California Business & Estate Planning

Medicaid Denials of Coverage on the Rise

With the fiscal crisis in Washington we are going to be hearing more and more stories of Medicare (MediCal in California) denials of claims.  A recent New York case is in point.  In the Matter of Komanoff Ctr. for Geriatric & Rehabilitative Medicine v Daines (N.Y. Sup. Ct., App. Div., 2nd Dept., No. 2010-05776, June 28, 2011) (here summarized on ElderLawAnswers.com.) the state was able to avoid paying benefits even though everyone agreed they were due.  Everyone but the judge, that is.   

It’s the case of Bernadette Jordan and how she entered a nursing home and filed for Medicaid only to find that the State ruled her ineligible for a period of 14.31 months. Apparently, Mrs. Jordan had transferred funds from a revocable trust to her daughter, to repay expenses that her daughter had shouldered in getting her to the nursing home. States are skeptical of such transfers, and often examine them carefully. In this case they found that the transfers were made at less than fair market value for purposes of Medicaid eligibility, and so denied Mrs. Jordan Medicaid benefits.

On Mrs. Jordan’s behalf, her nursing home called a hearing and later appealed. After all, the expenses the daughter paid were documented and done with the assumption that they would be repaid with assets from the trust. The State still denied benefits. The problem was that there was no written document at the time of the expenditure that specified the agreement to repay the daughter’s expenditures.  

The moral of the story is documentation. By documenting your interactions and intentions you can provide hard proof and avoid getting caught on a technicality. And there will always be technicalities.

Reference:  Elderlawanswers (July 5, 2011) “Transfer to Daughter Without Written Agreement Triggers Medicaid Penalty”

 

 

 

Don't Lose Those Insurance Policies

 

In 40 years of planning estates, I have picked up a few lessons.  One of these involves life insurance claims. Paying for a life insurance policy doesn’t necessarily guarantee your heirs will receive the benefit – not if the policy gets lost in the shuffle of life. Remember, your heirs may have to specifically approach the insurance company with their claim in order to receive any benefits. In fact, New York’s Attorney General’s office is investigating nine leading life insurers to see whether they have done enough to identify beneficiaries of life insurance policies. Do your heirs know the particulars of your life insurance, or where to find the paperwork?

I suggest to all clients that they stick copies of their policies as well as a single copy of bank and stock statements (for account numbers) in the binder with their estate planning documents.  Few people are so organized that they will make lists of their assets- it is a lot easier just to run a copy of a bank statement and stick it in the binder. 

As to insurance policies?  Don’t forget those freebie policies that you sometimes get with a credit card- accidental death if you charged the flight.  No heir (and probably not you) will be aware such a policy exists.  Just stick it into the binder and forget about it- hoping, of course, that it is never cashed in!   

Learn more about getting your legal and financial affairs in order in the November 2010 issue of our monthly estate planning newsletter, at www.tierneywatsonhealy.com.”

 

 

 

Got Creditors? Don't Make Things Worse

Since the downturn in the economy, and with the passage of enough time to let debts accumulate, I am getting an increasing number of calls from persons wanting to “protect their assets” from creditors. Many think that creating a revocable trust will somehow help shelter their money from creditors.  This is not the case.  In addition, if you decide to do some kind of transfer of assets after you know about a creditor, you are generally too late to do anything about it. These are referred to as fraudulent transfers and they have a tendency of coming back to bite you.  Several recent cases serve to demonstrate that fact, as in one of Lewis Saret’s recent posts on Forbes (and the much longer list in the Wealth Strategies Journal.)

One case is that of re Quaid, (2011 WL 285645, Bkrtcy.M.D.Fla., Jan. 26, 2011,) where a Florida man sought to use a self-settled trust to shield his assets from his creditors. According to his account, even though the trust was self-settled (he, the beneficiary of the trust, set it up) the assets were still exempt because of a spendthrift provision. Unfortunately the Orlando Division of the US Bankruptcy court ruled that a spendthrift provision does not apply to a self-settled trust when the beneficiary contributed assets, and that wrecked the plan. The assets amounted to $400,000 and were added to his estate, well within reach of his creditors.

Also consider the California case of Struyk v. Meltzer (2011 WL 1019916, Cal.App. 4 Dist, Unpublished, Mar. 23, 2011), and the far more common case of inter-spousal transfers deemed to be fraudulent. A California man, with $500,000 debt, tried to shield assets by transferring them to his spouse, who was debt-free. He tried to quit-claim his interest in their residence and allow her to claim it as sole property, effectively transferring the asset. Instead of shielding the residence, the jury found that the husband intentionally transferred the property to the wife in order to defraud his creditor, which ultimately led to a jury verdict well in excess of the value of the assets transferred.

