King & Wood, P.A.

Homeownership and Medicaid Can Be Problem

 

“Many people work hard to acquire real estate and then later find that that real estate makes them ineligible for Medicaid to help pay for nursing home or in-home, long-term care.”

The challenges begin when homeowners don’t do any Medicaid planning and decide the best answer is simply to gift their home to their children. It doesn’t always work out well for the homeowners or their children, warns the article “Owning real estate without jeopardizing Medicaid paying for nursing home” from limaohio.com.

A key tax avoidance opportunity is usually missed, when real property is gifted outright. The IRS says that if someone owns real estate, when that person passes, the heirs may eliminate a large portion of the taxable gains, if the real estate ends up being sold by an heir for more than the original owner paid for the property.

Let’s walk through an example of how this works. Let’s say Terry buys a farm for $1,000. The cost to buy the farm is referred to as a “tax basis.”

If the family is planning for the possibility of nursing home costs, Terry might want to give that farm away to her children Ted and Zach. She needs to do it at least five years before she thinks she’ll need Medicaid to pay for long-term nursing care, because of a five-year lookback.

When Terry gifts the farm to Ted and Zach, the two children acquire Terry’s tax basis of $1,000. Ted gets $500 of the tax basic credit, and so does Zach.

The years go by and Ted wants to buy out Zach’s half of the farm. The farm is now worth $5,000. So, Ted pays Zach $2,500 for Zach’s half of the farm. Zach now has a tax basis of $500, which is not subject to tax. And Ted receives $2,000 more than his $500 tax basis, and Ted will need to pay capital gains on that $2,000 gain.

It could be handled smarter from a tax perspective. If Terry owns the farm when she dies, then Ted and Zach get the farm through her will, trust or whatever estate planning method is used. If the farm is worth $3,000 when Terry dies, then Ted and Zach will get a higher tax basis: $3,000 in total, or $1,500 each. By owning the farm when Terry dies, she gives them the opportunity to have their tax basis (and amount that won’t be taxed if they sell to each other or to anyone else) adjusted to the value of the property when Terry dies. In most cases, the value of real estate property is higher at the time of death than when it was purchased initially.

There’s another way to transfer ownership of the farm that works even better for everyone concerned. In this method, Terry continues to own the farm, helping Zach and Ted avoid taxes, and keeps the property out of her countable assets for Medicaid. The solution is for Terry to keep a specific type of life estate in the farm. This needs to be prepared by an experienced estate planning attorney, so that Terry won’t have to sell the farm if she eventually needs to apply for Medicaid for long term care.

Your estate planning attorney will be able to help you and your family navigate protecting your home and other assets, while benefiting from smart tax strategies.

Reference: limaohio.com (Nov. 7, 2020) “Owning real estate without jeopardizing Medicaid paying for nursing home”

The Biggest Mistake in Trusts: Funding

 

 

 

 

                                                    "Your real estate holdings, life insurance, bank accounts and retirement savings won’t magically flow into your trust.”

