Trust lawyers are well aware of the variety of online estate planning tools available to those in Virginia and beyond, such as Quicken WillMaker, LegalZoom and Rocket Lawyer. The variety of products available can create a false sense of security, however, when an individual believes he or she has made adequate plans for the estate.  Recent Consumer Reports findings determined that the tools they reviewed were not robust enough to plan for situations that were even slightly complex.

For example, the high divorce rate in the US means that many individuals wish to provide for children from multiple relationships.  Most of the software reviewed by Consumer Reports could not meet the hypothetical clients’ specific wishes when it came to this subject.  In these “blended family” situations, the estate planning tools were too rigid in their options. This can result in accidentally leaving out a child, or favoring them unequally and causing hurt feelings.

A number of other problems were uncovered in this experiment, which is not a big surprise to most estate planning lawyers.  Each family and individual’s situation is highly dependent upon so many factors that it is nearly impossible for a computer program to anticipate them all.  Additionally, engaging with a live person means that there is a capacity for human understanding that the programs simply cannot replicate.

This interpersonal relationship is every bit as important as the documents that are created as a result.  From the lawyer’s extensive education and experience, he or she is able to guide clients into creating documents that are truly relevant to their particular circumstances.  In the world of estate planning, “one size fits all” simply doesn’t work.

One of the biggest problems with online estate planning tools is the fact that they seem to open so many estates up to the probate process.  As a result, families are left waiting for the courts to rule on decisions that the deceased believed had already been made.  Unfortunately, those decisions don’t always reflect the true wishes or spirit of the documents generated through the software.  Just as devastating is that fact that the probate process can be very expensive, thereby decreasing the amount of inheritance that beneficiaries do eventually receive.

It is commendable that so many people are now taking an interest in the estate planning process.  It is an unfortunate reality, however, that using online tools generally won’t be enough to plan for the actuality of your given situation.  Without a doubt, the best and safest approach is to develop a relationship with a trusted estate planning lawyer who can provide the expertise required to truly meet the needs of today’s modern families.

Learn more about Basic Estate Planning Here!

If you and your family are fortunate enough to go on that well-deserved resort vacation this year, then there is a good chance you’ll find yourself listening to the all-too-familiar ‘timeshare marketing pitch.’   Most people are familiar with the concept of a timeshare, but there is more to it than meets the eye.  The repercussions of owning a timeshare can vary tremendously depending on many things, including whether it is a real property interest, a mere right to use the property, or some other arrangement. Read on for more.

#1 – Timeshares are not Inherently Bad Investments. If a timeshare really interests you (and they are legitimate and worthwhile investments for many families), you can plan in advance to take ownership the right way and avoid legal traps and snares down the road.  Most people do not realize the thicket of possible legal ramifications inevitable to owning one (or more).  Timeshares are typically sold in a high-pressure environment, chock full of free food, gifts, and even vacations; these tools are all part of an intentional business model designed to encourage vacationers to make impulsive buying decisions.

#2 – Type of Ownership is Critical. If you own real property outside of Virginia and die without proper estate planning documents in place (no, a simple Will is not enough!) then the representative of your estate must appear in every state where such property is located.  This means that even if you live in Virginia but you own a timeshare for one week in Florida, if it is considered “real property,” then the Florida courts must determine how it is disposed. Combine that inconvenience with the fact that each state has slightly different estate administration laws and the representative of your estate could have a messy complication on their hands.

If a timeshare is in the form of a deeded contract, it is considered ownership of real property.  As you may know, real estate may be sold, rented, and gifted among other things.  And as you may have guessed by now, also incident to ownership are real estate taxes and probate.  Usually, taxes are included in the timeshare maintenance fee, but probate is another issue.  If you die without a trust to dispose of your assets, then the court system will “probate” the Will, or follow the statutes of the state if there is no Will.  In any event, dying without a trust and with real property can cause major headaches for your executor.  Luckily this can all be avoided.

