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ShockedA power of attorney is an overlooked and under-loved document . . . with all the potential of saving your posterior and avoiding a Class A Mess-up! Even if you DO have a power of attorney it may not have what it takes to avoid the Unpleasantness I just referred to.

For a simple example of usefulness, you can read what I wrote earlier on how a power of attorney is an important way to avoid a common banking error.

You can read about these make-or-break documents in less than 3 minutes right here.

What Is A Power of Attorney?

A power of attorney (or a POA) is an instrument in which a person called a “principal” appoints a person called an “agent” or an “attorney in fact” to manage some or all of the principal’s financial affairs.

By the way, an “attorney in fact” need not be (and usually isn’t) an attorney. The word “attorney” comes from the old French Norman word “attourne” meaning “one appointed.”

Is A Power of Attorney Really Necessary?

Without a power of attorney, if a person becomes incapacitated many of her affairs may be unmanageable without a court-appointed guardian or conservator. This will likely involve paying a licensed Appointed One (ok, ok . . . an attorney) to bring a guardianship petition, court supervision of the guardian, likely payment of a bond, and add all sorts of additional pressure on the family.

And that is if everyone is getting along. It becomes much messier if there is not peace in the land.

It doesn’t matter a bit that the incapacitated one is married because the ability of a spouse to manage many affairs is limited.

In fact, as I have written, if a principal is concerned with managing money if she becomes incapacitated, a power of attorney is a much better way to manage money than setting up a joint account with someone else (perhaps a child).

Broad? Or Narrow?

A power of attorney can be very narrow. “I hereby appoint Joe to manage my checking account while I am out of the country through next month.”

A power of attorney can be very broad. “I hereby appoint Joe to do anything and everything I could for myself until further notice.”

“Durable” confuses many. In some states a POA will become invalid after the incapacity of the principal unless the POA specifically states that the POA continues in effect after the incapacity of the principal. In any event, to use quaint terminology, a POA designed to last beyond the incapacity of the principal is said to be “durable.”

In North Carolina, a POA is by default “durable” — a POA must specifically “opt out” of durability if the principal wants it to be revoked after incapacity.

Now? Or Later?

A Principal may wish to appoint an Agent with immediate authority to act, but subject to a mutual understanding that the Agent will not do anything until needed. Thus, an “immediate” power.

On the other hand, the Principal may be a bit nervous about vesting too much power too soon in the Agent and might prefer to specify that the POA does not become effective until after the incapacity of the Principal. Thus, a “springing” POA.

The problem with a springing power of attorney is the task of convincing ever suspicious banks and financial institutions that the POA has “sprung” — that the conditions triggering the effectiveness of the POA have, in fact, occurred.

My usual question to a client wanting a springing POA is: If you don’t trust the Agent NOW, how can you trust her LATER when you won’t be able to do anything about it?

Is It Christmas Yet?

By the way, unless the POA specifically allows for gifting, the Agent won’t be able to make gifts, even if the POA is otherwise broad. Gifting, by the way, isn’t referring to Christmastime, it is referring to the ability to move assets around for planning purposes . . . which could be critical.

Back to the old trust issue. Restrictions can be put on gifting. Perhaps written permission from a sibling, a trusted advisor or friend.

POAs are important. And tricky. The best approach is to have an attorney draft one for you.

Filed Under: Banking, General, Powers of Attorney Tagged With: , , , , , , ,

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As I have previously written, Medicaid does not pay for assisted level of care. If you can qualify, the program is called Special Assistance, and it will help with the cost of an assisted living facility. But it is NOT Medicaid.

One of the main differences is an unforgiving income cap that has not been adjusted since 2009. Until now. Effective January 1, 2023, it goes up.

Special Assistance income caps will, from now on, be subject to the same COLA published annually for Social Security. In 2023, benefits will rise 8.7%.

Since 2009, the gross income (that’s income before any deductions) limit has been $1,247.50 for the general assisted living population, and it has been $1,580.50 for Memory Care.

