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Estate Planning for a Single Person

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If you are single, you may not think you need to plan your estate, but single people are in as much need of a plan as anyone else. Estate planning not only involves determining where your assets will go when you die — it also helps you plan for what will happen should you become incapacitated, perhaps as the result of a stroke, dementia, or injury. If you don’t make a plan, you will have no say in what happens to you or your assets.

Without a properly executed will in place when you die, your estate will be distributed according to state law. If you are single, most states provide that your estate will go to your children, parents, or other living relatives. If you have absolutely no living relatives, then your estate will go to the state. This may not be what you want to have happen to your assets. You may have charities, close friends, or particular relatives that you want to provide for after your death.

If you become incapacitated without any planning, a court will have to determine who will have the authority to handle your finances and make health care decisions for you. The court may not choose the person you would have chosen. In addition, going to court to set up a guardianship is time-consuming and expensive. With proper planning, you can execute a power of attorney and a health care proxy, which gives the people you choose the authority to act on your behalf, as well as an advance directive giving instructions on what type of care you would like. The power of attorney can also dictate exactly what powers the individual has.

Single individuals who are divorced need to make especially certain that the beneficiary designations on their IRAs, life insurance policies, and relevant bank accounts are up to date. If you don’t, your ex-spouse could get the funds. And for single people of means, opportunities to avoid state or federal estate taxes can be more limited than for married couples, although advance planning can close the gap.

In short, proper planning is a good idea for everyone. Contact your attorney to help you create an estate plan.

You Can ‘Cure’ a Medicaid Penalty Period by Returning a Gift

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Anyone who gifted assets within five years of applying for Medicaid may be subject to a penalty period, but that penalty can be reduced or eliminated if the assets are returned.

In order to be eligible for Medicaid, you cannot have recently transferred assets. Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed a penalty on people who transfer assets without receiving fair value in return.

This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.

However, Congress has created a very important escape hatch from the transfer penalty: the penalty will be “cured” if the transferred asset is returned in its entirety, or it will be reduced if the transferred asset is partially returned (although some states do not permit partial returns and only give credit for the full return of transferred assets).

Partially curing a transfer can be a “half a loaf” planning strategy for Medicaid applicants who want to preserve some assets.  In this case, a nursing home resident transfers all of his or her funds to the resident’s children (or other family members) and applies for Medicaid, receiving a long ineligibility period. After the Medicaid application has been filed, the recipients return half the transferred funds, thus “curing” half of the ineligibility period and giving the nursing home resident the funds he or she needs to pay for care until the remaining penalty period expires.

The person who returns the money needs to be the same person who received the gift; otherwise, it is not really a return of the original gift. But many people will have spent the gifted assets and no longer have any money to return. If the person who received the transfer no longer has the funds to cure, other family members could give or loan that person the funds to do so.

Returning the funds will likely mean the Medicaid applicant will have excess resources that will need to be spent down before the applicant will qualify for Medicaid. States vary on how they handle returns. Some states may consider payments made directly to the nursing home on behalf of the Medicaid applicant to be a return of funds; others require that the payments go directly to the applicant.

Your attorney can help you navigate Medicaid’s complicated rules and application process.

What Is a Fiduciary and What Are Its Obligations?

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When you need someone else to care for money or property on your behalf, that person (or organization) is called a fiduciary.  A fiduciary is a person or entity entrusted with the power to act for someone else, and this power comes with the legal obligation to act for the benefit of that other person.

Many types of positions involve being a fiduciary, including that of broker, trustee, agent under a power of attorney, guardian, executor and representative payee. An individual becomes a fiduciary by entering into an agreement to do so or by being appointed by a court or by a legal document.

Being a fiduciary calls for the highest standard of care under the law. For example, a trustee must pay even more attention to the trust investments and disbursements than for his or her own accounts. No matter what their role is or how they are appointed, all fiduciaries owe four special duties to the people for whom they are managing money or resources. A fiduciary’s duties are:

  • to act only in the interest of the person they are helping;
  • to manage that person’s money or property carefully;
  • to keep that person’s money and property separate from their own; and
  • to keep good records and report them as required. Any agent appointed by a court or government agency, for example, must report regularly to that court or agency.

