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Purchase of Exempt Assets

What is it?
What is meant by the phrase "purchase of exempt assets?"

To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits, which vary from state to state. In determining your eligibility for Medicaid, a state may add up only your countable resources; it cannot consider income and assets that are exempt under the law. Briefly, countable assets may be defined as anything valuable you own that is not exempt by your state's law or otherwise made inaccessible to you. Consequently, it has become standard practice for a Medicaid applicant to use countable resources to purchase exempt assets.

Which assets are exempt?
Exempt assets are those that do not affect your eligibility for Medicaid. (In Medicaid lingo, exempt assets are not countable.) Under federal guidelines, each state composes a list of exempt assets, which include the following:
  • Equity in your principal home up to your state's exempt asset limit (all equity is exempt if you, your spouse, or your minor, disabled, or blind child resides there)
  • Household furnishings, jewelry, and personal effects (though some states limit these items)
  • Burial plots for the Medicaid applicant and immediate members of family
  • Prepaid, noncancelable burial contracts
  • One automobile (for use by you and your family)
  • Term life insurance policies
  • Cash value of life insurance policies, provided the face value does not exceed $1,500
Example(s): If Medicaid applicant George and his wife, Martha, own a principal home worth $400,000, one car, and a term life insurance policy of $300,000, then none of these assets will affect George's eligibility for Medicaid--they are all exempt.

How is this strategy useful in Medicaid planning?
By spending countable assets (such as cash) on exempt assets (like a car), you are decreasing the level of your countable assets, which increases your chances of qualifying for Medicaid. At the same time, you are improving the quality of life for your at-home spouse. He or she can enjoy a new car, a paid-off mortgage on the principal home, or a new roof on the house. Clearly, however, this strategy is most useful if you have a spouse or other eligible family member residing in your family home.

What, specifically, should you purchase?
Basically, you should review your state's list of exempt assets and purchase any items you find useful. Moreover, you should pay off your debts. Remember, a transfer of assets is not prohibited if you are getting something of equal fair market value in return for the assets you have transferred. You may wish to consider spending your countable assets in the following manner:

Buy a home
Since your principal residence is an exempt asset while you live there or if you intend to return there, or if you're married and your spouse resides there, you should consider purchasing a house or a condominium if you presently rent. It makes no difference whether the house costs $45,000 or $245,000. You'll want to make sure that title to the house stands in the name of the healthy spouse.

This is not the best asset for everyone, however. For instance, home ownership (with all of its accompanying repairs and upkeep) may be impractical for an elderly spouse whose partner is in a nursing home. Also, it may or may not be the right move if you are single.
 
Make home improvements and repairs
You can use countable assets to improve your exempt home in a number of ways, including constructing an addition, repairing the driveway, replacing the roof, buying a new furnace, or adding handicap ramps.

Example(s): Assume Nicholas and Sandra are an elderly married couple with joint assets of $140,000, plus a house. When Nicholas enters a nursing home, the state determines that Sandra can keep the house (since it is exempt and she resides there) as well as one-half of the remaining assets (or $70,000). Because Nicholas owns $70,000 worth of countable assets, however, he will not qualify for Medicaid until he has "spent down" this money to $2,000, which is the threshold amount of assets his state allows for Medicaid applicants.

Example(s): Instead of using his $70,000 to pay nursing home bills, Nicholas can give an amount to his wife up to the limit of their state's maximum community spouse resource allowance and then he can use the remainder to add aluminum siding to the family house, add insulation, renovate the kitchen, add handicap ramps, and tend to the landscaping. When the money is spent, he can apply for Medicaid. Thus, money that would have been consumed by nursing home bills can, instead, be sheltered in the house.

Pay off your debts
Paying off your debts does not violate the transfer of assets rule because you receive something of fair value (i.e., forgiveness of a legal debt) in exchange for the payment. Therefore, you can use your countable assets to pay off your mortgage, your automobile loan, your credit card, and other debts. This is a wise move, because the Medicaid authorities will not net or subtract your debts from your assets when they determine the value of your countable assets.

Purchase a car and household goods
Household furnishings, personal effects, and one automobile are exempt assets. Therefore, you should consider using your countable assets to buy a new car, a new refrigerator, a new stove, or like items. (Note, however, that some states impose a limit on the value of a car that may be considered exempt.)

Be careful not to buy outrageous items, however, like a $20,000 oriental rug or a $50,000 diamond ring. The state will view such purchases with suspicion and may reclassify them as disqualifying transfers.

Prepay burial and funeral costs
Burial and funeral expenses are inevitable (and expensive), so you may wish to consider prepaying these items with your countable resources. Federal regulations allow a burial space (and gravestone or marker) to be purchased for the Medicaid applicant and the members of his or her immediate family. Additionally, some states allow you to enter into a prepaid, noncancelable burial contract (including funeral service) with a specific funeral home. Of these states, some impose a limit on the amount of money that can be set aside for this purpose, while other states allow a prepaid funeral contract in any amount to be exempted.

Several states also permit the Medicaid applicant (and spouse, if any) to set aside up to a specified amount in a bank account expressly reserved for funeral, burial, and related expenses which are not covered by a prepaid funeral contract.

When can it be used?
You want to preserve otherwise countable assets and you anticipate the need for long-term care
There are really no prerequisites that must be met. Purchase of exempt assets is a very useful strategy to help you qualify for Medicaid and/or to provide a higher standard of living for the at-home spouse.

Strengths
Helps Medicaid applicant qualify for Medicaid
In determining your eligibility for Medicaid, a state can consider only your countable resources; it cannot consider assets that are exempt under the law. Usually, your countable resources must be spent down to the threshold level set by your state before you can qualify for Medicaid. You can qualify for Medicaid much more quickly by spending your countable resources on exempt assets.

Potentially preserves assets for your loved ones
Under normal circumstances, your excess countable resources would be consumed by the nursing home to pay for your medical care. Purchasing exempt assets with countable resources, however, serves to potentially preserve assets and improve the quality of life for your spouse (if any).

Avoids Medicaid ineligibility period
Often, transferring your countable assets in order to qualify for Medicaid subjects you to various penalties, including a period of ineligibility before you can collect Medicaid benefits (the state has the right to look back at your finances for a period of 60 months to see if any transfers were made for less than fair market value that might affect your eligibility for Medicaid). A purchase of exempt assets, however, is an exception to this rule. By law, each state must allow you to spend your money on certain specified exempt assets; there can be no penalty imposed.

Tradeoffs
Strategy not quite as useful if you have limited means

If you have substantial resources, you can benefit greatly by purchasing a house, replacing a roof, adding vinyl siding, or buying a furnace. On the other hand, if you're very elderly, rent an apartment, no longer drive a car, and don't have much in the way of excess resources, a purchase of exempt assets may not be as beneficial.

Strategy not quite as useful if you're single
Assume you're single, have just become institutionalized in a nursing home, have $50,000 worth of excess countable resources, and wish to apply for Medicaid. Your house is not considered an exempt asset, since you no longer reside there and you have no spouse (or minor, disabled, or blind child; a sibling with an equity interest in the home who has been residing there at least one year before your institutionalization; or a child who has been living in the home with you for least two years and who provided care to you that allowed you to reside in the home) living there. Chances are, you are no longer able to drive, so you have no need for a car. What's left? Well, you can prepay your funeral and burial costs and perhaps buy a few personal effects. It's easy to see that single people do not benefit quite as much from the strategy of purchasing exempt assets as do married couples.

