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Medicaid Planning: The Fundamentals

Below is a one page summary regarding Medicaid Planning in Wisconsin that we provide our clients with when discussing Medicaid Planning (the laws regarding Medicaid Planning may be different in your State). It should be noted that, much like tax and estate planning, an experienced professional should be consulted if you are thinking about engaging in any Medicaid Planning. It is an extremely complex set of rules and requires up-to-date knowledge (all of the below information is only current and accurate as of September 2015; after such date the information may no longer be current and accurate).

Prior to Applying for Medicaid: The Lookback Period

5 years prior to the date of the Medicaid application
All gifts (or divestments) during that lookback period will cause a penalty
Penalty calculation:
- Total amount of gifts (or divestments) divided by average cost of care
  - Average cost of care is $252.95/day
- Example: You make a $20,000 gift to your child and apply for Medicaid 4 years later.
  - Penalty period: $20,000 divided by $252.95
  - Penalty period = 79.067 days (or just over 2½ months)
- Therefore, you will not qualify for Medicaid assistance for at least 79 days from the date of application and will have to arrange for care or payment for care yourself.

While Receiving Medicaid: The Resource Limits

Resource Limits for Single Persons (or if both spouses apply for Medicaid):
- Asset Limit: $2,000
- Irrevocable Burial Trust: $3,000
- Life Insurance – Face Amount: $1,500
- Income: $45/month
Resource Limits for Couples (if only one spouse is applying for Medicaid and the other spouse remains in the community):
- Assets: One-half of total countable assets
  - However, not less than $50,000 nor more than $119,220
- Income: Minimum Monthly Needs Allowance (MMNA) is $2,655/month
Exempt Assets:
- For the Medicaid Applicant –
  - A vehicle
  - Primary residence (if plan to return home or if spouse lives in home)
  - Burial space
- For Community Spouse (non-Medicaid applicant) –
  - All of the Community Spouse’s retirement assets

After You Pass Away: Estate Recovery – Under certain circumstances, the State of Wisconsin can place liens on your assets and/or recover remaining assets from your Estate after your death.

Planning Opportunities:

Self-insure
Long-term care insurance
Gifting (or divestments) either outright or in trust
Other planning opportunities (for example, purchasing annuities, life care agreements, etc.)

I hope this helps!

-Matt

The Foundation – Part 2: Probate Avoidance

Continuing with Part 2 of this three part series, I am going to briefly cover some of the most popular probate avoidance strategies. As a refresher, the purpose of this series is to cover the fundamentals and foundation of estate planning and some of what I typically go through with a client during an initial estate planning consultation, including the following topics:

Part 1 – Last Wills & Testaments and Powers of Attorney
Part 2 – Basic Probate Avoidance Strategies
Part 3 – Joint Revocable Living Trusts

For purposes of this post, it is extremely important to remember that if any of the following probate avoidance measures are used with respect to any of your assets, the distribution of those assets upon your death will NO LONGER be controlled by your Last Will & Testament. The designation or form you used to avoid probate will now control the distribution of that asset upon your death. This is one of many reasons why it is important to talk to an experienced professional when drafting your estate plan; the experienced professional can work with you to ensure that your entire estate plan (i.e., your Will, your beneficiary designations, etc.) works together to achieve your desired goals and results.

Example: The “Average” Estate

A significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property (e.g., your household furnishings, antiques, collectibles, etc.). By implementing a few of the probate avoidance strategies below, most individuals will have the peace of mind in knowing that a significant portion of their estate, if not all of it, will avoid probate.

And, even if not all of the assets avoid probate (e.g., like the car and the tangible personal property), if those remaining probate assets are below a certain threshold amount, your State may still provide a way to transfer those assets without the need for probate after your death (e.g., in Wisconsin, if you probate assets are under $50,000, they can be transferred by affidavit and probate can be avoided). This should be a goal for almost all estate plans – to at least have the value of your probate assets below the probate threshold amount in your State.

Joint Ownership

Generally, any assets held and titled as joint ownership property pass to the survivor of the joint owners outside of probate. Common assets that can be held jointly include bank accounts and real estate. However, keep in mind that the asset will pass fully to the survivor, even if you wish it to go to someone else.

Beneficiary Designations

Any assets where you can and do designate a beneficiary will pass to the beneficiary outside of probate. Common assets where beneficiary designations are used include retirement accounts (e.g., pension plans, 401(k)s, IRAs), life insurance policies and brokerage accounts. If you wish to designate a beneficiary to any of these types of accounts, you can do so by requesting a beneficiary change form from your account administrator.