Failing to put assets into trusts creates headaches for heirs and probate hassles, says the article “Once You Create a Living Trust, Don’t Forget to Fund It” from Kiplinger. It’s the last step of creating an estate plan that often gets forgotten, much to the dismay of heirs and estate planning attorneys.
Are people so relieved when their estate plan is finished, that they forget to cross the last “t” and dot the last “i”? Could be! Retitling accounts is not something we do on a regular basis, and it does take time to get done. However, without this last step, the entire estate plan can be doomed.
Here are the steps that need to be competed:
Check the deeds on all real estate property. If the intention of your estate plan is to place your primary residence, vacation home, timeshare or rental properties into the trust, all deeds need to be updated. The property is being moved from your ownership to the ownership of the trust, and the title must reflect that. If at some point you refinanced a home, the lender may have asked you to remove the name of the trust for purposes of financing the loan. In that case, you need to change the deed back into the name of the trust. If your estate planning attorney wasn’t part of that transaction, they won’t know about this extra step. Check all deeds to be certain.
Review financial statements. Gather bank statements, brokerage statements and any financial accounts. Confirm that any of the accounts you want to be owned by the trust are titled correctly. You may need to contact the institutions to make sure that the titles on the statements are correct. If there is no reference to the trust at all, then the account has not been recorded correctly and changes need to be made.
It’s also a good idea to review any accounts with named beneficiaries. Talk with your estate planning attorney about whether these accounts should be retitled. The rules regarding beneficiaries for annuities changed a few years ago, so naming the trust as a beneficiary might not work for your estate plan or your tax planning goals as it did in the past.
IRAs and other retirement accounts. These accounts need to be treated on an individual basis when deciding if they should have a trust listed as a primary or contingent beneficiary. Listing a trust as a beneficiary can, in some cases, accelerate income tax due on the account. If the trust is listed as the beneficiary, the ability to distribute assets to trust beneficiaries may be impacted.
The main reason to list a trust as a beneficiary to an IRA or retirement plan is to protect the asset from creditors, financially reckless heirs, or a beneficiary with special needs. An estate planning attorney will know the correct way to handle this.
Making sure that your assets are in the trust takes a little time, but it is up to the owner of the trust to take care of this final detail. The estate planning attorney may provide you with written directions, but unless you make specific arrangements with the office, they will expect you to take care of this. The assets don’t move themselves – you’ll need to make it happen.
Reference: Kiplinger (Oct. 26, 2020) “Once You Create a Living Trust, Don’t Forget to Fund It”

Can Mom Leave a Home to Daughter but Not Grandchildren?

“If you want a legal plan that avoids probate court, there are two options: first, an enhanced life estate deed, and second a living trust. Each has its pros and cons.”

There are numerous ways to accomplish distributing property, according to specific wishes. A woman with three grown daughters faced a problem about passing down the family home. She wanted to give it to the youngest daughter, who has taken care of and is closest to her. However, she also wanted to be sure that, if something happened to this daughter, the house would go to her two other daughters and not the close daughter’s adult children.

With proper planning, this can be done, as described in the article “Mom needs contingency plan to pass house title” from mySanAntonio.

One way is to rely on a last will and testament. The will would state that she leaves the house to the youngest daughter, under terms of a testamentary trust inside the will. The daughter is permitted to use, enjoy, and live in the house during her lifetime, as the beneficiary of the testamentary trust.

The two older daughters would be named as the secondary beneficiaries of the trust. When the younger daughter dies, the trust distributes the house to the older daughters.

The plan will need to be prepared by a qualified estate planning attorney and it will likely be probated. This is not a terrible process, if the will is professionally written, properly signed by the mother and two witnesses, includes an executor and a trustee and clear instructions about her wishes. An estate planning attorney can prepare it correctly.

If the goal includes avoiding probate, there are other options. One is an enhanced life estate deed, and another is a living trust. The enhanced life estate deed specifies that the woman is retaining a life estate, that is, the right to use, enjoy and occupy her home, for the rest of her life. The document specifies that when she dies, the home goes to her youngest daughter. The owner would also want to specify that she has the right to change her mind at any time.

This approach avoids probate. However, there is a downside. If the youngest daughter dies before the mother, then the mother will need to take legal action to cancel the deed and issue a new one to the two older daughters. If the daughter outlives her mother, once she inherits the house, there will be no way to have it transferred to the other sisters in the future (unless the daughter choses to do so).

A living trust provides the detailed control allowed in a will, but the trust, which must be properly created and funded, avoids going to probate. The trust would let the mother live in the home, and when she dies, the title to the house stays in trust with her youngest daughter, who is able to live in the house. However, she never becomes the owner of the house. The trust would continue to own the house. The trust would specify that when the daughter dies, the house goes to the two older daughters. To be extra safe, it should also specify what she would want to happen, if one or both of the older daughters dies.

None of these is simple, but they are all feasible. Speak with an experienced estate planning attorney.

Reference: mySanAntonio (June 8, 2020) “Mom needs contingency plan to pass house title”

 

Please Welcome Megan Hance!

We are pleased to announce that Megan Hance has joined our firm as a closing specialist. Megan comes to us with an extensive banking background. She worked in commercial lending for a year and a half and residential lending for two years. In her free time, she likes spending time with her family. She also enjoyed reading, cooking, and as a native Ohioan, cheering on the Ohio State Buckeyes during college football season.

Welcome Caroline Palmer!