How to do it
If you are interested in using your countable resources to purchase exempt assets, there are a couple of steps you should follow:

Gather your Medicaid eligibility information before visiting an attorney
  • Prepare a list of all your assets (and those of your spouse), indicating how title is held, the tax basis, and how much you paid for the asset.
  • Prepare a list of your (and spouse's) income from all sources.
  • Indicate whether your resources are, for Medicaid purposes, exempt, not exempt, or inaccessible.
  • Prepare a list of all assets transferred within the last five years, whether by way of gift, trust, or otherwise. Indicate date of transfer, transferee, purpose, and consideration (what you received in return).
  • If you are considering purchasing a funeral contract, burial plot, or headstone, obtain information on the choices and costs of these items.
Consult a Medicaid attorney
In recent years, the Medicaid laws have undergone a number of changes. Indeed, because certain planning vehicles have been eliminated and most rules tightened, it is reasonable to expect that further changes will occur in the years ahead. It is vital, therefore, to consult with an attorney experienced with Medicaid planning.

An attorney will advise you of your options, make recommendations, and ensure that you spend your countable assets in the most advantageous manner.

Tax considerations
Income tax

Essentially, there are no tax ramifications regarding your purchase of most exempt assets, such as prepaid burial plots, household furnishings, or personal effects. The expenses of purchasing these items are not deductible. However, itemized deduction issues may arise upon the purchase of a new house.

Questions & Answers
You're a widow who has just entered a nursing home. You are no longer able to drive a car and don't own a house--you had been renting for years. The problem is, you must spend down $15,000 before you can qualify for Medicaid. You don't want the nursing home to get that money. Is there any way you can help your daughter with it?

Yes. You can start by prepaying for your funeral and burial. That could use up about $4,500 or more. Next, you can prepay her funeral and burial. Finally, you may wish to buy a car for your daughter (to make it easier for her to visit you). Remember, exempt assets include burial plots for you and your family members and one automobile that can be used by you or by the members of your immediate family.

You live in a nursing home and have just applied for Medicaid. You know that your house would be exempt if you resided there or if your spouse (or minor, disabled, or blind child) lived there. Unfortunately, you are a widower, and your children are adults who live in homes of their own. What will happen to your house?

If you're a Medicaid recipient and have become a permanent resident of a nursing home, federal law allows a lien to be placed on your home. When you die, the state can seek reimbursement to recover Medicaid benefits paid on your behalf. State practice does vary, however, so check the laws of your state.

 

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015


 

Medicaid Planning: Transfer of Assets

What is meant by a "transfer of assets"?
Assets can be transferred in a number of ways, such as by gift, by sale, by trade, or through a trust. Because eligibility for Medicaid is based on the level of your income and other resources, state Medicaid authorities are interested in knowing whether you have tried to circumvent the rules by transferring assets out of your name in order to qualify for Medicaid. Consequently, when you apply for Medicaid, the state has the right to examine your finances (and those of your spouse) for a certain period of time.
This length of time is referred to as the look-back period for Medicaid , and it can go back as far as 60 months before the date you applied for Medicaid.

Caution: Medicaid eligibility rules are constantly changing. Seniors and their families should take no action without consulting a knowledgeable elder law attorney.

Which transfers will trigger scrutiny by Medicaid authorities?
Only certain transfers are prohibited. In general, fair market transactions are above reproach; that is, if you receive something of equal fair market value in return for the assets you transferred away, the transaction is considered a legitimate one. For example, there would be nothing wrong with using cash from your savings account to purchase some stock. The stock will be added with your cash and other countable assets together when the Medicaid authorities consider your eligibility for Medicaid. If, however, you transfer certain assets for less than fair market value close to the time you apply for Medicaid, the state will presume that the transfer was made solely to qualify you for Medicaid. More specifically, a transfer of countable assets for less than fair market value within the look-back period is suspect and could subject you to penalties. Therefore, it would be a problem if you made a gift of $50,000 to your daughter two months before you applied for Medicaid.

Basically, countable assets may be defined as anything valuable you own that is not exempt by law or otherwise made inaccessible. Exempt assets, on the other hand, are those that do not affect your Medicaid eligibility. Each state composes a list of exempt assets, including such items as your principal residence, one automobile, and prepaid burial contracts. You can transfer most exempt assets at any time without creating a period of ineligibility.

Will a transfer of assets during the look-back period cause ineligibility for Medicaid?
When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months from the date you apply for assistance. For transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), the look-back period is 60 months for all transfers of countable assets. Transfers of countable assets for less than fair market value made during the look-back period (other than transfers to a spouse or a disabled,
or a blind child or a disabled individual under age 65) will result in a waiting period or period or ineligibility before you can start to collect Medicaid benefits. If a transfer of assets takes place before the look-back period, however, the waiting period is inapplicable, and the transfer will not affect your Medicaid eligibility. The formula for determining the waiting period may be explained as the fair market value of transferred assets divided by the average monthly cost of nursing homes in your locale, the
quotient representing the number of months you must wait before you can be eligible for certain Medicaid benefits.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA / SIPC , a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.

 

Protecting At-Home Spouse

What are the basic Medicaid rules pertaining to spouses?
With respect to a married couple, financial protection of the healthy or at-home spouse is always an important concern. A general overview of the Medicaid rules pertaining to married couples is helpful before considering the applicable transfer strategies.

  • Eligibility for Medicaid is based on the amount of your income and other resources. With respect to a married couple, each spouse is entitled to his or her own periodic income; the healthy spouse is under no obligation to contribute to the institutionalized spouse's medical care.
  • A different rule applies to assets, however. When one spouse enters a nursing home and applies for Medicaid, the couple's assets must be totaled to determine what portion the noninstitutionalized spouse may keep. After this spousal resource allowance has been determined, the Medicaid applicant must transfer assets representing the amount of the allowance to the at-home spouse.

Example(s): Assume George enters a nursing home on February 2 and applies for Medicaid three months later on May 1. He and his wife, Martha, have combined assets of $24,000--$18,000 of which is held in his IRA. Medicaid will take a snapshot view of their combined assets on February 2 (the date of institutionalization) in order to determine the spousal resource allowance. Martha will be entitled to one-half of the assets up to a minimum established by their state.

After the transfer of assets (if any), the institutionalized spouse must spend down most of his or her portion of the assets on his or her own medical care, assuming his or her state allows a spend-down.

What planning strategies exist to help the at-home spouse?
Because Medicaid pools together a married couple's assets when determining the eligibility of one spouse for Medicaid, Medicaid permits unlimited transfers of these assets between the husband and wife without penalty, which creates planning opportunities.

