Estate Planning

Aug 20

Utilizing In-Marriage QDRO’s for Estate Planning

By Jessica L. Estes

As an estate planning and elder law attorney, often the most difficult type of asset to deal with is a retirement account. Not only must you consider the type of account it is, but you must understand the owner’s rights to the funds in the account, as well as the consequences, tax or otherwise, of accessing those funds, which can depend on age and/or other factors. In Maryland, retirement accounts are countable assets for Medicaid purposes, which adds another layer of complication. And, even something as simple as naming a beneficiary for the retirement account is not as simple as it may seem, especially if asset protection is your main goal.

There are many reasons why someone may need to access retirement benefits. Perhaps one’s spouse is in a nursing home and has a substantial retirement account that will have to be “spent-down” before qualifying for Medicaid, but the family wants to preserve those monies for the spouse at home, without suffering a huge tax consequence. Or, perhaps one spouse is older than the other spouse and wants to delay taking required minimum distributions (“RMD’s”), as the couple does not need the extra income and wants to avoid additional taxes.

Many people may have heard the term Qualified Domestic Relations Order (“QDRO”), but only in context to a divorce, and very few understand what a QDRO really is. Simply put, a QDRO is an order signed by an appropriate state court judge that: (1) recognizes the joint marital ownership interest in a retirement plan; (2) provides for the plan benefits between the parties – the plan participant (employee spouse) and the alternate payee (non-employee spouse); and (3) is approved, or qualified, by the retirement plan administrator. Unlike a QDRO in a divorce that transfers retirement benefits to an ex-spouse, an “in-marriage QDRO” transfers retirement benefits to a current spouse.

To be eligible for an in-marriage QDRO, the retirement account must be an Employee Retirement Income Security Act (“ERISA”) based plan, certain state pension plans, or a Federal Thrift Savings Plan. ERISA-based plans include 401k, 401(a), 403(b), corporate pension plans, some employee stock ownership plans, profit sharing plans, and State deferred compensation 457 plans. Plans that are not eligible for an in-marriage QDRO include military pensions, Federal pensions (FERS and CSRS), railroad retirement plans and privately sponsored non-qualified stock plans. Although individual retirement accounts (IRA’s) and simplified employee pension plans (SEP’s) are not immediately eligible, if a limited liability company (“LLC”) was established with a solo 401k, the funds in the IRA or SEP could be transferred to the solo 401k and then qualify for the in-marriage QDRO.

If eligible for an in-marriage QDRO, a review of the plan documents is necessary to verify the amount that may be transferred, as well as the amount that should be transferred based on the family’s needs. Similarly, an inter-spousal agreement must be drafted that is the basis for the justification of the in-marriage QDRO. The inter-spousal agreement should lay out the agreement between the spouses as to the division of the retirement funds. Using the example of the couple wanting to delay RMD’s, the agreement may state that all the retirement account will be transferred to the younger spouse which would allow the funds to remain in the account until the younger spouse reaches age 70 ½. Or, in the case of the couple wanting to qualify for Medicaid benefits, rather than “spend-down” the funds and pay taxes on that money, the retirement funds of the nursing home spouse would be transferred to the spouse still residing at home, which could avoid most, if not all, of the tax consequences and preserve the asset for the community spouse, while allowing the nursing home spouse to qualify for Medicaid benefits.

As you can see, in-marriage QDRO’s can be useful tools for estate planning but require careful drafting and knowledge of the various federal and state laws. Do not attempt this on your own; contact a qualified attorney to assist and help you navigate these complicated rules.

Jun 04

How to Qualify for Long-Term Care Medicaid

By Jessica L. Estes

Long-term care Medicaid is a needs-based program that helps qualified individuals pay for long-term care costs. Long-term care is required when an individual, for a period exceeding thirty days, is unable to perform the basic activities of daily living such as bathing, dressing, eating, toileting, walking, and transferring. Long term care can include homecare, adult daycare, respite care and assisted living or nursing home services, but long-term care Medicaid will only cover nursing home services. As such, an individual must be admitted to a nursing home or other long-term care facility in order to apply for long-term care Medicaid.

