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Category Archives: Estate Planning

Be Careful Not to Name Minors as Your Beneficiaries

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Most people want to pass their assets to their children or grandchildren, but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.

There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator to hold and manage the money. The court proceedings will cost your estate, and the conservator may not be someone you want to oversee your children’s money. Depending on the state, the conservator may have to file annual accountings with the court, generating more costs and fees.

The other problem with naming a minor as a beneficiary is that the minor will be entitled to the funds from the conservator when he or she reaches age 18 or 21, depending on state law. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas.

The way to get around these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduating from college. You can also spread out distributions over time to children and grandchildren.

If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust.

To create a trust, consult with your attorney.

Saying Medicaid Estate Recovery Keeps Families in Poverty, Advocacy Groups Call for Abolishing It

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To qualify for Medicaid coverage of long-term care, you must satisfy very complicated financial eligibility rules—rules that often can be traps for the unwary. One of the most significant traps is Medicaid’s right to recover its expenses from your estate after you die – a practice known as “estate recovery.”

Under current Medicaid law, states are required to attempt to recoup Medicaid spending for long-term care services. Since about the only asset you’re allowed to own and still get Medicaid coverage is your home, this right of estate recovery is the state’s claim against your home. In other words, if you own a home, Medicaid is really a loan. It will pay for your care, but your house will have to be sold when you die to repay the state for the services it provided.

Now, five elder advocacy groups are calling on Congress to eliminate Medicaid estate recovery after a congressional advisory commission concluded that the practice recoups only a tiny percentage of Medicaid spending while contributing to generational poverty and wealth inequity.

“The burden of estate claims falls disproportionately on economically oppressed families and communities of color, preventing families from building wealth through home ownership, which has been historically denied to communities of color through discriminatory public policy,” the five groups – Justice in Aging, the National Academy of Elder Law Attorneys, the National Health Law Program, California Advocates for Nursing Home Reform, and the Western Center on Law & Poverty – wrote in a jointly authored Issue Brief, Medicaid Estate Claims: Perpetuating Poverty & Inequality for a Minimal Return. “Congress should amend Federal law to eliminate Medicaid estate claims. Alternatively, the law should be amended so that states have the choice of whether to use Medicaid estate claims, as recommended in a recent report to Congress by the Medicaid and CHIP Payment and Access Commission (MACPAC).”

In its March 2021 report to Congress, MACPAC recommended that Congress amend Medicaid law to make estate recovery optional for states, rather than required as it is now. The group, a non-partisan legislative branch agency that provides analysis and recommendations to Congress, the U.S. Department of Health and Human Services (HHS) and the states, also recommends that HHS set minimum standards for hardship waivers under the Medicaid estate recovery program.  Currently, it’s up to the states to decide what qualifies as “hardship.”

Pointing out that estate recovery recoups only about 0.55 percent of total fee-for-service long-term care spending, MACPAC recommends that states not be allowed to pursue recovery against any asset that is “the sole income-producing asset of survivors,” homes of “modest value,” or any estate valued under a certain dollar figure.

In their Issue Brief, the five advocacy groups go a step further. Noting that “no other public benefit program requires that correctly paid benefits be recouped from deceased recipients’ family members,” they call for the elimination of estate recovery “so that low-income families are better able to retain wealth and pass it on to future generations. Or, at a minimum, federal law should be amended to make estate claims voluntary.”

The Issue Brief details how Medicaid estate recovery keeps families in poverty, exacerbates racial wealth gaps, and runs counter to efforts to create more affordable housing.

Non-Borrowing Spouses of Reverse Mortgage Holders Receive Expanded Protections

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The federal government has expanded access to protections for spouses of reverse mortgage holders who are not named in the loan document, allowing more such spouses the ability to stay in their home if the borrowing spouse dies or moves to a care facility.

A reverse mortgage allows homeowners to use the equity in their home to take out a loan, but borrowers must be 62 years or older to qualify for this type of mortgage. Up until 2014, if one spouse was under age 62, the younger spouse had to be left off the loan in order for the couple to qualify for a reverse mortgage. But couples often did this without realizing the potentially catastrophic implications. If only one spouse’s name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.