  • An important loophole exists in that the healthy spouse can take jointly owned, countable assets and purchase a single premium immediate annuity for the benefit of him- or herself alone. In effect, the healthy spouse is converting countable assets into an income stream, and, as mentioned before, each spouse is entitled to all of his or her own income.
  • Another option involves exempt assets and transfers for fair market value, discussed under the section Purchase of Exempt Assets. Briefly, a spouse entering a nursing home can use otherwise countable assets to purchase exempt assets, to pay off debts, and to make household repairs. Each state composes a list of exempt assets, meaning those assets that will not affect a person's eligibility for Medicaid. This list will typically include such items as the principal home, one automobile, and prepaid burial arrangements. By spending otherwise countable assets in this fashion, you can: (1) decrease the level of your countable assets in order to increase your chances of qualifying for Medicaid, and (2) protect the community spouse by lowering his or her debt level and increasing the value and safety of the family home.
  • Third, it's vital to recall that transfer of the family home between spouses is allowable. Such a transfer is not subject to a look-back period or to any other penalties. Therefore, if a husband becomes institutionalized, he can deed his interest in the house to his wife (so that it will stand in her name alone). She can then create a will, naming her children (or anyone other than the institutionalized spouse) as beneficiaries.

Caution: Absent such a transfer of a jointly owned home, the house could be taken by the state. If the healthy spouse unexpectedly died before the institutionalized spouse, the house would belong to the institutionalized spouse and the state could place a lien on it for reimbursement for Medicaid benefits paid. Further, although interspousal transfers are fine, bear in mind that transfers of resources for less than fair market value by either spouse to a third party are subject to transfer penalties, no matter which spouse is institutionalized when applying for Medicaid.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.

Medicaid Planning Basics

The best time to plan for the possibility of nursing home care is when you're still healthy. By doing so, you may be able to pay for your long-term care and preserve assets for your loved ones. How? Through Medicaid planning.

Eligibility for Medicaid depends on your state's asset and income-level requirements
Medicaid is a joint federal-state program that provides medical assistance to various low-income individuals, including those who are aged (i.e., 65 or older), disabled, or blind. It is the single largest payer of nursing home bills in America and is the last resort for people who have no other way to finance their long-term care. Although Medicaid eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.

In addition to you meeting your state's medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain levels if you are to qualify for Medicaid. However, several assets (which may include your family home) and a certain amount of income may be exempt or not counted.

Medicaid planning can help you meet your state's requirements
To determine whether you qualify for Medicaid, your state may count only the income and assets that are legally available to you for paying bills. That's where Medicaid planning comes in. Over the years, a number of tools and strategies have arisen that might help you qualify for Medicaid sooner.

In general, Medicaid planning seeks to accomplish the following goals:

  • Exchanging countable assets for exempt assets to help you meet Medicaid eligibility requirements
  • Preserving assets for your loved ones
  • Providing for your healthy spouse (if you're married)

Let's look at these in turn.

You may be able to exchange countable assets for exempt assets
Countable assets are those that are not exempt by state law or otherwise made inaccessible to the state for Medicaid purposes. The total value of your countable assets (together with your countable income) will determine your eligibility for Medicaid. Under federal guidelines, each state compiles a list of exempt assets. Usually, this list includes such items as the family home (regardless of value), prepaid burial plots and contracts, one automobile, and term life insurance.

Through Medicaid planning, you may be able to rearrange your finances so that countable assets are exchanged for exempt assets or otherwise made inaccessible to the state. For example, you may be able to pay off the mortgage on your family home, make home improvements and repairs, pay off your debts, purchase a car for your healthy spouse, and prepay burial expenses.

For more information on this topic, contact an elder law attorney who is experienced with your state's Medicaid laws.

Irrevocable trusts can help you leave something for your loved ones
Why not simply liquidate all of your assets to pay for your nursing home care? After all, Medicaid will eventually kick in (in most states) once you've exhausted your personal resources. The reason is simple: You want to assist your loved ones financially.

There are many ways to potentially preserve assets for your loved ones. One way is to use an irrevocable trust. (It's irrevocable in the sense that you can't later change its terms or decide to end it.) Property placed in an irrevocable trust will be excluded from your financial picture, for Medicaid purposes. If you name a proper beneficiary, the principal that you deposit into the trust (and possibly any income generated) will be sheltered from the state and can be preserved for your heirs. Typically, though, the trust must be in place and funded for a specific period of time for this strategy to be an effective Medicaid planning tool.

For information about Medicaid planning trusts, consult an experienced attorney.

If you're married, an annuity can help you provide for your healthy spouse
Nursing homes are expensive. If you must go to one, will your spouse have enough money to live on? With a little planning, the answer is yes. Here's how Medicaid affects a married couple. A couple's assets are pooled together when the state is considering the eligibility of one spouse for Medicaid. The healthy spouse is entitled to keep a spousal resource allowance that generally amounts to one-half of the assets. This may not amount to much money over the long term.

A healthy spouse may want to use jointly owned, countable assets to buy a single premium immediate annuity to benefit himself or herself. Converting countable assets into an income stream is a plus because each spouse is entitled to keep all of his or her own income, in contrast to the pooling of assets. By purchasing an immediate annuity in this manner, the institutionalized spouse can more easily qualify for Medicaid, and the healthy spouse can enjoy a higher standard of living.

Be aware, however, that for annuities purchased on February 8, 2006 and thereafter (the date of enactment of the Deficit Reduction Act of 2005), the state must be named as the remainder beneficiary of the annuity after your spouse or a minor or disabled child.

Beware of certain Medicaid planning risks
Medicaid planning is not without certain risks and drawbacks. In particular, you should be aware of look-back periods, possible disqualification for Medicaid, and estate recoveries.

When you apply for Medicaid, the state has the right to review, or look back, at your finances (and those of your spouse) for a period of months before the date you applied for assistance. In general, a 60-month look-back period exists for transfers of countable assets for less than fair market value. Transfers of countable assets for less than fair market value made during the look-back period will usually result in a waiting period before you can start to collect Medicaid. So, for example, if you give your house to your kids the year before you enter a nursing home, you'll be ineligible for Medicaid for quite some time. (A mathematical formula is used.)

Also, you should know that Medicaid planning is more effective in some states than in others. In addition, federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. This means that your state may be able to place a lien on your property while you are alive, or seek reimbursement from your estate after you die. Make sure to consult an attorney experienced with Medicaid planning and the laws in your state before taking any action.

 

Domestic Self-Settled Spendthrift Trusts

Introduction
In almost every state, when a person creates (or settles) a trust for his or her own benefit--even an irrevocable one--the assets held by the trust are not protected from the claims of his or her own creditors. However, there are a handful of states, including Alaska and Delaware, with laws authorizing trusts that purport to provide such protection. They are intended as a domestic alternative to the offshore trust arrangements that some wealthy people have used for years.

Details in the laws vary among the states that allow this type of trust (often referred to as a domestic asset protection trust (DAPT) or Alaska/Delaware trust), but all are similar. A DAPT is primarily designed to achieve three goals for people with a high net worth:

  • Place assets out of the reach of creditors
  • Keep the assets available to the creator of the trust (the grantor or settlor), but only at the trustee's discretion
  • Remove the assets from the grantor's gross estate for estate tax purposes

Tip: The grantor need not be a resident of the DAPT state in order to establish a trust under that state's laws. All states generally allow their residents to choose to have their trusts administered according to the law of another state. As discussed below, however, this freedom of choice may not be absolute or honored in particular situations when litigation arises.

Caution: The DAPT is a relatively new and controversial financial and estate planning tool. There are many unanswered questions regarding its operation and usefulness in the event of a challenge by creditors. A DAPT may not be appropriate for everyone, and the pros and cons should be discussed with your financial professional before establishing this type of trust. You should not establish a DAPT intending to use it as a piggybank, with regular or repeated access to the trust property.

