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Installment 4 of 10
In Our Series: “Long Term Care Costs for the Middle Class: 10 Steps to Asset Protection Through Medicaid in Illinois, for Middle Class Seniors and Boomers”
In this part of our ongoing series of how to deal with the looming crisis associated with long-term care costs for the middle class, I would like to talk about when it may be necessary to revise wills and trusts. Also, what should newly restated revised wills and trusts look like? First of all, we should remember that during our maturing years, most people, especially those with children, will prepare wills and trusts that deal with what happens to their assets upon death. This is a very understandable and laudable goal, especially for those people that are afraid of leaving small children behind. However, as we go beyond our maturing years and start focusing on our senior years, the focus is no longer “what happens when we die,” the focus now changes to “what happens if I don’t die and I need long-term care for a long period of time.” When that becomes the concern of someone going into their senior years, wills and trusts must be modified in few different ways.- For single persons, there needs to be the ability to withdraw assets from a revocable living trust, or various types of asset management accounts, like pay on death accounts at a bank, transfer on death accounts at a brokerage firm, and IRA accounts. The reason for this additional withdrawal power is so assets can be withdrawn from these repositories and used elsewhere in accordance with planning techniques designed to preserve assets so that eligibility for Medicaid long-term care benefits, such as nursing home cost coverage, can be achieved. This would be a satisfactory result.
- In the case of married individuals, it becomes very important to be able to not only withdraw assets from various places, but also redirect assets in the event of the death of one spouse. Specifically, if we have two spouses, but one is in a nursing home, and the other spouse, who is otherwise healthy, should die unexpectedly, the assets of the deceased spouse will be transferred to the surviving spouse and those assets could be subject to a complete Medicaid required spend down for nursing home costs. This unfortunate circumstance can be avoided if the couple restates their wills and trusts. Rather than transfer assets to the surviving spouse directly, assets can be transferred to certain special needs trusts that are created for the surviving spouse who is residing in a nursing home. This type of special transfer will allow the surviving spouse to continue to receive benefits from Medicaid for their long-term care, and at the same time enjoy the inheritance left behind by the predeceasing spouse. This would also be a satisfactory result.
Installment 3 of 10
In Our Series: “Long Term Care Costs for the Middle Class: 10 Steps to Asset Protection Through Medicaid in Illinois, for Middle Class Seniors and Boomers”
Many people ask, “What is guardianship in the state of Illinois?” Simply put, guardianship is the process of applying to a court to be able to legally assist an individual over the age of 18, if the person has a disability. A disabled person, for purposes of guardianship laws, is someone who cannot make basic life decisions or manage their own property or money. Due to the participation of the court system and the attorneys’ fees involved, this process is an expensive proposition and should be avoided at all costs, if possible. Guardianship is avoided by using other methods of surrogate decision making for disabled individuals such as powers of attorney, trusts, the Health Care Surrogate Act, and other related surrogate roles. Unfortunately, many people wait too long and do not have the authority to execute powers of attorney, trusts, etc. because they are incapacitated. In such cases, we are grateful that the guardianship court exists. Guardianship is achieved to the following general steps:- Filing of a petition for appointment of a guardian to be determined at a court hearing
- Issuance of service of summons;
- Appointment of a guardian and guardian ad litem, an unrelated individual who will be the eyes and ears of the judge in understanding the circumstances;
- Obtaining the necessary physician’s report establishing that the individual does not have decision-making authority, and;
- Giving notice to all spouses, children, siblings and agents under power of attorney so that they can concur or object with the guardianship itself.
