How Can I Easily Pass My Home to My Only Child? – Annapolis and Towson Estate Planning

This estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In estate planning, there are two primary questions to answer about the transfer of the home. First, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved, depends on how the daughter is added to the deed.

Adding the daughter as a joint tenant or tenant in common will not preserve the step-up basis for taxes. Ask an elder law attorney what this means in your specific situation.

A better option may be to transfer the remainder interest in the property to the daughter in this scenario and withhold a life estate for the mom.

That will preserve the step-up in basis at death.

This can also get complicated when there is an outstanding mortgage, so speak to an experienced elder law or estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

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SECURE Act has Changed Special Needs Planning – Annapolis and Towson Estate Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let us say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

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What Is a ‘Caregiver’ Agreement? – Annapolis and Towson Estate Planning

The idea that a family member or trusted friend may be paid to take care of an aging parent or sibling is a welcome one. However, most family members do not understand the legal complexity involved in privately paying for care, says the recent article “Paying a family member for care” from The Times Herald. Payments made to a family caregiver or a private caregiver can lead to a world of trouble from Medicaid and the IRS.

This is why attorneys create caregiver agreements for clients. The concept is that the care and services provided by a relative or friend would otherwise be performed by an outside person at whatever the going rates are within the person’s community. The payment should be considered a fully compensated transfer for Medicaid eligibility purposes and should not result in any penalty being imposed if it is done correctly.

This is more likely to be avoided with a formal written caregiver agreement. In some states, like Pennsylvania, a caregiver agreement is required to be sure that the payments made to the caregiver are not deemed to be a gift under Medicare rules.

The caregiver agreement must outline the services that are being provided and the rate of pay, which can be in the form of weekly, monthly or a lump sum payment. This is where it gets sticky: that payment should not be higher than what an outside provider would be paid. An excessively high payment would trigger a red flag for Medicaid and could be viewed as a gift.

Medicaid has a five-year look back period, where the applicant’s finances are examined to see if there were efforts to minimize the person’s financial assets to qualify for Medicaid. If any transfers of property or assets are made that are higher than fair market value, it is possible that it will be viewed as creating a period of ineligibility. That is why it is so important to have a contract or written agreement in place, when a family member or other person is hired to provide those services and is paid privately.

There are also income tax consequences. The caregiver is considered a household employee by the IRS. They are not considered to be an independent contractor and should not be issued a 1099 to reflect their payment. If that is done, it could be considered to be tax evasion.

Speak with an estate planning attorney about crafting a caregiving agreement and how to handle the tax issue, when privately paying for care. They will help avoid putting Medicaid eligibility in jeopardy, as well as avoiding problems with the IRS.

Reference: The Times Herald (Aug. 13, 2020) “Paying a family member for care”

 

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Social Security and Medicare and the Impact on Retiree Taxes – Annapolis and Towson Estate Planning

A 70% increase in Medicare premiums to $559 was a complete surprise to a woman who became a single taxpayer when her husband died. She felt like she was being punished for being a widow, she said in a recent article titled “Retirees, Beware These Tax Torpedoes” from Barron’s. With a 2018 modified adjusted gross income of $163,414, a combination of required minimum distributions, Social Security and her husband’s pensions, she went from being in the third-highest Medicare bracket into the second highest Medicare bracket. All it took was $414 dollars to exceed the $163,000 limit.

This is not the only tax trap awaiting unwary retirees. Lower- and middle-income taxpayers get hit by what is commonly referred to as “tax torpedoes,” as rising income during retirement triggers new taxes. That includes Social Security income, which is taxed after reaching a certain limit. The resulting marginal tax rate—as high as 40.8%—is made worse by a Medicare surtax of 0.9% on couples with taxable income exceeding $250,000. Capital gains taxes also increase, as income rises.

It may be too late to make changes for this tax-filing year, even with a three-month extension to July 15. However, there are a few steps that retirees can take to avoid or minimize these taxes for next year. The simplest one: delay spending from one year to the next and be extra careful about taking funds from after-tax accounts.

What hurts most is if you are on the borderline of a bracket. Just one wrong move, like selling a stock or taking a distribution, puts you into the next bracket. You need to plan carefully.

One thing that will not be a concern for 2020 taxes: required minimum distributions. While many retirees get pushed into tax traps because of taking large RMDs, the emergency legislation passed in response to the coronavirus crisis (the CARES Act) eliminated RMDs for this year.