How does a DAPT work?
While details vary, all DAPT statutes share the following elements:

  • An irrevocable trust is established with specific reference to the DAPT state's laws, to which the trust grantor transfers a portion of his or her wealth. Once an irrevocable trust has been set up and assets transferred to it, the grantor relinquishes the right to undo the trust or get the assets back.
  • At least one of the trustees is an individual resident of the DAPT state, or an institution authorized to serve as a trustee in that state.
  • At least some trust property must be located (or managed) in the DAPT state.
  • The grantor is one of the beneficiaries of the trust, but not the only beneficiary.
  • Distributions must be solely in the discretion of the trustee, although the grantor can be given a veto power.
  • The trust document contains a spendthrift provision that makes it difficult for creditors to reach trust assets to satisfy claims against the trust beneficiaries, including claims against the grantor.
  • There is a time limit (e.g., four years) within which a creditor must file suit in the DAPT state. To prevail in reaching trust assets, the creditor must prove that the transfer of property to the DAPT was fraudulent, as defined by state law.

If these conditions are satisfied, and assuming the transfer of property into the DAPT was not a fraudulent transfer, the trust assets are, in theory, beyond the reach of the grantor's creditors. However, there are few, if any, court cases that have either confirmed or rejected the protection from creditors intended by the DAPT laws. The DAPT is not battle-tested, and its usefulness has been hotly debated.

The legal landscape
Fraudulent transfers
A creditor hoping to undo a transfer and satisfy a claim out of DAPT assets must first establish that the grantor fraudulently transferred assets to the trust. DAPT statutes were written with the expectation that creditors might challenge the terms of these trusts in an effort to reach the assets held by them. These laws, therefore, set out legal obstacles to such challenges, based on the state's Fraudulent Transfer Act. (These laws vary slightly among states.) The primary obstacle is a strict time limit within which a transfer to a DAPT can be challenged.

Creditors fall into two categories for fraudulent transfer purposes: those with claims that already exist when the DAPT is formed, and those whose claims do not arise until after that date. The distinction is crucial because the law makes it easier for an existing creditor to reach DAPT assets.

Technical Note: The law defines a creditor of the grantor simply as someone with a claim against him or her. Moreover, the existence of a claim does not require that a lawsuit has been filed, but only that the grounds for a lawsuit have occurred.

A transfer to a DAPT will be considered fraudulent as to a creditor whose claim arose before the transfer was made if the grantor was insolvent at the time of the transfer, or became insolvent as a result. The grantor is considered insolvent if the sum of his or her liabilities, including the claim at issue, is greater than all of his or her assets.

For these claims that exist prior to the DAPT's formation, the creditor must bring suit and claim a fraudulent transfer within four years from the creation of the trust, or one year after the creditor could have discovered the transfer, whichever is later. Since the law allows a creditor to fully probe for assets only after having won a judgment in a lawsuit, an existing creditor would typically have a year from that date to discover and challenge a transfer to a DAPT. At best, a DAPT provides an uncertain degree of protection from existing creditors.

In the case of a future creditor, one whose claim arose only after the transfer was made, the court may examine a wide range of factors to determine whether a particular transfer to a DAPT will be considered fraudulent and, therefore, void. In looking at the most egregiously fraudulent transfers, the court will find actual intent to hinder, delay or defraud a creditor. If the court makes such a determination, then the creditor must bring suit and claim a fraudulent transfer within four years from the creation of the trust, or one year after the creditor could have discovered the transfer, whichever is later. In other words, the liberal time limit given to an existing creditor will be available even to future creditors in blatantly fraudulent transfer situations.

Because there is seldom direct evidence of the DAPT creator's subjective motivation, the courts in all states have traditionally looked for badges of fraud in scrutinizing transfers that creditors seek to undo, including transfers into DAPTs. In searching for badges of fraud, courts ask, among other questions:

  • Was the transfer a gift, rather than a bona fide sale?
  • Was the transfer to someone close to the person making the transfer?
  • Was the transferor left with insufficient resources to pay debts as they became due?
  • Was the transferor actually facing the possibility of a lawsuit?
  • Did the transferor try to hide the transfer?
  • Did the transferor retain a degree of continued benefit or control of the transferred property?

When one or more of these answers are affirmative, the suspicion arises that the transfer was indeed made with the intent to hinder, delay or defraud a creditor.

Of course, there are less clear-cut cases of fraudulent transfer. For example, assume a grantor transfers assets to a DAPT and remains solvent thereafter. Such a transfer might still be ruled fraudulent later, if the grantor was about to engage in a business or a transaction for which his or her remaining assets were unreasonably small. For this less flagrant class of fraudulent transfers, the law allows a less liberal time limit within which creditors must bring their claims: the creditor must bring suit and claim a fraudulent transfer within four years from the transfer.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
The U. S. Bankruptcy Court handles many cases in which creditors seek to undo a prior transfer of property by a debtor so that it may be used to satisfy the creditor's claim. Indeed, a creditor can force a debtor into bankruptcy involuntarily for this purpose. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 allows a bankruptcy trustee to void any transfer of property by the debtor that was made within ten years before filing the bankruptcy petition if:

  1. the transfer was made to a self-settled trust, including a DAPT
  2. the debtor is a beneficiary of such trust, and
  3. the debtor made the transfer with actual intent to hinder, delay, or defraud a creditor--present or future.

This is in addition to any other grounds upon which a bankruptcy trustee may void a transaction and bring a debtor's transferred property back into the bankruptcy estate.

On the one hand, the new bankruptcy law can be viewed as bad news for those contemplating a DAPT today. The ten-year look-back is a lengthy period during which the grantor cannot feel safe from the reach of creditors who choose to use the power of the Bankruptcy Court. As a federal rule, the ten-year look-back trumps the much shorter time limitations contained in state DAPT laws.

On the other hand, while ten years is a long asset protection planning gap, federal law has now expressly authorized the use of DAPTs. Additionally, DAPT proponents point out that undoing a transfer in bankruptcy requires a showing of actual intent to hinder, delay, or defraud--a difficult burden of proof for a creditor.

The bottom line is that until a significant number of case decisions are issued, there is only speculation as to the degree of protection the DAPT can offer if challenged in Bankruptcy Court.

The public policies of DAPT and Non-DAPT states
In all states until the late 1990s, and in the vast majority of states today, it is considered bad public policy to allow the assets of a trust to be protected from the creditors of the person who created that trust. The question thus arises: When push comes to shove in litigation, how will a judge in a non-DAPT state regard a trust created by a resident who has chosen to have his or her trust governed by the laws of Alaska, Delaware, or another DAPT state?

For example, say a New York resident creates a Delaware DAPT, funded with New York real estate and financial assets held by a Wall Street firm. The New Yorker is successfully sued by a fellow resident, a judgment being entered against him in a New York court. Would a New York judge feel obligated to honor the laws of Delaware and deny the judgment creditor access to the DAPT assets?

Generally, the law of the state that governs a trust determines the answer to questions like this. Therefore, the answer is yes; the New York judge should and would follow Delaware law. However, the answer could be no; the New York judge would not follow Delaware law because to do so would violate the public policy of New York. Unfortunately, although DAPTs have existed since 1997, there are few, if any, published court decisions that address this question. You should therefore be aware of the inherent uncertainty in relying on a DAPT if you are a resident of a state that does not authorize such trusts.

