Estate Planning Myths Explained

Occasionally, I run across a great article written by someone else. Today is one of those days and I just had to share it with you. Clients are often confused when they come in for initial consultations and have preconceived notions about planning their estates based on things that they’ve heard from their friends, neighbors, hairdresser, etc. Most of the time the information shared is incorrect, or at least incorrectly applied to their situation. This article does a great job of debunking the most popular “myths” of estate planning.  I only added one little thought in bold below. Thank you to my colleague, Attorney Gina Barry, from Bacon & Wilson in Springfield for putting this article together…. and as far as I know unicorns are still mythical creatures.  

Certain ideas with respect to estate planning are widely accepted, yet unfortunately, inaccurate. This article will reveal and explain the most commonly stated estate planning myths. 

Myth No. 1: ‘If I have a valid will, my estate does not have to go through probate.’

Many people believe that having a will means that their estate will not have to be probated when they pass away. A will is a document that, in part, gives instructions as to the distribution of the assets in the decedent’s probate estate. The assets in the probate estate are those assets that are held in the decedent’s name alone that do not have a designated beneficiary. Thus, whether or not probate is needed is not based upon whether or not the decedent had a will; rather, it is based upon how the assets are owned by the decedent.

If the decedent left probate assets, then in order for their will to ‘speak,’ a probate estate must be opened. If all the assets held in the decedent’s name are jointly owned with a right of survivorship or have named beneficiaries, then there is no need for probate.

Myth No. 2: ‘I can give away $10,000 to as many people as I want each year, but if I give more, then I have to pay gift tax.’

This myth emanates from the gift-tax system. In 2010, the rule with respect to gift tax is that you may give up to $13,000 to as many people as you want without having to file a gift-tax return. Note that the amount that can be gifted is stated incorrectly in the myth because most people remain unaware of the ongoing increases to the allowable gift amount.

Also under the current rules, even if a gift-tax return must be filed because more than $13,000 is given to one person, the giver of the gift will not pay any gift tax until he or she has gifted more than $1 million during their lifetime. Thus, if a person has $100,000 and gives all of it away in one year to one person, they will need to file a gift tax return, but they will not owe any gift tax because the gift does not exceed the lifetime threshold.

The estate tax system is NOT to be confused with MassHealth/Medicaid planning. If nursing home care is eminent and you intend on having MassHealth/Medicaid pay for your care, gifts of any size are not allowed and can lead to MassHealth/Medicaid disqualification.

Myth No. 3: ‘I can give away assets when I enter a nursing home and still obtain Medicaid benefits.’

When faced with a nursing home bill of approximately $8,000 per month, many people wish to obtain Medicaid benefits to pay for this care. In order to obtain Medicaid benefits, an asset limit must be met; therefore, assets valued above this amount must be reduced to the asset limit before benefits will be granted. In their efforts to reduce the excess assets, many people believe that they can gift the excess assets due to the gift-tax exclusion explained in Myth No. 2. While a person can make a gift of up to $13,000 per person in 2010 without filing a gift tax return, the Medicaid program is not governed by the gift tax rules.

The Medicaid program imposes a penalty when any assets are given away within five years of the application for benefits, except in very specific circumstances. This penalty results in being unable to obtain Medicaid benefits for at least five years after such a gift is made. Thus, a gift of any amount will typically result in a penalty being imposed even if the gift does not have to be reported on a gift-tax return.

Myth No. 4 – ‘If I need nursing home care, Medicare will pay for my care.’

In part, this myth is perpetuated due to the fact that “Medicare” sounds very much like “Medicaid,” which does pay benefits for nursing home care for approved applicants. Medicare Part A will pay for medically necessary inpatient care in a skilled nursing facility, but only following a three-day hospital stay. Medicare will pay for up to 100 days of skilled nursing care or rehabilitation services. The actual length of benefits could be much shorter than 100 days if those services are no longer required.

When Medicare benefits are paid, Medicare pays 100% of the cost for the first 20 days, but only 80% of the cost of the next 80 days. Most Medicare recipients also have Medigap insurance, which will pay the balance not paid by Medicare. When Medicare benefits are exhausted, an alternative payment source is needed to pay for ongoing nursing home care.