However, the RMDs will be back in 2021, so now is a good time to start thinking about how to avoid any of the typical tax torpedoes. RMDs used to start at age 70½; the SECURE Act changed that to 72.

If you do not need the money from an RMD in 2021, one workaround is to take it as a qualified charitable distribution. That avoids triggering higher taxes or higher future Medicare premiums. The administrator of the tax-deferred account needs to be instructed to make a donation directly to a charity.

An even better strategy: take steps long before Medicare income limits or tax torpedoes hit. If you can, live on after-tax savings, Roth IRA accounts or inherited money. Spend that money first, before tapping into tax-deferred accounts. You can then take advantage of being in a lower tax bracket to convert money from tax-deferred money to convert to Roth IRAs.

Another story of a tax hit that was avoided: a man with an income of about $80,000 prepared to take $4,000 from a tax-deferred account for a vacation. The couple’s normal top tax bracket was 12%, but they hit the income limit on Social Security taxes. The $4,000 in additional income would have caused $3,400 in Social Security income to be taxed, making his marginal tax rate 22.2% instead of 12%. With the help of a good advisor, the couple instead took $3,000 from a Roth IRA and sold a stock position for $1,000, where there were practically no capital gains generated.

Incomes at all levels can be hit by these tax and Medicare torpedoes. A skilled advisor can help protect your retirement and Social Security funds.

Reference: Barron’s (July 6, 2020) “Retirees, Beware These Tax Torpedoes”

 

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Your Estate Plan Needs to Be Customized – Annapolis and Towson Estate Planning

The only thing worse than having no estate plan, is an estate plan created from a ‘fill-in-the-blank’ form, according to the recent article “Don’t settle for a generic estate plan” from The News-Enterprise. Compare having an estate plan created to buying a home. Before you start packing, you think about the kind of house you want and how much you can spend. You also talk with real estate agents and mortgage brokers to get ready.

Even when you find a house you love, you do not write a check right away. You hire an engineer to inspect the property. You might even bring in contractors for repair estimates. At some point, you contact an insurance agent to learn how much it will cost to protect the house. You rely on professionals, because buying a home is an expensive proposition and you want to be sure it will suit your needs and be a sound investment.

The same process goes for your estate plan. You need the advice of a skilled professional–the estate planning lawyer. Sometimes you want input from trusted family members or friends. There other times when you need the estate planning lawyer to help you get past the emotions that can tangle up an estate plan and anticipate any family dynamics that could become a problem in the future.

An estate planning attorney will also help you to avoid problems you may not anticipate. If the family includes a special needs individual, leaving money to that person could result in their losing government benefits. Giving property to an adult child to try to avoid nursing home costs could backfire, making you ineligible for Medicaid coverage and cause your offspring to have an unexpected tax bill.

Your estate planning lawyer should work with your team of professional advisors, including your financial advisor, accountant and, if you own a business, your business advisor. Think of it this way—you would not ask your real estate agent to do a termite inspection or repair a faulty chimney. Your estate plan needs to be created and updated by a skilled professional: the estate planning lawyer.

Once your estate plan is completed, it is not done yet. Make sure that the people who need to have original documents—like a power of attorney—have original documents or tell them where they can be found when needed. Keep in mind that many financial institutions will only accept their own power of attorney forms, so you may need to include those in your estate plan.

Medical documents, like advance directives and healthcare powers of attorney, should be given to the people you selected to make decisions on your behalf. Make a list of the documents in your estate plan and where they can be found.

Preparing an estate plan is not just signing a series of fill-in-the-blank forms. It is a means of protecting and passing down the estate that you have devoted a lifetime to creating, no matter its size.

Reference: The News-Enterprise (June 23, 2020) “Don’t settle for a generic estate plan”

 

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Possible Pitfalls for Special Needs Planning for Parents – Annapolis and Towson Estate Planning

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are “needs tested,” where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

Needs testing” is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

 

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Quirk in Medicare System’s Observation Status – Annapolis and Towson Estate Planning

There is a troubling quirk in the Medicare system that occurs when older patients are hospitalized and instead of being officially admitted, they are placed on “observation status” reports the article “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You” from The National Law Journal.