Tip: Although it may be impractical, you may wish to relocate--with some or all of your assets--to a DAPT state. If you create a DAPT (before or after moving) and are later sued, the suit would probably have to be in your new home state--one that does not consider a DAPT to be against its public policy. In that setting, it is far more likely that the DAPT would offer meaningful protection.

Federal constitutional issues
The full faith and credit clause of the U.S. Constitution generally requires every state to recognize the legal judgments of every other state. Some experts believe that no matter which state's laws the grantor uses in creating a trust, if a lawsuit judgment is rendered against him or her in another state, even a DAPT state would be bound to honor that judgment. In other words, by this reasoning, the DAPT state courts would be compelled to disregard their own law and allow a sister-state judgment creditor access to DAPT assets that would otherwise be protected in the DAPT state.

Other legal authorities disagree with this analysis. They point out that a state may disregard a judgment rendered by a sister-state when enforcing that judgment would violate the public policy of the forum state. These issues remain unresolved.

Tax considerations
Income tax

Generally, DAPTs are grantor-type trusts--trust income and expenses flow through to the grantor on his or her personal income tax return. However, the trust may be deemed a separate taxpayer if an adverse party must approve distributions to the grantor.

Gift tax
Generally, transfers to a DAPT are subject to gift tax unless the grantor retains a power of appointment.

Estate tax
Whether assets remaining in a DAPT at the grantor's death are subject to estate tax depends on the degree of control retained by the grantor. Generally, a discretionary income interest is not considered a retained interest, whereas other retained interests could result in estate taxation.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.

 

Medicaid Penalties and Hardship Exceptions

Are you subject to penalties if you transfer assets in order to qualify for Medicaid?
It is important to realize that giving away your cash and other resources in the hope of qualifying for Medicaid can often create serious drawbacks, including the postponement of your ability to collect Medicaid benefits.

The Omnibus Reconciliation Act of 1993 (OBRA '93) mandates that transferring certain assets for less than fair market value to someone other than your spouse (or minor, disabled, or blind child) during a certain look-back period will result in a benefit ineligibility period.
 
In general, for transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), there exists a 60-month look-back period for all transfers of countable assets. Thus, if you're a nursing-home resident, your look-back period will normally begin 60 months before the day you became institutionalized and applied for Medicaid.

Essentially, this means that you will not qualify to collect Medicaid benefits until a period of time has passed from the date you become eligible for Medicaid (were it not for the asset transfer). The formula for determining the waiting period may be explained as the fair market value of transferred assets divided by the average monthly cost of nursing homes in your locale (as determined by state Medicaid regulations), the quotient being the number of months for which you will be ineligible to apply for Medicaid.

Example(s): Assume Alice gave $150,000 cash to her daughter. Two months later, she enters a nursing home (which charges a competitive rate of $6,000 per month) and applies for Medicaid. Alice will be ineligible to collect Medicaid benefits until 25 months have passed ($150,000 divided by $6,000 equals 25).

Do hardship exceptions to these penalties exist?
Denial of Medicaid eligibility due to a transfer of countable assets can cause an undue hardship for some people. Federal law (OBRA '93 and the Deficit Reduction Act of 2005) requires states to develop procedures for determining undue hardship in accordance with certain guidelines so that, in some cases, the state must grant Medicaid benefits to an applicant despite a disqualifying transfer.

Undue hardship exists when a denial of benefits would deprive a person of medical care to such an extent that his or her life or health would be endangered. Undue hardship also exists when application of the transfer of assets rules would deprive the person of food, clothing, shelter, or other necessities of life. Although states have a great deal of flexibility in determining whether a particular situation constitutes undue hardship, they are obligated to provide the following information:

  • A notice to recipients that an undue hardship exception exists
  • A timely process to determine whether an undue hardship exception will be granted
  • A process under which a denial of the exception can be appealed

Further, a facility may apply for a hardship exception on behalf of its residents with their consent, and a state may make payments to nursing facilities to hold beds for up to 30 days while a hardship exception is pending. For more information, contact your state's Medicaid office.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.


 

Bypassing Probate

You may have heard about the horrors of probate, but in truth, probate has gotten an undeservedly bad reputation, especially in recent years. If you bypass probate, your estate will go to your beneficiaries without any court proceeding, and you may save a certain amount of time and expenses. However, there is usually little reason for most people to avoid probate today. States continue to revise their probate laws, making them more consumer friendly, particularly for small estates. For most modestly sized estates, the probate process now costs little. In fact, there are some good reasons to distribute your property by will. Decisions are binding and have legal finality once your will is probated. Creditors who fail to file claims against your estate within a specific amount of time--usually six months after receiving notice--are out of luck.

However, some major drawbacks to probate do exist, including the time it can take. The process averages six to nine months to complete but may take up to two years or more for some complex estates, tying up the assets that your family may need immediately. Also, for a larger estate, the cost may be as high as 5 percent of the estate's value.

If you feel that the size and complexity of your estate warrant exploring alternatives to probate, you may want to consider one or more of the following:

Transfer your assets to a revocable living trust
A trust is like a basket that holds your assets. A revocable living trust (also known as an inter vivos trust) is flexible enough to include almost any asset that you own. While you are living, you can act as the trustee and can add or remove property as you see fit. You can also terminate or amend the trust at any time. When you die, your successor trustee distributes the trust assets to the trust beneficiaries, according to the trust agreement. Trusts require a significant amount of paperwork, are costly to create and maintain, and usually require a lawyer to draw up the trust documents. Also, a revocable living trust does not shield your estate from your creditors, creditors of your estate, or estate taxes.

Own property as joint tenancy with rights of survivorship
Assets owned as joint tenancy with rights of survivorship pass automatically to the surviving joint owner(s) at your death. To establish joint ownership, you may need to record new real estate deeds, titles for your car or boat, stock and bond certificates, statements of account for mutual funds, registration cards for your bank accounts, and other assets. This costs little and usually does not require a lawyer. Some drawbacks are that the joint owner has immediate access to your property, and your joint owner's creditors may reach the jointly held property.

Designate beneficiaries
Assets pass outside of probate if you establish payable-on-death provisions for your savings accounts and CDs. Ask your agent to set up transfer-on-death provisions for brokerage accounts containing stocks, bonds, or mutual funds. Your retirement accounts, such as profit-sharing plans, 401(k)s, and IRAs can also pass along to designated beneficiaries. Finally, life insurance death proceeds will avoid probate, provided you name a beneficiary other than your estate.