Effective January 1, 2023, the new gross income limits for the general assisted living resident will be $1,355 and $1,737 for Memory Care. Due to rounding, those limits are likely to be $1,354.50 and $1,736.50.

Well, that’s good news and we’ll take it. What is disappointing is the 2023 COLA is applied to a 13-year-old number. Just for fun, I found a calculator that computes the impact of inflation from any year to the present (fun/depressing to fool around with):  $1,247.50 in 2009 (the gross SA number set) would be $1,732.89 today.  The SCU gross of $1,580.50 would be $2,195.46.  So, the 2009/2023 inflation comparison with the 2023 “raise” is:

Calculated 2009-2023 Inflation Basic:  $1,732.89.   The new SA Rate:  $1,355.  That’s still $377.89 behind the inflation adjusted limit from 2009.

Calculated 2009-2023 Inflation Enhanced (Memory Care):  $2,195.46.  The new SA Rate:  $1,717.  That’s still $478.46 behind the inflation adjusted limit from 2009.

So, as you can see, SA remains woefully beyond the ravages of inflation since 2009.

Filed Under: Assisted living, Reader Favorites, Uncategorized

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Soldier wavingToday, I’m thinking of the 34 year-long veterans’ parade held in my conference room.

First, if you’re a veteran, thank you for stepping up. Most of what you did was certainly not glamorous. Occasionally very dangerous and often very boring. But someone had to do it, and you did. Thank you.

Your service underscores a current news thread. There is a crisis of recruitment as the various branches of the armed forces struggle to meet personnel needs. This is attributed to a number of factors. The perception that our country is a rotten place and not worth serving seems to be one factor. The economy is another (civilian jobs are plentiful). Kids in prime recruitment age are, well, “just not interested.” As a society, we have a lot of work to do turning this around.

I also think closer to home. I have had close family members involved in every conflict since World War II. I thank my Dad, uncles, brothers-in-law, nephew, and cousins (one of whom didn’t make it out of Viet Nam).

I also reflect on my own law practice and the veterans I have been privileged to serve over the years. Many of these guys had some interesting stories.

The WW II Guys

Earlier in my practice, they were the World War II vets. I think often of the rather grizzled guy who regaled me with stories of his years as a German POW. He’d been fighting under Patton when his unit got an unpleasant surprise from a bigger German unit. He told me that all-in-all the Germans didn’t treat them too badly as long as everyone behaved. He said it was a different story for the Russians on the other side of the wire in the same camp. Their captors’ hatred seemed limitless.

There was also the guy (a retired physician) who was an Army surgeon that went ashore in the third wave at D-Day. When I asked how it was he rather laconically replied, “We were really busy.”

I haven’t seen any WWII guys in quite a while. They were my parents’ generation. My Mom died last March at 104. Today, November 11, coincidentally, would have been her 105th (they celebrated her first birthday the day World War I ended – the first “Armistice Day”).

After going through the Great Depression as children, the WW II vets came home built lives and families and were, perhaps, the “Greatest Generation” (as Tom Brokaw dubbed them). For the most part, they’re all gone now, and I miss them.

The Korean War Vets

Yes, yes, I know. It wasn’t really a “war” in the legal sense. But ask anyone who was there.

For quite a few years there was a steady stream of Korean War vets into my conference room. One garrulous old Marine (he said his current status was “inactive”) became really quiet when I asked about his experience at Chosin Reservoir. He looked down at the conference room table and said, “Why don’t you just read about it.” I did. I had trouble getting my head around it.

I haven’t seen any Korean War vets in a good while, although I still have a few widows of those guys come through.

The Elvis Generation

I still see quite a few of these folks. Korea was over. Viet Nam hadn’t begun. But we were eye-to-eye with the Soviets and many feared an invasion through West Germany’s Fulda Gap. Like their age group peer, Elvis, they joined up and served (as one client wryly put it, “But Elvis got to make movies while he served. I just sat in a tank”).