If the deed to your current or prospective timeshare is a “leasehold deed,” then it means ownership only lasts for a specified period of time.  A “right to use” contract means what it sounds like – the purchaser acquires a right to use and enjoy the rights of the property owner (usually a resort).  However, the pitfall of a “right to use” contract is the fact that it is possible for “other” benefits you may not care about, like a club membership, to be included.  The “right to use” form of timeshare acquisition is used heavily overseas and in Mexico, because the ownership of foreign real property interests opens the door to many more legal issues.

#3 – You Do Not Have to Decide Then and There. Do not sign anything before you leave, unless you have a revocable living trust and have already met with your lawyer regarding the timeshare you are considering.  The concept of a timeshare is attractive, but before saying “yes,” it is absolutely imperative to speak with a good estate planning attorney.  For those who own timeshares already, it is still equally as important to not purchase another one until you have consulted an attorney, and also equally as important to talk to a good estate planning attorney if you own a timeshare but do not intend to purchase another.

Revocable Living Trusts Explained

Consult an Estate Planning Attorney Now!

Many of us are so caught up in the here-and-now of the present that we fail to consider our distant future. We may get around to it later in life, after we have lived awhile–wondering what we might be remembered for, or what we will leave behind. Others are born with this innate sense of purpose, this desire to create a lasting legacy for themselves, or perhaps their children.

Whichever group you fall into, August is “What Will Be Your Legacy?” month and should spur you to ponder that question for yourself. While we can’t control what others think of us after we’re gone, we can make sure that we lay the groundwork for a lasting legacy. Proper estate planning can be key to many of your goals. Is there a charity or cause that you believe can change the world? Charitable gifting from a trust can ensure that you play a vital part in its mission even after you’re gone. Do you have children? Planning ahead to give them the ultimate gift of a good education will change their lives, and you don’t have to wait until the end of your life to do it!

Choose to ignore this, and your legacy could turn into a nightmare you never dreamed of. Do you want your loved ones to have to go through “the nightmare of probate” after you’re gone, because you didn’t have the right documents in place? Is that the final impression you want to leave with them? Probably not. This month gives us a prompt to make the right choices in our lives, for ourselves and our loved ones. You might think this approach only applies to the here and now, but you can make the right choices for what you leave behind you as well. After all, isn’t that what a legacy truly is?

What is Probate?
What is a Revocable Living Trust?
How Does a Revocable Trust Avoid Probate?
What About Irrevocable Living Trusts?
Choosing a Trustee
Protect Assets from Lawsuits PLUS Divorce PLUS Nursing Home Creditors

Good news for veterans!

On April 6, 2011 a new statute was made Virginia law, awarding a real property tax exemption for permanently service-related disabled veterans and their surviving spouses. Originally approved by voters in November 2010, this statute will positively affect an estimated 7,350 disabled veterans living in the state of Virginia, according to the U.S. Department of Veterans Affairs. The exemption applies to the sole dwelling and land (not more than one acre) of the veteran, but not to any vacation homes or rental properties. For most people living in the city or suburbs this will be a sufficient and appreciated break. However, if your locality exempts more than one acre under its tax relief program for the elderly, then veterans will receive this new property tax exemption for the same number of acres as allowed for the elderly.

The application is a fairly simple one-time process that does not need to be re-submitted annually, unless you move or have another change in circumstance. First, you must obtain the required disability documentation from the VA by submitting VA Form 21-4138 . Second, after you have received the appropriate paperwork that proves your 100% service-related disability, download the “Disabled Veteran Exemption Application” from your county website and submit to your county’s Department of Tax Administration along with your VA documentation for approval. Lastly, once approved, make sure to alert your mortgage company (if applicable) so that they may adjust your monthly mortgage payment according to this property tax break.

The Farr Law Firm and the Elder Law Institute for Training and Education appreciates the military service of our veterans and are proud to offer a 15% discount on our Level 1 and 2 packages to all active duty, reserve and retired military members. Our Level 1 and 2 packages include incapacity protection planning documents and living trusts, as well as optional add-ons like wills and child protection plans. This is a substantial savings of up to $1000! If you’re a veteran in need of estate planning services, please contact us at 703-691-1888 to see how we can help.

 Photo by Maggie Smith.