The bottom-line is that fraudulent transfers can make things worse when aggressive creditors line up to collect their judgments. 

 

 

Got Big Income? Consider the Roth 401(k)

Today’s record low tax rates with the evitable prospect of higher tax rates (at least for the wealthy) in the future are causing many people to look to the Roth IRA as a way to hedge their bets. With the Roth IRA, you pay your tax upfront on contributions to the account, and withdraw them tax-free during retirement.

If you have a company 401(k), you may want to investigate another lesser-known option available in many 401(k) plans called the Roth 401(k). Stuart Robertson of Forbes describes the Roth 401(k) as a Big Brother to the Roth IRA, saying the 401(k) version of the Roth is bigger and stronger in many ways than the IRA version. You can choose to put some, none or all of your contributions after-tax into your Roth 401(k) savings up to $16,500 a year in 2011, or $22,000 if you are 50 years of age or older. The Roth IRA maximum amounts are much lower: $5,000 and $6,000 if 50 or over respectively.

Additionally, the Roth 401(k) has no income limits which makes it attractive for big earners who don’t need the money. Unlike the Roth IRA, anyone can have a Roth 401(k), if their employer offers it. To invest in a standard Roth IRA and make the maximum contribution, your modified adjusted gross income must be below $107,000 if you are single, $169,000 if you are married filing jointly.

If your company does not offer a Roth option in your 401(k) plan, and you have the say-so to make it happen, you should request it. Typically, this requires an amendment to the plan, and only a minor cost to the business owner.

If you have the income and you think Congress will increase the tax rates on the wealthy, then a Roth 401(k) may be a good way to hedge your tax bet.

 

 

Handling the Stress of Caring for the Aging

There is hardly a day that goes by in my practice that I am not confronted with an Elder Care issue.  While “Elder” is a tough term and possibly not the best, I am referring to those emotional and difficult decisions that happen after someone becomes infirm and needs the attention of children (hopefully) to make decisions for them.  Unfortunately, the ordeal is frequently exacerbated by healthcare decisions ranging from issues with the physician to end-of-life or funeral decisions. Having recently dealt with the loss of her father, I found the article of writer Jennifer Openshaw of The Wall Street Journal extremely helpful. She offers five tips on caring for elderly loved ones  

• Fire Your Doctor. Well, you may not have to fire your doctor, but realize that you can – and maybe you should. Many people don’t realize they can just fire a doctor who is not providing the care and attention their loved one needs.
• Likewise you can fire your home-care provider. Doctors often recommend a home-care provider, and even if you respect the doctor that doesn’t mean that you have to follow their advice or stick with a provider that isn’t working out for you.
• Make End-of-Life Plans Now. It’s very important – for the sake of those around you – to discuss the many details that you’d typically never think about, from life support to feeding tubes. For help thinking through these important decisions now, Florida-based (oddly enough given that State’s laws on the issue) Aging  with Dignity has a document titled “Five Wishes” that covers related concerns, issues and questions.
• Shop Funeral Costs. Yes, this is a difficult thing to do, but companies know there are profits to be made amid your grief, and prices (for very similar services) can vary widely from one provider to another. All the more reason to talk these matters through in advance, when your judgment is not clouded by grief.
• Review Long-Term Care Insurance. Review your policy’s stipulations for waiting periods, maximum benefit amounts, etc. A 90-day waiting period is fairly standard, but can be quite traumatic when you’re struggling through it. Knowing in advance what will and will not be covered can make these transitions less traumatic on the family.

 

Check out my website at www.tierneywatsonhealy.com for more information on long term care and while you’re there, be sure to sign up for my free monthly e-newsletter to stay informed on important topics like these.

 

 

 

Ex Spouse Wins Big From IRA Designation

 

Every now and then someone will come in with a concern that an ex spouse is still somehow a beneficiary of their estate.  Usually I can tell them, along with encouraging a change of their documents, that under California law the former spouse will lose her rights to inherit- but that is not always the case and courtesy of Bill Singer’s blog through Forbes, here’s another sad story to add to the file of otherwise avoidable legal woes. The entire story and Singer’s commentary are worth reading, but in essence it is the story of Financial Industry Regulatory Authority (“FINRA”) Arbitration 10-02435 (May 9, 2011), or the shortsightedness of one Newman Trowbridge, Jr, Esq. (that means lawyer).

