As is our custom, this semiannual correspondence is intended to keep you abreast of developments in estate and elder law. The following is a brief summary of noteworthy developments since our last communication:
Nursing Home Costs Skyrocket
We are regularly seeing nursing home costs that far exceed the published average rate for the State of Michigan. Rates of $9,000 to more than 14,000 per month per person are now the norm. The rising cost of long term care makes it even more imperative that you plan in advance, update your plan regularly, and call us in the event of an emergency. The financial health of your family depends on it.
Protect Your Home in a Personal Residence Trust
Special income and property tax treatment is accorded to one's principal residence. In the elder law realm, a principal residence is not counted as an asset when determining eligibility for a number of government programs, most notably veteran's benefits and Medicaid.
Both the VA and Medicaid exempt the principal residence of the applicant. But, to be sure, the exemption of the principal residence is neither automatic nor guaranteed in all circumstances. For example, Medicaid exempts a home only if it is owned personally and not in trust. Being owned personally, and not in trust, the residence will thus pass through probate at death. And, under rules that have been effect in Michigan since 2011, Medicaid will recover the amount spent on long term care from the owner's probate estate. Fortunately a special deed avoids the eligibility/recoupment trap set under the Medicaid rules.
Ladybird deeds have become an essential part of every estate plan
A Ladybird deed transfers the home from the individual owner (and his or her spouse) to him or herself (and spouse) for life, and upon the death of the owner(s) of the life interest to the named beneficiaries (usually the couple's revocable trust). Not surprisingly, by preserving Medicaid eligibility and frustrating government's attempt to assert its claim against the home, Ladybird deeds have become an essential part of every estate plan.
Another limitation of the exemption of the principal residence is that while the home is exempt the proceeds from its sale are not. The effect of this rule on those receiving VA or Medicaid benefits is that the home cannot be sold until the owner(s)' death. The fact that a vacant residence is uninsurable requires that the family of the person receiving benefits must rent the home after the owner moves to assisted living or a nursing home. This can be a problem for families that don't have the willingness or resources to become a landlord. Rental management companies have sprouted up to fill the void, but still require a level of participation from the owner's family that some families want to avoid.
A home placed in a PRT... allows the family to sell their loved one's home after they move to assisted living or a nursing home without affecting VA or Medicaid eligibility
A Personal Residence Trust (PRT) allows for the sale of the elder's home. A home placed in a PRT at any time prior to applying for VA benefits or five years before applying for Medicaid benefits allows the family to sell their loved one's home after they move to assisted living or a nursing home without affecting VA or Medicaid eligibility.
Technically, a PRT is an Intentionally Defective Grantor Irrevocable Trust (IDGIT). Transfers to the trust are considered completed gifts for estate and gift tax purposes, but incomplete for income tax purposes (and thus termed “defective” per Internal Revenue Code Sections 671 through 679). Property transferred into a PRT is a completed gift, but the property continues to be treated as owned by the transferor for income tax purposes. This treatment allows the transferor all of the benefits of ownership including:
- The right to live in the home;
- The right to add and subtract beneficiaries;
- The transfer does not uncap the value of the home for property tax purposes and does not affect the principal residence exemption;
- Gain on the sale continues to qualify for the $250,000 for individual or $500,00 for a couple; and
- If the home is sold after death of owner, then beneficiaries will be able to obtain a step-up in basis for tax purposes.
PRTs are not for everyone. They are most appropriate for clients over the age of sixty-five who expect to live independently for at least a few years, but who are concerned that at some point may require assisted living or a nursing home and wish to protect their assets.
Advanced and Crisis Planning
Advanced planning is critical for both estate and elder law. Trusts, powers of attorneys, wills and deeds are the documents that give effect to your wishes, appoint the people you want to put in charge, avoid probate, minimize costs and potential chaos. These documents also provide the tools for future elder law planning.
You may have noticed that every one of our newsletters ends with a few words on the subject of Call Us Immediately When... We regularly remind our clients to contact us when a family member is no longer able to live independently. We have a vast array of tried and true techniques to minimize or eliminate the cost of long term care. Generally speaking, the earlier you plan the better the result, but it's virtually never too late to save.