Moreover, there are three eligibility criteria that an individual must meet to qualify for long-term care Medicaid: (1) technical; (2) medical; and (3) financial. In Maryland, to be technically eligible, an individual must be (1) a resident of Maryland; (2) aged 65 or older, blind, or disabled; and (3) a United States citizen or resident alien. For purposes of Medicaid, an individual is considered a Maryland resident from the moment they are admitted to a nursing home in Maryland, even if their primary residence is located in another state or the District of Columbia.

To be medically eligible, an individual for a period exceeding thirty days, must require skilled nursing care, assistance with at least three activities of daily living, or assistance with at least two activities of daily living if the applicant also needs assistance with an instrumental activity of daily living. Skilled nursing care is care or treatment that can only be done by doctors or nurses such as complex wound dressings, rehabilitation, or tube feeding. Instrumental activities of daily living are not necessary for fundamental functioning but are necessary for an individual to live independently in the community. Instrumental activities of daily living include such things as using a telephone, shopping, preparing meals, housekeeping, or money management.

Most individuals in a nursing home will meet the technical and medical eligibility criteria; however, the financial eligibility requirements are two-fold and most people will not immediately be eligible. There are two tests an individual must pass to be financially eligible for Medicaid: the income test and the asset test. The income test is simple. If a person’s gross monthly income is less than the monthly cost of care at the facility, that person will pass the income test, and because the monthly cost of care at a nursing home is so high, most do.

The asset test, although simple, is not quite so easy to pass. An individual cannot have more than $2,500 in countable assets as of the first of the month in which he or she applies for benefits. As such, most people will need to “spend-down” their assets below that $2,500 limit to be eligible for benefits. But, be careful! The Medicaid qualification process is very complex and trying to navigate these rules alone, or with the assistance of a non-attorney, likely will result in wasted time, stress and frustration, and an unnecessarily large nursing home bill. Instead, seek the advice of a competent elder law attorney who will not only obtain Medicaid benefits for his or her client, but preserve some, or all, of the client’s assets as well.

Apr 09

Personal Care Contracts

By: Jessica L. Estes

If you currently provide care for a chronically ill, disabled, or aged family member, likely you spend, on average, twenty hours per week providing that care. This is in addition to your own personal commitments, which may, and often do, include managing a full-time job and your own family. Not only can this be overwhelming, but it can be extremely stressful. Moreover, family caregivers usually are not paid, as they feel some responsibility to provide this care solely out of love and affection.

But what happens when they can no longer provide adequate care for their loved one? The loved one may not have the resources to afford in-home, assisted living or nursing home care. And, unless the loved one has less than $2,500 in countable assets, they will not qualify for Medicaid benefits. Although one can “spend-down” assets below the $2,500 limit, Medicaid does not allow reimbursement for the care you provided. If you are reimbursed and your loved one files an application for Medicaid benefits, that reimbursement will be considered a gift subject to penalty and your loved one may not qualify for benefits for a very long time.

However, a family caregiver may be compensated for their services without any impact to their loved one’s Medicaid benefits if they have a personal care contract. A personal care contract is an agreement between a caregiver (one who provides care) and a care recipient (one who needs care) detailing the services to be provided for a set amount each month. To avoid a Medicaid penalty, the personal care contract should be written, signed and dated before you begin providing services or receiving payment. Also, the personal care contract should specify which services will be included and which will be excluded. Services can include meals, lodging, furnishings, utilities, laundry, housekeeping, personal assistance (bathing, dressing, grocery shopping, transportation to/from medical appointments, etc.), medical care and costs, and materials and supplies necessary to perform the services.

Additionally, the personal care contract should include the amount the caregiver will charge the care recipient for these services. You cannot, though, be paid more than someone with your equivalent experience and skills who does this professionally in your general area. For Medicaid purposes, though, the caregiver should keep a log of the services they are performing on a daily basis and a record of the payments received for these services. In the event the care recipient applies for Medicaid, the caseworker will want to see a record of the services provided and the payments made, which should be in accordance with the contract. As long as the services and payments are in accordance with the personal care contract, Medicaid will not penalize payments made to the family caregiver.