Mr. Trowbridge opened an IRA in 1994 and named his then wife as beneficiary of the account. Then two things happened: (1) his IRA was taken over by Capital One and his account was reassigned to a new broker (Rick Schenck, Sr.) and (2) he and his then wife underwent what was apparently a terrible and protracted divorce- pretty typical for lawyers. Mr. Trowbridge later re-married, put his life back together, and continued with his IRA with gusto (he quadrupled the balance) until he suddenly and tragically passed in 2009. At that time, Trowbridge’s estate went to his wife along with all the various accounts for which he named her as beneficiary, but the IRA went to his ex-wife. The story is familiar and you probably saw it coming, but Trowbridge had failed to reassign the beneficiary of his IRA and it has remained under his first wife.

Unfortunately, the story doesn’t end there since the recent widow had attempted to reclaim the IRA. She went so far as to present the broker with a court order stating that all accounts that make up the decedent’s estate must be transferred to the heirs of the decedent, but that didn’t work since the IRA isn’t a part of the estate to begin with. The broker defaulted to the named beneficiary, or the ex-wife. In response the widow tried suing on counts of negligence, amongst other things, since the broker had not carried out his duty by advising the late Mr. Trowbridge to rename his beneficiary. The suit is why this is the story of FINRA Arbitration 10-02435, and why it is all the more bitter since the widow lost the suit and it was held that the broker did his job (the case was even removed from his record.) Instead, the FINRA arbitration placed the blame squarely on Mr. Trowbridge, adding insult to injury since, we can presume and the court admitted, he probably didn’t intend to hand the IRA over to his ex-wife.

So- if you are an ex-spouse- take heed.  Depending on whether you are the owner or beneficiary of an IRA, the whole thing may not be over. 

 

 

 

Giant Cars and Electric Get a Big Tax Break

I normally only chat about estate issues, but a recent article about gas guzzlers in the Wall Street Journal really surprised me.  Much to my amazement the auto industry and the oil companies lobbied through another tax payer supported gas-guzzler provision- at a time when gas is now approaching record highs.  I guess there was just so much the administration could prevent.  If you are a small business owner who uses a vehicle in your business, then, as was true during the biggest giveaways of the mid decade years – the government is encouraging you to buy a massive gas guzzler.  

The new rules apply to vehicles purchased after Sept. 8, 2010 and before January 1, 2012. So, if you’re in the market to purchase a vehicle for your business, you’ll want to crunch some tax numbers first.

Make sure you check the following first:

• Business Use. Remember, unless the vehicle is used 100% for business, expenses are not fully deductible. The IRS is quick to question claims of 100% business use of a car.
• Depreciation deductions. This year Congress is running a large “bonus depreciation” on cars weighing more than 6,000 pounds, such as the Cadillac Escalade and Nissan Armada. Taxpayers may deduct 100% of the car’s cost in the first year – subject to the personal use disallowance, of course. Additionally, if this deduction creates a loss, the loss may be carried back to generate a refund. The new law also gives greater depreciation deductions in years two through six for cars costing more than $30,625.
• Tax Breaks for Fuel-Efficient Cars.  All is not lost for the rest of us who don’t want to buy a bus. There are still substantial tax breaks for purchasing a fuel-efficient car. All taxpayers (not just business owners) are eligible for a dollar-for-dollar tax credit up to $7,500 for “plug-in electric motor vehicles” like the Chevy Volt. If you are a business owner planning to purchase one of these vehicles, experts say you should take this credit first, and then figure depreciation based on the remaining purchase price.

As always, don’t let the “tax tail wag the dog,” when it comes to purchasing a car for your business. If a small, inexpensive, fuel-efficient car is what you really need, then purchasing something larger and more expensive just for the tax advantage probably will not make sense. However, if you need a heavier, more expensive vehicle to accomplish your business goals, then despite what you do for the environment, now is the time to buy.

 

Small business, business use of a vehicle, business expense, automotive deductions, depreciation deduction, taxes

 

 

Sell your home? Maybe.

 

Boomers have pretty much discounted living off their home equity- at least in the near future and especially if they re-financed for expenses when the loans were flowing.  A recent issue of SmartMoney bears this out, “With home prices falling for nearly five years, many American must consider what to do with their homes should prices continue to collapse and the equity in their homes, if they are still lucky enough to have any, disappears completely.”

Add to all this the warnings about shortfalls in social security and Medicare, rising health care costs, and the prospect of higher taxes now combine with disappearing home equity. No wonder so many Boomers say they plan to work through their “retirement.”

So, what do the experts say you should do with your home? Should you stay put and wait it out, hoping that home prices will eventually recover? Or should you bail out now, before you lose even more, and downsize?

“The answer is that it depends on the individual situation,” says Nicholas Paleveda, an adjunct professor at the graduate tax program at Northeastern University. “If you have plenty of assets for retirement, there may be no reason to downsize. If you do not have sufficient assets for retirement, then selling your home to live in a smaller home may be appropriate.”