Questions? Wondering if something you’ve heard is a ‘myth?’

 This article was originally published in Business West.

Obama’s Middle Class Task Force Recommendations Include Caregiver Initiative and Retirement Funds Security

One year ago, President Obama appointed a Task Force on the Middle Class to create a plan to help middle class families get back on their feet and bring our economy out of recession. Recently, this task force announced its recommendations, which included a $102.5 million Caregiver Initiative, and a plan to secure your retirement funds.

Support for Family Caregivers:
It is estimated that 38 million Americans provide unpaid care for an aging relative. Many of these caregivers have other jobs and small children to care for as well. The $102.5 million Caregiver Initiative would add $52 million to the Department of Health and Human Service’s budget for caregiver support programs and $50 million to programs that provide transportation help, adult day care, and in-home services for the elderly. Providing more government support for these programs will hopefully help lower costs so that caregivers of aging relatives can get the help they need and focus more on their jobs and immediate families. The Caregiver Initiative will also allow more seniors to stay in their homes with safe, reliable care, without placing an undue burden on their loved ones.

Retirement Security:
It is estimated that 78 million working Americans lack employer-based retirement plans. This means that about one half of all working Americans are either not saving for retirement or are being forced into doing so through private mechanisms that do not afford them certain key benefits. The task force is recommending that the Obama Administration establish a system of automatic IRA direct deposits where employers will be required to enroll their employees in an IRA program unless the employees opt out. Under the recommendation, eligible families will receive funds matching their contributions through the Savers Tax Credit. For families making under $65,000, the Savers Tax Credit will match 50% of the first $1,000 contributions, and a partial credit will be allowed for families making up to $85,000. This credit will also be a refundable credit, meaning that even if the taxpayers do not owe any taxes, they will be able to reap the full benefit of the credit.

Finally, the task force developed other recommendations to improve the transparency of 401(k) plans. This heightened level of transparency is meant to ensure that workers and plan sponsors have information they need to ensure that they are receiving investment, record-keeping, and other services at a fair price. Obviously, the first question here is: what information will be provided? Will workers receive invoices that show where all their fees are being spent? Or, will these documents show where their fees are being spent AND what other plans charge for the same services? How much will these recommendations actually improve transparency? All of the recommendations must go through Congress before anything will happen, so only time will tell.

Other recommendations concerning 401(k) plans include: encouraging plan sponsors to give unbiased investment advice to workers, making annuities and other forms of guaranteed lifetime income more available, and requiring clear disclosure on target-date funds. These recommendations are not ironed out clearly yet, and Congress is likely to spend a great amount of time working through them.

The full fact sheet on the recommendations presented by the task force includes recommendations on expanding the Child and Dependent Care Tax Credit and making college more affordable.

Massachusetts’ Seniors May Consider Filing Tax Returns for Circuit Breaker Credit Refunds

As we all know, tax season has been in full swing for many weeks now, and it is almost over for some. But, did you know that even if you did not have to file a tax return, as a senior, it may be beneficial for you to do so? Did you know there is a tax credit only available to seniors in Massachusetts who pay rent or real estate taxes? There is, and it is called the Circuit Breaker Tax Credit. Even if you don’t owe any taxes at all, you may be eligible for this credit, and it is just like money in your pocket (Certain counties in Massachusetts, including Worcester and Middlesex, have had tax deadlines extended to May 15th, because they have been declared Federal Disaster Areas due to the recent floodings).

The Circuit Breaker Tax Credit is meant to help low to moderate income seniors whose real estate taxes or rent take up at least 10% of their income. Both you, and your spouse, if you are married, must be age 65 or older as of December 31, 2009, and if you are married, you must file a joint return in order to qualify for this credit. No one else can claim you as a dependent, and you must rent or own a home in Massachusetts as your principle residence. This means that if your principle residence is in Florida, you are not eligible for this credit. You are also not eligible if your rent is paid through a federal or state subsidy.

