Category: Medicaid

gift-tax is treated differently by IRS and Medicaid

Gift-Tax treated differently by IRS and Medicaid

Different government agencies have different rules for the same things. It’s a hard lesson, especially for those who try to use their $15,000 annual gift tax exclusion for asset protection for long term care. The results are not good. The gift-tax is treated differently by IRS and Medicaid.

A recent article from The News Enterprise makes it clear: “Medicaid and IRS don’t view gift-tax-exemption in same way.”

To understand the exclusion better, let’s start by looking at what the amount is being excluded from. The IRS generally allows each person to gift a total of $11.7 million in gifts during their lifetime and after death without incurring a gift tax. There are exceptions, but this is true in most cases. However, that first $15,000 given to each person within each calendar year is excluded from the total amount.

If a woman gives her three children $15,000 each per year for five years, she has given away a total of $225,000. However, this amount is not deducted from the $11.7 million that she is allowed within her lifetime non-taxable gift amount.

However, if the same woman gave her children $16,000 each for five years, the extra $3,000 per year must be deducted from her lifetime non-taxable gift limit. Unless she reaches the $11.7 million after her death, her estate will still not pay taxes on the gifts. She will be required to file a form every year letting the IRS know that she is reducing her limit.

The $15,000 gift tax exclusion each year simplifies the ability to give gifts without cumbersome reporting requirements. However, it creates huge—and costly—problems when used in an attempt to become eligible for Medicaid. This federally funded program was created to help low-income people pay for medical and nursing home care. A person’s assets and any financial transactions made within a five-year lookback period are considered when determining eligibility.

What most people don’t know is that Medicaid does not allow the gift tax exclusion to be used for the lookback period.

Remember the woman who gave her three children $15,000 each year for five years? If she goes into a nursing facility in the fifth year, after giving her final set of gifts, the IRS won’t count any of those gifts made against her lifetime gift tax exemption. However, Medicaid will count the full amount—$225,000—as if those assets were available to pay for her care. The penalty period will make it necessary for her or her family to pay for care, possibly for five years.

To take advantage of the annual gift tax exclusion safely when Medicaid may be in the future, an estate planning attorney can create an Intentionally Defective Grantor Trust to hold assets. This is a hybrid trust used to separate assets from the grantor just enough to begin the five-year lookback period while holding property within the grantor’s taxable estate, allowing for a continuing opportunity to take advantage of the annual gift tax exclusion without triggering a new five-year look back at each gift.

The gift-tax exemption is treated differently by IRS and Medicaid because they work under different rules. Understanding what each agency requires can protect the family and those needing nursing home care without creating expensive and stressful results. In addition, some Medicaid planning techniques may work in some states but not in others.

If you would like to learn more about the gift tax, and other estate taxes, please visit our previous posts. 

Reference: The News Enterprise (Sep. 14, 2021) “Medicaid and IRS don’t view gift-tax-exemption in same way”

Photo by Nataliya Vaitkevich from Pexels

The Estate of The Union Episode 9 out now

 

www.texastrustlaw.com/read-our-books

What should women know about long-term care

What Should Women Know about Long-Term Care?

A longer retirement increases the odds of needing long-term care. An AARP study found more than 70% of nursing home residents were women, says Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care.”  What should women know about long-term care?

Living longer also increases the chances of living it alone because living longer may mean outliving a spouse. According to the Joint Center for Housing Studies of Harvard University, “In 2018, women comprised 74% of solo households age 80 and over.”

The first step is to review your retirement projections. It’s wise to look at “what-if” scenarios: What-if the husband passes early? How does that impact their retirement? What if a female client lives to 100? Will she have enough to live on? What if a single woman needs long-term care for dementia? Alzheimer’s and dementia can last for years, eating up a retiree’s nest egg.

Medicare and Medicaid. Government programs, such as Medicare and Medicaid, are complicated. For instance, Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare doesn’t pay for custodial care (at home long-term care). Medicaid pays for long-term care. However, you must qualify financially.

Planning for long-term care. If a woman has a high retirement success rate, she may want to self-insure her future long-term care expenses. This can mean setting up a designated long-term care investment account solely to be used for future long-term care expenses. If a woman has a modest degree of retirement success, she may want to lower her current expenses to save more for the future. She may also want to look at long-term care insurance.

