Law Office of Jacqueline Voss Lees
Shetland Park at 27 Congress Street Suite 512 Salem, MA 01970
Phone (978) 745-6006 Fax (978) 745-9071
[email protected] www.vosslees.com admitted in Mass. and Conn.
July 5, 2016 Michael and Elizabeth Scali 990 Happy Dale Lane All is Good, USA Re: Estate and Medicaid Planning Dear Michael and Elizabeth:
It was a pleasure to meet you a couple of weeks ago. I have given some thought to different alternatives you may consider given your objectives of avoiding probate, lessening or avoiding estate taxes and preserving your assets for your family by protecting them from the reach of a nursing home. I have also reviewed your current estate planning documents prepared by Attorney Jenny Jones. Your current documents are very well drafted. I will comment on each document in more detail below. I will not offer advice regarding investments or financial planning but I will consult with Mary Smith, your financial planner and Kay Cassidy, your accountant, if necessary. In order to achieve your objectives, your estate plan should include wills, trusts, health care proxies, HIPAA Release, durable powers of attorney and a homestead. I have briefly described each of the instruments in your plan and their intended uses in the paragraphs that follow. I.
Estate Planning A. Durable Power of Attorney
The durable power of attorney Jenny drafted for you is great, except there are only 2 agents – your spouse and then Andrea, your daughter. You may consider adding a third alternate agent if Andrea were not able to serve. I don’t see this as a critical issue but one you should be aware of. If you choose to add a third agent, I would have to draft a new power of attorney since “amending” is not good practice. As you may know, your 1
power of attorney grants someone else the authority to make legal decisions (primarily financial) on your behalf. Your durable power of attorney was effective the moment you signed it and it is very broad in scope. This does not mean that you are relinquishing any powers but merely authorizing another to act in your stead. Of course, your attorney in fact, (the person who received the power) owes you a fiduciary duty of utmost faith and loyalty. B. Health Care Proxy Your health care proxy should be re-drafted, in my opinion. In your current proxy, your spouse is your first agent. Joanna, your daughter and Andrea are consecutive agents, in that order. However, your agents are not permitted to admit you to a nursing home or authorize the administration of certain anti-psychotic measures without court approval. If your objective is to stay out of court, I would consider redrafting your proxies to include broader provisions, unless the foregoing restrictions were purposefully made. The powers of your health care agent will not become effective until such time as a doctor determines that you are unable to make or communicate health care decisions on your own behalf. The authority granted to the health care agent is a very broad authority. The health care proxy will give your health care agent the ability to make all health care decisions on your behalf, including decisions regarding life support and artificial feeding. The proxy will also be an opportunity to express your wishes regarding life support and organ donation. Your proxy will lay all this out. The primary purpose of the health care proxy and durable power of attorney is to avoid court intervention during your life so that a guardianship or conservator proceeding is avoided. C. HIPAA Release Jenny drafted several separate HIPAA releases for the following persons to have access to your medical information: Elizabeth – Michael, the kids, Frank and Stella Michael – Elizabeth, the kids, Richard and Colleen Assuming no change in your desires, the HIPAA releases are fine. D. Wills and Your Existing Revocable Trust The wills that I plan to create for you will be essentially mirror image wills that include special provisions to protect assets inherited by the surviving spouse from the reach of the nursing home. This technique does not protect assets while you are both alive.