- Uncontested guardianships: when everybody agrees with the process of the person selected, or
- Contested guardianships: when the Ward (the person that is the subject matter of the guardianship process) or someone known to the Ward may object to the guardianship, in which case the guardianship process becomes what is called a contested guardianship (which results in expensive litigation)
Installment 2 of 10
In Our Series: “Long Term Care Costs for the Middle Class: 10 Steps to Asset Protection Through Medicaid in Illinois, for Middle Class Seniors and Boomers”
In this part of our 10 installment series I would like to discuss when it is necessary to invoke the services of a physician in the estate planning, long-term care planning and eldercare journey. Obviously if there are immediate health concerns a physician should be contacted straightaway, before legal counsel is sought. However, there are circumstances where, in the process of delivering not only medical services, but also in the process of offering legal services, that we discover that the involvement of a physician is necessary. This generally arises in cases where clients come in to execute powers of attorney for property and powers of attorney for healthcare. In cases such as this, generally speaking, most clients will be able to walk into my office, introduce themselves to me explain to me what they wish to request from our law firm regarding services and engage us for those services. However there are instances in dealing with aging seniors and disabled adults where it becomes clear to me, as a lawyer, that I cannot be sure that the prospective client has full mental capacity. Sometimes, diminished capacity manifests itself by being unable to express your thoughts, comprehend thoughts that are presented, or formulate judgments based on facts that are presented. As a lawyer, it is my duty to suggest that the client be evaluated to determine the level of their capacity when I suspect that a potential client may not have the ability to comprehend what I am recommending to them. This is unfortunate, because sometimes the physician will give an opinion that indicates that the potential client no longer has the ability to make sound decisions or comprehend matters set before them. When that happens, I, as a lawyer, cannot present a document, such as powers of attorney, to such a client for signature, because I may be asking them to sign something they do not understand— which is prohibited under the professional rules of conduct for lawyers. The client’s inability to sign these documents will often result in the failure to do further planning and may create the need to seek a guardianship through the court process so somebody can act as a surrogate decision-maker for this person who has now lost their cognitive capacity. Thus, it is my recommendation that you seek counsel as early as you can in your life to obtain and put in place documents that will reflect your choice of surrogate decision-maker so that if you can no longer make decisions for yourself, your choice will prevail. Unfortunately, many of our clients do not come into our office and request powers of attorney and other advanced directives, so that later on they are left to request the court system to assist them in surrogate decision matters through a full-blown guardianship proceeding. This is very expensive, time-consuming and impersonal. Conclusion Don’t leave your decision-making authority to the court system unless it’s an absolute last resort, because this is a very expensive and impersonal process. You are better off putting in place powers of attorney for healthcare, powers of attorney for property and other advanced directives that will allow the person you choose to seamlessly proceed to make decisions for you pursuant to the guidelines you have set forth. Don’t wait until it’s too late. Coming up in our future blogs in this series:- Revise Powers of Attorney – See Previous Article
- Contact a Physician – See Above
- Seek Guardianship
- Revise Old Wills and Trusts
- Create a Blueprint
- Inventory Assets
- Seek Placement in a Facility
- Select a Strategy
- Prepare and File the Medicaid Application
- Prepare for the Post Application Audit
Installment 1 of 10
In Our Series: “Long Term Care Costs for the Middle Class: 10 Steps to Asset Protection Through Medicaid in Illinois, for Middle Class Seniors and Boomers”
Problem: We had six families of aging seniors come in to our office this week all of which had powers of attorney that amounted to nothing more than a simple document that would be much more appropriate for clients who are 25 years old. This is a devastating problem that I can correct if the aging Senior has the requisite mental capacity to execute new documents. If, however, the Senior has diminished capacity, then we are left with these almost worthless powers of attorney that do not permit any repositioning of assets in order to properly plan for long-term care, and a path to Medicaid to fund such long-term care. Solution: Revise Any Powers of Attorney and Healthcare That You Currently Have, and While You Can. Powers of Attorney for Property: Most of the powers of attorney that we see in our office, while valid, are inadequate to allow the necessary repositioning and reclassification of assets to gain eligibility to Medicaid, VA, and other governmental benefits. Your power of attorney for property must permit, at a minimum, the following powers: the transfer of assets to family members and nonfamily members, with or without compensation being received in exchange; the transfer of the personal residence; the creation, funding, and revision of revocable and irrevocable trusts; the authority to apply for various governmental benefits, including Medicare, Medicaid, VA benefits and other benefits; and the ability to change beneficiary designations