The Lady-Bird deed flies away, not to be missed by most Medicaid planning clients.

The Lady-Bird deed flies away, not to be missed by most Medicaid planning clients.

In the all the breathless hype over the past weeks regarding the demise of enhanced life estate—or so-called “Lady Bird”—deeds was lost a critical fact—that this technique was rarely the best option in Medicaid planning anyway.

First, the story known to some readers. After an unsuccessful attempt last year, this year the State agency which administers the Medicaid program was able to have legislation enacted which banned the future use of enhanced life estate deeds. Specifically, the legislation disallows an exemption of the home of a Medicaid recipient if it is titled to such an enhanced life estate deed recorded after June 30, 2014.

This pending date caused some attorneys to send mailings suggesting that action be taken before this “deadline” came and went.

I met with several of clients who had received these mailings. In each of these instances, I recommended that the clients not execute an enhanced life estate deed, but instead utilize a “traditional” life estate deed.

But how can this be? By definition, if the State is no longer allowing this technique, it must be most desirable, right?

Not necessarily. To understand why, the brief story not known to most readers—that of the approximately fourteen year life cycle of the enhanced life estate deed-will be helpful.

In August, 2000, the Rhode Island Department of Human Services (DHS), the State agency that administers the Medicaid program in Rhode Island, announced its intention to issue regulations which would prohibit the use of revocable living trusts holding title to a principal residence for Medicaid purposes. This was bad news, though expected, as DHS had been considering this for many years.

The reason: holding a principal residence in a revocable trust was a nearly ideal scenario. Since the trust was revocable, and the “settlors” of the trust (the property owners) were the only beneficiaries and were often trustees of the trust during their lifetimes, they essentially lost no control over their principal residence during their lifetimes.

Then why do it? Because it created, through the nomination of successor trustees, a smooth asset management technique in the event that one or both of the settlors/trustees became incapacitated. Even more importantly to clients, assuming proper titling of the property to the trust, it avoided the need for probate administration of the property upon the second of the settlors to die.

Probate in Rhode Island, assuming typical assets and a relatively intact family situation, is not the nightmare that clients have heard (or occasionally experienced as beneficiaries). Nevertheless, it turned out that this use of revocable trusts for holding title to a principal residence also had benefits for Medicaid planning. This is because, in the mid-1990s, the federal government forced Rhode Island and other states to institute so-called “estate recovery” techniques to seek to recover the cost of Medicaid following a Medicaid beneficiary’s death.

Rhode Island, like the majority of other states, opted to comply with the federal government’s requirement by limiting its estate recovery efforts to the probate estate. To expand the estate recovery to non-probate assets, Rhode Island and most states reasoned (and continue to reason), would require substantially greater expenditure of personnel and other state resources for potentially uncertain gains.

Thus, after the mid-1990s in particular, avoiding probate administration for a principal residence of a Medicaid recipient became particularly important. And since the use of revocable living trusts had all these other virtues, it became one more reason to consider their use for clients.

The Rhode Island Department of Human Service, has had been (and continues to be) fair-minded when it comes to considering people who made plans under the rules then in effect. For example, in response to comments by me and others, it “grandfathered” revocable trusts created on or before December 1, 2000, the effective date of its regulation.

Seeking an alternative, a technique known as the Lady Bird deed was imported from Florida. (Ironic, isn’t it, since most Rhode Islanders mostly mitigate in the opposite direction!) It was called a Lady Bird deed because a Florida attorney describing it used Lady Bird Johnson as a character in hypothetical fact situation.

I have always preferred to describe it by its proper name—an enhanced life deed—because it is easier to explain to a client. I find that clients generally can understand the concept of a “life estate deed”—that is, when you transfer property to a third party and reserve the ability to live in, use, enjoy, rent and do pretty much whatever you want to do with the property while you are living. (I generally prefer that the third party to whom the property is transferred is an irrevocable trust, but that’s a topic for another day.)

The modifer “enhanced” means that those rights transferred—to keep a portion of the proceeds of the property if it is sold during the life estate holder’s lifetime, or even requiring the third party’s permission for such a sale—are in fact not given away.

