Category Archives: Probate, Estate, and Trust Administration

Guardianship – The Last Resort

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.

The benefits of guardianship are that the day-to-day management of financial affairs can be handled by the guardian of the estate, and the day-to-day management of health matters can be accomplished by the guardian of the person. Sometimes the same individual is the guardian of both the estate and the person and sometimes different persons are appointed to these roles because of their different skill sets.

Guardianship can consist of both:

  • 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)

The guardianship process is a last resort when people have not taken time to do the appropriate estate planning. I recommend that people get powers of attorney for property and powers of attorney for healthcare in place at age 18, in order to avoid guardianship in the event they become incapacitated. Remember, at age 18, you are an emancipated adult and you can make decisions for yourself and nobody else can make decisions for you, unless you authorize them to do so. It is for this reason we recommend powers of attorney whenever we can.

Don’t allow your personal and health matters to fall into guardianship. We are grateful that guardianship exists for tragic situations where proper planning has not taken place. But, now that you know that you can avoid guardianship through proper estate planning, prudence would indicate that you take the steps to do such planning.

Afraid of Long Term Care Costs in the Middle Class? Seek Asset Protection Through Long Term Care Planning in Illinois, for Middle Class Seniors and Boomers

Problem: We recommend that our clients seek to purchase long term care insurance. But, what happens if it cannot be purchased either due to unaffordable costs or underwriting prohibitions?

Solution: Medicaid is the only federal governmental program that will pay for long-term care. This will require using some of your own funds in order to properly pay your way at a long term care facility, but if planned for properly, will not result in the use of all of your funds.

Therefore, in order to access the Medicaid program in Illinois, one must take some of the following steps in order to become eligible. Be aware, this is a very complex area of planning, but these initial steps should be an overview of what you need to do to begin the process. You would be wise to consult with an Illinois elder law attorney who focuses in this type of asset protection work.

  1. Revise Powers of Attorney

First, revise any powers of attorney for property and health care that you currently have. 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.

  1. Contact a Physician

If the senior has mental competency issues, then perhaps contacting a physician to determine whether or not the senior has the requisite mental capacity to execute new estate planning documents is essential. It is unethical to have a senior sign anything that they don’t have the capability of understanding.

  1. Seek Guardianship

This step is a last resort, but may be necessary in some cases, if no powers of attorney can be executed due to diminished mental capacity.

  1. Revise Old Wills and Trusts

Revising old wills and trusts is also essential. Most wills and trusts are nothing but death plans. But, when you’re looking to gain eligibility for Medicaid for long-term care, the documents must reflect the authorization of handling long-term care planning matters rather than just distribution of assets and a death.

  1. Create a Blueprint

The next step, which is useful to seniors, and the family members that are supporting them, (and boomers that are beginning to ponder the long-term care journey), is to create a blueprint.  This blueprint will consist of breaking down considerations into life’s 3 main phases: preplanning, wait-and-see planning, and crisis planning. Preplanning is done when there is plenty of time to plan, waitand-see planning is done when there is a diagnosis, but you are not forced to leave home for long-term care, and crisis planning is when you must seek a higher level of care in an institutional facility of some type.

Quite often, after the blueprint is done and steps one through four are completed, there is nothing further to do until the situation becomes more escalated and a higher level of care may be needed by the senior or boomer, who may migrate to a crisis planning stage.

  1. Inventory Assets

Assuming that we need a higher level of care, we need to continue the work that we did in steps one through five and take the next step, which is set up work necessary to inventory assets and get an understanding of asset ownership, beneficiary designations, and ability to convert to cash in order to pay for long-term care expenses, at least for some period of time.

  1. Seek Placement in a Facility

The next step, assuming that a higher level of care is to be delivered, is to seek placement in a facility. There are many kinds of facilities, such as, independent living facilities, assisted living facilities, supportive living facilities, and nursing homes, and continuing care retirement communities (CCRC’s). I am pleased to say that, for the most part, we see these business entities delivering good care to most of our seniors. Like any other business entity some of their business contracts are fair and others are unscrupulous. It is necessary for you to have a lawyer familiar with these types of contracts to be sure that, from a legal standpoint, whatever you are signing is acceptable. Remember, some of these contracts can require you to pay $10,000 a month and may unnecessarily impose financial liability on children and other signers of these contracts.