Remember, your fiduciary exists to protect you and your interests. If your fiduciary fails to perform any of those four duties or generally mismanages your money or affairs, you can take legal action. The fiduciary will probably be required to compensate you for any loss you suffered because of their mismanagement.

Don’t Just Hope for an Inheritance; Get It in Writing

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A Massachusetts case demonstrates the importance of getting any agreements about inheritance in writing. The Massachusetts Appeals Court ruled that rendering services to someone in the hope or expectation that it will result in payment from an estate is not sufficient to entitle an individual to a portion of the estate.

Suzanne M. Cheney performed many services for her stepfather, Anthony R. Turco, expecting to receive a share of his estate. However, to her great disappointment, upon his passing he left her nothing. Ms. Cheney subsequently sued James F. Flood, Jr., who was both her stepfather’s lawyer and administrator of her stepfather’s estate, alleging legal malpractice and that she was entitled to recovery from the estate for the reasonable value of the services she and her family performed for Mr. Turco during the last years of his life.

The trial court judge dismissed the legal malpractice claim because Ms. Cheney and Mr. Flood had no attorney-client relationship.  The judge then dismissed the claim that there had been an implied promise of payment for services, called quantum meruit under the law, because Ms. Cheney failed to allege that she performed services for Mr. Turco with the expectation that she would be paid for them.

Ms. Cheney appealed the decision regarding the quantum meruit claim, arguing that while there was no express agreement between her and Mr. Turco that she would provide services to him in exchange for being listed in his will as beneficiary, she had always hoped that he would pay her through his estate. Unfortunately for Ms. Cheney, the court found that this gave her no legal basis for payment without an underlying contract or agreement between the parties.  The court ruled that Ms. Cheney’s hope or expectation, even though well founded, is not equivalent to entitling her to reasonable value of services under the legal concept of quantum meruit.

It seems that Ms. Cheney’s mistake was relying on a hope or expectation of receiving an inheritance under her stepfather’s estate and neither discussing it with him nor documenting a contract or agreement between the two.

Using a Minority Valuation Discount to Reduce Estate Taxes

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While the current estate tax exemption is quite high, a closely held family business may put your estate over the limit. Careful planning is necessary to lower or completely avoid the tax, and minority valuation discounts are one strategy.

Families that want to pass on their business may run into the estate tax. Estates valued at more than $11.7 million (in 2021) are subject to federal estate taxation. If you decide to give your business away before you die, you need to consider the gift tax. The lifetime federal gift tax exclusion – the amount you can give away without incurring a tax – is also $11.7 million (in 2021). You can also give any number of other people $15,000 each per year (in 2021) without the gifts counting against the lifetime limit.

One estate planning strategy for reducing estate taxes is to gift some or all of a company’s ownership to your children. When you transfer a minority interest in a company, that stake is not as valuable because the minority owner doesn’t have the right to make all the decisions or vote on important issues relevant to the company. This is called a “minority discount.” So, for example, if a company is worth $10 million, a 10 percent interest in the company would be discounted to less than $1 million. The amount of the discount depends on each individual case, but usually ranges between 10 to 40 percent of the undiscounted value.

By using discounts, you can reduce the value of your company for estate tax purposes while at the same time gift your children a percentage of the company at a reduced rate. These discounts apply even if everyone who owns a stake in the company is a family member.

In 2016, federal regulations were introduced to eliminate this type of discounting. The regulations were withdrawn in 2017, but under the new administration it is possible that they will come back.

To find out if a minority valuation discount is the right strategy for your family business, contact your attorney.

Be Careful Not to Name Minors as Your Beneficiaries

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Most people want to pass their assets to their children or grandchildren, but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.

There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator to hold and manage the money. The court proceedings will cost your estate, and the conservator may not be someone you want to oversee your children’s money. Depending on the state, the conservator may have to file annual accountings with the court, generating more costs and fees.

The other problem with naming a minor as a beneficiary is that the minor will be entitled to the funds from the conservator when he or she reaches age 18 or 21, depending on state law. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas.