Got it? Well, it’s more complicated and generally took longer for clients to get their minds around than a “traditional” life estate. However, in limited situations–generally crisis planning involving single people–it was an excellent tool and hence we recommended and utilized it on a number of occasions.

However, what made it work in crisis planning—that effectively no transfer for Medicaid purposes occurred—also made it generally ill-suited to non-crisis planning. Take for example a widow—let’s call her Hope–in her early 80s in relatively good health, with no near turn plans to sell her home and with a modest amount of other assets. If Hope transfers title to her home using a traditional life estate, that transfer is subject to a potential five year “lookback period” for Medicaid eligibility should she require nursing home care.

However, if Hope utilized the enhanced life estate deed, that transfer is not subject to any potential penalty period for Medicaid eligibility purposes. That’s better, right?

Well, assume that Hope three years into the five year lookback period sells her home and moves to an assisted living facility for which she is paying privately. And then two years later, Hope suffers a stroke and requires nursing home care.

Had Hope utilized the enhanced life estate deed, 100% of the proceeds of that sale would be exposed to spenddown for nursing home costs. Conversely, had she utilized a traditional life estate—one in which she transferred an interest in the property to an adult child as trustee of an irrevocable trust—a substantial portion of the sale proceeds would be protected in the irrevocable trust from exposure for nursing home costs.

I will miss reaching into my Medicaid planning toolbox and pulling out the enhanced life estate deed to solve a problem created by a single person with little or no chance of making through a five year lookback period, and with limited non-home assets capable of getting him or her through the five year period. However, in many other circumstances—for example, a married couple or a relatively healthy single person like Hope—there were always better alternatives.

Fortunately, those alternatives still exist even after the Lady Bird deed technique flies away. However, the lack of being able to pull this tool out when needed puts more of a premium on clients, particularly single persons, to initiate planning in advance in order to get a jump on the five year lookback period for Medicaid eligibility.

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What is the Personal Liability for Obligations of an Executor, Trustee or Power of Attorney Arising from Ownership or Control of an Estate

By Fredrick P. Niemann, Esq., a Probate Estate Administration Attorney

A fiduciary can be held individually liable for obligations arising from the ownership or control of the estate or for torts committed in the course of his or her administration of the estate under New Jersey laws only if he or she is personally at fault. In other words, you’re not automatically liable for damages and legal claims just because you serve as the agent of the estate or trust. But you must be cautious as there are many exceptions to this general rule that can create unpleasant and unintended consequences to you.

If you have questions regarding a probate estate administration matter, please contact Fredrick P. Niemann, Esq. toll-free at 855-376-5291 or email him at fniemann@hnlawfirm.com.

 

Can the Executor or Administrator of an Estate Purchase the Assets of the Estate Without the Consent of the Beneficiaries?

By Fredrick P. Niemann, Esq., a New Jersey Estate Administration and Probate Attorney

The answer to this question is yes, but with conditions. New Jersey probate laws require that:

Any sale to the fiduciary, his spouse, agent or attorney, or any corporation or trust in which he or she has a substantial beneficial interest, or any transaction which is affected by a substantial conflict of interest on the part of the fiduciary, is voidable by any person interested in the estate except for a beneficiary who has consented after fair disclosure, unless:

  1. the will or a contract entered into by the decedent expressly authorized the transaction; or
  2. The transaction is approved by the court after notice to all interested persons.

 

In one case that I’m aware of, the wife was declared incompetent, and the husband was appointed as guardian. They owned a house and other property jointly, but the husband obtained a loan on commercial property titled solely in his name, which was secured by the marital home that was jointly owned with his spouse. The husband died and the plaintiffs, his children, were appointed co-guardians over their mother. The defendant-bank sought to collect its defaulted loan against the marital home as the first mortgage holder on the property. The plaintiff-children asserted that the mortgage was invalid as the husband had failed to obtain court permission before disposing of the property. The court held that the ward’s property was not vigorously protected and that the husband had acted improperly and under a conflict when he purchased the commercial property titled solely in his name. The court held that New Jersey laws were applicable because, although the bank knew of the guardianship, it had allowed the transaction anyway, which showed less than good faith on its part.