on various assets. This is only a small list of must-haves in your power of attorney for property. To give you an idea of the importance of this, we attach an additional five pages of these types of powers so that every client we have has a full toolbox of resources available to carry them through their maturing years and senior years. These tools are most often needed in the senior years when long-term care planning is a necessity so as to avoid having our seniors rendered penniless due to the devastating costs of long-term care. Be careful about selecting an effective date for your power of attorney. Remember you can sign a power of attorney today that either (1) takes effect today, or (2) takes effect upon a future event, such as when your doctor determines you are unable to make financial decisions for yourself. The approach you select will depend on your particular circumstances and your family composition. Remember, anyone can create a document, but correct elder law counseling about that document will help you achieve the best results. Contact your Chicago elder law attorney or Illinois elder law attorney today to discuss this. Powers of Attorney for Healthcare: In January 2015, the State of Illinois legislature enacted a new power of attorney for healthcare. However, some bar associations have found this version of the power of attorney to be ineffective in five or six important areas. As of this moment, these defects are being cured through pending legislation in the Illinois General assembly. The healthcare power of attorney is your authority to express your wishes about your care and your end-of-life wishes. Please keep your eyes peeled to this blog for an update on the changes that are forthcoming to make this important document better in the future. Summary: I hope this gives you a simplistic view about the importance of powers of attorney in the state of Illinois. These documents are critical to enable your agent to use Medicaid asset protection strategies to qualify you for Illinois Medicaid should you need institutionalized care. Remember, most of our clients are trying to preserve some assets for a “rainy day fund” in their senior years, and they are entitled to do so as a matter of exercising their civil rights so long as they do this legally and ethically. This planning is not done by wealthy individuals, as those persons can pay their way through any costs associated with long-term care. Rather, this planning is best done by middle class individuals who have worked to accumulate some savings, only to find that the cost of long-term care will make their life’s work disappear in no time. Our goal, as asset protection attorneys for the middle class, is to allow seniors to gain access to the Medicaid program, to use some of their own assets for their cost of long-term care, but also to enable them to preserve some of their assets, so that in their senior years, after a lifetime of work, they are entitled to some dignity and some resources to make a life in a nursing home more livable. Coming up in our future blogs in this series:- Revise Powers of Attorney – See Above
- Contact a Physician
- Seek Guardianship
- Revise Old Wills and Trusts
- Create a Blueprint
- Inventory Assets
- Seek Placement in a Facility
- Select a Strategy
- Prepare and File the Medicaid Application
- Prepare for the Post Application Audit
- Revise Powers of Attorney
- Contact a Physician
- Seek Guardianship
- Revise Old Wills and Trusts
- Create a Blueprint
- Inventory Assets
- Seek Placement in a Facility
- Select a Strategy
- Prepare and File the Medicaid Application
- Prepare for the Post Application Audit
- Creditor Protection:
- Selection of Fiduciaries:
- Income Tax Impact is Now Front and Center:
- Second Marriage Planning:
- Business Succession Planning:
- Long-Term Care Planning:
[i] Resulting trusts arise when property is bought with the money of one person, but the title is taken in the name of another.[ii] The creator of the resulting trust must not intend to give the recipient a present interest.[iii]
Illinois law further provides that although there is a presumption that transfers between family members are gifts, the presumption can be overcome by showing the intentions of the family members.[iv] If the property was (1) purchased solely with the creator’s own funds, (2) the recipient did not contribute to the taxes, management, or maintenance for the property, or (3) the property was put in joint tenancy for the purpose of probate avoidance, these factors contribute to overcoming the presumption of a gift.[v]
The recipient’s understanding of the arrangement is also a factor that Illinois courts consider.[vi] If the recipient believed that she had no present interest in the property that, along with the other factors, contributes to the court’s finding a resulting trust.[vii] When a resulting trust is established, the recipient has title to the property in name only and is acting instead as a trustee. (Emphasis added).[viii]
3. Practical Applications
So, what are the practical applications of the use of the resulting trust?
The first application relates to the elimination of potential gift taxes when the unintended sole beneficiary, the surviving joint tenant, wishes to reallocate or redistribute the assets to the true intended beneficiaries of the decedent’s estate as expressed. In these cases, I think it may be possible to make a resulting trust argument to the IRS. I think the resulting trust argument would apply specifically in cases where the personal representative of the estate was listed as a joint owner on assets belonging to the decedent, despite the fact that the personal representative did not contribute any of their own money towards the purchase of the assets, nor did the personal representative assist in their maintenance or pay any of the taxes on the property.