Some options to consider include:

• Multi-Generational Living. Think of The Waltons, with three generations living in one house. Multi-generational living was commonplace years ago, and is growing in popularity now. In fact the number of household comprising multiple generations jumped to 7.1 million, or 6.1% of all US households in 2010. Of course, things worked out well for The Waltons, but remember that was television … and even John Boy eventually moved out!
• Pay Down the Mortgage. Depending upon your circumstances, it may be wise to pay down, or pay off, your mortgage before retirement to reduce your monthly expenses.
• Downsize. In today’s market, it may actually make sense to sell your house, even if it is underwater, if you can purchase a smaller home at a particularly good price and low interest rate. The cost of paying off your current mortgage would effectively be added to the purchase price of your new, smaller home. In some instances, after the dust settles, you could still be money ahead in the long run.
• Buy a Second Home Now. That may seem counter-intuitive, but if you have the means and can find a good price on a second or vacation home that will mesh well with your retirement needs, then you could basically lock in that price (and interest rate) now, and sell your primary home when the market recovers.

 Bottom line:  There are many options and issues.  Just don’t go down one road without thinking them all through. 

 

 

The Tale of the $2 Heir

 

I grouse frequently about the need for people to get a trust and to at all costs stay out of the clutches of the Probate Court, but even after 40 years I can still be amazed at the lack of common sense displayed by our system.  It seems like a good opportunity to make people aware that if they don’t get their act together, someone who doesn’t care a whit about them or their intentions will be in charge.

My client is a sweet elderly lady whose sister died leaving a will, which in effect left everything to her.  The decedent did leave some property to a friend in the will, but other than that had no other heirs except my client.  Because the decedent was poorly advised (I hope not by an attorney, but more probably by someone who holds themselves out in the poorer parts of town as a “legal assistant”) her Will left $2 to 3 nieces and nephews (children of a pre-deceased sister) whom she had not seen in 30-40 years.  Somehow her “advisor” thought this was a good way to disinherit them, even though they had no claim to the estate even if they could be found.

Well, guess what.  The great court system has taken on their cause!  Because they were named a formal accounting needed to be done which cost hundreds of dollars, even though the only real heirs didn’t care about an accounting- after all, they were doing it!  That wasn’t the court’s fault however- that was the fault of the “advisor” who prepared the Will. 

The court got to substantially increase the cost to the survivor (and prevent her receiving her  money) by determining that a full search needed to be made for these $2 heirs (we did what amounted to an internet search) at who now knows what cost; that even though the Will gave everything to my client, there were some technical issues in the wording that might conceivably result in the remote possibility that the 3 missing $2 heirs might have an interest in another asset (worth less than the filing fee to separately probate the asset) and that until this $2 heir issue was resolved, nobody was going to get anything. 

Try explaining this to very sweet non-lawyers.  It is a system run amuck by persons unable to apply common sense- and the lesson is clear.  Get a Revocable Trust, keep your estate out of the courts at all cost.  One simple oversight can delay for months or years the inheritance of those who follow you and can cost them substantially.  Unfortunately I have many such horror stories and this is why I am such an advocate of trusts even if your estate is modest.

Just remember the $2 heirs.   

Times Tough? Consider Your IRA.

Times are tough and a lot of people under age 59-1/2 are eyeing their IRAs as a way to make ends meet. Of course, there are a few good reasons for leaving it alone – heavy tax hits and penalties – and for that Forbes has recently offered some uncommon advice for withdrawing from your IRA early and penalty free.

The general wisdom is to leave your IRA alone until age 59-1/2 or else pay a 10 percent penalty on withdrawals. But there are allowances for penalty-free distribution in the case of serious financial hardship, higher educational expenses, or the cost of a first home. What is far less known is the 72(t) exception for Substantially Equal Periodic Payments (SEPP). Essentially, the IRS regulations allow annuitization of your IRA, so you can receive distributions straight from your IRA by taking them as a series of “substantially equal periodic payments.” The payments, once initiated, act much like required minimum distributions in that you must take out an amount determined by your life expectancy (or the joint life expectancy of you and your beneficiary) and at regular intervals, at least annually. Once initiated, you must take these distributions for 5 years or until age 59-1/2. You can then reorganize your distribution pattern or hold off entirely until the actual required minimum distributions set in at age 70-1/2.

The process, as you would imagine, is fairly complicated and that probably accounts for its relative under-use. To see it in action you can consult the original Forbes article, but even they found it simpler to reiterate the examples and information from the IRS’s FAQ. It is tricky, and perhaps a little risky, but it is at least an interesting tactic to bring to light, and may be a practical solution to getting through some tough times.

 

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