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At our meeting we talked about “Medicaid Will.” Basically, I would create a Standby Supplemental Needs Trust inside each of your wills. The trust is Standby in that it would not own any assets until and unless one spouse needs nursing home care and the other spouse is in the community but critically ill. The idea behind incorporating the standby trust now is to protect against losing the opportunity to create it later in the event of incompetency. Additionally, it typically takes a great effort to address estate planning and I am fearful that it just won’t get done. The purpose of the Standby Supplemental Needs Trust is that upon the death of the community spouse, all assets get funneled into this trust inside of the will and are protected from having to be spent on nursing home care for the ill spouse. However, it would be imperative to do additional work in the future to position your assets correctly. Basically, if one spouse is in the nursing home and the other is in the community but critically ill, we would transfer all the assets to the spouse in the community in conjunction with additional Medicaid planning. If the community spouse dies, then all the assets would flow into her estate, the estate would be probated and the assets would flow into the Supplemental Needs Trust inside of her will. You would not avoid probate in this instance, but the assets would be protected after the death of the community spouse and may be used to supplement but not supplant the nursing home spouse’s needs. Upon the death of the survivor of you, I assume that you would want to follow the same distribution scheme as your Revocable Trust. You provided that your assets are equally distributed to your children and if a child predeceased you, that child’s share would trickle down to your grandchildren. If a child predeceased you without grandchildren, her share would be absorbed by the remaining beneficiaries. If grandchildren inherit, their share stays in trust until age 30. However, at age 25, each grandchild may demand ½ of their share and the balance at age 30. Additionally, until the grandchildren turned those magic ages, the trustee (their aunt) could pay for health, education, maintenance and support of that grandchild. I think that makes sense. Is this distribution scheme still ok? You also thought about a total family disaster in your existing Revocable Trust. You provided that the trust assets would be equally distributed to Frank, Thomas, Stella and Richard. I assume these folks are your siblings. Is this still ok?. Each of your wills shall name your daughters as your Executor. Your current will provides that Alyssa, Andrea and Joanna serve as alternates in that order. Is that still ok? II.
ESTATE TAX CONSIDERATIONS
Without any further planning, then your estate may pay estate taxes on the death of the second spouse if your combined assets exceed $1M. Your total estate for estate tax purposes is $1,200,000 based upon Mary’s summary. This includes your respective life
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insurances. The estimated estate tax would be approximately $45,000. We can draft a plan that eliminates estate taxes. The Federal government imposes an estate tax on the assets transferred at the time of the death. As you know, the current Federal Estate and Gift tax exemption is $5,450,000. Federal estate taxes are not the tax of concern. There is also an estate tax in Massachusetts for decedents dying with more than $1 million. The Massachusetts tax scheme changed in 2003 when it was “decoupled” from the Federal estate tax scheme. Your plan takes the Massachusetts estate tax into account as well. Therefore, if we effectively remove assets from your taxable estate, your estates will not pay any taxes upon your deaths. I suggest we use an Irrevocable Life Insurance Trust to remove the death benefits of $350K from your taxable estate. Then your combined estates will be less than $1M and no estate taxes will be due upon your deaths. I will give you the reader’s digest explanation of the tax advantages to the ILIT. Life Insurance and Life Insurance Trust One Irrevocable Life Insurance Trusts (ILIT) should be the owner of your respective life insurances so that the value is excluded from your estate. If you create the ILIT, the tax savings will be about $45,000 – nothing to sneeze at. Since you already have the policies, you need to survive for three years after transferring the existing policies to the ILIT in order to avoid the value of those policies (the death benefit) being “clawed back” into your taxable estate. Since your policies have a cash value presently, you would be making a gift of the cash value. My notes do not reflect the cash value of the policies. Additionally, by making this gift you will have made a disqualifying transfer for Medicaid purposes, if and only if you need nursing home care in the next five years. Assuming the cash value is more than $14,000, you should file a gift tax upon transfer of the policies to the ILIT. No gift taxes are due, unless you give away $5,450,000 over your lifetime. Massachusetts does not have a gift tax. The ILIT is irrevocable and premium payments that you make to the ILIT annually are gifts to the ILIT. However, if your premium is less than $14,0000 annually, no Federal gift tax return is required. We can provide for the death time distribution scheme in the ILIT to mirror the scheme of the Revocable Trusts or something different. We should consider including provisions in the ILIT to address Andrea settling up with her sisters if you gift or buy a house together. It seems that the death benefits are more than sufficient to address the same and are likely to exist at your death (assuming you continue to pay the premium). The owner of the policy should be the trust. The beneficiary of the policy should be the trust. 4
The Trustee (who can be your child) must apply for and receive a separate Tax ID # for the trust. That can be done through your accountant or online at www.irs.gov. The income tax consequences will flow to your 1040 as the ILIT will be a “grantor trust” (IRS lingo) for income tax purposes. After obtaining the Tax ID #, the Trustee must establish a separate bank account. The bank will need a copy of the trust plus the tax id #. I would call ahead and see what your bank’s requirements are as they change from bank to bank. Every year, your Trustee has to advise you, as the Grantor, of the premium due and ask that you fund it. Thereafter, within 45 days of the premium being due the Trustee must send a “Crummey” letter, advising the beneficiaries (your spouse and the kids) and the Grantor of their withdrawal rights. I will include a sample letter for your Trustee’s convenience. Assuming no one exercises their Crummey rights, then the Trustee can take the money and pay the premium. If the ILIT is administered properly, the death benefits are excluded from your taxable estate. I would also put the obligation to “settle up” between your daughters in the ILIT so we don’t have to worry whether sufficient funds exist in your liquid estate or Andrea coming up with money to “settle up” between your children. III.
