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In most people’s experience the creation of an asset inventory may seem to consist of nothing more than creating a list of assets.
However, in many cases, nothing could be further from the truth.
Some Issues that can Complicate Your Asset Inventory
The preparation of an asset inventory will depend, in part, on what the purpose of the asset inventory is for. There are many times in life that the preparation of an asset inventory is necessary, but the purpose for which the inventory will be used can vary.
For example, it is important to create an asset inventory at various times that include but are not limited to the following:
- When you are ill, and high-cost long-term care costs may loom in the future.
- When you are looking to establish eligibility for Medicaid for long-term care in either a supportive living facility or a skilled nursing facility.
- When you’re contemplating transferring the responsibilities of conducting your affairs to a fiduciary such as an agent under power of attorney, a guardian, or a trustee.
- When you’re doing estate planning both for disability planning and death disposition.
- When you’re doing estate planning for the minimization of federal and Illinois estate taxes and income taxes
- When you are doing estate planning for asset protection purposes.
- When you’re doing estate planning to avoid probate.
- When you are attempting to refinance.
- Also, there are many other instances when an asset inventory is important especially in the commercial sector when financing is involved.
As an Elder Law attorney, I will focus momentarily on challenges faced by our clients that are seeking Medicaid for long-term care. Often, we are seeking to assist clients with specific issues involving asset inventories. In cases involving individuals who are applying for Medicaid, their asset level must be down to $2,000. Quite often the easiest way to get to those lower asset limits is to liquidate assets and convert to cash. However, in doing so, various issues arise, some of which I will describe below:
- Any liquidation of any tax qualified retirement account such as a tax qualified annuity, 401(k), IRA etc. will trigger tax, except for a few exceptions. Quite often however, our clients are not sure whether their accounts are tax qualified or not. Hence the need for a thorough asset inventory.
- The payment of debts prior to the filing of the Medicaid application for long term care, must be given adequate attention regarding the order in which debts are paid. Sometimes certain creditors have priorities over other creditors. Any failure to recognize these priorities and creditors can result in allegations of a fraudulent conveyance. Pay attention to due on sale clauses, and covenants in various contracts dealing with early prepayment.
- In the liquidation of assets, sometimes there are penalties associated with early liquidation. For example, annuities can have early withdrawal penalties and surrender charges. Sometimes notice has to be given before you can exit from the contract.
- Payment of outstanding debt such as credit card debt, mortgages and HELOC (home-equity) loans, may become an important part of your overall strategic spend-down plan when you’re seeking governmental benefits. In trying to reach the correct statutory asset limits for a spouse for example, paying off existing debt is often a wise choice in attempting to reach the correct asset limit.
- Long Term Care Insurance can and should be considered an asset and income source for certain governmental benefits, but make sure to understand when and under what circumstances the policy terms will make payment available. Some policies are very strict regarding their elimination period (which is a form of deductible before payment starts 30 days, 60 days, etc.). Also, there are often restrictions on where and what the payments can be made for.
- When seeking needs based governmental benefits like Medicaid, be sure to review of prior years’ account statements to determine whether there are prior transfers or gifts and other uncompensated transfers of cash or property that can make Medicaid eligibility impossible is such transfers were made within the past 5 years. This” lookback period” is often referred to as the 5-year Medicaid lookback period. This lookback period can be a liability when you look for Medicaid eligibility for long-term care, that results in a delay of the commencement of your monthly Medicaid payment.
- Homes and principal residences may need to be listed for sale when an individual seeks Medicaid eligibility, unless occupied by certain allowable individuals such as adult disabled children, spouses, or minor children.
- Business assets may also need to be listed for sale.
In SPOUSAL cases:
- In a spousal case, if you are going to apply for Medicaid for an ill spouse, then the ill spouse may have to liquidate or change the form of ownership of certain tax qualified assets such as IRAs and 401k. However, with IRA’s and other tax qualified retirement accounts we do not want to trigger the payment of taxes sooner than is necessary since the ill spouse may still be residing either at home or in a facility that does not take Medicaid or where no Medicaid eligibility is possible. Why pay tax to the IRS earlier than you need to?
- Eventually however you may begin the process of transferring the IRA from the ill spouse who may be entering a long-term care facility to the healthy spouse who may still be living in the community by relying on the provisions of a properly drafted power of attorney for property. However, to accomplish this, it will be necessary to have specific gifting provisions in the power of attorney for the ill spouse, to make such a transfer from the ill spouse to the healthy spouse. If such power of attorney does not exist or does not contain specific provisions allowing such gifting, it may be necessary to seek the assistance of the guardianship court to accomplish such a transfer.
- When transferring an IRA from a living ill spouse to the healthy spouse, be prepared to incur the triggering of all deferred income tax (for example say, 20% or more).
- Remember many IRAs are structured as “IRA annuities” by your financial adviser, and there may be penalties and surrender charges on the transferring of such IRA annuity or the cashing out of such an IRA annuity.
- Illinois Medicaid regulations provide that if the community spouse can remain living in the family home, then the community spouse is entitled to retain $109,560 of the couple’s nonexempt assets in addition to the family home, an automobile, personal and household effects, and Medicaid compliant prepaid burial arrangements. Because of these asset limitations, which may be exceeded under certain circumstances with careful planning that is authorized under the Medicaid regulations, it is crucial that you be thoughtful in inventorying your assets, and then transferring assets from one spouse to the other.
As we indicated at the outset, the task of preparing an asset inventory should not be that complicated.
The difficulties come in when one seeks to re-position or transfer certain assets that are found in your inventory.
Many assets have contractual constraints, deferred tax implications, or problems with access before the assets can be freely used for the benefit of you and your loved one.
Be complete in the inventory of your assets and consider seeking professional guidance to deal with any complicated assets in your asset inventory when you or your loved one is on the long- term care journey.
Anthony B. Ferraro
Elder Law and Estate Planing Attorney
Partner at DiMonte Law Firm