Make lifetime gifts
Another way to avoid probate is to simply give away your property to your beneficiaries while you are living. Carefully planned gifting can also free those assets from gift and estate taxes. The following are usually nontaxable gifts:

  • Gifts to your spouse
  • Gifts to qualified charities
  • Gifts totaling $14,000 (in 2014 and 2015) or less per person, per year ($28,000 in 2014 and 2015 if you and your spouse can split the gifts)
  • Tuition payments on behalf of an individual directly to an educational institution
  • Medical care expenses paid directly to the provider on behalf of an individual

Other ways to bypass or minimize probate
If your estate is small enough to meet state guidelines, your beneficiaries can simply claim your assets by presenting a notarized affidavit. About half of the states set a limit of $10,000 to $20,000 of the qualified estate value; most of the other states allow as much as $100,000. You can generally deduct estate expenses from your qualified estate value, such as taxes, debts, loans, or family allowance payments, plus the value of any other assets that pass outside probate (e.g., a home jointly owned with a spouse). Real estate is usually disqualified from claims by affidavit. Therefore, your estate may qualify even if it is fairly large. Expect the process to take 30 to 45 days. Another method is for your executor to file for summary, or simplified probate. This streamlined process is generally a paper filing only, requiring no attorney. States vary widely regarding the allowable size of an estate for simplified probate.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.

 

Asset Protection in Estate Planning

You're beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others.

To insulate your property from such claims, you'll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.

Liability insurance is your first and best line of defense
Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.

A Declaration of Homestead protects the family residence
Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded.

Dividing assets between spouses can limit exposure to potential liability
Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse's job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.

Business entities can provide two types of protection--shielding your personal assets from your business creditors and shielding business assets from your personal creditors
Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business.

Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member's interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.

Certain trusts can preserve trust assets from claims
People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust.

Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary's creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary's creditors will have. Thus, the terms of the trust are critical.

There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include:

  • Spendthrift trusts
  • Discretionary trusts
  • Support trusts
  • Personal trusts
  • Self-settled trusts

Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.

A word about fraudulent transfers
The court will ignore transfers to an asset protection trust if:

  • A creditor's claim arose before you made the transfer
  • You made the transfer with the intent to defraud a creditor
  • You incurred debts without a reasonable expectation of paying them

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.

Look-Back Period for Medicaid


What is a look-back period?
When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months before the date you applied for assistance. Because eligibility for Medicaid is based on the level of your income and other resources, the state wants to know whether you have tried to circumvent the rules by transferring assets out of your name. Essentially, a snapshot view of your resources is taken when you apply for Medicaid. At this time, you must also disclose any asset transfers that you made during the look-back period.

If you transfer countable assets for less than fair market value (FMV) within the look-back period, the state presumes that the transfer was made solely to qualify you for Medicaid. Basically, countable assets may be defined as anything valuable you own that is not exempt by law or otherwise made inaccessible.

Tip: Bear in mind, however, that you can transfer noncountable assets (with the exception of the house) to anyone, at any time, without creating a period of ineligibility.

Caution: Medicaid eligibility rules are constantly changing. Seniors and their families should take no action without consulting a knowledgeable elder law attorney.

How long is the look-back period?
In general, for transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), there exists a 60-month look-back period for all transfers of countable assets. Thus, if you're a nursing-home resident, your look-back period will normally begin 60 months before the day you became institutionalized and applied for Medicaid.

In some states, ascertainment of the beginning date of your look-back period may depend on whether you are institutionalized when you apply for Medicaid or whether you apply for Medicaid before entering a nursing home. Check your state's laws to determine the correct starting date.

Will a transfer during this period cause ineligibility for Medicaid?
Transfers of countable assets for less than fair market value (FMV) made during the look-back period (other than transfers to a spouse or a minor, disabled, or blind child) will result in a waiting period or period of ineligibility before you can start to collect Medicaid benefits. For transfers made on or after February 8, 2006, the waiting period begins on: (1) the first day of the month during or after which assets have been transferred for less than FMV, or (2) the date of first possible eligibility for Medicaid (but for the penalty period), whichever is later.

The formula for determining the waiting period may be explained as the FMV of transferred assets divided by the average monthly cost of nursing homes in your locale, the quotient being the number of months of ineligibility before you can apply for Medicaid.

Example(s): Assume that Ralph used $288,000 to create an irrevocable trust, naming himself as beneficiary and his son as trustee. One year later, Ralph entered a nursing home in a state where the average monthly nursing-home cost is $6,000.

Example(s): Ralph applied for Medicaid, but because he transferred assets to a trust during the look-back period (60 months), he was not eligible to receive Medicaid benefits until 48 months had elapsed ($288,000 divided by $6,000 equals 48 months).

Tip: If a transfer of assets takes place before the look-back period, the waiting period is inapplicable and the transfer will not affect your Medicaid eligibility.

Example(s): Assume that 75-year-old Mary made a gift of $400,000 cash to her adult children, in a state where the average monthly cost of nursing-home care is $5,000. Seven years later, Mary entered a nursing home and applied for Medicaid.

Example(s): Because Mary did not transfer the $400,000 within the look-back period, no waiting period applied. She was able to collect Medicaid benefits as soon as her application was approved.

Caution: Asset transfers require a thorough familiarity with Medicaid law. Consult an elder law attorney with Medicaid planning experience.


Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.

 

Medicaid Qualifying Trusts


What is a trust?
A trust is a legally enforceable arrangement that allows the creator of the trust (the grantor) to transfer property to someone (the trustee) who holds the property for the benefit of someone else (the beneficiary). There are many variations on this theme; for instance, it is perfectly acceptable for you to be both the grantor and the beneficiary of a particular trust, and you may also be a trustee.

A revocable trust should be created if the grantor wants the ability to change the terms of the trust at any time or to terminate the trust at will. An irrevocable trust should be established if the grantor does not want (or can't have) such power. There are advantages and disadvantages to each type of trust.

Although there are many reasons for creating trusts, trusts are often used to shelter assets from creditors, to yield favorable tax benefits, and to avoid probate.

How can a trust help you to qualify for Medicaid?
To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits (which vary from state to state). In determining your eligibility for Medicaid, a state may count only the income and resources that are legally available to you for paying medical costs.

A trust helps you to qualify for Medicaid because it can make your income and assets unavailable to you. The state Medicaid authorities cannot consider assets that are truly inaccessible to the Medicaid applicant; therefore, anything that stays in an irrevocable trust and cannot under any circumstances be payable to you will generally lie outside of your financial picture (for Medicaid eligibility purposes). Such transfers to trust are subject to the applicable "look-back" period, which pulls back into the Medicaid eligibility equation transfers into trusts made before applying for Medicaid.

What is the "look-back" period? When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months before the date you applied for assistance. Because eligibility for Medicaid is based on the level of your income and other resources, the state wants to know whether you have tried to circumvent the rules by transferring assets out of your name. Essentially, a snapshot view of your resources is taken when you apply for Medicaid. At this time, you must also disclose any asset transfers that you made during the look-back period.

If you transfer countable assets for less than fair market value (FMV) within the look-back period, the state presumes that the transfer was made solely to qualify you for Medicaid. Basically, countable assets may be defined as anything valuable you own that is not exempt by law or otherwise made inaccessible.

In general, for transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), there exists a 60-month look-back period for all transfers of countable assets. Thus, if you're a nursing-home resident, your look-back period will normally begin 60 months before the day you became institutionalized and applied for Medicaid.