In 2014, the Department of Housing and Urban Development developed a rule that better protected at least some surviving spouses. Under the rule, if a couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.” If the older spouse dies, the non-borrowing spouse may remain in the home, provided that the surviving spouse establishes within 90 days that he or she has a legal right to stay in the home (this could, for example, be an ownership document, a lease, or a court order). The surviving spouse also must continue to meet the other requirements of a reverse mortgage holder, such as paying property taxes and insurance premiums.

While this rule was beneficial to many non-borrowing spouses, it left some out: It applied only to loans taken out after the law became effective in 2014 and did not cover spouses of borrowers who had to leave the home due to medical reasons. In May 2021, the Federal Housing Authority issued a new rule that addresses these issues and expands the protection to the following spouses:

  • All non-borrowing spouses, not just ones whose loans began after 2014
  • Non-borrowing spouses of borrowers who had to move to a health care facility for more than 12 consecutive months
  • Spouses who were in a committed relationship with the borrower at the time of the loan, but were prevented from marrying the borrower due to their genders, provided they eventually married before the borrower’s death

The new rule also eliminates the requirement that non-borrowing spouses demonstrate that he or she has a marketable title or the legal right to remain in the home.

This rule still does not cover spouses who were not married to the borrower at the time of the loan (except in the case of same-sex marriages that were prohibited at the time). Additionally, the non-borrowing surviving spouse still cannot access the remaining loan balance.

How to Make Changes to Your Will

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As life circumstances change (births, marriages, divorces, and deaths), it may become necessary to make changes to your will.  If an estate plan is not kept up-to-date, it can become useless. The best way to make changes is either through a codicil — an amendment to the will — or by creating a new will.

While it may be tempting to just take out a pen and make changes by hand, this is not recommended. Changes will not be effective unless you use the same formalities as you did when drafting the will. And depending on state law, changes made by hand on the will may void the will altogether. If you sign your name to handwritten changes and have the changes witnessed, it is possible a court will find that the changes are valid, but there is no guarantee and there are likely to be delays with the court while your final wishes are sorted out.

If you have small changes to make to your will (e.g., changing your executor or updating a name that has changed), a codicil may be appropriate. The benefit of a codicil is that it is usually cheaper than redoing the entire will. The same rules for wills apply to codicils, which means the codicil should be dated, signed, and witnessed. Always keep a codicil with the will so your personal representative can find it easily.

If you have significant changes to make to your will (e.g., adding a spouse or removing a beneficiary) or have more than one change, it is generally better to update your will rather than write one or more codicils. The updated will should include a date and a clear statement that all other previous wills and codicils are revoked.

Before you make any changes to your will, you should consult with your attorney.

 

You Can Stretch the Gift Tax Limit by Paying for Education or Health Care

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If you want to make a gift to family members but have exceeded the annual gifting limit, there is another way. Payments for a family member’s education or health care expenses are exempt from the gift tax.

The annual gift tax exclusion for 2020 and 2021 is $15,000. This means that any person who gave away $15,000 or less to any one individual does not have to report the gift or gifts to the IRS. Any person who gave away more than $15,000 to any one person (other than their spouse) is technically required to file a Form 709, the gift tax return.

One way for a gift to be exempted from reporting requirements, no matter the gift’s size, is to pay for someone else’s medical care or educational tuition. A payment to a school must be made directly to the school (schools include not just colleges but nursery schools, private grade schools, or private high schools). The payment must be for tuition only–it cannot cover room and board or books. Pre-payments can often be made as soon as the person is admitted to the school. However, if you contribute to someone else’s 529 college savings plan, you are subject to the $15,000 gift exclusion rule. A special regulation in the tax code enables a donor to use up five years’ worth of exclusions and gift $75,000 (in 2021) to a 529 at one time.

With regard to medical expenses, the payment must be made directly to the health care provider or to a company that provides medical insurance. You can pay for the diagnosis, cure, mitigation, treatment or prevention of disease. In some circumstances, you may also be able to pay for transportation or lodging for the person seeking medical care. If the person is reimbursed by medical insurance for the care, the payment is not exempt from the annual gifting limit.

To find out the best way to provide for your loved ones without paying gift taxes, talk to your attorney.

 

The Durable Power of Attorney: Your Most Important Estate Planning Document

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For most people, the durable power of attorney is the most important estate planning instrument available — even more useful than a will. A power of attorney allows a person you appoint — your “attorney-in-fact” or “agent” — to act in place of you – the “principal” — for financial purposes when and if you ever become incapacitated.

