral, Princess found a copy of Jim’s old will naming Princess as executor. She made an appointment with Bob Mason and asked him “tell me what to do?”

Princess, We Have a Problem . . .

Jim’s 2004 will left a life estate in the Greystone house to Eloise and also left all household furnishings to Eloise (with the proviso that Eloise allow Jim’s kids to have whatever). The will left the rest of Jim’s estate to his children.

After some research Bob discovered that in 2005 Jim deeded a tenancy by the entireties interest in the Greystone home to Eloise (a type of estate in land in which spouses own the land together and in which the surviving spouse takes the entire interest upon the death of the first spouse to die).

Bob also noted from documents dropped off by Princess that Jim’s Acme Investment Advisors mutual fund was titled in his and Eloise’ name.

After Princess qualified as Executor, Bob discovered that two other bank accounts were jointly titled with Eloise and that she had been beneficiary of Jim’s IRA since 2005.

At a followup meeting, Bob delivered the bad news.

“Let’s Get Bud and Kitten on a Conference Call”

In an Anderson family meeting (Bud and Kitten called in, Princess spent most of the time with the tissue box in the conference room), Bob explained that the Greystone home they were raised in became Eloise’s home (outright, to do with as she pleased, and not “just a life estate”) upon Jim’s death by virtue of the 2005 tenancy by the entireties deed. The will didn’t really matter.

Bob also explained that the jointly owned accounts were now owned by Eloise, and that as IRA beneficiary she was entitled to that account. Again, the will didn’t matter.

Bud and Princess both agreed that Eloise’s son, Eddie Haskell, “had a lot of lawyer friends.” They said that Eddie had been extremely ingratiating to Jim for years and “he probably talked Jim into setting up everything that way.”  Bob explained that it would be very difficult to prove undue influence or fraud many years after Jim had retitled the house and the accounts . . . especially when Jim had been so active (and obviously in command of his mental faculties) up until his death.

Eloise Anderson

To Add Insult to Injury . . .

Princess called Eloise and attempted (very politely) to ask if Princess could have some of the furniture, silver and china that had been her parents. Eloise grew vague and mumbled something about “thinking about it.”

Princess Anderson

When Princess called back a few weeks later Eloise exploded and demanded that Princess leave her alone and that if she kept pestering her she would have Eddie contact a lawyer.

Options?

None.

What Should Have Been Done?

You tell me! A copy of the 9 1/2 hour DVD set “Elder Law University” ($149 value) will be given to the best response in the comment section below. The August 1 issue of Elder Law Update (and an accompanying post here) will discuss a few of my recommendations . . . and, of course, announce a winner

So . . . post away!

 

PS: IF YOU ARE ONE OF MY LAWYER READERS NO YOU CAN’T PARTICIPATE!!

 

AND NOW . . . HEH, HEH, HEH . . . THE ANSWER

Two weeks later and here we are.

Of course, the correct answer was Don James’ (below): He should have hired ME! But since he didn’t . . .

Billie Hansen, Kelly Anderson, and Celeste Spence all mentioned a wonderful idea . . . . COMMUNICATION! What a novel idea! True, people procrastinate, but marriages at any age are a major milestone. Out of a love and kindness to both families there should have been some frank discussions ahead of time.

The problem often is that no matter how well planned a will may be, they are relatively easy to change. A properly drafted prenuptial agreement can create enforceable rights in later heirs if the parties to the prenuptial agreement specify and agree that they will maintain valid wills that make the desired dispositions to various family members. Even if they later change their wills or titles to real property there may be a cause of action available to the heirs. Prenuptial agreements do nothing, however, to protect assets if this older couple is concerned about protecting assets in the event the new bride or groom ends up in a nursing home. Medicaid counts the assets of both members of a married couple, and North Carolina has something called the “Doctrine of Necessaries.” Under that old doctrine, each of a husband and wife are legally obligated for the other’s medical care regardless of any agreement they may have had between each other (this doesn’t apply if one is on Medicaid). In those cases a “prenup” wouldn’t have mattered, although a prenup is good to establish other understandings.

