This is a short presentation on The Alabama Small Estate Summary Distribution available for estates that include no real property and assets not exceeding $30,245 (in 2020).
No one wants to plan for it, but death is inevitable. To be sure your loved ones are protected and your assets pass as you wish, you need to understand asset titling and the probate process. This publication is Alabama specific and provides an overview of the ways property can be passed at death. This document can be read online or downloaded and printed. It will remain available in the Publications at this web site.
A recent case involving basketball star Caldwell Jones demonstrates the danger in having only one spouse’s name on a reverse mortgage. A federal appeals court has ruled that an insurance company may foreclose on a reverse mortgage after the death of the borrower, Mr. Jones, even though Mr. Jones’ widow is still living in the house. While there are protections in place for non-borrowing spouses, many spouses are still facing foreclosure and eviction.
A reverse mortgage allows homeowners to use the equity in their home to take out a loan, but borrowers must be 62 years or older to qualify for this type of mortgage. If one spouse is under age 62, the younger spouse has to be left off the loan in order for the couple to qualify for a reverse mortgage. Some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way. But couples often did this without realizing the potentially catastrophic implications. If only one spouse’s name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.
In order to protect non-borrowing spouses, the federal government revised its guidelines for reverse mortgages taken out after August 4, 2014 to allow spouses to stay in the house as long as they meet certain criteria, including proving ownership within 90 days of the borrowers death. In 2015, the federal government allowed lenders to defer foreclosure on a widow or widower and assign the mortgage to the federal government. Advocacy groups looking at reverse mortgage foreclosures have found that despite these new regulations, lenders are still foreclosing on non-borrowing spouses. Of the 591 non-borrowing spouses who have sought help to avoid foreclosure, only 317 received assistance.
These regulations did not help Mr. Jones’ wife, Vanessa. Mr. Jones obtained a reverse mortgage in 2014 on the Georgia home he lived in with his wife. The contract defined the “borrower” to be “Caldwell Jones, Jr., a married man.” Ms. Jones did not put his wife’s name on the reverse mortgage because she was under age 62 at the time of the mortgage. Mr. Jones died later that year, and when Ms. Jones did not repay the loan, the insurer began foreclosure proceedings.
Ms. Jones sued the insurer in federal court to prevent the foreclosure, arguing that federal law prohibited the insurer from foreclosing on the house while she lived in it. Under a provision in federal law, the federal government “may not insure” a reverse mortgage unless the “homeowner” does not have to repay the loan until the homeowner either dies or sells the mortgaged property and defines “homeowner” to include the borrower’s spouse.
On appeal, the 11th Circuit Court of Appeals (Estate of Caldwell Jones, Jr. v. Live Well Financial (U.S. Ct. App., 11th Cir., No. 17-14677, Sept. 5, 2018)) ruled that the federal law in question only covers what the federal government can insure and does not govern the insurer’s right to foreclose. The court agrees with Ms. Jones that the law is intended to safeguard widows and implies that the federal government should not have insured the loan in the first place, but finds that federal law does not cover the insurer’s private right to demand immediate payment and pursue foreclosure.
When purchasing a reverse mortgage, it is always safer to put both spouse’s names on the mortgage. If one spouse is underage when the mortgage is originally taken out, that spouse can be added to the mortgage when he or she reaches age 62.
Medicaid benefits seem more like loans than benefits these days. This is because there are laws that require states to recoup what it spent on care from estates after the Medicaid recipient dies.
This federal recoupment effort carried out by each state is known as Medicaid Estate Recovery. For this reason it is important for a person who is considering application for any type of Medicaid to get solid advice on this topic prior to applying for Medicaid. It is also important for any person probating a will or administering an estate to consider the possibility of Medicaid being an estate creditor to put the agency on notice before disbursing the proceeds of an estate or else risk personal liability against the personal representative (aka executor).
To grasp Medicaid Estate Recovery, it is important to understand that there are many different categories of Medicaid, but they are all part of a joint federal/state program. Estate recovery applies to some categories of Medicaid and not to others.
