The Connecticut Elder Law Blog

Medicaid Planning + Attempting to Avoid Probate = Big Trouble!

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.

Attention All Summer Cottage Owners!

Since we're still in the middle of January it might be a little early to start thinking about your summer cottage.  I always try to avoid catching "spring fever" until late February at the earliest!  But if you own real estate outside the state of Connecticut then I'd like to take this opportunity to alert you to a potential "probate pitfall" that may be an issue for you.

When you pass away with real estate in your name (either solely or jointly) your name has to be officially removed from the title to the property.  Otherwise, you have what's called a "cloud on title" which will make it impossible to pass on good title to someone else if someone tries to sell or transfer the property.  The only way to remove a decedent's name from the property is to go through a probate procedure, the extent of which will be determined by the size of the estate and how it's titled.

This process of removing a decedent's name from a deed is true in all states.  So...if you happen to own real estate in more than one state then you will be leaving your family with not just one probate headache, but multiple probate headaches since each state will require a probate process.  Yikes.

Now, I don't agree with many attorneys who believe that every person needs a revocable living trust no matter what.  But in a case where a client owns real estate in Connecticut and another state, I almost always recommend a living trust, and I do so strongly.  That's because if you set up a living trust and you transfer ownership of both houses into the name of the trust then you end up with no probate for either property instead of double probate.

It's also worth mentioning that I'm talking about probate, not taxes.  Each state would be able to levy an estate tax, if the state has one, and the trust wouldn't avoid that (unless it has some special tax planning provisions).  Still, avoiding double-probate for your loved ones is usually more than enough reason to set up a living trust to own both houses.

Keep That Address Book Updated!

Of course, there are plenty of practical reasons to keep your contact information up-to-date.  It would have come in handy recently with the Christmas card list, for example.  But let me add one more big (albeit morbid) reason to keep a record of everyone's current address: the Executor of your estate will be most appreciative.

Right now I'm helping a client administer an estate and it appears that no one in the family has an updated address for one of the beneficiaries of the will.  When the Court attempted to send the beneficiary notice of the probate administration it came back as "undeliverable".  Despite the family's best efforts, they can't find a more recent address for this person.

Well, this is a pretty big deal as far as the Court's concerned because the law requires that every beneficiary named in the will (as well as other parties) be given formal notice of what's going on with the probate process.  That gives the beneficiary an opportunity to object to any of the documents that the Executor files with the Court in case he/she feels that there's some dirty pool taking place.

The Court takes this so seriously, in fact, that they have now appointed an attorney to represent the "missing heir".  The attorney's job is to interview family members to get some background information, then try to track down the missing heir and advise him of his rights regarding the probate administration. 

And the attorney, like every other attorney, will charge a fee for her time and it will have to be paid from the estate.  My guess is that the fee will end up being at least $500, which is a shame when you think about it. 

So, I know it's tough sometimes, but keep everyone's addresses updated.  At some point (hopefully well down the road) it might save someone a lot of hassle and money.

Dying With Debt, But Without a Will

I recently received an e-mail questioning what would happen if someone died without a will but plent of debt.  Could the creditors go after the surviving children?

To greatly summarize what would happen under Connecticut law, if someone dies without a will then an estate would still be opened in the local probate court.  If the debt is large enough then the creditors might take the time and effort to initiate the probate process if the family does not step up and do it. 

The court would then appoint an “administrator” (this person would be called the “executor” if there was a will) and that person’s first job would be to ascertain the legitimate, outstanding debts of the decedent and pay them off with estate assets, if possible.  Once all of the legitimate creditors are made whole then the administrator would distribute any remaining funds to the next of kin.  “Next of kin” would be the surviving spouse, if none then the children, if none then siblings, and so on.  All of these steps would be taken under the supervision of the probate court.

So, in short, the creditors couldn’t directly go after the kids since the kids have no legal responsibility for the parents’ debts (unless they agreed to be responsible in writing, for some reason).  But the creditors could go after the estate which would reduce what the kids would have received from the estate otherwise.

Connecticut's New Conservatorship Laws

For those of you who are involved in conservatorship matters in Connecticut, there's a whole new atmosphere in our probate courts due to a new set of laws that kicked in on October 1st.  This was prompted mostly by a great deal of negative press that the Connecticut probate system has been receiving over the last several years.

There are a lot of new administrative issues addressed by the new laws, and if you would like to review the laws in their entirety, click here for PA-07-116 and here for PA-07-117.

In regards to the "big picture" evaluation of the new laws, there are two issues to bring to your attention: (1) more formal hearings, and (2) an enhanced emphasis on the conserved person's wishes.

As of October 1st, all probate court hearings, regardless of whether or not the matter is contested, must follow the formal rules of evidence.  This includes the use of tape-recorders during hearings, swearing in anyone who provides testimony, etc.  This is a dramatic departure from the previous procedure which allowed for a more informal approach to hearings and employed more relaxed evidence rules in order to facilitate a less restrictive discussion of conservatorship matters. 

The new laws also mandate a stronger consideration of the conserved person's wishes when the conservator acts and when the Court renders a decision.  Essentially, if the conserved person can communicate his wishes and it's possible to accomodate such wishes without jeopardizing his safety and well-being (and the necessary financial support can be provided) then the conservator needs to to do what she can to fulfill those wishes.  The law talks about the "reasonable and informed preferences" of the conserved person, which is certainly open to different interpretations.  In any case, the strong emphasis on ascertaining and trying to fulfill the conserved person's wishes is new to conservatorship law in Connecticut.