Social Security. Women can also think about waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to ask the higher-earning spouse to delay until age 70, if possible. When the higher-earning spouse dies, the widow can step into the higher benefit. The average break-even age is generally around 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay collecting until age 70.

Estate Planning. Having a comprehensive estate plan is a must. Women (and men) should have a power of attorney (POA). A POA gives a trusted agent the ability to write checks and send money to pay for long-term care.

When it comes to long-term care, women should know their own health and the potential drain on the retirement savings. Work with a financial advisor and estate planning attorney to make sure your later years are secure.

If you would like to learn more about long-term care, please visit our previous posts.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

 

benefits of a charitable lead trust

Which Trust Is Right for You?

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report. Which trust is right for you?

What is a trust and what do trusts accomplish? Trusts are not just for the wealthy. Many families use trusts to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.

There are two basic kinds of trust. It can be difficult to know which trust is right for you and your family situation. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.

There are pros and cons for each type of trust.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: they can’t be amended once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.

However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.

Your estate planning attorney will know which trust is right for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs. If you would like to learn more about the different types of trusts available, please visit our previous posts. 

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

New Installment of The Estate of The Union Podcast

 

www.texastrustlaw.com/read-our-books

women should plan for long-term care

Women should plan for Long-Term Care

Women face some unique challenges as they get older. The Population Reference Bureau, a Washington based think tank, says women live about seven years longer than men. This living longer means planning for a longer retirement. While that may sound nice, a longer retirement increases the chances of needing long-term care. Thus, women should consider how to plan for long-term care.

Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care” explains that living longer also increases the chances of going it alone and outliving your spouse. According to the Joint Center for Housing Studies of Harvard University, in 2018 women made up nearly three-quarters (74%) of solo households age 80 and over.

Ability to pay. Long-term care is costly. For example, the average private room at a long-term care facility is more than $13,000/month in Connecticut and about $11,000/month in Naples, Florida. There are some ways to keep the cost down, such as paying for care at home. Home health care is about $5,000/month in Naples, Florida. Multiply these numbers by 1.44 years, which is the average duration of care for women. These numbers can get big fast.

Medicare and Medicaid. Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare does not pay for custodial care (at home long-term care). Medicaid pays for long-term care, but you have to qualify financially. Spending down an estate to qualify for Medicaid is one way to pay for long-term care but ask an experienced Medicaid Attorney about how to do this.

Make Some Retirement Projections. First, consider an ideal scenario where perhaps both spouses live long happy lives, and no long-term care is needed. Then, ask yourself “what-if” questions, such as What if my husband passes early and how does that affect retirement? What if a single woman needs long-term care for dementia?

Planning for Long-Term Care. If a female client has a modest degree of retirement success, she may want to decrease current expenses to save more for the future. Moreover, she may want to look into long-term care insurance.

Waiting to Take Social Security. Women can also consider waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to encourage the higher-earning spouse to delay until age 70, if that makes sense. When the higher-earning spouse dies, the surviving spouse can step into the higher benefit. The average break-even age is generally around age 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay claiming benefits until age 70.

Estate Planning. Having the right estate documents is a must. Both women and men should have a power of attorney (POA). This legal document gives a trusted person the authority to write checks and send money to pay for long-term care.

Living longer means women should plan for long-term care. Work with your estate planning attorney and financial advisor to craft a plan that ensures you are well cared for should long-term care be needed.

If you would like to learn more about long-term care, and other related issues, please visit our previous posts.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

Photo by Matthias Zomer from Pexels

Episode 6 of The Estate of The Union podcast is out now

 

www.texastrustlaw.com/read-ou-books

Qualifying for Medicaid can be complicated

Qualifying for Medicaid can be complicated

Qualifying for Medicaid can be complicated. Take this cautionary story for example. An 84-year-old retired police officer recently took a fall in his home and injured his spinal cord. He retired from the police force more than 20 years ago and received a lump sum. Currently, he gets more than $2,000 per month from his pension and Social Security.

How does this retired police officer spend down to qualify for Medicaid, since he is now a paraplegic?

State programs provide health care services in the community and in long-term care facilities. The most common, Medicaid, provides health coverage to millions of Americans, including eligible elderly adults and people with disabilities.

Medicaid is administered by states, according to federal requirements. The program is funded jointly by states and the federal government.