In that case, the person you choose will be able to step in and take care of your financial affairs. Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, your representative may have to seek court permission to take planning steps that she could implement immediately under a simple durable power of attorney.

A power of attorney may be limited or general. A limited power of attorney may give someone the right to sign a deed to property on a day when you are out of town. Or it may allow someone to sign checks for you. A general power is comprehensive and gives your attorney-in-fact all the powers and rights that you have yourself.

A power of attorney may also be either current or “springing.” Most powers of attorney take effect immediately upon their execution, even if the understanding is that they will not be used until and unless the grantor becomes incapacitated. However, the document can also be written so that it does not become effective until such incapacity occurs. In such cases, it is very important that the standard for determining incapacity and triggering the power of attorney be clearly laid out in the document itself.

However, attorneys report that their clients are experiencing increasing difficulty in getting banks or other financial institutions to recognize the authority of an agent under a durable power of attorney. A certain amount of caution on the part of financial institutions is understandable: When someone steps forward claiming to represent the account holder, the financial institution wants to verify that the attorney-in-fact indeed has the authority to act for the principal. Still, some institutions go overboard, for example requiring that the attorney-in-fact indemnify them against any loss. Many banks or other financial institutions have their own standard power of attorney forms. To avoid problems, you may want to execute such forms offered by the institutions with which you have accounts. In addition, many attorneys counsel their clients to create living trusts in part to avoid this sort of problem with powers of attorney.

While you should seriously consider executing a durable power of attorney, if you do not have someone you trust to appoint it may be more appropriate to have the probate court looking over the shoulder of the person who is handling your affairs through a guardianship or conservatorship. In that case, you may execute a limited durable power of attorney simply nominating the person you want to serve as your conservator or guardian. Most states require the court to respect your nomination “except for good cause or disqualification.”

 

Biden Administration May Spell Changes to Estate Tax and Stepped-Up Basis Rule

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A new administration usually means that tax code changes are coming. While it remains unclear exactly what tax changes President Biden’s administration will usher in, two possibilities are that it will propose lowering the estate tax exemption and eliminating the stepped-up basis on death. The first would affect only multi-millionaires, but the second could have an impact on more modest estates and their heirs.

In 2017, Republicans in Congress and President Trump doubled the federal estate tax exemption and indexed it for inflation. For the 2021 tax year, the exemption is $11.7 million for individuals and $23.4 million for couples. As long as your estate is valued at under the exemption amount, it will not pay any federal estate taxes, and the vast majority of estates do not owe any tax. President Biden has expressed an interest in lowering the estate tax exemption. It could be more than halved to $5 million or even reduced to the previous exemption of $3.5 million for individuals.

Another possible tax change is to how property is valued when it is passed on at death. “Cost basis” is the monetary value of an item for tax purposes. When determining whether a capital gains tax is owed on property, the basis is used to determine whether an asset has increased or decreased in value. For example, if you purchase a stock for $10,000, that is the cost basis. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value.

Under current law, when a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. For example, suppose you inherit a house that was purchased years ago for $50,000 and it is now worth $250,000. You will receive a step up from the original cost basis from $50,000 to $250,000. If you sell the property right away, you will not owe any capital gains taxes.

According to an article in the New York Times, the current administration may propose to eliminate the basis step-up rule. In the past it was difficult to determine the original cost basis of some property, but in the digital age that information is more easily gathered. The change could result in tax increases for some people inheriting property that has risen significantly in value.

Another question is whether either of these changes will be made retroactively. It is unlikely, but possible, that if Congress changes these rules later in the year, they could be made retroactive to the first of the year.

If you are concerned about these rules changing, a trust may be a good way to protect your estate. Property in a trust passes outside of probate, and there are specific types of trusts that are designed to protect assets against estate taxes and capital gains. Talk to your attorney to determine if a trust is right for you.

Tax experts agree that while changes to the tax code are likely, they probably won’t happen right away. The coronavirus pandemic and the recession it has triggered mean that Congress has other priorities at the moment.

Married Couples Need an Estate Plan

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Don’t assume your estate will automatically go to your spouse when you die. If you don’t have an estate plan, your spouse may have to share your estate with other family members.