Healthy Spouse, Ill Spouse
Special planning is available for married couples where only one of the spouses requires care. Often, the care provided by a healthy spouse allows the ill spouse to remain at home, saving the expense in-home, assisted living or nursing home care. The unexpected death of the healthy spouse would force an immediate and drastic change in the ill spouse's care plan. All of the couple's assets would be at risk if the healthy spouse simply left all of his or her assets to the ill spouse. While spouses take a vow to be there for one another in sickness and health and for richer or poorer, simply leaving everything to each other when one of the spouses is unable to live independently exposes the couple's assets to complete depletion.
One valuable strategy is to amend the healthy spouse's estate plan to leave as much of the couple's assets as possible to children, with the stipulation (in some cases stated and in other cases not) that the assets be used for the ill spouse. Assets transferred in this fashion are not counted as the ill spouse's assets and are not considered a gift that causes a period of disqualification under the three year VA look back or the five year Medicaid lookback. The ill spouse would thus qualify for all available government benefits, and the couples' assets are preserved.
Testamentary Trusts
Rather than leave assets outright to other family members, the healthy spouse could create a Testamentary Trust for the benefit of the unhealthy spouse. Assets in a testamentary trust may be used for the ill spouse but not count as an asset of such spouse for Medicaid eligibility purposes.
The healthy spouse should also consider leaving retirement account assets like IRAs directly to their children and not their spouse. Understandably, it requires a leap of faith to leave cherished retirement assets to someone other than your life partner, but doing so preserves the retirement assets. An IRA can be left directly to children or, if further control is desired, an IRA Trust.
IRA Trusts
IRAs have become a significant if not the largest asset of baby boomers. Unless they are of the Roth variety, IRAs are fully taxable to the recipient. Leaving an IRA to children can be problematic if they are not good money managers, have trouble with addiction, are in financial trouble, or in bad marriages. Potentially, the IRA could be spent without proper withholding leaving the child with a tax bill that may not be dischargeable in bankruptcy. When control of the IRA distribution is desired, an IRA trust should be established to receive the beneficiary's share. Upon the death of the IRA owner, the IRA is converted to an Inherited IRA and is disbursed at the direction of the IRA trust trustee.
While minimum distributions (RMDs) must be taken annually, distributions above the minimum are at the discretion of the trustee. A prudent IRA trustee can preserve the IRA and manage the taxable income of the beneficiary. Distributions in excess of annual RMDs assets would be made only as deemed necessary by the trustee.
Your IRA Is Your Long Term Care Policy
IRA distributions normally constitute ordinary taxable income. However, they become essentially tax-free if used to pay for long-term care. Nursing home care, assisted living costs (as long as care is received for two activities of daily living) and home health care are deductible as a medical expense to the extent they exceed 7.5% adjusted gross income. Thus, other than the 7.5% floor, IRA taxable income is almost entirely offset by the medical deduction.
Call Us Immediately When…
Call us from the hospital before you are discharged to “rehab.” While hospital discharge planners may suggest a facility, it is ultimately your right to choose the nursing home (nursing homes provide both rehabilitation and long-term care services) where you wish to continue your recovery. Hospital discharge planners often choose facilities that only accept Medicare. Since at least 90% of rehab facilities accept both Medicare and Medicaid, it would be a shame to accept a discharge to a facility that you will have to leave when your Medicare days (potentially up to 100 days) run out. Also, please call us if we haven’t seen you since 2011.
Please Say Nice Things About Us!
If you are unhappy with our service please contact our office and speak with our office manager, Kim Rapp, and we will do our best to remedy the issue. If you are happy with our service, please visit our Facebook page called “Accettura & Hurwitz: Estate and Elder Law” and/or Google Review and give us a good review so others will know of our good work.
Very truly yours,
ACCETTURA & HURWITZ
- P. Mark Accettura
- Samuel A. Hurwitz
- Rebecca A. Coyle
- Wendy Turner
- Austin R. Accettura (Law Clerk)
This Newsletter is considered general information and is not intended to constitute individual legal advice. Please contact us if you think the information herein impacts you directly. We look forward to speaking with you soon.