Nj.com’s recent article entitled “How can this retired police officer qualify for Medicaid?” advises that long-term services and supports are available to those who are determined to be clinically and financially eligible. A person is clinically eligible, if he or she needs assistance with three or more activities of daily living, such as dressing, bathing, eating, personal hygiene and walking.

Financial eligibility means that the Medicaid applicant has fewer than $2,000 in countable assets and a gross monthly income of less than $2,382 per month in 2021. The applicant’s principal place of residence and a vehicle generally do not count as assets in the calculation. If an applicant’s gross monthly income exceeds $2,382 per month, he or she can create and fund a Qualified Income Trust with the excess income that is over the limit.

The options for spending down assets to qualify for Medicaid can be complicated and are based to a larger extent on the applicant’s current and future living needs and the amount that has to be spent down.

Consult with an elder law attorney or Medicaid planning lawyer to determine the best way to spend down, in light of an applicant’s specific situation.

If you would like to learn more about Medicaid planning, please visit our previous posts.

Reference: nj.com (July 19, 2021) “How can this retired police officer qualify for Medicaid?”

Photo by Centre for Ageing Better from Pexels

Episode 6 of The Estate of The Union podcast is out now

 

www.texastrustlaw.com/read-ou-books

The Estate of The Union Episode 10 out now

Episode 6 of The Estate of The Union is out now

Episode 6 of The Estate of The Union is out now! In this episode, Brad Wiewel is joined by attorney Melissa Donovan, Certified Elder Law Attorney with The Wiewel Law Firm, to discuss the difficult and important task of coordinating care for loved ones with special needs. Melissa works with clients on special needs planning – helping individuals properly plan their estate to care for disabled loved ones.

Brad and Melissa cover the most common questions made by families with special needs. They provide the listeners with a broad understanding of the financial and estate planning strategies available to ensure your loved one is well cared for when you pass. In episode 6 of The Estate of The Union they focus on how planning differs between a minor and adult, and how easily errors can be made that could have significant consequences for your disabled child.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insight into estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

The Estate of The Union can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen. We hope you enjoy it.

New Episode of The Estate of The Union Podcast

The Wiewel Law Firm focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. 

how to distribute Inheritance to disabled child

How to Distribute Inheritance to Disabled Child

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock. How do you distribute an inheritance to a disabled child?

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how best to distribute an inheritance to his disabled child after he passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

If you would like to read more about inheritance and related topics, please visit our previous posts.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

Photo by Meruyert Gonullu from Pexels

New Episode of The Estate of The Union Podcast

 

www,texastrustlaw.com/read-ou-books

how to manage a special needs trust

How to Manage a Special Needs Trust

Special-needs trusts have been used for many years. However, there are two factors that are changing and parents need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their parents and primary caregivers. This makes planning for the long term more critical. Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts. With the changes that are occurring, it is important to understand how to manage a special needs trust.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the special needs individual live? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A Special-Needs Trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending in the special needs trust . The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed. Work closely with an Elder Law attorney who has experience educating clients on how to manage a special needs trust.

If you would like to learn more about special needs planning, please visit our previous posts. 

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

 

www,texastrustlaw.com/read-ou-books

protect assets and maintain Medicaid eligibility

Protect Assets and maintain Medicaid Eligibility

Medicaid is a welfare program with strict income and wealth limits to qualify, explains Kiplinger’s recent article entitled “You Can Keep Some Assets While Qualifying for Medicaid. Here’s How.” This is a different program from Medicare, the national health insurance program for people 65 and over that largely doesn’t cover long-term care. There are a few ways to protect assets and maintain Medicaid eligibility.

If you can afford your own care, you’ll have more options because all facilities don’t take Medicaid. Even so, couples with ample savings may deplete all their wealth for the other spouse to pay for a long stay in a nursing home. However, you can save some assets for a spouse and qualify for Medicaid using strategies from an Elder Law or Medicaid Planning Attorney.

You can allocate as much as $3,259.50 of your monthly income to a spouse, whose income isn’t considered, and still maintain Medicaid eligibility. Your assets must be $2,000 or less, with a spouse allowed to keep up to $130,380. However, cash, bank accounts, real estate other than a primary residence, and investments (including those in an IRA or 401(k)) count as assets. However, you can keep a personal residence, non-luxury personal belongings (like clothes and home appliances), one vehicle, engagement and wedding rings and a prepaid burial plot.