Who's Who in a CT Conservatorship Proceeding (Part 3 of 3)

Of course, the conservatorship process does not end with the appointment of a conservator.  In fact, it usually does not end until the conserved person passes away.  It is very rare for a Court to terminate a conservatorship while the conserved person is still alive; the Court will only do so if the person's capacity to manage his own affairs is restored.  But in most cases the mental disorder that initially prompted the conservatorship (usually Alzheimer's or some other type of dementia) is not something that improves or goes away. 

However, a "conservatorship of the estate" (financial management only) may terminate if the incapacitated person runs out of money or nearly does so since there would obviously be little for the conservator of an estate to do at that point.  "Conservatorship of the person" (management of personal affairs) typically continues until death.

After the conservatorship is established the conservator is required to report to the Court regularly in regards to how things are going.  This is done by way of written reports which summarize any extraordinary developments and financial accountings.  Whenever such reports and accountings are filed, interested parties and their attorneys (including the attorney that the Court assigned to represent the conserved person) are given an opportunity to review them and see if anything contained in them would warrant a hearing or a status conference.

Again, a conservatorship proceeding is a serious legal affair.  If you think a family member or friend is in a situation which requires the judicial supervision and legal safeguards offered by a conservatorship then make sure you educate yourself thoroughly on the process.  And I'm aware that this advice is self-serving, but it's worth it to retain an attorney experienced in conservatorship matters if you expect things may get complicated in court.

Who's Who in a CT Conservatorship Proceeding (Part 2 of 3)

Then there is the "Guardian Ad Litem" (GAL) who's job is to interview all the interested parties, look at the totality of the circumstances and inform the Court what she thinks would be in the respondent's best interests. 

Of course, what the respondent wants may be quite different from what is in his best interests.  But, unlike the attorney, the GAL does not advocate for anyone's position.  The role of the GAL is to provide the Court with a detached, impartial perspective on the situation.  The Judge can find the GAL's report and testimony invaluable in difficult cases.  This type of person does not get involved in most conservatorship proceedings, but incorporating such a person into the matter can have a dramatic impact on the outcome.

Finally, we can't forget the Judge.  Not only does he make the critical decision as to whether a conservator is necessary, but the Judge also plays an important ongoing role in the conservatorship.  Although a conservator will make day-to-day decisions for the incpacitated person, she is always accountable to the Judge.  It is sort of like an employer-employee relationship, with the conservator acting as the employee who needs to answer to the boss, or the Judge.

Who's Who in a CT Conservatorship Proceeding? (Part 1 of 3)

When a conservatorship proceeding is initiated in the local probate court, it's often an unpleasant, or at least an awkward affair.  It can also be a rather confusing affair for the uninitiated, so the purpose of this three-part blog is to explain the different roles involved in this unique legal matter.

When a conservatorship application is submitted to the local probate court, someone (the "petitioner") is claiming to the Court that the person in question (the "respondent") has lost the capacity to manage his own personal and/or financial affairs.  If the Court agrees with the petitioner then a "conservator" is appointed to take over some or all of the respondent's affairs.  This is obviously a serious matter because such an action essentially takes away many of the respondent's civil rights.  So the laws establish safeguards to ensure that appointing a conservator is the right thing to do in under the circumstances.

First of all, the Court will appoint an attorney to represent the respondent.  This is assuming that the respondent does not have the ability to go out and find his own attorney the way an average person would (looking through the Yellow Pages, asking friends for referrals, etc.).  The attorney is required to treat the respondent like any client that walked into her office off the street.  That is to say that she can counsel the client on how to proceed (assuming she is able to effectively communicate with the respondent), but ultimately the attorney must ascertain what the respondent's position is in regards to the conservatorship; does the respondent agree that he needs a conservator or is he objecting to the conservatorship application?  Or something in between? 

But once the attorney learns the respondent's position, she needs to advocate for that position in court.  This is where it can get awkward for the attorney, because no matter how irrational or unreasonable the respondent's position is, the attorney is still obligated to advocate for that position. 

How Much Does Probate Court Cost in Connecticut?

One of the most common questions my clients ask, particularly when we have a discussion about revocable living trusts, is how much Probate Court is going to cost upon death.  The Connecticut Probate Courts apply a formula to your gross taxable estate to determine what the Court is owed, and they will not issue all the decrees and other documents you will need to close out the estate until the Court's fee is actually paid. 

Unfortunately, it's not a flat percentage.  Fortunately, most of my clients tell me that the fee turns out to be much less than they had anticipated.  Here is the calculation you need to make:  it's $150 for the first $10,000 of the gross taxable estate, plus another .35% of anything between $10,000 and $500,000, then an additional $.25% of anything over $500,000.  For example, if your gross taxable estate is $500,000, then the bill for the Probate Court will be $1,865.

But don't forget that your gross taxable estate includes all life insurance proceeds and the equity in your real estate.  Most clients are not aware of the fact that life insurance is part of the calculation and they tend to forget about the home equity, so most clients have estates that are larger than they thought.

One other thing that is worth mentioning here has to do with revocable living trusts.  Living trusts are very good at avoiding the probate process, but they will not allow you to avoid probate costs.  In other words, if you have a living trust and it is fully funded, you will avoid the hassle of having to prepare and file several documents with the Court, you will not have to attend Court hearings and you shouldn't have to hire an attorney to guide you through the process.  But before the Court will issue all the documents that you will need (for example, a document to formally remove a decedent's name from a deed on the land records), it's going to send you a bill based on the calculation in the previous paragraph, even if you did not go through the formal, full-blown probate process.  This is probably the singlemost common misunderstanding when clients create living trusts, so you should take this fact into consideration while you are trying to decide between making a Will or a Living Trust the centerpiece of your estate plan.

Posts on revocable living trusts and the estate tax (a separate issue from probate costs) will appear here in the future.