As Halloween approaches this year, I can’t help but draw an analogy between the nights I spent meandering my neighborhood as a kid looking for handouts, and our current economic times.  I recall my grade-school friends and I operating our minds at their collective capacities, as we planned the best streets to target and the best routes to take to get from house to house most efficiently. Some of the parents surpassed expectations and gave out the good stuff — like king size candy bars! Others doled out the less-desirable treats, such as candy corns, smarties, or the dreaded raisins.  Some neighbors, when they were gone for the evening, left out giant bowls of candy for us trick-or-treaters to help ourselves.  Other neighbors were always gone, and their houses completely dark.  But fortunately for us candy-loving kids, most or our neighbors participated in the fun of Halloween. In fact, many of our neighbors offered a variety of different candy to choose from each year.  We never knew how much candy we’d wind up with at the end of the night, or how much of the “good stuff” we’d have in our bag.

Similar to the unpredictability of household Halloween generosity encountered by children, the Federal Government is providing the public with what can appropriately be called a “mixed bag” of economic solutions. It might just depend on what house, or rather, what state you live in.

Social Security and Supplemental Security Income recipients will not receive an increase in 2011 because there has been no increase in the federal Consumer Price Index.  Read the Social Security News Release Here (released October 15, 2010).

Though the federal Social Security Administration is not able to provide an increase for its beneficiaries because of long-standing federal law that ties Social Security and Supplemental Security to the Consumer Price Index, other federal agencies, and some state agencies, are doing what they can to help alleviate the financial struggles of the elderly and disabled.

One prime example:  the federal Administration on Aging and the Centers for Medicare and Medicaid Services (both part of the U.S. Dept. of Health and Human Services) recently awarded more than $2 million in grant funding to the Virginia Department for the Aging and the Virginia Department of Medical Assistance Services, the latter being the Virginia agency that runs our state’s Medicaid system.   Read the Commonwealth of Virginia Press Release Here (released October 6, 2010).

This grant funding to Virginia’s Medicaid system comes with high hopes and great expectations. The over $2 million in funding will be used to bolster services for two key underprivileged groups – the elderly and the disabled – by alleviating burdens in the following areas:

•    Prescription drug coverage
•    Long-term care services
•    Transition support from nursing homes to community based services
•    In-home support services for sufferers of Alzheimer’s disease

In providing these much-needed funds to Virginia for the improvement of Virginia’s Medicaid program and the development of additional services for the elderly and the disabled, the Federal Government has demonstrated its continuing commitment to improving and strengthening the Medicaid system throughout the United States.  As Senator Rockefeller wrote in 2005, on the 40th anniversary of the Medicaid program,  ”taking care of our most vulnerable people is a moral obligation . . . our representative democracy has a responsibility to do for the future what we have repeatedly done in the past: protect, preserve, and strengthen Medicaid.”

Medicaid is what pays for the vast majority of nursing home care in the United States. With both the Federal Governemtn and the Virginia State Goverment now strenghtening the Medicaid program, smart long-term care planning (i.e., Medicaid Asset Protection Planning) has never been as important as it is now. According to the Virginia Department for the Aging, the population of elderly adults in Virginia will double in less than 20 years — to the point where one in five residents of Virginia is expected to be aged 65 or older.

A statistic I cited in a previous article demonstrates the importance of Medicaid Asset Protection Planning — about 70% of Americans who live to age 65 will wind up needing long-term care at some point in their lives.  For the more than 40% who will require long-term placement in a nursing home, the cost of such care will be financially devastating without a smart Medicaid Asset Protection Plan focused on structuring assets in a way that protects those assets while allowing earlier Medicaid eligibility.