  1. Select a Strategy

The next task is to select a strategy which will allow the senior or boomer to legally and ethically reposition his or her asset(s).  This opens up eligibility for the Medicaid benefit in Illinois without spending down to the paltry statutory level of $2,000 of assets. Remember without further planning, Illinois expects you to rely on $2,000 for the rest of your life. This is impossible because some of our seniors enter long-term care at the age of 67 and may remain in long-term care for the next 20 years. It would be nice to have more than a mere $2,000 to buy the TVs, radios, bathrobes and slippers, hearing aids, and eyeglasses that make life more tolerable.

  1. Prepare and File the Medicaid Application

The next step is to prepare and select a time, after the implementation of all asset protection strategies, to file the actual Medicaid application, which fully documents all transactions over the last 60 months. In some cases this can be very demanding task as some seniors lose documentation and forget about transactions and assets.

  1. Prepare for the Post Application Audit

The next step is to prepare for the post application audit by the State of Illinois staff members and be ready to file an appeal in the event the state objects to anything you have presented in the application. Also be ready on an annual basis to respond to the state’s request in what is called their annual redetermination process (REDE).

Summary:

I hope this gives you a simplistic view about how to qualify for Illinois Medicaid while using Medicaid asset protection strategies. Most clients are trying to preserve some assets and they are entitled to do so as a matter of exercising their civil rights as long as they do this legally and ethically.

This planning is not done by wealthy individuals, as they 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 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. Although this requires clients to use some of their own assets for their cost of long-term care, it also enables them to preserve some of their assets.  Therefore, 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.

Anthony B. Ferraro

BS-MSTax-CPA-JD

What Can Counsel Do When Assets Pass to Unintended Beneficiaries That Inherit?

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.[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.

The Tax Game Has Changed: From Estate Tax to Income Tax

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.

The Irrevocable Living Trust | Chicago Area Estate, Probate and Elder Law Attorney

Remember that a Revocable Living Trust is like a door or an open box; things can come both in and out. The next type of trust that I want to explain is the Irrevocable Living Trust (IRLT).

The irrevocable living trust differs from the revocable living trust (RLT) because once something is put into the IRLT, it is permanently there. Imagine that instead of a door that can be opened in an RLT, an IRLT is like a door that has been permanently locked. If you decide to put all of your assets in an irrevocable living trust and you need to get to them one day, you will have a big problem. Another way of putting it is is that it is like a box that can be locked.

You’re probably asking yourself “well, why would anyone want to use an irrevocable living trust then?” The truth is, an IRLT is commonly used because it has asset protection, while an RLT does not. So, since many of us want some control over our assets, IRLTs and RLTs are generally created to work simultaneously.

One example of a commonly used IRLT is a Medicaid Asset Protection Trust (MAPT). This special type of trust is used by people who need or will need to pay nursing home costs, but want to protect some their assets from being spent-down. In order to utilize this type of trust though, you must have enough money to potentially private-pay for long-term care during the entire 5-year penalty period. But sometimes, you can use this strategy and not have to be able to private pay for 5 years!

Stay tuned to explore more options.

-Anthony B. Ferraro

All of a sudden everybody wants a taxable estate! Why? Because income tax relief is now preferred over estate tax relief.

We are witnessing a sea change in it in tax planning due to two new developments:

 1) The new “portability” of the estate tax exemption for our clients

The concept of portability allows the surviving spouse (widows and widowers) to carry over the estate tax exemption of the spouse who died and add it to their own exemption amount.

However, to take advantage of this action you must “elect portability”. This means your executor, with the assistance of estate tax counsel, must handle the estate of the spouse who has died and file a federal estate tax return, even if there are no estate taxes due.