Payable on Death Accounts

Similar to beneficiary designations, payable on death accounts allow you to designate a beneficiary of that particular account. If such a beneficiary is designated, that account will pass to the beneficiary outside of probate upon your death. Payable on death accounts are particularly useful when it comes to your bank accounts. Most banks (if not all) will allow you to name a beneficiary to your bank account, you just need to speak to your banker.

Transfer on Death Designations

Again, similar to beneficiary designations, transfer on death designations are used to pass interests in property upon your death to a named beneficiary without the need for probate. The most common use of transfer on death designations are for real estate and business interests. This type of probate avoidance strategy will usually involve seeing an attorney to draft the transfer on death designation.

Marital Property Agreements (with Washington Will provisions)

For married couples in some States, marital property agreements with Washington Will provisions can be used to pass all of the decedent spouse’s property to the surviving spouse upon the death of the first spouse without the need for probate. If otherwise consistent with your estate plan, this can make the time and expenses involved at the first spouse’s death much easier to cope with. However, only some States allow for this type of probate avoidance strategy. This will also require you to see an attorney to draft the agreement.

Trusts

Any assets held in trust will also pass to (or be held for) the beneficiary of the trust without the need for probate. Generally, almost any asset can be held in trust; thus, this can provide a lot of flexibility and the most overall probate avoidance. Additionally, this will also require an attorney to draft the trust agreement. In Part 3 of this series I will focus solely on trusts so be sure to check that out once I post it.

Recap: The “Average” Estate

Above I stated that a significant portion of most individuals’ estates are made up of the following assets: a house, bank accounts, retirement/brokerage accounts, life insurance, an automobile and tangible personal property. The following is a recap of the probate avoidance strategies that can be used to pass those assets to your heirs without the need for probate:

House – joint ownership, transfer on death designations, and trusts.
Bank accounts – joint ownership, payable on death accounts, and trusts.
Retirement/brokerage accounts – joint ownership, beneficiary designations, and trusts.
Life insurance – beneficiary designations and trusts.
Automobile and tangible personal property – joint ownership and trusts.

Conclusion

As you can see, there are multiple ways to avoid probate in regards to a particular asset and among your entire estate. The strategy and combination of strategies chosen will be different for every individual; some strategies may provide more advantages than other strategies depending on your individual circumstances. Additionally, many of the above probate avoidance strategies can be achieved for relatively little cost and time while saving your estate and your heirs A LOT of time and expense after you pass.

However, like I stated in Part 1, any plan starts with a good and solid foundation, and that includes your estate plan. That means that even if you engage in the above probate avoidance strategies, you still need to have a Last Will & Testament to “catch” those assets that you may have missed or that could have fallen outside the probate avoidance measures you took. Probate avoidance strategies must be integrated into an already existing solid estate plan; otherwise, the benefits and advantages such strategies provide will be diminished.

Make sure to check out Part 3 (Trusts) of this series when I post it. And, lastly, like with any topic I blog about, I am only scratching the surface of these topics, you must contact a professional in order to fully consider how these estate planning strategies will play out in your individual circumstances.

I hope this helps!

-Matt

The Monthly 5 and 5: Trusts as IRA Beneficiaries – Part 1

In this month’s installment of The Monthly 5 and 5, I will be discussing five advantages and five disadvantages of designating a trust as an IRA beneficiary. In part one below, I will discuss five advantages; I will post part two discussing five disadvantages next week. While this post will focus on IRAs, much of it may also apply to designating a trust as a beneficiary of other kinds of retirement assets. As you will read below, designating a trust as an IRA beneficiary may allow you to achieve many of your estate planning goals; but, if the trust is drafted improperly, the results could have a substantial unintended impact on your estate plan. It should be noted that the discussion below is very summarized and only covers general rules; an experienced professional should be contacted before designating a trust as a beneficiary of your IRA (or other retirement asset).

Five advantages to designating a trust as an IRA beneficiary:

1. Stretch-Out the IRA Balance

When an individual is designated as a beneficiary of an IRA and the owner of that IRA passes away, the beneficiary becomes the owner of an “inherited IRA.” With an inherited IRA, the IRC allows the beneficiary to “stretch out” the IRA balance over their life expectancy instead of being required to either withdraw all of the IRA funds within five years of the deceased owner’s death or take required minimum distributions over the deceased owner’s life expectancy (which may be much shorter if the beneficiary is much younger, i.e., the beneficiary is the owner’s kid). If only the required minimum distribution based on their own life expectancy is withdrawn every year, the balance is left to grow, thus creating more wealth to be transferred to the beneficiary.