We are pleased to announce that Caroline Palmer has joined our firm as Front Desk Coordinator.  Caroline will administer our client intake and scheduling processes. 

Caroline is a 2019 graduate of Florida State University, where she completed a B.A. in History with a minor in English.  A native of Live Oak, Florida, Caroline enjoys taking her dog, Jack, to the park, spending time with family and friends, and travelling when she can.  Caroline plans to continue her education by pursuing a master’s degree in Library and Information Sciences.

 

Welcome to the firm, Caroline!

Why Should I Buy a Home with a Real Estate Trust?

“When you buy a home, you have the option of buying the home in a trust. Why should you choose to purchase a home in a trust? By getting a property in a trust, you hold the property for your benefit and the benefit of whomever you decide to own it after you.”

If you place your home in a trust, you become the trustee of the property. When you die, your successor then becomes the trustee.

Being the trustee of a property gives you certain powers over where your home will pass once upon your death. It can also enable you to shield your estate from future economic problems, says Investopedia in the recent article, “Buying a Home in Trust.”

First, decide who will have the legal right to sell the home. Then, you need to determine what type of trust to set up for the estate. Let’s look at the two basic types: the revocable trust and the irrevocable trust.

A revocable trust is an agreement that establishes the rights and heirs of the estate. The owner of the trust has full control at all times and can change it, when he or she wants. Based upon the way in which you set up the documents, all or one of the future trustees can also change the document at any time. Revocable means “capable of being canceled.”

In contrast, an irrevocable trust generally doesn’t allow any changes or terminations of the trust without permission of the beneficiary. The trustee acts more like a fiduciary who’s charged with maintaining the assets for the beneficiary. Irrevocable trusts can protect assets from creditors, if the assets were placed in the trust before the credit problems.

Whether creating a revocable or an irrevocable trust, it’s important to work with an experienced estate planning attorney. However, it is important to be aware of how putting a home may impact your eligibility for Medicaid, if that may be a future issue.

Buying a home in a real estate trust can give you and your beneficiaries advantages that otherwise wouldn’t be available.

Reference: Investopedia (October 13, 2018) “Buying a Home in Trust”

Life Estate Questions Answered

“With a life estate, there are two types of property owners.”

A recent article in USA Today, “Estate planning: Consider a life estate deed,” explains that a life estate is a way to transfer real estate to your beneficiaries during your lifetime.  However, it still allows you to keep the right to use and/or live on the property for the rest of your life. This simple process has some tax advantages, and it’s a way to avoid probate on the real estate.

The life tenant has the exclusive right to use the property during his or her lifetime. In many cases, this is a joint life tenant, like a husband and wife. The life tenant must maintain the property and pay the taxes and insurance. The remainderman has the exclusive ownership rights and responsibilities after the life tenant(s) die. At that point, the full ownership automatically transfers to the remainderman—without any probate or court filings. At this point, there’s what’s known as a full step up in basis, which provides capital gain tax advantages to the remainderman.

If a property is sold when there is a life tenant, both the life tenant and the remainderman must approve the sale. If both parties agree to the sale, then the life tenant will get a percentage of the sale proceeds (based on the life tenant’s age) and the remainderman will receive a percentage of the proceeds.

It is important to note that there may be an issue for the life tenant, if he or she is receiving or planning to qualify for Medicaid benefits. An estate planning attorney can help plan the sale properly, so the proceeds may not need to be spent down on the cost of care.

Life estates were used in the past as a way to protect real estate from potential long-term care costs and to keep control over the real estate during one’s lifetime. After five years lapsed from the transfer date, prior to applying for Medicaid, the property was protected from the cost of care. When applying for Medicaid for long-term care costs, the state usually wouldn’t calculate a life estate as an available asset.

However, some states have passed laws providing that all life estates created on or after a certain date are thereafter subject to estate recovery. This means that upon the death of a person receiving Medicaid benefits, the state could recover a percentage of the value of the life estate property, with the percentage determined by the age of the Medicaid recipient at the time of death. In these states, a life estate deed wouldn’t be the best way to preserve real estate from the cost of potential long-term care.

Life estates aren’t the best solution for everyone. Talk with an experienced estate planning attorney to determine the best ways to achieve your goals.

Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”

Is Protecting Homes with Trusts a Good Idea?

“The key to any kind of asset protection planning, is that it must take place well before the need to be protected arises.”

The owner of a California townhouse in a homeowner’s association should examine his or her escrow documents, title report, property deed and the association’s governing documents, rather than relying just on the physical appearance of the property to know exactly what type of property was purchased. This is according to a recent article in The Los Angeles Times, “Trusts aren't a surefire way of making your HOA property judgment-proof.” The owner might want also to ask about placing real estate assets into a family trust to protect against future lawsuits with the HOA.

There are several legal distinctions between condominiums and Planned Unit Developments (PUDS)—the ownership of common areas is one of the most cited.  However, whether a townhouse or a single-family dwelling is part of a PUD or condo development, both are deed-restricted properties subject to homeowner associations regulated by California’s Davis–Stirling Common Interest Development Act in the California Civil Code. A power reserved for the board of all common interest developments is the right to place a lien on the property of an owner who violates the covenants or fails to pay on some association-related debt. The lien lets the board foreclose on and take that property to satisfy the debt.

This is tough for estate planning, because if a lien is applied to the property and the owner passes away, the estate can be attached. This keeps the property from passing to the owner’s heirs until any outstanding debts are paid.

Unfortunately, the most commonly used trusts won’t protect these assets.

Revocable Trusts

When folks talk about a “family trust” or “living trust,” they usually mean a “revocable trust.” This is where the grantors maintain ownership and control over their property during their lives. At death, the control goes to a trustee who then further administers or distributes the assets without having to go through probate. These trusts are “revocable” because the grantors can make changes to the terms, distribute assets early and even revoke the whole deal.  However, the assets in the trust are still subject to taxes and are not protected from creditors, litigation or foreclosure both during the lifetime and after the grantor’s death.

Irrevocable Trusts

By contrast, irrevocable trusts provide the creditor protection to the grantors, but only if they’re created for legitimate estate planning purposes. However, in an irrevocable trust, the grantors give up control over the assets placed in that trust—they can’t amend nor revoke the trust during their lifetimes. When the trust is created, the grantors must choose who they want to have their property when they die. That decision can’t typically be changed, and real property can be difficult or impossible to sell or refinance while it’s in the trust.

While there is no foolproof way to protect residential deed-restricted property from litigation with an HOA, especially property that is rich in equity, the key to any asset protection planning is to do this long before the need to be protected arises.

Reference: Los Angeles Times (February 4, 2017) “Trusts aren't a surefire way of making your HOA property judgment-proof”

The Truth about Living Trusts

“A Living Trust is totally private–as opposed to your Will, which becomes public when it is probated after your death.”

A recent nj.com article, “Living Trusts explained,” says that you should think of a living trust as a contract between the current “you” and the future “you.” Practically speaking, it can also duplicate and/or replace the provisions of your durable power of attorney and even your will.  This is how a living trust addresses three major concerns:

1. Real estate in another state. Laws are different in each state, so estates may be treated differently. There are some states that include all owners of property within their state in their tax laws. When the real estate owner is a trust, those rules don’t apply. You also avoid a potential battle with another state about your residency and property ownership.
2. Meddling relatives. All trust documents are private, so family meddlers won’t have access to your affairs. The people you designate will know who’ll be managing your finances and who gets what when you pass away.
3. Health issues of one or both partners/spouses. If you know that some conditions "run in the family" or are concerned about dementia as you age, a living trust can detail all of your wishes. It can also make provisions for carrying out your wishes in the event you’re unable to manage your affairs. Your designated successor trustee will immediately step in to support you and take over.

A living trust is revocable, so at any point you can change your mind and change any provision … or get rid of the whole thing. However, when you die, the living trust becomes irrevocable and directs the disposition of your estate. You’ll still need a will, but that includes language referring to the living trust for instructions and details.

Make sure you have the trust document prepared by an experienced estate-planning attorney who specializes in this area. If you decide that a living trust is right for you and have the document prepared by an attorney, you need to change the title of your accounts and assets from you to the name of the trust. A living trust can provide comfort and reduce stress for your family.

Reference: nj.com (November 13, 2016) “Living Trusts explained”