This application and argument is further bolstered by evidence that the decedent (a relative) who passed away had expressed during his lifetime that he did not want his estate to go through probate, but merely wanted the personal representative to handle distributions to other family members, for example, in a well-executed will subsequent to the creation of the joint tenancy. We all know that gratuitous transfers will be viewed as gifts from the transferor, thereby either causing gift taxes to be paid or, at a minimum, creating a charge against their lifetime exclusion amount, assuming that the gift exceeds the annual exclusion amount. Thus, we believe that by arguing for a resulting trust, we will be able to spare the surviving joint tenant from incurring the unwanted gift taxes, or perhaps estate tax at death, by gratuitously re-conveying the assets received through joint tenancy to the intended beneficiaries described in the decedent’s will that a decedent may subsequently have prepared after creating the “temporary” or “convenience-type” joint tenancy asset with the surviving joint tenant.
A second application may arise in the handling of matters pertaining to the elderly. One may use the resulting trust argument to posit to the state Medicaid agencies that an asset held by a Medicaid applicant is not a “countable asset” because it is being held merely in a resulting trust. Of course, some practitioners of Medicaid eligibility law will argue: “Why not just make a complete return of the asset prior to application?” The implication of this argument is that the asset will be out of the Medicaid applicant’s estate; thus, no problem with ineligibility.
Generally, I would agree with this line of argument, but, there are some assets that cannot be returned at least on a timely basis. Sometimes Medicaid eligibility is something that is required immediately with greater urgency because of lack of other funds.
Furthermore, practitioners of Medicaid eligibility should be aware of the potential counter-argument by the State Medicaid agency that indicates that any asset held by the Medicaid applicant that is available, but is instead disclaimed or transferred without compensation, will result in a possible penalty for uncompensated transfers. While practitioners are well aware of this prohibition, the essence of the resulting trust argument is that the Medicaid applicant was never intended to be in possession of this asset or countable resource in the first place, thus creating the resulting trust and thus eliminating the need for a disclaimer or a compensated transfer.
4. Conclusion
In conclusion, one hopes that both the IRS and Illinois state Medicaid agency can see and agree to practical applications and usage of the resulting trust argument: 1) for avoidance of IRS imposed gift taxes on the re-distribution of assets inadvertently held by the surviving joint tenant taxpayer who erroneously came into title through joint tenancy, and 2) in the avoidance of having a State Medicaid agency consider an asset inadvertently acquired by operation of law to be a countable asset for Medicaid eligibility purposes and thereby delaying or preventing the eligibility that a senior needs.
[i] Suwalski v. Suwalski, 40 Ill. 2d 492, 495 (1968).
[ii] Id.
[iii] In re Estate of Wilson, 81 Ill.2d 349, 355 (1980).
[iv] See In re Estate of Koch, 297 Ill. App. 3d 786, 789 (1998)
[v] Ludwig v. Ludwig, 413 Ill. 43, 52 (1952).
[vi] Id.
[vii] Id.
[viii] In re Estate of Koch, 297 Ill. App. 3d at 789.
1. The Problematic Situation
You represent the personal representative of an estate where the decedent made one person their joint tenant on real property, accounts, stocks, or other assets.
It becomes clear upon reading the decedent’s will, which was prepared after the creation of the joint tenancy accounts, that the decedent did not actually intend for the co-tenant to take a 100% beneficial interest in the property at the decedent’s death. Rather through the prior conversations with the co-tenant and others, the decedent was merely trying to avoid the probate process and wanted to assign the responsibility for the re-distribution of the jointly owned assets to one person: the surviving joint-tenant.
Unfortunately, the decedent may not have realized or may have forgotten that when the first co-owner of joint tenancy property passes away, the surviving joint tenant takes title to 100% of the legal and beneficial interests in the jointly owned property.
This may create an unintended consequence where the surviving joint tenant wishes to “normalize” the inherited assets and redistribute them among the beneficiaries stated, for example, in the decedent’s will. The unintended consequence is that the surviving joint tenant will incur gift taxes (and possible estate taxes if the interest passed is large enough), upon distributing the inherited assets to the intended beneficiaries.
One possibility for mitigating the burden on the surviving joint tenant is to argue that the assets were in fact held in a “resulting trust.”