Likewise, if a trust is set up properly and designated as a beneficiary of an IRA, this same stretch-out is allowed. The IRC allows you to “look through” the trust and base the required minimum distribution on the trust beneficiary’s life expectancy. Thus, the trust can achieve the same stretch-out discussed above as if the individual was named personally. The added bonus that the trust provides is that the beneficiary cannot cash in the entire IRA balance immediately after the death of the IRA owner; like they could if they were named personally. The IRA balance is protected by the trust and only the trustee of such trust would be allowed to cash it in or take distributions greater than those required each year. This protects the beneficiary from squandering all of the money immediately after the owner’s death on something that may not be as advantageous as saving the money for the future, which may be what the deceased owner would have wanted.

2. Defer Taxes

Another benefit of stretching out the inherited IRA over the beneficiary’s life expectancy is greater tax deferral. Since taxes on the funds in the IRA will not be paid until they are withdrawn from the IRA, that leaves more in the IRA to grow and compound, thus creating more wealth to be transferred to the beneficiary. By designating a trust as an IRA beneficiary instead of the individual personally, the trust can ensure that the beneficiary takes advantage of this tax deferral by not allowing the beneficiary to cash in the IRA immediately after the owner’s death, which the beneficiary could do if they were personally designated as the IRA beneficiary.

Additionally, suppose that the beneficiary is personally designated as the IRA beneficiary and does cash in the entire IRA immediately after the owner’s death. This may cause the beneficiary’s total income for that year to jump up into a higher tax bracket. The result: the beneficiary ends up paying more in taxes on that IRA balance than they would have had they spread it out and withdrawn it over their life expectancy instead. Again, the trust can ensure that the beneficiary does not immediately cash in the IRA and increase the overall tax liability on the IRA funds.

3. Asset Protection

If a trust is designated as beneficiary of an IRA, all of the traditional trust asset protections could apply to that IRA. This means that if the trust is properly drafted, the IRA balance may be protected from creditors, bankruptcy, and/or a divorcing spouse. While an IRA is typically afforded bankruptcy protection if the original owner of the IRA files bankruptcy, it is not afforded that same protection if a beneficiary later inherits the IRA personally and files for bankruptcy (see the U.S. Supreme Court’s 2014 decision in Clark v. Rameker). However, by properly drafting a trust and designating it as the beneficiary instead of the individual personally, the IRA could be afforded bankruptcy protection.

4. Protect Minor and/or Disabled Heirs

Another reason why individuals set up trusts is to protect and provide for their minor and/or disabled heirs. If the trust is properly drafted, it can be designated as the IRA beneficiary and those IRA funds can be protected and used accordingly to provide for any minor and/or disabled heirs. If instead the minor and/or disabled heirs are personally named as the IRA beneficiary, the IRA funds may not be managed and controlled like they would be in a trust for the minor and/or disabled heirs. Additionally, if they are designated personally as an IRA beneficiary instead of a trust, the minor heirs could get outright access to the funds at age 18 (or age 21 in some states) and the disabled heirs may lose their public benefits until they spend down the IRA funds.

5. Control Distributions

Furthermore, individuals will typically include trusts in their estate plan if they would like to have some say in, limit or completely control distributions to the beneficiaries. If properly drafted, the same can hold true for a trust that is a beneficiary of an IRA. The IRA owner may designate a trust as the IRA beneficiary because the owner wishes to control when or how the beneficiary receives the IRA distributions. This can be for a variety of reasons: to provide spendthrift protection, to transfer some of the wealth to future generations, etc. The same would not hold true if the beneficiary was personally designated as the IRA beneficiary instead of the trust.

As you read above, the advantages to designating a trust as an IRA beneficiary can be great. It can really help you accomplish your estate planning goals. However, as you will read in the second part of this post next week, there are disadvantages that need to be considered. Some of these disadvantages are caused by poor trust drafting and are avoidable, while others you are stuck with. Designating a trust as an IRA beneficiary should never be done on the whim; but, with proper professional advice and drafting, and after fully considering the advantages and disadvantages associated with designating a trust as an IRA beneficiary, you can make an informed decision. It certainly is not for everyone, but for some it is certainly necessary.

– Attorney Matthew D. Brehmer

Crummey Estate Plan

All Things Estate Planning – Putting You "In the Know"

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Medicaid Planning: The Fundamentals

The Foundation – Part 2: Probate Avoidance

The Monthly 5 and 5: Trusts as IRA Beneficiaries – Part 1