INTRODUCTION – TRUSTS
Trust – a legal relationship with respect to the property where one party (the trustee) holds the property with the legal duty to manage it for the benefit of another (the beneficiary). The key distinction is that the trustee holds title to the property, but the beneficiaries are the true owners. The person who creates the trust is called the grantor, settlor, or trustor. The persons who eventually receive the principal of the trust are called the remaindermen.
Types of Trusts –
There is no shortage of jargon describing the types of trusts, e.g. Bypass, Credit Shelter, Charitable Remainder, Charitable Lead, Marital, Non-Marital, Crummey, Life Insurance, Medicaid Qualifying, GRIT, etc. It is more important to understand the purpose and intention of the trust than to focus on the jargon. The important questions to ask are:
What is the purpose or objective of this Trust?
What is the grantor trying to accomplish by use of this Trust?
A testamentary trust is one that is created in a Will and is a part of the Will document. It does not come into existence until the person passes away. A living trust (AKA inter vivos trust) is one created in a separate trust document and is in existence during the life of the grantor. In general, most estate plans can use either a testamentary or living trust.
2. A Different Way to Own Your Property
A Trust is just a different way to own property. Most of us think of “ownership” as a simple matter of our absolute possession and control of a particular property. However, you are not the sole and absolute owner of many things that you think you own.
For example, if you own a house with a mortgage, the bank has certain rights in your house and you owe legal obligations to the bank. If you don’t make your mortgage payment, the bank can foreclose and evict you. If you damage or decide to not maintain the property to the extent that you diminish the property value, the bank can also foreclose. Even if you have no mortgage, the government has a right to take your house away from you for any public purpose (e.g. building a road). This is called the right of eminent domain. If your activities on your property (e.g., a pig farm) interfere with your neighbors enjoyment of their property, they may sue you on the grounds you are creating a “nuisance.” Thus, our ownership always includes certain obligations toward others who have certain rights on property that we “own”.
Some people choose to lease a car rather than to own it. The lease gives them the right to drive the car, park it in their driveway and, in general, use it just as if they owned it. Thus, they obtain the same benefits and rights as with ownership.
Long-term care and custodial care are terms referring to assistance to a person for their daily living requirements such as dressing, walking, bathing, eating and taking medications. Trained medical personnel are, by definition, not required for such care.
Medicare is a federal health insurance program primarily for the elderly (age 65 and over). Medicaid is a federal and state health insurance program for specified groups of people meeting financial and other criteria for eligibility. Medicare does not pay for custodial care. Medigap and Medicare supplemental insurance and most private medical insurance also do not cover custodial care.
MEDICAID ELIGIBILITY FOR NURSING HOME COSTS
Another option in planning for the possibility of nursing home entry is to plan for Medicaid eligibility. With a knowledge of the complexities of the relevant law, one can usually preserve significantly more of their estate by proper planning. The following explains some of the basic law relating to Medicaid. Please realize that this area of the law is very complex and there are many nuances and exceptions that are not covered here. Legal analysis is highly dependent on the specific facts relating to each person’s circumstances.
The following abbreviations are used in this outline:
CS: community spouse; this is the spouse who continues to live at home
NHS or IS: nursing home spouse or institutionalized spouse
CSRA: community spouse resource allowance
IP: ineligibility period related to a transfer of resources
DRA: The Deficit Reduction Act of 2005
2) Eligibility Rules
In order to qualify for coverage one must meet requirements in the following categories:
a) Covered group – e.g., age 65 and over
d) Need for care
JTWRS Bank Accounts:
Bank accounts that are held with two or more names on the account as “joint owners with right of survivorship” are presumed to be 100% owned by the person applying for Medicaid. For example, Mary’s daughter, Joan, is added to Mary’s bank account as a joint owner to assist her with paying her bills. This is counted as all Mary’s funds for purposes of Medicaid eligibility. However, if the other joint owner can actually prove that the funds on balance are really his/her funds, then the presumption can be overcome. Adding someone as POA only to assist with paying bills from the account will not cause any presumption of ownership and is the preferable method to add someone to an account for this purpose.
The following are non-countable resources under Medicaid law:
a) The home is exempt if it is occupied by the applicant’s spouse. However, for a single/widowed person, the residence is only non-countable for a thirteen month period beginning in the first month that the applicant is both residing in a nursing facility and met all requirements for Medicaid eligibility. After such thirteen month period, the residence is a countable resource which will cause ineligibility.
b) One of the new DRA provisions is a new limitation on the residence exemption. A home equity interest that exceeds $500,000 will cause the applicant to be ineligible. This restriction does not apply if the community spouse is still residing in the home.
c) Some nursing homes and Continuing Care Retirement Communities (CCRC) require a substantial deposit upon entry into an independent living unit. The person usually does not receive any equity interest similar to a deed to real estate. The deposit may or may not be refundable in some amount depending on the terms of the contract. Under prior law, there was no clear rule concerning the status of such deposits as countable assets. In practice, many caseworkers interpreted such deposits as exempt under the above residence exemption. However, now the DRA specifically sets forth requirements for determination of the status of such deposits. These deposits are considered to be countable resources for purposes of Medicaid eligibility if all of the following conditions are met: 1) the person has the ability to use the entrance fee to pay for care; 2) the person is eligible for a refund if they die or leave the CCRC; 3) and the entrance fee does not confer an ownership interest.
d) Life insurance cash surrender value if the face amount of all policies is less than $1500. All term insurance is exempt.
e) Irrevocable Pre-Need Funeral contracts for burial expenses and burial plots for the family.
f) One automobile up to $4500 value or one auto of any value for the CS.
g) Certain trusts except to the extent amounts can be made available to the applicant.
h) Special exempt Medicaid annuities are non-countable resources under Medicaid law. These are annuity contracts issued by insurance companies but different than the standard policies and they must be set-up according to Medicaid regulations.
i) Household goods and personal effects in a reasonable amount.
j)Basic resource limit for an individual is $1500. The limit for a husband and wife both applying for Medicaid is $2250.