Tip: It is important to note here that revocable trusts and irrevocable trusts from which payment can be made to you or for your benefit are not effective in Medicaid planning. If you can revoke your trust, you retain sufficient control over the assets and they are not inaccessible to you (in the eyes of the Medicaid authorities). If an irrevocable trust includes a provision that payments from the trust can go to you, any payment actually made to you is income to you for Medicaid purposes; income of the trust which is payable to you or for your benefit is considered an available resource to you for Medicaid purposes. Likewise, any portion of the corpus of an irrevocable trust that is payable to you makes that portion of the trust an available resource of yours for Medicaid purposes. Payment from income from the corpus of an irrevocable trust made to another individual are considered transfers of assets by you for less than fair market value and could result in a Medicaid eligibility penalty if made during the applicable "look-back" period. If you use a trust for Medicaid purposes, therefore, it should not allow payments to you from income or the corpus.

Which trusts are most useful for Medicaid planning?

Medicaid planning usually focuses on the possibility of long-term nursing home care. An aging population and the increased cost of long-term care have made Medicaid planning a crucial topic for many people and may well be an important part of your overall financial plan. If you anticipate the need for long-term care and are looking for a strategy to preserve your resources, consider using one of the following four trusts:

  1. An irrevocable income-only trust
  2. An irrevocable trust (in which the creator of the trust is not a beneficiary)
  3. A Miller trust
  4. A special needs trust

Irrevocable income-only trust
An irrevocable income-only trust is a vehicle that may allow an applicant to qualify for Medicaid benefits while preserving substantial assets for family members or other heirs. The Medicaid applicant is both the grantor and the beneficiary of the trust, but someone else is named as the trustee. As the name of the trust suggests, you are entitled to receive only the income from the trust--you cannot access the trust principal. Only the trust principal, therefore, will be considered inaccessible for Medicaid purposes while you are alive and can generally go to your heirs when you die. Income from the trust that is actually paid to you is considered to be income to you for Medicaid purposes. Income that could be paid to you is considered an available resource of yours for Medicaid purposes.

Tip: Be aware, however, that certain states will not allow the trust principal to pass directly to heirs. If you are the income beneficiary of an irrevocable income-only trust, the state could (in some cases) be entitled to collect the present value of your income interest at the moment of your death as reimbursement for the Medicaid benefits it paid on your behalf.

With respect to the trust income that you receive, most of it must be spent down to pay for part of your nursing home care each month--Medicaid will pay the rest.

Irrevocable trust (in which the creator of the trust is not a beneficiary)
An irrevocable trust (in which the creator of the trust is not a beneficiary) is a vehicle that allows an applicant to qualify for Medicaid benefits while preserving substantial assets for family members or other heirs. As a Medicaid applicant, you are the grantor of the trust but not the beneficiary. You select someone else as beneficiary and make sure that the trustee has no discretion (ability) to direct trust income and assets to you. Since you are not entitled to receive any income or principal from the trust, whatever you deposit into trust will be considered inaccessible to you and preserved for your heirs. However, every transfer you make to this type of trust is considered a transfer for less than fair market value and will subject you to eligibility penalties if made during the applicable "look-back" period.

This trust is an especially useful tool when you have a second home or when you live in a so-called income-cap state (a state that does not allow you to spend down income on medical care).

Miller trust
A Miller trust is a Medicaid planning tool that is available only in certain states--income-cap states. In these states, you can qualify for Medicaid only if your income falls below a threshold level; you cannot spend down excess income on medical care in order to qualify.

A Miller trust is an irrevocable or revocable trust in which you are both the grantor and the beneficiary. You transfer all of your income (e.g., Social Security checks, pension checks, etc.) into the trust. The trustee then pays part of your nursing home bill (up to one dollar less than the income cap for your state), and Medicaid pays the rest. The trust must contain a provision which states that upon your death all the property remaining in the trust at your death, up to the amount that has been paid to you by your state Medicaid plan, will be paid to your state. Therefore, you are able to keep in the trust enough income to allow you to meet your state's income-cap cutoff.
 
Special needs trust
A special needs trust is a federally recognized Medicaid planning tool created for permanently disabled persons who are under the age of 65. It is an irrevocable trust in which you (the Medicaid applicant) serve as beneficiary only; you cannot be the grantor or trustee of this trust. Moreover, your parent, grandparent, legal guardian, or a court must establish the trust for you.

The goal of the special needs trust is to supplement (rather than replace) Medicaid benefits in order to create a more comfortable lifestyle for institutionalized individuals. Therefore, the trust might pay for such things as a new television set or a private room. Since the trust income and principal are not considered to be available for paying medical bills, it's possible for one to qualify for Medicaid and still enjoy the benefits of the money.

Should you be aware of any problems regarding trusts?
It is important to realize that giving away your cash and other resources in the hope of qualifying for Medicaid can sometimes create serious drawbacks, including the postponement of your ability to collect Medicaid benefits.
As a final note, because the Medicaid transfer rules have been tightened in recent years (and may continue to change in the years ahead) and because certain trusts are prohibited in certain states, it is wise for you to consult with an attorney experienced in the Medicaid area if you are interested in establishing a trust.


Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015.


 

Setting Up Your Estate to Minimize Probate
 

What can you do to lessen its impact for your heirs?

Probate subtly reduces the value of many estates. It can take more than a year in some cases, and attorney’s fees, appraiser’s fees and court costs may eat up as much as 5% of a decedent’s accumulated assets. Think tens of thousands of dollars, perhaps more.1
  
What do those fees pay for? In many cases, routine clerical work. Few estates require more than that. Heirs of small, five-figure estates may be allowed to claim property through affidavit, but this convenience isn’t extended for larger estates.
 
So how you can exempt more of your assets from probate and its costs? Here are some ideas.
 
Joint accounts. Jointly titled property with the right of survivorship is not subject to probate. It simply goes to the surviving spouse when one spouse passes. There are a couple of variations on this. Some states allow tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship. A few states allow community property with right of survivorship; assets titled in this way also skip the probate process.2,3,4
 
Joint accounts may be exempt from probate, but they can still face legal challenges – especially bank accounts when the title is modified by a bank employee rather than a lawyer. The signature card may not contain survivorship language, for example. Or, a joint account with rights of survivorship may be found inconsistent with language in a will.5
 
POD & TOD accounts.  Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank accounts and securities (and even motor vehicles in a few states). As long as you live, the named beneficiary has no rights to claim the account funds or the security. When you pass away, all that the named beneficiary has to do is bring his or her I.D. and valid proof of the original owner’s death to claim the assets or securities.3
   
Gifts. For 2013, the IRS allows you to give up to $14,000 each to as many different people as you like, tax-free. By doing so, you reduce the size of your taxable estate. Please note that gifts over the $14,000 limit may be subject to federal gift tax of up to 40% and count against the lifetime gift tax exclusion, now at $5.25 million.6
 
Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. (A pour-over will can be used to add subsequently accumulated assets; it will be probated, however.)2,7,8
 
The trust owns assets that the grantor once did, yet the grantor can use these assets while alive. When the grantor dies, the trust becomes irrevocable and its assets are distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate) and it can save heirs court costs and time.7
  
Are there assets probate doesn’t touch? Yes. In addition to property held in joint tenancy, retirement savings accounts (such as IRAs), life insurance death benefits and Treasury bonds are exempt. Speaking of retirement savings accounts...2    
 
Make sure to list/update retirement account beneficiaries. When you open a retirement savings account (such as an IRA), you are asked to designate eventual beneficiaries of that account on a form. This beneficiary form stipulates where these assets will go when you pass away. A beneficiary form commonly takes precedence over a will, because retirement accounts are not considered part of an estate.8
 
Your beneficiary designations need to be reviewed, and they may need to be updated. You don’t want your IRA assets, for example, going to someone you no longer trust or love.
 