Also understand that there are certain types of liens on property that individuals can give to Medicaid to allow them to qualify for Medicaid. These are pre-death liens referred to as TEFRA (Tax Equity and Fiscal Responsibility Act) liens. An example might be a single person of any age who cannot qualify for nursing home Medicaid because he owns his home, thus resulting in resources that exceed the $2000 resource limit. He might give a lien and place the property on the market to sell and qualify for nursing home Medicaid under the “bona fide effort to sale” property exclusion. Medicaid will hopefully recoup funds from the sale of the property up to the amount it paid for the care of the individual who gave the lien, but often the property does not sell during the lifetime of the Medicaid recipient. Medicaid will continue to hold that lien and right to recover funds from the sale after the Medicaid recipient dies.
But what is referred to as Medicaid Estate Recovery goes a step further. Even without a specific TEFRA lien being given by the property owner, Medicaid can recoup funds from the probate estate of the Medicaid recipient after his death provided there are funds from which to recoup. In other words, this is a statutory lien that applies to estates of deceased Medicaid recipients for whom certain types of Medicaid benefits were paid.
Through Medicaid Estate Recovery the federal government requires states to seek recovery of funds spent on care from the estates of persons who received certain benefits, particularly benefits paid after the age of fifty-five years and incorrect payments. This includes:
- benefits that were not paid correctly to a person of any age (resulting in what is known as an overpayment);
- benefits paid after age 55 for nursing home Medicaid;
- benefits paid after age 55 for waiver services (at home care provided to avoid institutional care);
- benefits paid for hospital and drugs for persons who received those benefits in connection with nursing home or waiver Medicaid after the age if 55.
Federal law gives the states the option to seek recovery of funds for all Medicaid expenditures for services received after age 55 unless otherwise exempted (more on this later). This would include money spent for SSI eligible persons who qualify for Medicaid in the community. Alabama has opted to exercise this recovery.
To further complicate matters, the Alabama Medicaid Administrative Code includes language indicating that the agency will seek recovery for benefits paid for a person of any age who permanently resides in a nursing facility, intermediate care facility for the intellectually disabled or other medical institution. There are attorneys in Alabama who believe that this application of estate recovery for institutional benefits for persons under the age of 55 violates the federal statute. If Medicaid does seek recovery of such funds a recovery in this category will likely be challenged in years to come.
Medicaid Estate Recovery does not apply to the Medicare Savings Programs (QMB, SLMB and QI), but Alabama is collecting on benefits paid for these programs prior to 2010. These are programs that help low income persons eligible for Medicare pay for healthcare costs through Medicaid. Due to the Medicare Improvements for Patients and Providers Act (MIPPA) these categories of Medicaid benefits are not subject to estate recovery. Note that as of 2016 the award letters to these recipients incorrectly indicated that estate recovery would apply. An exception to this exclusion is Medicare Savings Program benefits paid on behalf of beneficiaries of first party special needs trust.
At this time Medicaid Estate Recovery only applies to property in the probate estate in Alabama. That means that property that passes directly to someone outside of the probate estate cannot be reached by Medicaid. Examples include property titled as survivorship property (in a deed where the owners hold property as joint tenants with right of survivorship); property in which the deceased had already transferred it to another retaining only a life estate (through a life estate and remainder deed); proceeds of life insurance, IRAs, or brokerage accounts with a beneficiary named to take the proceeds at death; joint bank accounts with a co-owner or set up as payable on death to a named beneficiary.
Estate recovery/lien enforcement can be delayed or waived in certain circumstances.
Delay may occur:
- until after the death of any surviving spouse (no lien was taken);
- related to the home, until the property is no longer occupied by a surviving child under the age of 21 years of age; a surviving child who is blind or disabled (no lien was taken);
- related to the home, until the property is no longer occupied by a sibling with an equity interest who had resided in the home for at least one year preceding the Medicaid recipient’s admission to the facility where benefits were paid (no lien was taken);
- related to the home, until the property is no longer occupied a son or daughter who provided two years or more of care immediately before the admission to the facility where benefits were paid and that care was of such a level that it allowed the Medicaid recipient to reside in the home and avoid institutional care (a lien may exist, and note that the property could have been transferred to the child without penalty).