It seems unfair, but because there wasn’t any active shooting going on anywhere (a “War Time Period” as the VA calls it), these guys don’t qualify for a block of VA benefits that, say, a current maintenance mechanic at Ft. Bragg will qualify for because the VA says the “Gulf War Time Period” is still ongoing. Go figure.

‘Nam!

A few years ago, the stream of Viet Nam vets began as they hit that prime age for seeking out an elder law attorney. One had been a POW. His treatment was quite a bit rougher than that of my old (and now long deceased) former guest of the Germans.

One client flew Hueys in Viet Nam. Never talked too much about combat, but we did pickup a good term from him. My wife is an expert at “combat loading” our dishwasher. A combat load is maximizing every square inch, but wisely, so as to be able to get off the ground. That client is married to my wife’s sister. My cousin flew those, too. He didn’t come home.

The Gulf War

The other day, I had a first. Maybe I should call him a “vanguard” to use a more military term. My first Gulf War vet. Before I started law school I lived and worked in Saudi Arabia. Two large oil paintings of Saudi desert scenes hang in my conference room. If you’ve been (or currently are) a client, you know those paintings.

While I was talking with his wife, I noticed his gaze on one of the paintings. He seemed almost lost in the scene. By this point in the conference I learned he had a service connected disability.

“Gulf War? Iraq?” He seemed to snap back to the conference room. “Yes. It really does look like that, doesn’t it?”

We talked about our experiences. I worked some near the Iraqi border (King Khalid Military City) and well before the war. He was IN Iraq during the war. After we routed Hussein’s army, the US Army stockpiled huge amounts of captured ordnance near an Iraqi weapons depot at Khamisiya. The idea was to destroy the ordnance. Later we learned that some of the weapons destroyed in the “Khamisiya Explosion” (Google it, there are pictures online) contained toxic nerve agents. Thus, my new client’s disability.

We settled back into our mundane estate planning session, but he kept looking back up at that painting.

Thanks

I’ve always felt a bit awkward. What are you supposed to say? “Thanks for your service” seems so trite. But we do appreciate you. And I have been privileged to serve a steady stream of you through my conference room over the past few decades.

Filed Under: Reader Favorites, Uncategorized, Veterans

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In the last article, we looked at the general characteristics of various ways of owning real property, namely: fee simple, tenancy in common, joint tenancy with rights of survivorship, and life estates. I have “hotlinked” each property type so you can go back for a “refresher.”

Now that you have a basic understanding of ways of holding real property, understanding how those different ownership interests impact Medicaid (and how Medicaid impacts those interests —  especially if you’re interested in keeping that property) is very important. As we’ll see, the various ownership interests also have different tax impacts.

Fee Simple Ownership

Medicaid:  Unless the property owned is a residence, real property held in fee simple is countable for purposes of Medicaid eligibility. Also, even if the property is a residence, although noncountable for purposes of eligibility, the property will likely be available for estate recovery purposes.

Taxes:  If the property is a person’s principal residence, the first $250,000 of capital gain is tax free ($500,000 for a couple). If the property is a principal residence, sale of the property will likely generate taxable capital gain. You can read a bit more about capital gains taxes here.

People inheriting the property will receive “stepped up” basis equal to the value of the property on the date of the death that triggered receipt of the property. This could completely avoid capital gains tax on the kids that Mom and Dad would have paid if they had sold the property before they died (assuming the property was nonresidential). Again, you can read a bit more about capital gains taxes here.

Probate:  Unless the property is held in a trust, it will be subject to probate proceedings at death of the owner.

Tenancy in Common

Medicaid:  Not countable, BUT subject to estate recovery.

Taxes:  Same rules as fee simple ownership discussed above.

Probate:  Same rules as fee simple ownership discussed above.