If for some reason you leave the beneficiary form for your life insurance policy blank, it could be subject to probate when you die. If you leave the beneficiary form for your IRA blank, then the IRA assets may be distributed according to the default provision set by the IRA custodian (the brokerage firm hosting the IRA account). These instances are rare, but they do happen.9,10   
 
To learn more about strategies to avoid probate, consult an attorney or a financial professional with solid knowledge of estate planning.
  
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC , a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
 
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
     
Citations.
1 -
www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [4/17/13]
2 -
www.kiplinger.com/article/retirement/T021-C000-S001-four-facts-of-living-trusts.html#iwrC4LSHbmjf9emt.99 [4/4/13]
3 -
www.inc.com/articles/1999/11/15611.html [11/99]
4 -
www.law.cornell.edu/wex/tenancy_by_the_entirety [8/19/10]
5 -
www.newyorklawjournal.com/PubArticleNY.jsp?id=1202585770799 [1/28/13]
6 -
www.chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]
7 - blog.nolo.com/estateplanning/2011/08/24/trusts-revocable-v-irrevocable/ [8/24/11]
8 -
www.nytimes.com/2011/02/10/business/10ESTATE.html [2/10/11]
9 -
www.investopedia.com/articles/retirement/03/031803.asp [11/8/09]
10 -
www.smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

 

A Primer for Estate Planning

Things to check and double-check before you leave this world.

 
Estate planning is a task that people tend to put off, as any discussion of “the end” tends to be off-putting. However, those who leave this world without their financial affairs in good order risk leaving their heirs some significant problems along with their legacies.
 
No matter what your age, here are some things you may want to accomplish this year with regard to estate planning. 
 
Create a will if you don’t have one. Many people never get around to creating a will, even to the point of buying a will-in-a-box at a stationery store or setting one up online.
 
A solid will drafted with the guidance of an estate planning attorney may cost you more than a will-in-a-box, and it may prove to be some of the best money you ever spend. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity.
 
Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.
 
You should know that a living will is not the same thing as a durable medical power of attorney. A living will makes your wishes known when it comes to life-prolonging medical treatments, and it takes the form of a directive. A durable medical power of attorney authorizes another party to make medical decisions for you (including end-of-life decisions) if you become incapacitated or otherwise unable to make these decisions.
 
Review your beneficiary designations. Who is the beneficiary of your IRA? How about your 401(k)? How about your annuity or life insurance policy? If your answer is along the lines of “Mm … you know … I’m pretty sure it’s…” or “It’s been a while since …”, then be sure to check the documents and verify who the designated beneficiary is.
 
When it comes to retirement accounts and life insurance, many people don’t know that beneficiary designations take priority over bequests made in wills and living trusts. If you long ago named a child now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die - regardless of what your will states.1
 
Time has a way of altering our beneficiary decisions. This is why some estate planners recommend that you review your beneficiaries every two years.
 
In some states, you can authorize transfer-on-death designations. This is a tactic against probate: TOD designations may permit the ownership transfer of securities (and in a few states, forms of real property, vehicles and other assets) immediately at your death to the person designated. TOD designations are sometimes referred to as “will substitutes” but they usually pertain only to securities.2 
 
Create asset and debt lists.
Does this sound like a lot of work? It may not be. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.
 
* One list should detail your real property and personal property assets. It should list any real estate you own, and its worth; it should also list personal property items in your home, garage, backyard, warehouse, storage unit or small business that have notable monetary worth.
* Another list should detail your bank and brokerage accounts, your retirement accounts, and any other forms of investment plus any insurance policies.
* A third list should detail your credit card debts, your mortgage and/or HELOC, and any other outstanding consumer loans. 
 
Think about consolidating your “stray” IRAs and bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear.
 
Let your heirs know the causes and charities that mean the most to you. Have you ever seen the phrase, “In lieu of flowers, donations may be made to …” Well, perhaps you would like to suggest donations to this or that charity when you pass. Write down the associations you belong to and the organizations you support. Some non-profits do offer accidental life insurance benefits to heirs of members. 
 
Select a reliable executor. Who have you chosen to administer your estate when the time comes? The choice may seem obvious, but consider a few factors. Is there a stark possibility that your named executor might die before you do? How well does he or she comprehend financial matters or the basic principles of estate law? What if you change your mind about the way you want your assets distributed – can you easily communicate those wishes to that person?
 
Your executor should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them.
 
Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and emotional issues among your heirs upon your passing.
 
Many people have the idea that they don’t need an estate plan because their net worth is less than X dollars. Keep in mind, money isn’t the only reason for an estate plan. You may not be a multimillionaire yet, but if you own a business, have a blended family, have kids with special needs, worry about dementia, or can’t stand the thought of probate delays plus probate fees whittling away at assets you have amassed … well, these are all good reasons to create and maintain an estate planning strategy.

Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC , a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.
Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
 
This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 
Citations.
1 -
www.knoxnews.com/news/2012/may/07/retirement-accounts-not-governed-by-wills/ [5/7/12]
2 -
www.investopedia.com/university/estate-planning/estate-planning5.asp#axzz1vjRm6aPe [3/20/13]

 

BUT, I DON’T NEED ESTATE PLANNING … DO I?

Why estate planning is so important, and not just for the rich.

Do you have an estate? It doesn’t matter how limited (or unlimited) your means may be, and it doesn’t matter if you own a mansion or a motor home. Rich or poor, when you die, you leave behind an estate. For some, this can mean real property, cash, an investment portfolio and more. For others, it could be as straightforward as the $10 bill in their wallet and the clothes on their back. Either way, what you leave behind when you die is considered to be your “estate”.

If the estate is small, should you still plan? Well, even if you’re just leaving behind the $10 bill in your wallet, who will inherit it? Do you have a spouse? Children? Is it theirs? Should it go to just one of them, or be split between them? If you don’t decide, you could potentially be leaving behind a legacy of legal headaches to your survivors. This, quite simply, is what estate planning is all about – deciding how what you have now (money and assets) will be distributed after your lifetime.

Do you HAVE to create an estate plan? While it is absolutely possible to die without planning your estate, I wouldn’t say it is advisable. If you die without an estate plan, your family could face major legal issues and (possibly) bitter disputes. So in my opinion, everyone should do some form of estate planning. Your estate plan could include wills and trusts, life insurance, disability insurance, a living will, a pre- or post-nuptial agreement, long-term care insurance, power of attorney and more.

Why not just a will? Did you know that your heirs could encounter legal hassles … even if you have a will? Basically, a will tells the world what you’d like to have happen, but proper estate planning is what provides the tools to make those things happen. While your will may state who your beneficiaries are, those beneficiaries may still have to seek a court order to have assets transfer from your name to theirs, and in such a case, those assets won’t lawfully belong to them until the court procedure (known as probate) concludes. Estate planning can include items like properly prepared and funded trusts, which could help your heirs to avoid probate.

Where do you begin? I would advise you to speak with a qualified legal or financial professional – one with experience in estate planning. A financial advisor can refer you to a good estate planning attorney and a qualified tax professional, and lead a team effort to assist you in drafting your legal documents.

These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information. 
 

 

 

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