2. Illinois Law
Under Illinois law a resulting trust can be created by operation of law when property is transferred to a person who did not pay for the property, and it is implied that that person hold the property for the benefit of another person.
Resulting trusts should not to be confused with “constructive trusts,” even though they are both judicially imposed “trusts.” A constructive trust arises when a wrongdoer party has taken title to property rightfully owned by another. That party is then ordered to transfer the property back to the rightful owner. In a resulting trust, however, the party vested with the mistakenly inherited assets (for example a surviving joint tenant) is acting like a mere trustee, and did not commit any wrongdoing to obtain title to the property.
Under Illinois law, a resulting trust is a trust created by operation of law based on the intent of parties.During your stay in a hospital, your doctor and the staff must work with you to help plan for discharge from the hospital. Your input is an important part of creating a comprehensive plan for what happens after you leave the hospital setting and enter long term care. The following questions come from a document called “Your Discharge Planning Checklist” from the Centers for Medicare and Medicaid Services. We recommend using this and other checklists in working with the hospital’s staff before discharge. During your stay in a hospital, your doctor and the staff must work with you to help plan for discharge from the hospital. Your input is an important part of creating a comprehensive plan for what happens to you after you leave the hospital setting and enter long term care. The following questions come from a document called “Your Discharge Planning Checklist” from the Centers for Medicare and Medicaid Services. We recommend using this and other checklists in working with the hospital’s staff before discharge. The following questions are important considerations as you prepare to leave the hospital:
- Where will you receive care after discharge?
- Who will be helping you in the transition from the hospital to long-term care?
- What is the current status of your health? What can you do to improve it?
- What potential problems should you be aware of with regards to your health? Is there someone you could call if these problems do arise?
- Do you need medical equipment (like a walker)?
- Create “My Drug List” to write down any prescription drugs, over the counter drugs, vitamins, and herbal supplements that you need to take, along with the dosage and other pertinent information.
- Ask for written discharge instructions and a summary of your current health status. Bring this information, along with your complete “My Drug List” to follow up appointments.
- Talk to a social worker or a representative from your health plan to determine what your insurance will cover and how much you will have to pay.
- Talk to an elder law attorney if you do not know how your long term care will be covered:
-Long Term Care Insurance? Not many people have it.
-Private Pay? This can cost over $8,000 a month!
-Medicare? Does not cover long term care in a nursing home or assisted living facility.
-Medicaid? This covers long term care, but you must take planning steps to qualify based on your assets and income.
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For your information, Anthony B. Ferraro was elected President of the Illinois Chapter of NAELA, the National Association of Elder Law Attorneys. Congratulations to him.
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For years, estate planners have done what is considered traditional estate planning. They drafted plans primarily concerned with minimizing future estate tax liability and gave minimal attention to income tax consequences.
This was perfectly fine years ago when the estate tax was much more severe than the potential for income tax. This was attributable to relatively high estate tax rates, low estate tax exemption that was not indexed for inflation, and comparatively low capital gains rates.
Recently, however, Congress has tinkered with the tax system in a huge way. Accordingly, the income tax impact of estate planning is taking on greater significance.
More attention is directed towards the importance of income tax basis considerations in estate planning due to the narrowing between the estate tax rates and the income tax rates. In fact, in most estates worth less than $10.5 million, estate taxes are no longer an issue. Now, income taxes loom large, primarily because of the lack of attention on the income tax basis (i.e. cost or adjusted basis) of capital assets.
The bad news for most middle-class taxpayers is that for years they’ve been fed a steady diet of estate tax minimizing wills and trusts. Worse yet, they hang onto these outdated documents for many years, thinking they are done with their estate planning and not wanting to be bothered. Sadly, these old documents will no longer serve their intended purpose: estate tax minimization. While there will be no estate tax savings with these documents, because very few middle-class taxpayers will ever pay estate tax, the documents will unnecessarily increase income taxes for their heirs upon the liquidation of any assets.
Bottom line: the game starts anew. Let’s focus on income tax minimization for most taxpayers and forget about estate tax minimization. Unless your estate is worth $10.5 million or more as a couple (or $5.34 million as a single person), your biggest risk is overpaying income taxes due to inattention to income tax basis planning in your wills and trusts. Don’t make that mistake. Review your documents today.