Observation status originally was meant to serve as a temporary status for people who were receiving medical care and tests in a hospital setting until they were either sent home or a diagnosis was made, and they were officially admitted.

However, in the past 10 years or so, the number of patients in hospitals deemed to be in observation status has increased enormously, even when patients have received a diagnosis and their doctors have admitted them to the hospital. This is a direct result of the Medicare claims review process, where hospitals risk not being paid because of inpatient services being billed without documents of certain diagnoses and levels of care.

The hospital seeks to protect itself, by designating a patient as observation status. There is no downside to the hospital, since this is covered by Medicare, just under Part B, rather than Part A.

However, for the patient, it is not that simple. First, the denial of Part A inpatient coverage means that the patient has to pay for each and every deductible and copay for each service. Prescription drugs received while the patient is in the hospital are billed separately and are not included under the Part A inpatient payment.

It gets worse. Medicare coverage for post-hospital care is denied or extremely limited for observation status patients. Medicare only covers rehab costs in a facility, if the patient was admitted to the hospital for at least three days.

Observation status days do not count towards those qualifying days. It does not matter if the treating physician had the patient admitted to the hospital, because hospitals can change the status of the patient retroactively.

Until recently, there was no recourse for patients. However, a recent class action suit in Connecticut may see that begin to change. A federal judge held that Medicare beneficiaries whose hospital stays were changed to observation status may appeal to Medicare for reimbursement of their payments to rehabilitation facilities. As a result of Alexander v. Azar, patients have the right to recover payments for their nursing home rehabilitation stays.

Patients whose doctors placed them on observation status still are not permitted to appeal.

Speak with your elder law estate planning attorney, if this scenario applies to you or family member.

Reference: The National Law Review (May 26, 2020) “Caught Paying for Rehab Due to Observation Status? Medicare May Owe You”

 

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Your Children Wish You Had an Estate Plan – Annapolis and Towson Estate Planning

It is the adult children who are in charge of aging parents when they need long-term care. They are also the ones who settle estates when parents die. Even if they cannot always come out and tell you, the recent article, “Why your children wish you had an Elder Law Estate Plan” from the Times Herald-Record spells out exactly why an elder law estate plan is so important for your loved ones.

Avoid court proceedings while living. In a perfect world, everyone over age 18 will have an advance directive, including a power of attorney, a health care proxy, and a living will. These documents appoint others to make financial, legal, and medical decisions, in case of incapacity. Without them, the children will have to get involved with time-consuming, expensive guardianship proceedings, where a judge appoints a legal guardian to make these decisions. Your life is turned over to a court-appointed guardian, instead of your children or another person of your choosing.

Avoid court proceedings after you die. If you die and assets are in your name alone, then your estate will go through probate, a court proceeding that can be time consuming and costly. Not having any assets in trusts leaves your kids open to the possibility of wills being challenged, disputes among family members and litigation that can drag on for years.

Wills in probate court are public documents. Trusts are private documents. Do you really want a stranger to access your will and learn about your assets?

An elder law estate plan also plans for the possibility of long-term care and costs. Nursing home care costs can run between $12,000—$18,000 per month. If you do not have long-term care insurance, you can create a Medicaid Asset Protection Trust (MAPT) that protects assets in the trust from nursing home costs, once the assets are in the trust for five years. The MAPT also protects assets from homecare provided by Medicaid, called “community” Medicaid, once the assets are in the trust for 30 months under a new rule that starts on October 1, 2020.

The “elder law power of attorney” has unlimited gifting powers that could save about half of a single person’s assets from the cost of nursing homes. This can be done on the eve of needing nursing home care, but it is always better to do this planning in advance.

Having a plan in place decreases stress and anxiety for adult children. They are likely busy with their own lives, working, caring for their children and coping in a challenging world. When a plan is in place, they do not have to start learning about Medicaid law, navigating their way through the court system, or wondering why their parents did not take advantage of the time they had to plan properly.

You probably do not want your children remembering you as the parents who left a financial and legal mess behind for the them to clean up. Speak with an elder law estate planning attorney to create a plan for your future. Your children will appreciate it.

Reference: Times Herald-Record (May 23, 2020) “Why your children wish you had an Elder Law Estate Plan”

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Should I Give My Kid the House Now or Leave It to Him in My Will? – Annapolis and Towson Estate Planning

Transferring your house to your children while you are alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

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