Community Spouse Resource Allowance (CSRA)
The CS is entitled to a Community Spouse Resource Allowance (CSRA) free from spend-down. The amount of this CSRA is 50% of the combined assets. This 50% cannot exceed $109,560 but there is also a minimum allowance of $21,912.
Income Eligibility Rules
In general, all of the NHS’s income must be paid to the nursing home. Medicaid pays the difference between the nursing home bill less the NHS’s income, taking into account certain allowances to said spouse. The CS is entitled to keep all of his/her income (e.g., his/her social security, pension, annuity etc..) that is payable in his/her sole name.
Determining who receives what out of the NHS’s income involves some detailed calculations. The following is an example of how this works.
Transfer of Resources
a) Pre-DRA (2/8/06) Transfer of Resources – Any transfer of assets (i.e., a gift without a return payment for the full value of the property) made by an applicant or his/her spouse during the 36 month period preceding application for Medicaid, to the extent uncompensated, incurs a period of ineligibility. The law employs a multiple step process to determine the amount of uncompensated transfers for which a period of ineligibility will be incurred, how many months of ineligibility will be assessed and the commencement date of the period(s) of ineligibility.
The procedure is as follows:
I) First, the total uncompensated values of all asset dispositions within the look-back period are aggregated. The “look-back” period, for institutionalized individuals, begins on the first date the individual is both an institutionalized individual and has applied for Medicaid. The “look-back” period is 36 months except in the case of transfers to an irrevocable trust which are subject to a 60 month look-back period.
II) Secondly, the total combined amount (determined under I ) is divided by the average monthly cost of nursing facility services (an officially determined rate) in the state determined as of the date of application for benefits, not on the date(s) of the transfer(s).
III) Thirdly, the period of ineligibility determined under the first two steps begins on the date of the first transfer.
Be careful making outright transfers. You are giving up all rights in your life savings with an unenforceable promise that your children (or other trusted persons) will hold and use this money for your benefit. Any arrangement recognizing this understanding (e.g., partnership, corporation or other writing) would be within the definition of “trust or similar legal device” and subject to the trust rules. Property in the children’s name could be lost due to divorce, bankruptcy or death. There can also be substantial estate and income tax disadvantages to an outright transfer of a residence or other property. For example, a gift transfer of your residence to a child would result in a loss of the step-up in basis in your estate and upon the later sale of the residence by the child would result in taxable gain to the child based upon your original cost. If you choose to make transfers, you should take steps to legally protect yourself and make sure you are able to pay for nursing home costs during the period of ineligibility.
LIVING TRUST TO AVOID PROBATE
a) Attorneys fees for setting up a trust will generally be lower than fees for probate.
b) The privacy of your estate will be preserved by using a living trust. The probate inventory is a public record open to inspection by anyone.
c) Avoiding the delay of probate and immediate distribution of the estate are commonly expressed advantages. However, the trustee cannot distribute the whole estate to the heirs until estate taxes and all other debts are paid. If the trustee does so, he/she will be personally liable to pay these debts out of their own funds. However, the lack of time constraints and probate requirements will certainly be avoided and the trustee in most cases will be able to complete the administration much sooner and with less work.
d) The cost of an executor’s fee may be avoided if an executor would have been appointed who would have charged a fee. In most situations, an heir or family member can be appointed executor on the condition that he/she serves without compensation.
e) A guardianship proceeding in Probate Court may also be avoided. However, an inexpensive power of attorney may also accomplish this same objective.
f) Avoidance of estate taxes is often implied as an advantage of a living trust. Although a living trust can be part of an estate plan that eliminates estate tax, this can also be accomplished with a will. Therefore, estate tax savings is clearly not an advantage of a living trust.
a) There will be present costs to create the trust and transfer costs for putting the assets into the trust.
b) There may be additional complications and requirements associated with everyday transactions once you have transferred title to all your assets into the trust. Banks, stock brokerage companies etc. may require various forms to be filled out, a copy of the trust and other assurances that the trustee is authorized to take certain actions. However, living trusts have become more commonplace in recent years and most companies can now handle trusts without too much complication.
c) Upon death, the transfer to the heirs is not automatic. Various legal documents will be needed to fulfill legal requirements.
e) The trustee is not accountable to a court and the supervision of the Probate Court is not available. Some of the functions of probate are for the executor to report to the court all receipts and disbursements, an accurate appraisal of assets, payment of bills and distribution to the heirs. If the executor misapplied some money or did not distribute according to the Will, the court would probably be aware of this and take action against the executor. A trustee of a living trust is typically not accountable in this fashion and the heirs may have no way of knowing if estate funds were misappropriated. Of course, the trust beneficiaries have a right to sue, but this will be more costly and involved as opposed to filing an appropriate motion in Probate Court.