Finally, because this is a legal contract, I recommend having a qualified elder law attorney draft the contract for you, especially if Medicaid benefits might be needed in the future.

Mar 26

Naming a Trust as Your IRA Beneficiary

By Jessica L. Estes

Most people with individual retirement accounts (“IRAs”) name their spouse and children as the primary and contingent beneficiaries, respectively, of their IRA. Or, if they are not married or do not have any children, their siblings and nieces or nephews. For the reasons outlined below, this may not be the best decision. Though, to understand why it may not be the best decision, it is important to understand the basics of IRAs and required minimum distributions (“RMD”). Generally, an owner’s funds in an IRA will be protected from his or her creditors, but a RMD will not be protected. A RMD is the distribution that must be taken starting at age 70 ½, which is based on one’s life expectancy. Once the distribution is made, that income is not protected unless state law provides otherwise. When the owner of the IRA dies, his or her beneficiary receives an inherited IRA.

In 2014, the U.S. Supreme Court’s decision in Clark v. Rameker sent shock waves through the legal and financial planning industries. The Court was asked to decide whether funds held in an inherited IRA were “retirement funds” within the meaning of the bankruptcy statute and thus, exempted from an individual’s bankruptcy estate. The Court answered this question with a resounding “no” and specifically held that funds in an inherited IRA are not “retirement funds,” rendering those funds available for payment to creditors. The Court reasoned that “retirement funds” are monies set aside for a day when one stops working; whereas, an inherited IRA consists of funds that may be used for immediate consumption. Prior to this decision, an inherited IRA was considered “retirement funds” and protected from the reach of one’s creditors. After this decision, though, that is not necessarily the case.

If one’s spouse inherits the IRA, they can: (1) create a new IRA in their name; (2) roll the inherited IRA into an existing IRA already in the spouse’s name; or (3) they can leave the inherited IRA in the deceased spouse’s name if the deceased spouse was younger than the surviving spouse so the payments can be stretched out for a longer period. If the spouse chooses option 1 or 2, the funds in the account will be protected; however, if the spouse chooses option 3, likely the funds would not be protected.

Moreover, if a child inherits the IRA, they could stretch out the RMD’s based on their life expectancy rather than their parent’s life expectancy, or the child could take the money all at once. Either way, though, the funds would not be protected from the child’s creditors, which may include a bankruptcy court, general creditors, lawsuits and judgments entered against them. Additionally, the Supreme Court decision opens the door for Medicaid to recover against an inherited IRA since the federal law allows recovery against beneficiary- designated accounts.

Another reason to name a trust as the beneficiary of your IRA is to protect government benefits for a spouse who may require or is currently receiving long-term care Medicaid benefits, or a disabled child receiving benefits. If those individuals were to inherit even a small IRA, it could disqualify them from continuing to receive benefits. Depending on the amount of the IRA, that may or may not matter, but one should be aware of the consequences of such action.

Similarly, if a designated beneficiary (1) is a spendthrift, (2) has a drug, alcohol or gambling addiction, or (3) has creditors, or any number of other issues, naming a trust could be beneficial to preserve the funds so it is not depleted quickly.

The trust must be drafted carefully so as not to trigger a five-year payout. If the Internal Revenue Service (“IRS”) considers the trust as the owner or beneficiary of the IRA, the trust must liquidate the IRA and distribute it within 5 years of the decedent’s death. However, the IRS will not consider a trust the owner or beneficiary of the IRA if four requirements are met: (1) the trust is irrevocable as of the decedent’s death; (2) the trust is valid under State law; (3) the trust identifies “human” beneficiaries; and (4) the trustee provides a copy of the trust to the plan administrator or custodian within 9 months of the date of death. If there is the possibility that a non-human can become a beneficiary (e.g. ultimate beneficiary is a church or charity), then the 5-year payout rule applies. As long as the above requirements are met, the trust will be considered a “see through” entity and any distributions paid to the beneficiary of the trust, will be taxed at that beneficiary’s income tax rate.