If the house was the major concern (as is often the case) Jim could have established either a revocable or irrevocable trust and titled the house in the name of the trust. He could have named Bud or Princess as the trustee (or perhaps even co-Trustee with Jim). The trust could have specified that Eloise would have a life estate in the home upon Jim’s death. It could have also specified that at any time after the establishment of the trust the house could not be taken out of trust without the written agreement of all trustees (that would have prevented Jim from later adding Eloise’s name to a tenancy by the entireties title).

There really is no ONE correct answer other than Jim and Eloise, out of love for their children, should have opened up the communications channels and been willing to seek some guidance.

This was a sad story.

The winners:

Don James is a CPA and hangs out with too many lawyers! (Sorry, Don) I couldn’t decide between Billie, Kelly and Celeste . . . so I’ll send each one an Elder Law University DVD set.  Ladies, please send your mailing address to Stacey Kinney at:  sck (at) masonlawpc.com (replace the “(at)” with an “@” and close up the spaces!

For more reading on second marriage issues go see Tying the Knot . . . Or Just Moving In?

Filed Under: Banking, General, Mason Law Horror Stories!, Powers of Attorney, Trusts generally, Wills (or Not!) Tagged With: , , , , , , , , ,

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VA Pension benefit (Aid & Attendance) rules will likely borrow a few Medicaid concepts under legislation proposed by North Carolina Senator Richard Burr and Oregon Senator Ron Wyden. Thanks to the kindness of Senator Burr’s office, I have managed to grab a copy of the bill and I will outline the basics below. But first . . .

I Told You So!

I have been belly-aching for a long time about unscrupulous annuity sales people masquerading as “veterans’ benefit advisors” to sell expensive, inappropriate, and occasionally harmful annuities. And, yes, a few attorneys have used high pressure tactics to sell unnecessary trust services at inflated prices. So, I was gratified to learn that I wasn’t alone.

The Senate Ordered a Report.

About a year ago Congress asked the Government Accounting Office (GAO) to look at the entire issue of abusive sales tactics directed to aging veterans as well as the effectiveness of the VA at policing these activities. In an interesting report (VETERANS’ PENSION BENEFITS – Improvements Needed to Ensure Only Qualified Veterans and Survivors Receive Benefits, May 2012) the GAO cited numerous abusive sales tactics.

The GAO used undercover agents posing as the children of aging veterans. Some of the telephone conversations were recorded and are available.  A recording of some of the conversations can be found online at the GAO website (look under “VIDEO” on the right hand side).

The report found the VA had unclear guidance and inconsistent decisions (I have long noted that with regard to trusts). Some services actually harmed the veterans, the report noted, and some ‘advisors” charged prohibited fees. The report also cited a number of cases involving huge amounts of money (in one case over a million dollars) transferred immediately prior to applying for benefits. Question that has puzzled me: Why would anyone want to transfer $1,000,000 simply to pick up another $1,500 or $2,000 a month?

The report urged Congressional action and suggested lookback rules and penalties similar to Medicaid.

As part of the GAO Report, a letter from the VA indicated that they were working on pre-filing asset transfer regulations and anticipated having those complete in December, 2013.

The Senate Held a Hearing

On June 6, 2012, the Senate Special Committee on Aging held a hearing under the title “Pension Poachers: Preventing Fraud and Protecting America’s Veterans.”  The hearing lasted about two hours and can be viewed online. The video is interesting and some of the participants were clearly uncomfortable.  The grillees were Dan Bertoni (GAO), Lori Perkio (American Legion), Kristi Schaffer (daughter of a veteran), Emily Schwarz (Veterans Financial, Inc. . . . one of the “bad guys” – they absolutely skewered her) and David McLenachen (U.S. Department of Veterans Affairs . . . who received a senatorial scolding for laxness).

My biggest complaint:  The senators and the panelist from the American Legion and the VA equated legitimate advisors (mainly attorneys) undertaking perfectly legal planning activities with the trolls who are outrageously ripping off veterans with inappropriate and expensive annuities.