The way to get around these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduating from college. You can also spread out distributions over time to children and grandchildren.

If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust.

To create a trust, consult with your attorney.

Saying Medicaid Estate Recovery Keeps Families in Poverty, Advocacy Groups Call for Abolishing It

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To qualify for Medicaid coverage of long-term care, you must satisfy very complicated financial eligibility rules—rules that often can be traps for the unwary. One of the most significant traps is Medicaid’s right to recover its expenses from your estate after you die – a practice known as “estate recovery.”

Under current Medicaid law, states are required to attempt to recoup Medicaid spending for long-term care services. Since about the only asset you’re allowed to own and still get Medicaid coverage is your home, this right of estate recovery is the state’s claim against your home. In other words, if you own a home, Medicaid is really a loan. It will pay for your care, but your house will have to be sold when you die to repay the state for the services it provided.

Now, five elder advocacy groups are calling on Congress to eliminate Medicaid estate recovery after a congressional advisory commission concluded that the practice recoups only a tiny percentage of Medicaid spending while contributing to generational poverty and wealth inequity.

“The burden of estate claims falls disproportionately on economically oppressed families and communities of color, preventing families from building wealth through home ownership, which has been historically denied to communities of color through discriminatory public policy,” the five groups – Justice in Aging, the National Academy of Elder Law Attorneys, the National Health Law Program, California Advocates for Nursing Home Reform, and the Western Center on Law & Poverty – wrote in a jointly authored Issue Brief, Medicaid Estate Claims: Perpetuating Poverty & Inequality for a Minimal Return. “Congress should amend Federal law to eliminate Medicaid estate claims. Alternatively, the law should be amended so that states have the choice of whether to use Medicaid estate claims, as recommended in a recent report to Congress by the Medicaid and CHIP Payment and Access Commission (MACPAC).”

In its March 2021 report to Congress, MACPAC recommended that Congress amend Medicaid law to make estate recovery optional for states, rather than required as it is now. The group, a non-partisan legislative branch agency that provides analysis and recommendations to Congress, the U.S. Department of Health and Human Services (HHS) and the states, also recommends that HHS set minimum standards for hardship waivers under the Medicaid estate recovery program.  Currently, it’s up to the states to decide what qualifies as “hardship.”

Pointing out that estate recovery recoups only about 0.55 percent of total fee-for-service long-term care spending, MACPAC recommends that states not be allowed to pursue recovery against any asset that is “the sole income-producing asset of survivors,” homes of “modest value,” or any estate valued under a certain dollar figure.

In their Issue Brief, the five advocacy groups go a step further. Noting that “no other public benefit program requires that correctly paid benefits be recouped from deceased recipients’ family members,” they call for the elimination of estate recovery “so that low-income families are better able to retain wealth and pass it on to future generations. Or, at a minimum, federal law should be amended to make estate claims voluntary.”

The Issue Brief details how Medicaid estate recovery keeps families in poverty, exacerbates racial wealth gaps, and runs counter to efforts to create more affordable housing.

Non-Borrowing Spouses of Reverse Mortgage Holders Receive Expanded Protections

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The federal government has expanded access to protections for spouses of reverse mortgage holders who are not named in the loan document, allowing more such spouses the ability to stay in their home if the borrowing spouse dies or moves to a care facility.

A reverse mortgage allows homeowners to use the equity in their home to take out a loan, but borrowers must be 62 years or older to qualify for this type of mortgage. Up until 2014, if one spouse was under age 62, the younger spouse had to be left off the loan in order for the couple to qualify for a reverse mortgage. But couples often did this without realizing the potentially catastrophic implications. If only one spouse’s name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.

In 2014, the Department of Housing and Urban Development developed a rule that better protected at least some surviving spouses. Under the rule, if a couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.” If the older spouse dies, the non-borrowing spouse may remain in the home, provided that the surviving spouse establishes within 90 days that he or she has a legal right to stay in the home (this could, for example, be an ownership document, a lease, or a court order). The surviving spouse also must continue to meet the other requirements of a reverse mortgage holder, such as paying property taxes and insurance premiums.

