The Troubled Intersection of Medicaid Planning & Planning to Avoid Probate

Two of my most often-read blogs intersected today when Michael J. Keenan of the The Connecticut Elder Law Blog posted an article by David Goldman of The Florida Estate Planning Lawyer Blog.

Loosely based on the premise in Elder Law planning that “when you fix one problem you end up creating a brand-new problem”, Mr. Keenan posted David’s “Most Common Mistakes That Florida Families Can Make” as these mistakes relate to Medicaid Planning and Probate Avoidance.  It was timely posted because Ezine Articles also this morning posted their list of “10 Estate Planning Mistakes That Most Americans Make.” (No medicaid angle here though.)

These lists are among my favorite things posts because it allows me another trip to the top of my soap-box to rant about the problems I see everyday; problems that are easily avoided if only the subject family had gone to a qualified estate planning attorney…  Anways, snippets from each list are below, sprinkled with my own special color commentary of course.

1.  Transferring a portion or all of a home to a family member.  This drives me bonkers

Often, people executed deeds that include other family members in an effort to avoid probate.  The most common type of deed that people use is a life-estate deed.  Normally, A life-estate deed reserves the right for the owner to live in the home for the remainder of his or her life and then upon death the property belongs to the designated family members.  Although a life-estate deed avoids probate, it can cause many unforeseen problems.  These problems include 1) a gift for federal income tax purposes which is often unreported and can accrue interest and penalties for years; 2) loss of the stepped up basis the recipient would receive upon the death of the original owner; 3) the inability to sell or refinance the property without the consent of all owners; and 4) the creation of a disqualifying transfer for Medicaid qualification.

(A life estate deed doesn’t exist in Ohio.  Instead, we have a transfer-on-death deeds which I use frequently as they avoid all of the problems David lists above…  I include his #1 as my #1 though because, really, it drives me bonkers when I see partial interests transferred to children during mom/dad’s life solely in an attempt to avoid probate.  Bonkers)

2.  A joint account holder using funds for personal benefit.

Another common technique used by the elderly to avoid probate is to create jointly owned bank accounts with other family members.  For Medicaid planning purposes, all funds in such bank accounts are considered assets of the applicant, regardless of the source of the funds.  Often, family members do not keep sufficient records or may use the joint account to pay bills that are not the responsibility of the applicant.  Medicaid considers such transactions as “gifts” and will disqualify the recipient if they are done within 5 years of the application process.  It is possible to undo these transactions, but often the family member who received the benefit is unable or unwilling to return the money.

Purely from a planning perspective, joint accounts as probate avoidance vehicles are nightmares because, in Ohio, all the money contained in the joint account automatically passes to the surviving joint owner.  This can lead to all kinds of family strife when the remaining surviving siblings realize the joint-account-sibling just got a more from mom/dad’s estate than they did.  What makes it even worse is, those assets that went to joint-account-sibling are still included in the decedent’s gross estate for estate tax purposes but are not included in the probate assets where the family will first look to pay any estate taxes…  So not only did the other siblings not get the money, but they are (oftentimes) still expected to pay the taxes due on these monies…  Hi-jinks ensue.  And by hi-jinks, I mean lawsuits.  And if the joint-account-sibling used any of the funds for their personal benefit rather than for mom/dad…  Lookout.  This one ruins christmases everybody.

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