A big thank-you to Attorney David Goldman who is based in Jacksonville, Florida who generously shared an article he wrote regarding the problems that are triggered when the elderly maneuver to avoid probate.
One of my favorite sayings when it comes to planning and elder law is that usually when you fix one problem you end up creating a brand-new problem. Then you have to determine which of the two problems is the bigger one! Anyway, this dilemma is wonderfully illustrated by Attorney Goldman in his article, and I have posted it below with his permission. Thanks Dave!
Common Mistakes Made When the Elderly Attempt to Avoid Probate.
By David Goldman with the Jacksonville based Apple Law Firm PLLC
In an effort to avoid the costs and time involved with a
Florida
probate case, many families rely on techniques that that they hear about from friends or that were used by previous generations. Due to the expense of nursing home coverage, these techniques often cause problems far beyond the potential savings. In November 2007, Florida enacted the Deficit Reduction Act of 2005. This Act drastically changed Medicaid qualifications by eliminating many of the techniques used to spend recipient’s funds and by increasing the “look-back” period to 5 years. In addition, any ineligibility for Medicaid benefits begins from the application date and not the date of the transfer. This article will address the mistakes and some solutions when these actions are taken to allow an individual to qualify for Medicaid coverage.
The most common mistakes that Florida families make include:
1. Transferring a portion or all of a home to a family member.
Often, people executed deeds that include other family members in an effort to avoid probate. The most common type of deed that people use is a life-estate deed. Normally, A life-estate deed reserves the right for the owner to live in the home for the remainder of his or her life and then upon death the property belongs to the designated family members. Although a life-estate deed avoids probate, it can cause many unforeseen problems. These problems include 1) a gift for federal income tax purposes which is often unreported and can accrue interest and penalties for years; 2) loss of the stepped up basis the recipient would receive upon the death of the original owner; 3) the inability to sell or refinance the property without the consent of all owners; and 4) the creation of a disqualifying transfer for Medicaid qualification.
Fortunately, there is a way to avoid probate without the downsides associated with a life-estate. If an Enhanced Life Estate Deed is used, the problem will not occur. The enhanced life estate deed is similar to a life-estate deed. However, an Enhanced Life Estate Deed gives the life tenant the ability to sell, convey, mortgage, or refinance the property without another person’s consent. Moreover, an Enhanced Life Estate Deed is beneficially avoids probate, maintains the stepped up basis benefit upon the death of the life tenant, does not create a gift, and is not a disqualifying transfer for Medicaid qualification purposes.
Indeed, one must use caution when executing an Enhanced Life Estate Deed, because it is possible to draft them incorrectly and create problems that will result in the necessity of a probate. Typically, this occurs for of two reasons. First, the deed does not use the correct language to keep part or all of the property outside of the life tenants estate. This occurs when one or more of the beneficiaries pre-deceases the life tenant. The second, more common reason is that the title company is not satisfied with the language of the deed and requires a probate in order to issue title insurance. In Florida, Title insurance is required when a home is sold with a mortgage. Therefore, you will not be able to sell the home without a probate to clear the title. In addition, the requirement of a probate can subject the home to claims by Medicaid under Florida’s Medicaid reimbursement program. This is not the type of deed that one should undertake without the advice and consent of a licensed Florida lawyer who has dealt with these issues.
2. A joint account holder using funds for personal benefit.
Another common technique used by the elderly to avoid probate is to create jointly owned bank accounts with other family members. For Medicaid planning purposes, all funds in such bank accounts are considered assets of the applicant, regardless of the source of the funds. Often, family members do not keep sufficient records or may use the joint account to pay bills that are not the responsibility of the applicant. Medicaid considers such transactions as “gifts” and will disqualify the recipient if they are done within 5 years of the application process. It is possible to undo these transactions, but often the family member who received the benefit is unable or unwilling to return the money.
3. Making gifts or donations to people, charities, or religious institutions.
The third major mistake of Medicaid applicants is making gifts or donations to churches or charities. As you age, the chance that you will need Medicaid increases. If you desire to continue to make donations, you must be prepared to repay the money in the event you need Medicaid coverage. There is a solution. You can make gifts conditional that in the event that such gift creates ineligibility for Medicaid coverage, the organization accepting the gift shall return the funds necessary to cure the ineligibility. However, most institutions refuse to accept gifts or donations under these circumstances.
Another problem area with gifts occurs when gifts are given to family members and friends for holidays and birthdays. While there is not a problem in making a gift to a spouse, although a gift to a child or grandchild is a problem. Often the applicant’s children understand, but it is a difficult concept to explain to the grandchildren. In these situations, we often recommend that the applicant tell the grandchild’s parent to purchase the gift for the grandchild with his or her own money.
4. Selling assets to family members for less than fair market value.
The fourth major area of problems with Medicaid eligibility occurs when the applicant has sold or given real or personal property to another for less than fair market value. The difference between the fair market value at the time of the transaction and the amount received is considered a gift and creates a disqualification period. This can happen with a vehicle, home, a piece of land, or other asset owned by the applicant. The solution is to have the person who received the funds reimburse the fair market value of the items prior to the application for coverage being filed.
5. Transferring assets to a Living Trust.
One of the more common but easily correctable mistakes is when the applicant transfers assets to a revocable trust. Often, these transfers are part of normal estate planning. It is important as people age that any estate-planning take into consideration Elder law issues and the potential need for Medicaid planning. Since the trusts are revocable, they can be revoked and the assets are returned to the applicants. It is important to do this prior to applying for Medicaid to avoid penalties.
As our family members age it is important to review and modify our planning techniques based on their individual circumstances. Often, we can accomplish the goals of probate avoidance and Medicaid eligibility with alternative tools and techniques. As the rules for eligibility become more complex it is important to deal with someone who is familiar with elder law and estate planning.
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David Goldman is an attorney with the Apple Law Firm who practices in the areas of elder law, Medicaid planning, estate planning, and Asset protection.