If you have questions regarding a estate administration and probate matter, please contact Fredrick P. Niemann, Esq. toll-free at 855-376-5291 or email him at fniemann@hnlawfirm.com.

 

Medicaid Member Update Clarifies How Wisconsin Will Implement New Estate Recovery Rules, Leaves Members in the Dark on Community Spouse Divestment.

A “Member Update” publication dated June 13, 2014 arrived in the mailboxes of Medicaid recipients last week. We received copies in my office on behalf of some clients. You can read a copy here. 

This update clarifies that Wisconsin’s new and draconian estate recovery provisions will not be applied against beneficiaries until August 1, 2014. It also states that life estates and revocable trusts created prior to August 1, 2014 will not be subject to estate recovery. This resolves a large degree of uncertainty as to whether life estates created many years ago, would now be subject to recovery on the death of the life estate holder. They will not.

It also clarifies that recovery from non-probate assets such as Payable on Death accounts and joint accounts will begin for recipients who die on or after August 1, 2014.

Interestingly, while the state had the opportunity to educate recipients about another critical change in its policies, specifically the rule  that prevents the spouse (“community spouse”) of a person in a nursing home or on Family Care (“institutionalized spouse”), from transferring the community spouse’s assets to anyone else until the institutionalized spouse has been on Medicaid for five years,  and while including this information in an update that went out to all recipients would have been simple, the state chose not to include this. I have already been contacted by community spouses inadvertently caught in this trap. Unlike estate recovery which the state is implementing going forward, the state has chosen to apply the new divestment penalty going back to the effective date of the Joint Finance Committee’s approval of the law, and to do so without warning. When I contacted a DHS employee about this concern a couple months ago, I was told the reason not to provide this information was the cost of sending it to all affected recipients. Well, given that the June Member Update went to everyone, that does not appear to be a valid concern.  It is disappointing that the state chooses to keep couples in the dark about this rule.

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Do Spousal Impoverishment Protections Apply to Same-sex Married Couples?

gay marriageIn a decision dated June 6, 2014, Judge Barbara Crabb has struck down Wisconsin’s constitutional amendment prohibiting same-sex marriage in Wisconsin. You can read her full decision here. As a result, many same-sex couples are happily marrying in Wisconsin. Nonetheless, the legal decision is being appealed, and the future is somewhat uncertain at this time.

So how will these newlyweds be affected if one of them needs long term care in a nursing home? Under the federal policy guidance issued by the Center for Medicare and Medicaid Services shortly after the decision of the United States Supreme Court in U.S. v. Windsor, same-sex couples whose marriage is legally recognized in in the state where the Medicaid application is made, will be treated exactly like heterosexual married couples.

This means that for those couples who now marry legally in Wisconsin, spousal impoverishment protections  will apply if one of them needs long term care Medicaid. I have written about these protections here. Also, spouses can transfer assets to each other without a divestment penalty. There is still some concern whether the marriages taking place in Wisconsin now will ultimately be recognized as legal if Judge Crabb’s decision is overturned. That concern should be resolved in due course.

As I advise all couples, from the perspective of Medicaid issues, marriage can be a double – edged sword. On the one hand, the couple has a more generous asset level than a single person. On the other hand, all of the assets belonging to either spouse are counted (with some exceptions) and subject to a maximum. On the one hand, couples can transfer assets to each other without penalty. On the other hand,  there will be estate recovery from the surviving spouse’s estate. Couples considering marriage  need to weigh the advantages and disadvantages from the Medicaid perspective if that is a concern.  I am happy to help address those questions. and am looking forward to working with same-sex spouses on these issues.

In the broader context, Attorney Ruth J. Irvings, my partner at Nelson Irvings Wessels, has considerable experience and expertise in same-sex couple counseling and estate planning. Couples may want to consider seeking legal advice from Ruth in making this decision.