MEDICAID PLANNING
We also discussed Medicaid planning. I do think that it is wise to consider the same. For all practical purposes, the only “insurance” plan for long-term care is Medicaid. In the United States, Medicare (health insurance) only pays for approximately 7 percent of skilled nursing care. Private insurance pays for even less. The result is that most people pay out of their own pockets until they become eligible for Medicaid. While Medicare is an entitlement program, Medicaid is a form of welfare. So to be eligible, you have to become “impoverished” under the program's guidelines, which limit an individual’s “countable” assets to $2,000. A married couple can retain $121,220 of combined assets, plus a house and one car. You told me that you have cash ($50K) and investments ($512K), Annuity ($70K), and the house ($150K – equity). If you were to apply for Medicaid today, your assets are over the limit. Medicaid would not count your primary residence or any life insurance policy with a face value of $1,500 or less. The two whole life policies would be counted unless you created the ILIT and 5 years or more have passed. I have disregarded the other policies, assuming the face value is less than $1,500 but you would need to confirm this assumption. When calculating your total countable assets. The total countable assets are approximately $632K – roughly $511K over the limit. 5
One very reasonable approach is to do nothing and spend the assets above the $121K on care or other permitted uses. However, many people consider advance planning. In your circumstances, I definitely think it is wise to consider advance planning but since you are thinking about selling your house and either buying or moving into your daughter’s house, I do not recommend you actually do anything until you are more set on your course of action. Therefore, I will outline various alternatives for you to consider and keep in mind when and if you sell your house and live with your daughter. A. Over/Under Income Issues: Since you each have significant pensions of $90K annually, your income may create a unique situation called an “over/under” case. Basically, an over/under case means that your income is above the state reimbursement rate but under the private pay rate for nursing home care. If that comes to bear, then you will not qualify for the government to pay for nursing home care regardless of your assets. Each nursing home has different Medicaid reimbursement rates and those rates vary within each nursing home depending on the level of necessary care. The reimbursement rates range is between $100-270 a day. Therefore, if you need nursing home care at the lower level of this range, your income (only income of the nursing home spouse) will be sufficient to pay for care and the government will not pay. Even at the highest rate I found in all of Massachusetts ($270/day), your income brings you close to an over/under situation. Of course, rates and income will change over time. In an over/under situation, you would pay for care with your income and either negotiate with the nursing home to accept this as total payment or you could apply for Medicaid with a rolling 6 month deductible. Basically, you would pay for your care and then every 6 months apply for the state to pay for your care. This would be done every year. As you may imagine, this would not be the best situation. However, there is nothing you can do about it now. If it comes to bear, we will deal with it then. B. Asset Planning: As discussed in our meeting two approaches can permit you to protect your assets from being spent entirely on nursing home care: (1) transferring a portion of your assets outright to an irrevocable trust and (2) the wait and see approach. Under the current law, once you apply for Medicaid, there is a 5 year look back. During the 5 years immediately preceding nursing home placement, Medicaid scrutinizes any transfers. If certain transfers are made within the look back period, then the transfers disqualifies you from Medicaid. The disqualification is known as the penalty period. As 6
a result of a law change in 2006, the penalty period starts to run once you apply for Medicaid and are “otherwise eligible” as to all transfers made after 2/2006. Thus, once you are sick and poor and in the nursing home, the penalty period begins to run. These are the options I have thought of: 1.
Do nothing as explained above.