For most seniors over age 65, Medicaid is the equivalent of government-subsidized long-term care insurance, just as Medicare is governement-subsidized health insurance.  But remember — the fact that Medicaid is “government-subsidized” does not mean that it’s a “handout.” On the contrary, it’s your tax dollars that fund the Medicaid program, just as it’s your tax dollars that fund Medicare.  It’s also important to note that the Federal Government and Virginia State Government both encourage Americans to engage in smart Medicaid Asset Protection Planning — for example:  there are laws that protect spouses of nursing home residents; there are laws that encourage Americans to engage in Medicaid Asset Protection by purchasing Long-Term Care Insurance “Partnership” policies; there are laws that allow the exemption of certain types of assets when applying for Medicaid; there are laws that permit individuals to qualify for Medicaid even after transferring assets to a spouse, or to a disabled family member, or to a caregiver child.  To smartly plan and protect assets while accelerating qualification for Medicaid is no different than planning ahead to maximize your income tax deductions in order to minimize your income taxes.   It is no different than taking advantage of tax-free municipal bonds.  It is no different than planning your estate to avoid estate taxes (which, incidentally, a lot more people are going to be doing again next year when the Federal Estate Tax returns with a vengeance – with an Exemption Equivalent Amount of only $1 million – but that’s for another article . . . ).

At a time when much federal spending leads to controversy, Medicaid is an example of the government legitimately promoting the best interests of society.  Similar to how my mom always made sure I ate a well-balanced dinner before embarking upon my annual October 31st sugar binge, our Federal Government and State Government are truly looking after the citizens of America (even in these gloomy economic times) by directing funds to programs that benefit and protect our most fragile citizens — the elderly and disabled.

The Farr Law Firm specializes in Family Protection Planning (i.e., Estate Planning, Incapacity Planning, and Medicaid Asset Protection Planning), and we are here to help you.  If you have not yet done your Family Protection Planning, I encourage you to call us to take advantage of a free consultation to determine the planning solution that’s best for you and your family.

I’m conducting two seminars this week on the topic of Income Only Trusts. The first one is a teleseminar for attorneys around the country who are members of the professional group ElderLawAnswers.  Entitled Using Income Only Trusts for Medicaid (and General) Asset Protection, this teleseminar is Thursday, Feb. 11, at 2pm Eastern. If you’re a member of ElderLawAnswers, you can click here to register for the Teleseminar, 

The other is a free seminar I’m teaching on Saturday morning for clients and potential clients, entitled How to Protect Your Assets from the Expenses of Probate and Long Term Care.  This will be held at the Tysons Corner Mariott, 1960-A Chain Bridge Road, McLean, VA 22012.  Please click here to register for the Saturday morning seminar. 

The answer to the question “How Can You Protect Your Assets from the Expenses of Probate and Long Term Care?” is, of course, to use the Living Trust Plus™ Asset Protection Trust, my highly-developed and proprietary income only trust that’s currently used by dozens of successful Estate Planning and Elder Law Attorneys across the country. 

 As stated by Elder Law Answers, “Income Only Trusts have been around since the 17th century, but have only recently gained in use and popularity, in large part due to the publications and educational efforts of our speaker and long-time ElderLawAnswers member, Certified Elder Law Attorney Evan Farr.”

What most Elder Law attorneys don’t understand is that income only trusts also provide clients with protection from lawsuits and other general creditors, and in the ElderLawAnswers teleseminar, I will be demystifying the income only trust, explaining how and why it works, and explaining to my fellow ElderLawAnswers Members the dos and don’ts of income only trusts so that they may properly serve clients in this exciting and growing practice area.

For middle class Americans seeking asset protection, the income only trust is the preferable form of asset protection trust because, for purposes of Medicaid eligibility, the income only trust is the only type of self-settled asset protection trust that allows a trust settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies.

 For my clients and potential clients in the Washington, DC Metro area, by coming to my FREE class on Saturday, you’ll learn what thousands of my clients already know . . .

- That a Will puts your assets through probate, and is a very poor estate planning document.
- That a regular living trust protects your assets from probate, but offers you no asset protection.
- That my proprietary Living Trust Plus^TM Asset Protection Trust protects your assets from the expenses of probate PLUS lawsuits PLUS the catastrophic expenses of nursing home care.

If you answer YES to any of the questions below, you need to attend this class:

 - Is someone in your household over age 65?
- Does someone in your household have a serious medical condition?
- Has someone in your household been turned down for long-term care insurance, or found it too expensive?
- Do you want to protect your assets for your family from the devastating expenses of long-term care?
- If you need long-term care in the future, do you want to receive the best possible care?