Also, the trust can be drafted in a way that maximizes the payout to the beneficiaries. Likewise, it is important to decide how the RMD’s payable to the trust will be handled. Giving the trustee the authority to decide whether to make distribution to the beneficiary or to continue to hold the RMD’s in trust provides more flexibility and creditor protection for the beneficiary. Depending on your situation, a trust might be the better choice for your IRA beneficiary designation.

Mar 05

Prenuptial and Postnuptial Agreements – Why You Should Have One

By: Valerie E. Anias, Esq.

There is a misconceived notion that asking for or discussing a prenuptial or postnuptial agreement implies distrust or concern over your relationship and its future. This isn’t true! There are a significant number of benefits gained as a result of a prenuptial agreement, or postnuptial agreement if you’re already married.

There are two ways to dissolve a marriage: divorce and death. Prenuptial or postnuptial agreements help in making the dissolution as easy as possible.

The reality is this: marriage is both a romantic and business relationship. With very few exceptions nearly everything is or becomes marital. As such, nearly everything can become subject of costly litigation in the event of divorce or death. A well drafted and all-inclusive agreement will limit many of these issues. For example, the agreement will identify what is and is not marital property, each parties’ rights in the event of death or divorce, predetermine rights and obligations for spousal support, inheritance, and more. In addition, the agreement will have a complete financial disclosure including each spouses’ assets, liabilities, and income.

A properly drafted agreement will provide a full financial disclosure to both prospective or current spouses. It will list all assets, income, real property, personal property, etc. For example, what if you have your great-grandmother’s engagement ring? You’d want to be sure that said ring would remain with you, your children, and/or your family. If you were to pass, the value of that ring may ultimately be considered part of your estate and have to be divided. That could mean sold.

When contemplating whether you think a prenuptial or postnuptial agreement is needed for you, you should consider whether you want to be on the hook for your partner’s debt in the event of divorce or marriage? Whether you want your spouse from a second marriage to inherit more than your children from their first marriage? Whether you want your private business to be impacted in the event of divorce or death?

Obtaining a prenuptial or postnuptial agreement is simply a combination of planning and protection. Planning for the future of your spouse, children, and yourself while simultaneously protecting your spouse, children, and yourself.

Sep 18

#TuesdayTips: Everyone Needs a Plan

Do you live paycheck to paycheck and are convinced you have no assets? It would seem to follow then that you have no estate to leave behind when you pass on. But, frankly, nothing could be farther from the truth. To the contrary – everyone needs a plan. Let’s consider just three of the many good reasons for preparing an estate plan no matter your net worth or age.

Estate plans are actually a set of documents that informs your loved ones how to address your affairs in the event you become incapacitated or depart this world. People who do not plan their estates often leave living family members with a legal mess to deal with during the grieving process. Ultimately, estate planning is not meant as an aid for you but for your loved ones.
Should you fail to plan the IRS and state probate courts will be happy to step in and prepare a plan post-death. Probate is the outcome of failing to plan. For example, failing to provide a will or creating a will but not including a trust. The process is generally very slow, all transactions become part of the public record, and it can become costly thereby reducing the size of your initial estate. It is the sad reality that failing to plan can actually be pricier than advanced preparations.
It’s not all about the money. If you haven’t given any thought to what you want your end of life to be – now is a good time to do so. You need to consider all the eventualities. For example, you should grant authority to someone to act as your agent regarding health care decisions should you be unable to speak for yourself. Additionally, identify a conservator and guardian for young children. These are determinations you want to have control over – and not something that would require the intervention of third parties who should not be involved in family matters such as these.

Estate planning may seem like a chore that you can put off until you have the time to think about it. But, the best advice is to take the time today to plan for the tomorrows when you won’t be here. It is the nicest gift you will leave your loved ones who will be able to cherish the memories instead of dreading the task of closing out your estate.

If you would like to know more about estate planning and other legal issues related to your family’s and your own personal well-being contact us at the ERA Law Group, Annapolis. We’re your experts in estate planning. We will treat your matters as if they are our own.

Estate Planning

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