2. Second, you can establish an irrevocable gift trust and transfer cash or property to that trust. We can pick and choose which assets. You don’t have to transfer all your assets and could not transfer retirement assets unless you are willing to pay income taxes being due immediately upon the transfer. Neither spouse can be the trustee of that trust. Further, you would not be entitled to the income generated from the trust assets. However, the trustee can make distributions from the trust to the beneficiaries (the kids) and then the kids buy things or take care of things for you but they cannot do that with any frequency – a back door of sorts. You should view this as a true gift. You would not have access to the principal. Sometimes, beneficiaries are influenced by spouses or other external forces once they have the asset in hand. Clearly, that is not so in all cases and we can talk about this issue if you have a concern. There is a 5 year look back for transfers to this type of trust. If you needed to apply to the nursing home within 5 years, this transfer to the trust would disqualify you. Thus, at that point we would need to “cure” - that is the trustee would distribute the assets to the beneficiaries and the beneficiaries would have to give it back to you. You would be totally reliant on the trustees to distribute funds to the kids and then the kids to give it back to you. Then we would have to figure out what to do from there. You should think carefully about giving away cash assets. If you are inclined to fund an Irrevocable Gift Trust, you should review your assets while asking yourself, which among these assets am I willing to give up and absolutely save for the kids’ inheritance. Once they are given away, you lose access to the asset and can’t use those assets to pay for in home care. If you are inclined to create an irrevocable trust, we can draft it now so that it is done but wait until decisions are firm relative to your new living situation before you actually put funds into the trust. 3. The other option is to take the wait and see approach. One major issue with the wait and see approach is that if the law changes, our “plan” may not be effective. Additionally, the wait and see approach really only “plans” for the admission of the first spouse who needs nursing home care and not the second. Nonetheless, the wait and see approach has variations. Wait till either one of you needs nursing home care (hopefully never) and see what your assets are at that time. If you own anything above the $121,220 (excluding a house and car) at that time, it could spent down on non-disqualifying things (such as purchasing an interest in a house, funeral prepayment, burial accounts, house repairs and such) and 7
the balance would be either transferred to an annuity or transferred to a pooled trust (see below). You are fortunate to have the opportunity to buy a house with your daughter; you could either do that now or wait. If only one spouse needs nursing home care, then the community spouse could buy into your daughter’s home at that time (assuming Andrea and Joe still agree and their mortgage company agrees). If you did not want to leave that to the future, then you should consider buying a house together with your daughter and owning it jointly with rights of survivorship (Andrea inherits if you both die). Any funds you contribute to the purchase is not a disqualifying event so long as your name is on the deed with hers. It is not a disqualifying event because you are getting fair value – i.e. ownership in a house. Regardless of whether you purchase a house now or later, I would include the obligation to “settle up” in the ILIT to account for any disparity among your children’s inheritances. The annuity approach would basically take your excess assets (over $121K) and convert that into an income stream to the healthy spouse. The state would have to be named as a beneficiary on the annuity to recover for any benefits paid in the future for the healthy spouse. The annuity would have to be irrevocable and actuarially sound. We would want the term of the annuity to be as short as possible so that the payments come back to the healthy spouse as quickly as possible. The interest earned on this type of investment is virtually nil. You should view this as merely a way of converting a countable asset into an income stream in favor of the healthy spouse to keep it from the reach of the nursing home. Then we would have to figure out what to do with those assets to protect them if the healthy spouse needed nursing home care and had excess assets. C. Options if Second Spouse Needed Care: If the second spouse need nursing home care the options are very limited. One option is for you to fund a pooled trust at the time of your application for Medicaid. Medicaid law permits "(d)(4)(C)" or "pooled trusts" for beneficiaries with special needs. Such trusts pool the resources of many beneficiaries, and those resources are managed by a non-profit association. The non-profit is the trustee and in total control of the money in the trust. Unlike individual disability trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary herself. In