The income limits to qualify for this credit are relatively high, which is a good thing because it means many seniors in Massachusetts can take advantage of it. If you are filing as a single adult, your income must be below $51,000; if you are filing as head of household, your income must be below $64,000; and if you are married filing jointly, your combined income must be below $77,000. Remember, though, that your rent or real estate taxes must be at least 10% of your income in order to qualify. So, if you are married filing jointly and your income is $75,000, your rent or real estate taxes must be more than $7,500. Also, be aware that income here includes social security, retirement, pensions, annuities, and other nontaxable sources.

If you have not yet filed your taxes, and you are interested in filing so that you can take advantage of this credit, there are many organizations that offer free tax assistance. The Circuit Breaker Tax Credit form is easy to fill out, and if it is the only reason you want to file a return, you should not pay a paid professional. In Worcester, there are four VITA (Volunteer Income Tax Assistance) sites, and volunteers at these sites would be happy to prepare a return for you. This is a free service, and contact information for the sites is listed below. You can also visit your local library to pick up the forms you need (Massachusetts Form 1 and Schedule CB), or visit this website to file your return electronically on your own. Finally, if you have not taken advantage of this credit before, you can file Massachusetts Form CA-6 (Application for Abatement/Amended Return) and Schedule CB to obtain the credit for the past three years.

In these hard economic times, we need all the help we can get. If you are over age 65 and more than 10% of your income goes to rent or real estate taxes, take advantage of this credit. The maximum credit amount for 2009 is $960, which is a good chunk of change right in your pocket.

Worcester Community Action Council Inc.
Last day open: April 14th
484 Main Street, Suite 320
Worcester, MA 01608
508 754-1176

Plumley Village
Last day open: April 13th
16 Laurel Street
Worcester, MA 01608
508 770-0508

Main South Community Development Corp
Last day open: April 14th
875 Main Street
Worcester, MA 01610
508 752-6181

Worcester State College
Last day open: April 15th
Sullivan Building, 2nd Floor, Room 220
486 Chandler Street
Worcester, MA 01602
508 929-8635

No, You Can’t Just Give It Away! The Dangers of “Gifting” when Considering Long Term Care

Hardly a day goes by when I don’t have a client who tells me that they can give away a certain amount of money free and clear, avoiding look-back periods for long-term care planning. They inform me that their neighbor, friend, or cousin told them that this is allowable. I then have the unfortunate task of telling them that they are wrong and that most states that have enacted the Deficit Reduction Act. After February 8, 2006, the rules relative to gifts changed.

Regardless of the amount, any gift that is made is a transfer and is subject to a look-back period of five-years for MassHealth (Medicaid) purposes. This doesn’t mean that the State will take that money, but rather, that the State will not pay for the donor’s long-term care costs until the five-year look-back is exhausted, or in the alternative, until all the gifts that have been transferred are used to pay for the institutionalized person’s care.

The sum that most clients feel that can be gifted (erroneously) without a look-back is $10,000. This amount actually relates to a past year’s annual amount that could have been gifted on an annual basis to as many individuals as the donor wishes without the need to file a GIFT TAX return. This has NOTHING to do with the look-back period when applying for MassHealth (Medicaid) coverage of a nursing home. However, the exemption in 2010 for gift giving on an annual basis is $13,000 per donee per year. Again, this is only a tax amount gift, and is not a Medicaid or asset protection plan exempt amount. A gift of $13,000 from a parent to a child will constitute a non-taxable gift, but this gift will carry with it a waiting period of five-years relative to MassHealth (Medicaid) qualification.

Far too often, family, friends, and other non-professional advisors provide well-intended but erroneous advice that can lead to significant adverse consequences if relied upon. If in doubt, it is always appropriate to contact a professional accountant, geriatric care manager, attorney, or other financial advisor for the appropriate and up to date laws relative to gifts, Medicaid planning, taxes, etc.

If you are unsure about how to find a qualified elder law attorney contact the National Academy of Elder Law Attorneys.

I drafted a follow-up to this blog, dealing with the exceptions to the gifting rule. It can be found here.

This blog was modified from one originally posted by Attorney Hy Darling from Bacon Wilson, Attorneys at Law in Springfield, MA. Its original version can be found here.