If you die without an estate plan, the state will decide where your assets go. Each state has laws that determine what will happen to your estate if you don’t have a will. If you are married, most states award one-third to one-half of your estate to your spouse, with the rest divided among your children or, if you don’t have children, to other living relatives such as your parents or siblings.

In addition, without an estate plan, you need to worry about what could happen if you become incapacitated. While your spouse may be able to access your joint bank accounts and make health care decisions for you, what happens if something happens to your spouse? It is important to have back-up plans. And even if your spouse is fine, depending on how your finances are set up, your spouse may not be able to access everything without a power of attorney authorizing it.

To avoid this, it is important to make sure you have estate planning documents in place. The most basic estate planning document is a will. If you do not have a will directing who will inherit your assets, your estate will be distributed according to state law, which, as noted, gives only a portion of your estate to your spouse. If you have children, a will is also where you can name a guardian for your children.

You may also want a trust to be a part of your estate plan.  It permits you to name someone to manage your financial affairs. You can name one or more people to serve as co-trustee with you so that you can work together on your finances. This allows them to seamlessly take over in the event of your incapacity. Trusts have many options for how they can be structured and what happens with your property after your death. There are several different reasons for setting up a trust. The most common one is to avoid probate. If you establish a revocable living trust that terminates when you die, any property in the trust passes immediately to the beneficiaries. This can save your beneficiaries time and money. Certain trusts can also result in tax advantages both for the donor and the beneficiary. These could be “credit shelter” or “life insurance” trusts. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid.

The next most important document is a durable power of attorney. A power of attorney allows a person you appoint — your “attorney-in-fact” or “agent” — to act in your place for financial purposes if and when you ever become incapacitated. Without it, if you become disabled or even unable to manage your affairs for a period of time, your finances could become disordered and your bills not paid, and this would place a greater burden on your family. They might have to go to court to seek the appointment of a conservator, which takes time and money, all of which can be avoided through a simple document.

Similar to a durable power of attorney, a health care proxy appoints an agent to make health care decisions for you when you can’t do so for yourself, whether permanently or temporarily. Again, without this document in place, your family members might be forced to go to court to be appointed guardian. Include a medical directive to guide your agent in making decisions that best match your wishes.

Do not assume your spouse is automatically protected when you die. Consult with your attorney to make sure you have all the estate planning documents you need.

Moving to a New State? Be Sure to Update Your Estate Plan

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While legally you may not need all-new estate planning documents if you move to a different state, you should have your documents reviewed by a local attorney in your new home.

The Constitution of the United States requires that states give “full faith and credit” to the laws of other states. This means that your will, trust, durable power of attorney, and health care proxy executed in one state should be honored in every other state. While that’s the law, the practical realties are different and depend on the document.

Your will should still be valid in the new state, but there may be differences in the new state’s laws that make certain provisions of the will invalid. The same is true of revocable trusts.

This is less true of durable powers of attorney and health care directives. While they should be honored from state to state, sometimes banks, medical professionals, and financial and health care institutions don’t accept documents and forms with which they are not familiar. In addition, the execution requirements may be different depending on the state. Some states require witnesses on durable powers of attorney and others don’t. A state requiring witnesses may not allow a power of attorney without them to be used to convey real estate even though the document is perfectly valid in the state in which it was executed. In the case of health care proxies, other states may use different terms for the document, such as “durable power of attorney for health care” or “advance directive.” (And the people reviewing your power of attorney or health care proxy may not be well versed in constitutional law.)

Moving is a good excuse to consult an attorney to make sure your estate plan in general is up to date. Other changes in circumstances such as a change in income or marital status can also affect your estate plan. In addition, there may be practical changes you will want to make. For example, you may want to change your trustee or agent under a power of attorney based on which family members are closer in proximity.

For all these reasons, when moving out of state it’s wise to have an attorney in the new state review your estate planning documents.`

Your Medical Directive

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Any complete estate plan should include a medical directive. This term may encompass a number of different documents, including a health care proxy, a durable power of attorney for health care, a living will, and medical instructions. The exact document or documents will depend on your state’s laws and the choices you make.

Both a health care proxy and a durable power of attorney for health care designate someone you choose to make health care decisions for you if you are unable to do so yourself. A living will instructs your health care provider to withdraw life support if you are terminally ill or in a vegetative state. A broader medical directive may include the terms of a living will, but will also provide instructions if you are in a less serious state of health, but are still unable to direct your health care yourself.

 

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