Joint Tenancy with Rights of Survivorship

Medicaid:  Not countable. Currently not subject to estate recovery. According to old common law (court rulings going back many years as well as “commonly accepted” understandings of the law) joint tenancies pass free of the claims of creditors against a deceased joint tenant. There is also a 62 year-old North Carolina Supreme Court case that says that is the case. Wilson County v. Wooten, 251 N.C. 667, 670 (1960). But that’s it. The General Assembly could change this if it had the political will to do so. So, bottom line: Joint tenancies currently work to avoid estate recovery. If there is a more solid strategy available, however, I use it.

Note:  Many people avoid or minimize transfer penalties by simply giving someone a 1% joint tenancy with rights of survivorship interest. That way, they have made a very small (1%) gift subject to a transfer penalty. Or the person receiving the 1% might pay for it and avoid a transfer penalty completely.

Taxes:  Same as tenancy in common interests discussed above.

Probate:  Avoids probate.

Tenancies by the Entireties

Medicaid: Unless the real property is the residence, tenancy by the entireties property owned by the married couple will be countable. This property will need to be converted to a joint tenancy with rights of survivorship to become noncountable (perhaps by giving a child 1% and holding the other 99% as tenants by the entireties by the married couple). It’ll be a joint tenancy with respect to the 99% and 1% and the 99% held by Mom and Dad as tenants by the entireties. I know — Strange.

Life Estates

Medicaid:  Not countable for eligibility purposes and not available for estate recovery. The problem is, recall when someone sets up a life estate with real property they currently own in fee simple (or as tenancies by the entireties if owned by married parents) they are giving a remainder interest to others that is worth a certain percentage of the overall value of the property. That percentage value will be considered a Medicaid sanctioned transfer if there is a Medicaid application made within five years.

Example:  If Falstaff is 70 years old, Medicaid uses an actuarial chart that shows Falstaff’s life estate to be worth about 60% of the value of the property, and Prince Hal’s remainder interest to be worth 40% of the property value. If the property is tax assessed at $100,000, Falstaff will be treated as having made a $40,000 sanctionable transfer, which could back to haunt him if he applies for Medicaid within five years. On the other hand, Falstaff could have sold Prince Hal the remainder interest and there would be no problem.

Another problem:  If the land (or residence) subject to the life estate is sold, a portion of the proceeds will belong to the life tenant. In the example just given, Falstaff would receive 60% of the proceeds, which could be most inconvenient if he is on Medicaid.

Prince Hal

Woops. Wrong Prince Hal.

Another planning strategy:  One planning strategy that is occasionally used is for Falstaff to buy a life estate. Let’s say Prince Hal actually owns Blackacre. If Falstaff pays $60,000 for a 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. But this DOES raise another issue.

The Issue:  If the life estate Falstaff purchases is in property that was “the home of another person” (that is, this is Prince Hal’s home) then Falstaff would 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. You can thank Congress for that little gem. On the other hand, if Blackacre is not “the home of another” Falstaff should be OK.

Taxes:  If the property is sold and there are capital gains, a portion will be taxable to the life tenant and a portion will be taxable to the remainder interest holders.  If it is the life tenant’s residence being sold, however, the life tenant will get a capital gains tax break on her share, but the life tenants – pay up! If the property is never sold, the remainder interest holders receive the property with stepped up basis to fair market value as of the date of the life tenant’s death.

Probate:  Life estates avoid probate.

Lady Bird Deeds:  These are sooo early 21st century! But because folks occasionally hear about these, I’ll explain. 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. There is not a shred of law to support these. We at Mason Law, PC stopped using these years ago.

Instead, I prefer to use a 99% — 1% joint tenancy deed instead. At least you have the common law and an old North Carolina Supreme Court case to rely on.

A Final Word on Trusts

As you can see, the foregoing ownership techniques pose some Medicaid drawbacks. If there is any chance property could be sold, there is the problem with a portion of the proceeds being considered owned by the potential Medicaid recipient. Some techniques pose some potential estate recovery risk. If an individual feels like she can get through five years without applying for Medicaid (either because of good health or enough other assets to cover the nursing home bill for a few years), and if she cares about the property, a trust is usually a better asset protection technique. A trust can also preserve all the tax advantages discussed above.

