Jan Neal Law Firm LLC

Alabama Elder and Special Needs Law


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Wills and Beneficiary Designations Work Together to Distribute Your Estate

will and gavelWhile a will is an important document to have in any estate plan, the reality is that most property passes to heirs through other, less formal means.  Failure to recognize this fact can result in some unintended consequences in estate distributions.

Many bank and investment accounts, as well as real estate, can be titled to joint owners who take ownership automatically at your death.  Other banks and investment companies offer “payable on death” accounts that permit owners to name the person or people who will receive the account funds when the owner dies. Life insurance, of course, permits the owner to name beneficiaries.  Some real property is titled to joint owners with rights of survivorship so that when one owner dies, the other takes full ownership of the property.  A future interest in property can be transferred during a person’s life, subject to a life estate held by the transferor, so that when the life estate holder dies, the property is owned by the person/s to whom the future interest was given.  No probate would be necessary.

All of these types of ownership and beneficiary designations permit these accounts and types of property to avoid probate, meaning that they will not be governed by the terms of a will. When taking advantage of these simplified procedures, owners need to be sure that the decisions they make are consistent with their overall estate plan.  It is  not unusual for a will to direct that an estate be equally divided among the decedent’s children, only to find that because of joint accounts or beneficiary designations, the estate is distributed unequally, or even to non-family members, such as new or old boyfriends and girlfriends.

It is also important to review beneficiary designations every few years to make sure that they still reflect your wishes. An out-of-date designation may leave property to an ex-spouse, to children who disappeared from you life while other children provided care, to ex-girlfriends or ex-boyfriends, to relatives who are on means tested public benefits who will  lose those benefits by inheriting, and to people who died before the owner. All of these failures to make proper designations can thoroughly undermine an estate plan and leave a legacy of resentment that most people would prefer to avoid.

These concerns are heightened when dealing with retirement plans, whether IRAs, SEPs or 401(k) plans, because the choice of beneficiary can have significant tax implications. These types of retirement plans benefit from deferred taxation in that the income deposited into them, as well as the earnings on the investments, are not taxed until the funds are withdrawn. In addition, owners may withdraw funds based more or less on their life expectancy, so the younger the owner, the smaller the annual required distribution.  Further, in most cases, withdrawals do not have to begin until after the owner reaches age 70 1/2. However, this is not always the case for inherited IRAs.  To further complicate matters, the spouse has a right to funds in a 401(k) that must be disclaimed by waiver after marriage to prevent their having rights to those funds even if you named someone else as your 401(k) beneficiary.

Following are some of the rules and concerns when designating retirement account beneficiaries:

  • Name your spouse, usually. Surviving husbands and wives may roll over retirement plans inherited from their spouses into their own plans. This means that they can defer withdrawals until after they reach age 70 1/2 and take minimum distributions based on their age. Non-spouses of retirement plans must begin taking distributions immediately, but they can base them on their own presumably younger ages.
  • But not always. There are a few reasons you might not want to name your spouse, including the following:
    • He or she is incapacitated and can’t manage the account
    • Doing so would add to his or her taxable estate
    • You are in a second marriage and want the investments to benefit your first family
    • Your children need the money more than your spouse
  • Consider a trust. In some circumstances, a trust would be appropriate, providing for management in the case of an incapacitated spouse, permitting assets to benefit a surviving spouse while being preserved for the next generation. Those in first marriages may want to name their spouse as the primary beneficiary and a trust as the secondary, or contingent, beneficiary. Transferring assets to a trust can also be used to plan for long-term care expenses if planning is done early enough (five years before you or your spouse need nursing home care).
  • But check the trust. Most trusts are not designed to accept retirement fund assets. If they are missing key provisions, they might not be treated as “designated beneficiaries” for retirement plan purposes. In such cases, rather than being able to stretch out distributions during the beneficiary’s lifetime, the IRA or 401(k) will have to be liquidated within five years of the decedent’s death, resulting in accelerated taxation.
  • Be careful with charities. While there are some tax benefits to naming charities as beneficiaries of retirement plans, if a charity is a partial beneficiary of an account or of a trust, the other beneficiaries may not be able to stretch the distributions during their life expectancies and will have to withdraw the funds and pay the taxes within five years of the owner’s death. One solution is to dedicate some retirement plans exclusively to charities and others to family members.
  • Consider special needs planning. It can be unfortunate if retirement plans pass to individuals with special needs who cannot manage the accounts or who may lose vital public benefits as a result of receiving the funds. This can be resolved by naming a special needs trust as the beneficiary of the funds, although this gets a bit more complicated than most trusts designed to receive retirement funds. Another alternative is not to name the individual with special needs or his trust as beneficiary, but to make up the difference with other assets of the estate or through life insurance.
  • If probate will be necessary, leave an account jointly titled with your personal representative to provide expenses during probate.  If your home needs to be sold, funds will need to be available to pay property tax, insurance, utilities, etc.
  • Keep copies of your beneficiary designation forms. Don’t count on your retirement plan administrator to maintain records of your beneficiary designations, especially if the plan is connected with a company you worked for in the past, which may or may not still exist upon your death. Keep copies of all of your forms and provide your estate planning attorney with a copy to keep with your estate plan.
  • But do name beneficiaries! The biggest mistake many people make is not to name beneficiaries at all, or they end up in this position by not updating their plan after the originally-named beneficiary passes away. This means that the plan will have to go through probate at some expense and delay and that the funds will have to be withdrawn and taxes paid within five years of the owner’s death.