addition, at the beneficiary's death the state does not have to be repaid for its Medicaid expenses on her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (i.e. not your family but other participants in the pooled trust. Typically, the pooled trust will charge about 25% of the value of the account at the primary beneficiary’s (whoever is in the nursing home) passing before the state is repaid. So, there is likely to be nothing left for the family. The advantage of this is that the trust can pay for things that the state does not cover while you are alive and your care is reimbursed at the state rate at your passing rather than the private pay rate. Some examples of things the pooled trust may pay for are: Clothing; Recreational equipment, games and crafts; Telephone, answering machine; Television, 8
radio and cable service; Musical instruments; Handicap van or regular car; Stereo system; Purchase a home, with rent paid by occupants; Tools to perform home improvements, repairs and maintenance by homeowner; Audio/video equipment; Household goods of reasonable value; Durable medical equipment, such as wheelchairs; and Prepaid funeral contract, gravesite, and stone. Home improvements, repairs, and maintenance by outside source; Travel and education; Recreation and entertainment; Non-refundable airline ticket; Medical insurance; Telephone bills; Vehicle insurance, repairs, fuel, and other expenses Newspaper subscriptions; Furniture; Services of a care manager; Vacations; Travel expenses of relatives; Movies; Tax payments; Medical treatment for which public funds are unavailable; Difference between a private and semi-private room in an institution; Installation of a burglar alarm or monitoring/response system in home; School tuition, books and supplies; Health and life insurance premiums; Cleaning supplies and paper products; Dental care, physical therapy, massages, support services, and other medical costs not covered by any benefit programs; and Home care services not covered by another program. If you bought a house with your daughter (either now or later) and the second spouse needed nursing home care, then you may be able to avail yourself of some other types of exceptions. The first is the caretaker child exception we talked about. Your daughter would have to be provide the level of care necessary to keep you from nursing home admission. The proof is considerable and your daughter has to live with you for at least 2 years prior to nursing home admission. D. Other Exceptions: The other exception is that you can maintain ownership of an income producing house so long as the house (your unit) produces income. Therefore, your unit would have to be rented and the net rental income would be paid to the nursing home. During your life, Medicaid would place a lien on the house (which accrues at the state reimbursement rate) but at death, the lien disappears. A new lien could not be put on the house, if and only if, you owned the house jointly with rights of survivorship with Andrea so that at your death, she inherited your share of the house by virtue of the deed. Under current law, Medicaid is only reimbursed from your “probate” estate – that is from assets you die owning in your own name with no joint owner and no beneficiary designation. This exception also relies upon the state of the law. Massachusetts currently limits recovery rights to the probate estate. Other states have “expanded” estate recovery which reaches assets outside of the probate estate. There was push in 2006 and then again very recently to change the law. Both efforts, thankfully, failed. Conclusion: Overall, my opinion is that you consider new Will with testamentary SNTs, new health care proxies, and ILIT and possibly an Irrevocable Gift Trust that would be standing by to fund in the future. It is also very reasonable to wait until the future to create the Irrevocable Gift Trust as well.
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IV.
General Information, Attorney’s Fees and Confidentiality:
I have outlined my fees on the next page. I typically will respond to your calls or other communication within 24 hours on normal business days, Monday through Friday. Of course, if you have an emergency or other pressing matter, make sure you tell my receptionist and she will contact me immediately. Please feel free to call my cell phone at (978)317-8226. I do appreciate if you limit after hours calls to pressing matters. You may also reach me by email at the address noted above. I will routinely forward copies of any documents I receive from third parties to you so that we may both maintain a complete file. Please be assured that all communications us are confidential and will not be disclosed to third parties without your expressed written consent. Notwithstanding, you can authorize me to discuss your affairs and provide information and documentation, to the extent necessary, to designated persons by filling in the authorization on the signature page below. You may terminate my representation at any time for any reason but you agree to pay fees earned and expenses incurred by me prior to the date of your written notice of termination. V.