To learn all the details and find out if the Living Trust Plus™ is right for you, please register now at http://VirginiaElderLaw.com/seminars.html 

Protect and Prosper! 

–
Evan H. Farr, Certified Elder Law Attorney
Creator of the Living Trust Plus:  http://www.LivingTrustPlus.com
ALI-ABA Co-Author, Planning and Defending Asset-Protection Trusts (2009): http://www.ali-aba.org/bk64
ALI-ABA Co-Author, Trusts for Senior Citizens (2009): http://www.ali-aba.org/bk65
Farr Law Firm, 10640 Main St., Suite 200, Fairfax, VA  22030
Tel: 703-691-1888 | Fax: 703-940-9160
www.VirginiaElderLaw.com & www.VirginiaEstatePlanning.com
—————————————————————————————————-
NOTICE – Unless expressly stated otherwise, this communication: (1) is not legal advice absent an existing attorney-client relationship between us; (2) does not create an attorney-client relationship; (3) does not constitute an offer, acceptance, or contract amendment; (4) may contain confidential or legally privileged information protected by the attorney-client relationship and/or work product privilege; (5) is only for the use of the individual to whom it is intended by the sender to be sent, and if you are not such recipient, disclosure, copying, distribution or reliance upon this  communication is prohibited; and (6) is not intended, and cannot be used, to avoid tax-related penalties pursuant to treasury department circular 230.

Because of a Congressional failure to act before the end of 2009, there’s good news and bad news to report on the Estate Planning and Elder Law front.  The good news is there’s no Estate Tax if you die this year.  The bad news is you may owe significant capital gains taxes if a loved one dies this year and leaves you significant appreciated assets. If you have total assets of around $1 million or more (including face value of life insurance, retirement plans, home equity, etc.) you should make sure your estate plan is up to date.

Congress has had nine years to prevent this from happening, but has failed to act. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the estate tax exemption has been gradually raised over the past eight years while the tax rate on estates has been reduced. For estates of those dying in 2009, only assets worth $3.5 million or more were subject to estate taxed, at a rate of 45 percent. But now, for the year 2010, the estate tax has disappeared entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is exactly where things stood before the 2001 change.

Everyone — lawyers, politicians, and political commentators — has expected for the past 9 years that this law would be “fixed” before the end of 2009, but it wasn’t.  According to some commentators, the Republicans concluded that it was in their interest to let the estate tax repeal occur; and the Democrats apparently don’t agree among themselves as to what they think the estate tax law should be, as Democrates have differing opinions over what the tax rate and the exempt amount should be. Senate Democrats tried to persuade Republicans to extend the 2009 estate tax law for a couple of months until a more permanent solution could be devised, but even that effort failed.  Accordingly, there is currently no tax on the estates of those dying during 2010. Congress could reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, but this is not likely according to many commentators.

As the law stands, a few thousand very wealthy families have great financial incentive to hope that their loved ones die this year.  On the other hand, tens of thousands of taxpayers of more modest wealth may have great incentive to keep their loved ones alive into 2011, because if their loved one dies in 2010 and they inherit an appreciated asset, they may have pay capital gains on that inherited asset, and someone acting as an executor will face additional and confusing administrative burdens.

Loss of Step-Up in Basis May Be Quite Expensive for Many Taxpayers

For most people, the main concern with the law as it now stands is not that the estate tax is repealed for 2010; a bigger problem for many is that it’s replaced with a 15 percent capital gains tax on inherited assets that are later sold.  Previously, someone inheriting an appreciated asset (for example, a house that had greatly appreciated in value over the lifetime of your parents) upon a loved one’s death got a “step-up in basis” in the property. A step-up meant that heirs could sell the inherited, appreciated asset right away without owing any capital gains taxes, because the tax “basis” in the property was “stepped-up” to the value of the property at death.

If you inherit an asset now (in 2010), only the first $1.3 million in assets gets a step-up in basis. Anything over the $1.3 million in assets (plus $3 million for assets transferred to a surviving spouse) will not get a step-up in basis.  Instead, when you sell the property you’ll have to pay capital gains taxes based on the original cost basis (typically the price paid for the asset). This raises an additional concern — having to determine what the cost basis of the asset was.  This in itself could be quite expensive, not to mention time-consuming in trying to ascertain the original price paid for assets, including any renovations or improvements made to real estate over the years.