Yes, a trust is a bit more complicated to setup. And yes, a trust is a bit more expensive. But in the grand scheme of things, it could well be a superior solution.

You can read more about trusts here.  You can read more about Medicaid and Trusts here.

Filed Under: Medicaid, Reader Favorites, Real Property, Tax Issues Tagged With: , ,

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Understanding different ways of owning real estate is important because the way real property is titled influences Medicaid results, taxes, and probate avoidance. You may need to lockdown Medicaid, and you certainly don’t want to lose your house and land in the process. And, of course, minimizing or avoiding taxes is also nice.

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 upon Thames Taverne four hours after closing time and Sir John Falstaff and some of his barrister buddies had gotten a bit into their cups.

First, let’s break down the different types of ownership interests. Later, we’ll look at the impacts of those different ownership interests.

Fee Simple

The most common way for a single person to own real property is called fee simple. Someone with fee simple title completely owns the property. She can sell it, give it away, rent it out, 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 real property, the property is likely a tenancy in common. Think of it as 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. In some states (not North Carolina), a married couple is presumed to own property as tenants in common, although they can make other arrangements in a deed (such as a joint tenancy discussed below).

Finally, tenancies in common do not need to be equal percentages.

Example:  Paul, John, George, and Ringo owned a recording studio on expensive real property. After John and George died, the land was owned by Paul, Ringo, and each of John’s and George’s estates. Paul and Ringo eventually bought out the estates (they tired of dealing with Yoko) and they now own the land as equal tenants in common.

Joint Tenancy With Rights of Survivorship

This type of ownership might seem similar to tenancy in common, but it isn’t. The difference is that if one owner dies, the other owner (or owners) immediately takes the deceased tenant’s share pro rata.

Example: Paul and Ringo decided that it would be nice if the survivor of the two of them could automatically own the land upon the death of the first of them to die. They changed the ownership to a joint tenancy with rights of survivorship. When one of them dies, the other will automatically own the property.

Under Ye Olde English law, joint tenancies had to be equal percentages. That has not been the case for centuries in North Carolina – although that topic was subject to some debate. Sometime ago, however, the General Assembly clarified the law to state that unequal percentages in a joint tenancy were fine.

Tenancy by the Entireties

A few states (North Carolina included) have retained Ye Olde English tenancies by the entireties. Tenancies by the entireties are unique to marital status. If a married couple purchases real estate, upon the death of one spouse the other spouse automatically owns the property, free of the claims of creditors solely of the deceased spouse.

In North Carolina, if real property is conveyed to two married persons, the real property is presumed to be tenants by the entireties. If the couple wishes to own the property as tenants in common (maybe it is a second marriage) the deed must specifically say “tenants in common.” Also, neither spouse, acting alone, can change property out of a tenancy by the entireties – they’ll both have to sign the deed.

Example:  Wilma and Fred bought a home in Bedrock, North Carolina. Fred died, owing thousands of rubles in gambling debts. Wilma owns the house free and clear (although I understand she has been getting threatening phone calls). On the other hand, if Wilma and Fred had borrowed money from Barney, the home could be subject to Barney’s claims if Wilma did not repay.

By the way, if a besotted couple purchased real estate before The Big Day, they’ll own the real estate as tenants in common. If they want it to be tenants by the entireties after The Big Day, they’ll need to prepare a new deed into the two of them as “tenants by the entireties.”

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 25 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 borrower dies . . . poof! . . . so does the banker’s security. The property passes immediately and automatically to the remainder interest holders. 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.”

Next, let’s look at the Medicaid, tax and probate issues associated with these different ownership rights.

STAY TUNED: THERE WILL BE A PART TWO OF THIS ARTICLE POSTED ON AUGUST 1, 2022

Filed Under: Medicaid, Reader Favorites, Real Property, Tax Issues Tagged With: , ,