In short, while wills are important, in large part because they name a personal representative to take charge of your estate and they name guardians for minor children and disabled spouses, they are only a small part of the picture. A comprehensive plan needs to include consideration of beneficiary designations, especially those for retirement plans.


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January 2018 Newsletter Available

Our January 2018 Newsletter, Bookmarks, has been published , and you can view it online at the link provided.  Several articles are included covering Medicare, Medicaid, nursing home resident dumping, and the new tax law.  Let us know if you want to be added to the email list.


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Resource For Managing Money as an Agent in Alabama

I want to make available to you a guide titled Managing Someone Else’s Money in Alabama.  This guide was adapted from the Consumer Financial Protection Bureau’s (CFPB) Managing Someone Else’s Money guides and tailored to Alabama state law by members of The Alabama Interagency Council for the Prevention of Elder Abuse, Jones School of Law Elder law Clinic at Faulkner University and AARP Alabama.  The work was overseen by Clinical Associate Professor John Craft, and his Research Assistant, Lauren Hogeland. Many thanks for their work helping caregivers understand their duties.


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Dementia Resource Publication

We have been working on a publishing project with Middle Alabama Area Agency on Aging (M4A) to produce dementia friendly resources for professionals and caregivers.  This booklet was published in June 2017 and can be read here.  To download you will need to go to the publishing platform, Issue, to create a free account or download the pdf here.  Printed copies may be obtained by contacting M4A at (205) 670-5770 or toll free (866) 570-2998.


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Resources for UNA Social Workers

Last week I spoke to the alumni social workers group at The University of North Alabama in Florence, Alabama, and shared information about authority and capacity issues for seniors.  I promised to post additional information for reference on our web site, so here you have it.

The Alabama Uniform Power of Attorney Act effective January 1, 2012, is found at Alabama Code (1975) Sections 26-1A-101 through 404.  The standard power of attorney form is found at Section 26–1A–301.  This power is presumed durable without specific language being required like previous powers of attorney.

ALA. CODE § 26-1A-120(a)(3) provides that a person may not require an additional or different form of power of attorney for authority granted in the power of attorney presented, and a person who refuses to effect a transaction in reliance upon an acknowledged power of attorney may be subject a court order mandating that the person effect the transaction.  If the document is found to be valid, attorneys fees and costs incurred may be awarded.

The Portable Physician Do Not Attempt Resuscitation Orders regulation  is found at Board of Health 420-5-19-.02.  Different facilities can continue to use their own forms, but for the order to be portable the statutory form provided in the regulation is required.

The capacity assessment materials I discussed produced by the American Bar Association and American Psychological Association can be found here.

What a great group of social workers I met, and I look forward to speaking again to the group in August.

 

 


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Deeding Property with a Reserved Life Estate

agreementThe term “life estate” often comes up in discussions of estate and Medicaid planning, but what exactly does it mean? A life estate is a form of joint ownership that allows one person to remain in a house until his or her death, at which time it passes to the other owner, referred to as the person with the remainder interest. Life estates can be used to avoid probate while giving a house to children without losing the ability to live in the home, remaining responsible for property tax – with the benefit of homestead and age related tax exemptions, remaining responsible for homeowner insurance, yet creating ownership in the children at the death of the parent.   This type of deed can play an important role in Medicaid planning since Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay for nursing home care.  If the transfer occurred prior to five years before application, there will be no penalty for the transfer.