It is unfair for Congress or an executive agency to whine that people should not avail themselves of legal planning techniques which respect to which the federal agency has been fully aware (for years) and fully capable of controlling or curtailing (for years) through regulation.  Stop whining, stop the cop-out of “oh, it’s legal but it really wasn’t supposed to be that way” . . .  and do something.  In the meantime, I am remiss as an attorney if I do not explain those rules to my clients.

There is a world of difference between an attorney explaining how assets can be transferred to a child (or a trust if he would rather not transfer directly to a child) . . . and an annuity salesman saying he is a “veterans advisor” and the only way the veteran can qualify for benefits is by transferring money to a child and then having the child buy an annuity paying the salesman (sorry, advisor) a HUGE commission.

The Senate is Considering a Bill

The day of the hearing, Senator Burr and Senator Wyden introduced a bill (S. 3270) to provide transfer restrictions on those applying for VA benefits. While many will moan and others will scream “unfair,” the bill simply imposes rules that are similar to (but more lenient than) Medicaid rules that have been around for years. My only surprise is that it has been so long (so very long) in coming.

If enacted, the statute would impose a period of ineligibility for VA benefits if assets are transferred to others, a trust, or certain types of annuities within 36 months of applying for benefits. The length of the period of ineligibility would be the total value of the transferred assets divided by the amount of VA benefit the applicant would have received.  The penalty would never exceed 36 months, however, and also unlike Medicaid the penalty would begin to run in the month of transfer.

Example:  Mr. and Mrs. Kilroy transfer a home worth $150,000 to their son in Year 1. In Year 3, Mr. Kilroy applies for Aid & Attendance benefits that would ordinarily pay him $2,019. Because a transfer was made within 36 months, a penalty would be calculated by dividing $150,000 by $2,019 (74.29) and rounding to 74. Because a penalty would never run more than 36 months, Mr. Kilroy would be ineligible for another 36 months. He probably should have simply waited a few more months to apply.

Example:  Mr. and Mrs. Kilroy transfer $30,000 to their son in Year 1. In Year 3 Mr. Kilroy applies for benefits as above. The penalty would be 15 months ($30,000 divided by $2,019 and rounded to the nearest whole number). Because the penalty began running immediately and Kilroy applied more than 15 months later, there would be no period of ineligibility.

Note:  You may check other VA benefit rates elsewhere on this website.

And, of course, there are hardship provisions. The VA is authorized to promulgate regulations to relieve the penalty if imposition would cause an “undue hardship.” Look for very strict regulations because it is hard to imagine when an “undue hardship” caused by a temporary suspension of one to two thousand dollars of monthly benefits would warrant a waiver of the penalty. Medicaid hardship exemptions, for example, apply in only the direst of circumstances.

When Would the Rules Take Effect?

Finally, the law would not take effect until 12 months after enactment. One of Senator Burr’s staffers thought the chances of enactment in an election year would be very slim. Perhaps . . . but I’m not so sure. Watch the video of the hearing. The condemnation and calls for action were bipartisan.

If the Senate and the House both acted, and the President signed the bill on, say, October 1, the law would not be in effect until October 1, 2013. Look for a busy, busy year of veterans transferring assets!

Stay tuned . . . I will keep you posted.

Filed Under: General, Veterans Tagged With: , , , , , ,

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IMPORTANT: THIS ARTICLE HAS BEEN DRASTICALLY REVISED IN 2022. PLEASE SEE THE UP-TO-DATE VERSION HERE.

 

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!

Falstaff

“Right, then! Another two of these and I’ll be ready!”

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

Lady Bird

“Hey. Bob will discuss Lady Bird deeds directly.”

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?

“They’ll NEVER figure these out!”

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

“Lyndon tried one of those fancy deeds on the house behind me, but there was some kind of problem.”

(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.

A recent Georgia Lady Bird sighting.

 

PLEASE NOTE: I HAVE CLOSED COMMENTS TO THIS ARTICLE. SORRY, BUT AFTER RECEIVING OVER 100 (!) COMMENTS I SIMPLY COULDN’T CONTINUE TO RESPOND AND STILL FIND A BIT OF TIME TO PRACTICE LAW. THANKS FOR YOUR INTEREST, THOUGH.

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