However, your spouse may not have enough to live on. You could boost a spouse’s income with a Medicaid-compliant annuity. These turn your savings into a stream of future retirement income for you and your spouse and don’t count as an asset. You can purchase an annuity at any time, but to be Medicaid compliant, the annuity payments must begin right away with the state named as the beneficiary after you and your spouse pass away.

Another option is a Miller Trust for yourself, which is an irrevocable trust that’s used exclusively to maintain Medicaid eligibility. If your income from Social Security, pensions and other sources is higher than Medicaid’s limit but not enough to pay for nursing home care, the excess income can go into a Miller Trust. This allows you to qualify for Medicaid, while keeping some extra money in the trust for your own care. The funds can be used for items that Medicare doesn’t cover.

These strategies are designed to protect assets or income for couples; leaving an asset to other heirs is more difficult. Once you and your spouse pass away, the state government must recover Medicaid costs from your estate, when possible. This may be through a lien on your home, reimbursement from a Miller Trust, or seizing assets during the probate process, before they’re distributed to your family.

Note that any assets given away within five years of a Medicaid application date still count toward eligibility. Property transferred to heirs earlier than that is okay. One strategy is to create an irrevocable trust on behalf of your children and transfer property that way. You will lose control of the trust’s assets, so your heirs should be willing to help you out financially, if you need it. Work with an estate planning attorney to craft a plan that protects assets and maintains Medicaid eligibility.

If you would like to learn more about Medicaid planning, please visit our previous posts. 

Reference: Kiplinger (May 24, 2021) “You Can Keep Some Assets While Qualifying for Medicaid. Here’s How”

Read our books

 

Can I be paid as a caregiver?

Can I Be Paid as a Caregiver?

AARP’s recent article entitled “Can I Get Paid to Be a Caregiver for a Family Member?” says that roughly 53 million Americans provide care without pay to an ailing or aging loved one. They do so for an average of nearly 24 hours per week. The study was done by the “Caregiving in the U.S. 2020” report by AARP and the National Alliance for Caregiving (NAC). This begs the question: Can I be paid as a caregiver?

Medicaid. All 50 states and DC have self-directed Medicaid services for long-term care. These programs let states grant waivers that allow qualified people to manage their own long-term home-care services, as an alternative to the traditional model where services are managed by an agency. In some states, that can include paying a family member as a caregiver. The benefits, coverage, eligibility, and rules differ from state to state.

Veterans have four plans for which they may qualify:

Veteran Directed Care. This plan lets qualified former service members manage their own long-term services and supports. It is available in 37 states, DC, and Puerto Rico for veterans of all ages who are enrolled in the Veterans Health Administration health care system and need the level of care a nursing facility provides but want to live at home or the home of a loved one.

Aid and Attendance (A&A) benefits. This program supplements a military pension to help cover the cost of paying for a caregiver, who may be a family member. These benefits are available to veterans who qualify for VA pensions and meet certain criteria. In addition, surviving spouses of qualifying veterans may be eligible for this benefit.

Housebound benefits. Vets who get a military pension and are substantially confined to their immediate premises because of permanent disability can apply for a monthly pension supplement.

Program of Comprehensive Assistance for Family Caregivers. This program allows for a monthly stipend to a vet’s family member to be paid as a caregiver to provide assistance with everyday activities because of a traumatic injury sustained in the line of duty on or after Sept. 11, 2001.

Other caregiver benefits through the program include the following:

  • Access to health insurance and mental health services, including counseling
  • Comprehensive training
  • Lodging and travel expenses incurred when accompanying vets going through care; and
  • Up to 30 days of respite care per year.

Payment by a family member. If the person requiring assistance is mentally sound and has sufficient financial resources, that person can pay a family member for the same services a professional home health care worker would provide.

So yes, under certain criteria, you can qualify to be paid as a caregiver. It is best to work carefully with an Elder Law attorney who has experience managing Medicaid and VA issues.

Reference: AARP (May 15, 2021) “Can I Get Paid to Be a Caregiver for a Family Member?”

Read our books

 

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact The Wiewel Law Firm to schedule a complimentary consultation.
View Blog Archives
View TypePad Blogs