In a life estate, two or more people each have an ownership interest in a property, but for different periods of time. The person holding the life estate — the life tenant — possesses the property during his or her life. The other owner — the remainderman — has a current ownership interest but cannot take possession until the death of the life estate holder. The life tenant has full control of the property during his or her lifetime and has the legal responsibility to maintain the property as well as the right to use it, rent it out, and make improvements to it.

Another example of use of life estates is when a spouse who owns property in only his or her name wants to leave that property to his or her children from a former marriage but wants the later in life spouse to be protected and have a place to live.  That person might write a will leaving a life estate to the spouse with the remainder to his or her children on the death of the spouse.  This comes up not infrequently when individuals want to protect property passed to them by family and who want to keep that property in their blood line while protecting the spouse as well.

When the life tenant dies, the house will not go through probate, since at the life tenant’s death the ownership will pass automatically to the holders of the remainder interest. Because the property is not included in the life tenant’s probate estate, it can avoid Medicaid estate recovery in states that have not expanded the definition of estate recovery to include non-probate assets, which includes Alabama at the time this is being written.

Although the property will not be included in the probate estate, it will be included in the taxable estate. Depending on the size of the estate and the state’s estate tax threshold, the property may be subject to estate taxation.  However, the joint federal lifetime estate tax exemption and gift tax exclusion is $5,490,000, so few people are actually subject to estate tax.

The life tenant cannot sell or mortgage the property without the agreement of the remaindermen. If the property is sold, the proceeds are divided up between the life tenant and the remaindermen. The shares are determined based on the life tenant’s age at the time — the older the life tenant, the smaller his or her share and the larger the share of the remaindermen.

Be aware that transferring your property and retaining a life estate can trigger a Medicaid ineligibility period if Medicaid application is made within five years of the transfer. Further, purchasing a life estate should not result in a transfer penalty if you buy a life estate in someone else’s home, pay an appropriate amount for the property and live in the house for more than a year.

For example, an elderly man who can no longer live in his home might sell the home and use the proceeds to buy a home for himself and his son and daughter-in-law, with the father holding a life estate and the younger couple as the remaindermen. Alternatively, the father could purchase a life estate interest in the children’s existing home. Assuming the father lives in the home for more than a year and he paid a fair amount for the life estate, the purchase of the life estate should not be a disqualifying transfer for Medicaid.  Just be aware that there may be some local variations on how this is applied, so get good advice before finalizing arrangements involving a life estate if long term care could be a future concern.


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SSI and Gifting Resources

SSI is the basic federal safety net program for the elderly, blind and disabled, providing them with a minimum guaranteed income. If your resources are above the program’s resource limits of $2,000 for an individual or $3,000 for a married couple, you may be able to “spend down” to qualify for SSI, similar to the process to qualify for the Medicaid program.

If you give away a resource or sell it for less than it is worth in order to get under the SSI resource limit, you may be ineligible for SSI for up to 36 months. The SSA looks at whether or not you have transferred a resource within the previous three years. If you have, it computes a penalty period by dividing the amount of the transfer by your monthly benefit amount.

Thus, if you give your son a $6,000 gift and then apply for a monthly SSI benefit of $600 within three years of the gift, you will not be eligible for SSI for 10 months (6,000/600=10). That 10-month period will begin on the date of the transfer and end 10 months later. In other words, although you can be ineligible for up to 36 months due to a transfer, that is only a cap. The actual period of ineligibility is based on the value of what you transferred divided by the monthly benefit in your state.

You should be aware that transfers may be “cured” by the person to whom you made a gift returning it to you. And, finally, there are certain exceptions to the transfer penalty. These include gifts to:

A spouse (or anyone else for the spouse’s benefit);
A blind or disabled child;
A trust for the benefit of a blind or disabled child;
A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the applicant, under certain circumstances).

In addition, special exceptions apply to the transfer of a home. The SSI applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

The applicant’s spouse;
A child who is under age 21 or who is blind or disabled;
Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the applicant, under certain circumstances);
A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home; or
A “caretaker child,” who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.