Further, this estate tax return must be filed within nine months of death. However, the Internal Revenue Service has recently issued a Revenue Procedure creating some relief for people who fail to make this filing.

Portability has the additional advantage of allowing assets to get a basis adjustment to fair market value after the date of the surviving spouse’s death. By contrast, this step up in basis is not available for assets that went into a bypass or credit shelter trust at the first spouse’s death.

Most of the readers of this article have just those kinds of trusts. Specifically, the types of trusts that will not allow step up and tax basis and probably result in more income tax being due than is necessary.

Note: This means that it’s probably a good time to review existing wills and trusts.

2) Increased demand by clients for increase in tax basis to avoid increasing capital gains tax from 15 to 20%

On January 2, 2013 the capital gains tax increased from 15% to 20%.  Furthermore, Obamacare introduced a 3.8% Medicare tax that applies to capital gains. The combination of these two taxes can result in capital gain taxes of up to 23.8%. This can be a bad result especially when an estate consists of a trust or trusts created to eliminate estate tax but no estate tax, will be due. In 2014, no estate tax will be due unless a husband and wife have a pooled net worth of approx. $10.5 million!

Therefore a review of trusts is suggested. It makes no sense to have trusts that avoid estate tax that you will never pay while those same trusts will force you to pay 23.8% in capital gains tax, when that 23.8% tax does not have to be paid at all.

In short, the only way that this can be resolved is by creating a potentially taxable estate on the death of the first spouse to die that will fall below the $10.5 million taxation threshold.

Simultaneously because the estate of the deceased spouse is left in a way that is potentially taxable to the surviving spouse, the surviving spouse gets to step up in income tax basis at their death. The net result is no estate tax and no income tax due. I would call that a pretty good days work.

I have written on this topic before but because it is so immensely important I have chosen to dedicate another article to this concept of estate tax elimination combined with income tax income tax elimination.

Still think it’s not time to review that estate plan?

Think again.

Anthony B. Ferraro
Attorney – MS Tax – CPA
847-292-1220

The Revocable Living Trust | Chicago Wills and Trusts Attorney and CPA, Anthony B. Ferraro

Hopefully by now you understand the basics on what a trust is, so we are going to look at one of the most common types of trusts, the Revocable Living Trust.  The easiest way to remember what exactly this is by remembering that “revocable” means you can change your mind, so like the meaning of the word, you can make changes to the trust.

A revocable living trust is like a door.  Things go in and things go out.  For example, if today you open a checking account, it can go in the trust.  Another few months go by, and you open a savings account.  Then you decide to buy some stock in your favorite company.  You can put it all in the name of the trust.

But what if you need to take something out of the trust?  That’s why it’s a good thing that this kind of trust is like a door!  You can take an asset out if you need to.

Additionally, if you suddenly pass away, so long as your trust has written instructions to your successor trustee, your family should not have to go through probate after you die because your trust is holding all of your assets securely.

Remember though, that this is not the only kind of trust available to you.  Revocable living trusts do not have any asset protection, and that may be something you need if you need long-term care, for example.

More on other types of trusts to follow.

-Anthony B. Ferraro

Medicaid Reform Again, But WORSE!

The SMART Act SB 2840 will reverse many of the DRA changes Elder Law attorneys fought for on behalf of our clients.  The changes include the following:

  • Legal fees are no longer exempt for 3-month backdating.
  • Abolishes spousal refusal entirely.
  • A homestead in Trust is no longer an exempt asset.
  • Except for the Community Spouse Resource Allowance ($109,560) and Minimum Monthly Needs Maintenance Allowance ($2,739, HFS is no longer limited in how much it can seek when pursuing a support order against a community spouse.
  • Reverts to the old limits on prepaid funeral contracts.
  • Reduces the home equity exemption to the minimum allowed under federal law (base figure of $500,000, adjusted annually for inflation, rather than the $750,000 adopted in the DRA rulemaking).
  • No exception for prepaid funerals for 3-month backdating.

More to come.