While this rule was beneficial to many non-borrowing spouses, it left some out: It applied only to loans taken out after the law became effective in 2014 and did not cover spouses of borrowers who had to leave the home due to medical reasons. In May 2021, the Federal Housing Authority issued a new rule that addresses these issues and expands the protection to the following spouses:

  • All non-borrowing spouses, not just ones whose loans began after 2014
  • Non-borrowing spouses of borrowers who had to move to a health care facility for more than 12 consecutive months
  • Spouses who were in a committed relationship with the borrower at the time of the loan, but were prevented from marrying the borrower due to their genders, provided they eventually married before the borrower’s death

The new rule also eliminates the requirement that non-borrowing spouses demonstrate that he or she has a marketable title or the legal right to remain in the home.

This rule still does not cover spouses who were not married to the borrower at the time of the loan (except in the case of same-sex marriages that were prohibited at the time). Additionally, the non-borrowing surviving spouse still cannot access the remaining loan balance.

Can Life Insurance Affect Your Medicaid Eligibility?

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When applying for Medicaid many people often forget about life insurance. But depending on the type of life insurance and the value of the policy, it can count as an asset.

In order to qualify for Medicaid, you can’t have more than $2,000 in assets (in most states). Life insurance policies are usually either “term” life insurance or “whole” life insurance. If a Medicaid applicant has term life insurance, it doesn’t count as an asset and won’t affect Medicaid eligibility because this form of life insurance does not have an accumulated cash value. On the other hand, whole life insurance accumulates a cash value that the owner can access, so it can be counted as an asset.

That said, Medicaid law exempts small whole life insurance policies from the calculation of assets. If the policy’s face value is less than $1,500, then it won’t count as an asset for Medicaid eligibility purposes. However, if the policy’s face value is more than $1,500, the cash surrender value becomes an available asset.

For example, suppose a Medicaid applicant has a whole life insurance policy with a $1,500 death benefit and a $700 cash surrender value (the amount you would get if you cash in the policy before death). The policy is exempt and won’t be used to determine the applicant’s eligibility for Medicaid. However, if the death benefit is $1,750 and the cash value is $700, the cash surrender value will be counted toward the $2,000 asset limit.

If you have a life insurance policy that may disqualify you from Medicaid, you have a few options:

  • Surrender the policy and spend down the cash value.
  • Transfer ownership of the policy to your spouse or to a special needs trust. If you transfer the policy to your spouse, the cash value would then be part of the spouse’s community resource allowance.
  • Transfer ownership of the policy to a funeral home. The policy can be used to pay for your funeral expenses, which is an exempt asset.
  • Take out a loan on the cash value. This reduces the cash value and the death benefit, but keeps the policy in place.

Before taking any actions with a life insurance policy, you should talk to your attorney to find out what is the best strategy for you.

How to Make Changes to Your Will

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As life circumstances change (births, marriages, divorces, and deaths), it may become necessary to make changes to your will.  If an estate plan is not kept up-to-date, it can become useless. The best way to make changes is either through a codicil — an amendment to the will — or by creating a new will.

While it may be tempting to just take out a pen and make changes by hand, this is not recommended. Changes will not be effective unless you use the same formalities as you did when drafting the will. And depending on state law, changes made by hand on the will may void the will altogether. If you sign your name to handwritten changes and have the changes witnessed, it is possible a court will find that the changes are valid, but there is no guarantee and there are likely to be delays with the court while your final wishes are sorted out.

If you have small changes to make to your will (e.g., changing your executor or updating a name that has changed), a codicil may be appropriate. The benefit of a codicil is that it is usually cheaper than redoing the entire will. The same rules for wills apply to codicils, which means the codicil should be dated, signed, and witnessed. Always keep a codicil with the will so your personal representative can find it easily.

If you have significant changes to make to your will (e.g., adding a spouse or removing a beneficiary) or have more than one change, it is generally better to update your will rather than write one or more codicils. The updated will should include a date and a clear statement that all other previous wills and codicils are revoked.

Before you make any changes to your will, you should consult with your attorney.

 

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