Joint Representation and Authorizations
Since you have decided that I will represent both of you, it is important that you understand that because I will be representing both of you, each is considered my client. Accordingly, matters that one person might discuss with me must be disclosed to the other person. Any communications and information will be fully disclosed by me to each of you. I have explained to you the possibility of conflict that is raised by such joint representation. Specifically, potential conflicts in this case include, but are not limited to, the following: (a) how property should be held (for example, in one name, in both names, or in joint tenancy); and (b) how property should be disposed of and what persons should serve in fiduciary capacities (for example, the executor or the trustee). Each Client may have different interests, goals, or perspectives regarding these or other matters. You are expressly consenting to joint representation despite the possibility of conflict. Further, you have agreed that this rule will apply both now and in the future so long as I represent both of you in estate planning matters. If you are uncomfortable with full and free disclosure of information to each other, we can discuss this matter further to evaluate whether we can reach a different arrangement. Also, each of you may decide to retain separate attorneys so that each of you would have an advocate for your respective positions and receive totally independent advice. This is not the case when one attorney advises all of you.
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I will assist you in developing a coordinated plan and encourage resolution of differing interests, to the extent possible. If you each have a difference of opinion concerning the proposed plan for disposition of your property, I will attempt to point out the pros and cons of such differing opinions. However, ethical considerations prohibit me from advocating one position over the other. In the event such differences cannot be amicably resolved, it may be necessary to refer both of you to separate lawyers. Alternatively, I may feel it necessary to withdraw from representing one or both of you if there is an actual conflict. If I decide I must withdraw you will receive written notice. By signing the enclosed copy of the signature page and returning it to me with your retainer in the self-addressed stamped envelope, you have authorized my disclosure of information and agreed to the fee arrangement detailed below. VI.
DOCUMENT RETENTION
We should coordinate who keeps the originals of the other documents. All of your originals (the ones Jenny prepared and the new ones) should be kept in the same place. I look forward to working with you and I am pleased that you have presented this opportunity to me to represent you in your estate planning matters. Please feel free to contact me with any questions. If you decide to move forward, please initial your alternative choice on the next page, sign where indicated and forward one half of the quoted fee. The balance of the fee will be due when the documents are signed. Sincerely,
Jacqueline Voss Lees
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Attorney’s Fees and Costs: {please initial your choice and remit ½ of the fee quoted} Alternative 1 (my recommendation): My fee and anticipated costs for your estate and Medicaid planning will be $4,500. This includes drafting of an one Irrevocable Life Insurance Trust ($1,500); Complex Irrevocable Gift Trust ($1,500), two wills with special needs standby trusts ($1,000), two health care proxies ($500)___________ [initial here] Alternative 2: My fee and anticipated costs for your estate planning and NO Gift Trust will be $3,000. This includes drafting of an one Irrevocable Life Insurance Trust ($1,500); NO Complex Irrevocable Gift Trust ($0), two wills with special needs standby trusts ($1,000), two health care proxies ($500), _________________ [initial here] Two New DPOA, if desired: $500 in addition to fees above _________[initial here] Authorizations Please be assured that all communications between us are confidential and will not be disclosed to third parties without your expressed written consent. Notwithstanding, you have authorized me to discuss your affairs and provide information and documentation, to the extent necessary, to the following person(s):___________________________ _________________[insert family members, if appropriate], ______________________________________________________[insert accountant, Bank and financial planner or broker] I have read and agree to the foregoing. By signing the enclosed copy of this letter and returning it to me in the self-addressed stamped envelope, you have authorized my disclosure of information, to the extent necessary to the persons identified above and agreed to the fee arrangement detailed above. Please remit one half of the total fees associated with the plan you choose. The second half of the fee is due upon execution of the documents.
________________________ Elizabeth Scali
_________________________ Michael Scali
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CIRCULAR 230 DISCLAIMER Please be advised that all estate planning involves some degree of risk; both from audits and future changes in the law. The greater the degree of complexity, the greater the risk. All techniques presented are believed to be acceptable to the Internal Revenue Service, but no guarantees can be made. The creation of certain trusts increases accounting and tax preparation expenses. Annual gifts to trusts may require gift tax returns to be filed. I recommend that your accountant be engaged in this process. IRS Circular 230 Disclosure: To ensure compliance with U.S. Treasury Regulations governing tax practice, I inform you that: Any U.S. tax advice contained in this communication (including attachments) was not written to be used for and cannot be used for (i) purposes of avoiding any tax related penalties that may be imposed under Federal tax laws, or (ii) the promotion, marketing or recommending to another party of any transaction or matter addressed.
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