- related to the home, until the property is no longer occupied by a sibling who is lawfully living in the home and was lawfully residing continuously in the home for at least one year immediately prior to the Medicaid recipient being admitted to the facility where benefits were paid (a lien may exist).
Waiver may occur:
- for an amount of money equal to sums paid under a qualified long-term care insurance policy;
- upon proving undue hardship which is: the existence of a situation, established by convincing evidence, that the estate subject to recovery is an asset such as a family farm or family business which produces “limited income” (defined as equal to or less than the income limit established in Rule 560-X-25-.14 [at or below 141% of the poverty level]) and is the sole income-producing asset of one or more heirs to the estate. The limit of 141% of the poverty level is $1426.45 for a one person household, $1934.05 for a two person household (for larger households, add 507.60 for each additional person). Note that the Medicaid regulations state that undue hardship does not apply for recipients with long term care insurance policies who became Medicaid eligible by virtue of disregarding assets because of payments made by a long term care insurance policy or because of entitlement to receive benefits under a long term care insurance policy OR if the Medicaid agency determines the hardship was created by the recipient by resorting to estate planning methods under which the recipient illegally divested assets in order to avoid estate recovery.
To request an undue hardship waiver a request for a waiver application must be made to Alabama Medicaid within 30 days of receiving the agency notice against the estate or upon the sale, transfer or conveyance of real property subject to a TEFRA lien.
A bill was filed in the Alabama Senate in the 2017 legislative session and again in the current 2018 session that would give the Alabama Medicaid broad statutory powers to impose liens against the real property of any Medicaid beneficiary. Astonishingly it would require every estate administered in Alabama to notify the agency as a creditor even if the deceased person never applied for Medicaid. That pending legislation can be read here.
The 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.
On October 10, 2016, Jan taught the first of a two part presentation on Elder Law at Osher Lifelong Learning Institute (OLLI) at Auburn University entitled Elder Law: Enhancing the Lives of Seniors Through Education, Planning For What Comes Next. The second session will be taught on Monday, October 17, 2016, at 2:30 p.m. at The Clarion in Auburn, Alabama.
Topics covered in this training include: Older Americans Act Legal Assistance; Important Documents Needed for Proper Planning; Authority Issues; Long-term Care Levels of Care and Payment Options; Medicaid for Long-term Care; Special Needs Planning; Probate; Administration of Estates; Planning for Last Remains and Funerals.
A 39 page Keynote presentation covering these topics is provided to course participants.
Anyone interested in this and the many other learning opportunities available through OLLI can learn more by visiting the OLLI website.
When an estate is being settled in Alabama, it will take six months or longer before the assets in the probate estate can be distributed. I frequently advise people to plan for this and to designate a bank account jointly titled to themselves and the person they have named to be the personal representative (aka executor) of their will so that funds will be available for any immediate cash needs. Another source of cash may be life insurance with the beneficiary designated as the person who will be responsible for the estate.
Historically, one main reason to buy life insurance as part of an estate plan was to have cash available to pay estate taxes. Now that the estate tax exemption is so large (in 2016, estates can exempt $5.45 million per individual from taxation), most estates don’t pay federal estate taxes. If someone dies in Alabama with less than the $5,450,000 exemption amount, his or her estate will not owe federal estate tax, and there is no Alabama estate tax. The heirs and beneficiaries will inherit the property free of tax as it relates to the federal government and Alabama (but they may owe estate tax in another state). So the use of life insurance for estate tax reasons is greatly diminished, however, life insurance can still be helpful in a number of other ways.
Life insurance provides cash to use for the payment of home expenses for property held in the probate estate (such as utilities, mortgage payments, maintenance, insurance, property tax), debt, burial fees, or estate administration fees and expenses, replacement of income or assets lost to pay for long-term care, funds for a trust for a minor child or a child with special needs, buying out a business interest, funding charity, or balancing the interests between heirs to non-probate property (e.g. if one child is inheriting a certificate of deposit, a life insurance policy can ensure that the other child receives the same amount).
It is important to think through the property you own and determine what will be part of your probate estate and what will fall outside the probate estate and plan for enough liquidity to make the settling of your estate manageable for those charged with that responsibility.