The capital gains tax rules can be quite complicated, but let’s look at a relatively simple example:  a client called me a few days ago with a home worth approximately $1 million and 40 acres of commercial land that her father gifted to her prior to his death, now worth approximately $2 million. The home was originally purchased by my client for $8,000 in 1961 and she put a $40,000 addition on the home in 1982, so her tax basis in the home is $48,000. Her father originally purchased the 40 acres of land around 1943, for $1,000; at the time of his death in 1992, the 40 acres was worth about $600,000.  Had he left the land to his daughter upon his death, she would have taken a stepped-up basis under the old law, but because he gifted it to her prior to his death, she took over his cost basis of $1,000.  So now her two parcels have a total cost basis of $49,000.  If my client had died last year, then her heirs would have received a step-up in basis, meaning if they sold the properties for their current value of $3 million, they would pay no capital gains tax.  Under today’s law, if my client dies this year, in 2010, her heirs will inherit her cost basis of $49,000, meaning that if her heirs then sell these properties for their current value of $3 million, they will pay a 15% capital gains tax on $1,651,000 ($2,951,000 – $1,300,000), or $247,650 in tax.

The chief tax counsel for the House Ways and Means Committee estimates that continuing the estate tax at its 2009 rates would have affected about 6,000 people, but the new capital gains provisions that we now have will affect more than 70,000. And, in general, these 70,000 will be far less wealthy than the heirs who would have been affected by a continuation of the estate tax.

Couples With Credit Shelter Trusts at Risk

The new world of no estate tax places at particular risk certain couples who have built in “Credit Shelter” trust provisions (also called ”Bypass Trust” or “Family Trust” provisions), that are designed to allow both spouses to take advantage of their estate tax exemptions. These are common arrangements used in estate planning for married couples. With the estate tax gone, one possible problem is that the wording of some of these trusts could cause all assets to completely bypass the surviving spouse when the first spouse dies, meaning a surviving spouse might get nothing without the expensive process of claiming her “elective share.” For a more detailed explanation of this potential problem, click here.

Why Did This Happen?

The House passed a bill in early December permanently extending the 2009 estate tax rules, which would have brough in an estimated $25 billion for 2009 by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of 2009, but they were blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

“Republicans who claim to have accomplished something by blocking an extension need to explain why raising taxes on the middle class while lowering them for the very rich is something to be proud of,” the Los Angeles Times editorialized.

For more on the implications of the disappearance of the estate tax, see CBS MoneyWatch’s “Estate Tax: What You Need to Know for 2010,”SmartMoney’s “The Federal Estate Tax Is Dead: Now What?,”and Kiplinger’s “FAQs on the Death of the Estate Tax.”

Everyone — Especially Married Couples — Should Have Their Estate Planning Reviewed ASAP

Because of these somewhat unexpected tax changes, a review of your existing estate planning documents is essential.  If you are a member of the Farr Law Firm’s Estate Plan Protection Program or Lifetime Protection Program, you are entitled to a free review (and, if necessary, a free modification) of your existing estate planning documents every year, and you should call us to take advantage of this annual review as soon as possible.  Most of our trusts will not need to be modified because of special language we inserted in the document, but changes to some trusts may be required.  If your estate planning was done by a different attorney, you should consider going back to that attorney for a review; alternatively, please feel free to contact our office and we will be happy to do a free review of your estate planning documents, determine if any changes are required, and quote you a fee for us to prepare the necessary revised documents.

Under current law, there will be no cost-of-living adjustment (COLA) in Social Security in 2010 — the first time that has happened since automatic cost-of-living adjustments began in 1975. Several bills before Congress would grant a special increase in Social Security payments for 2010.

In addition, when no Social Security COLA is provided, Medicare Part B premiums — which are deducted from Social Security checks — are frozen for most beneficiaries so that the Social Security checks do not drop (click here for more information).

Below are figures for 2010 that are frequently used in the elder law practice, including the new Medicaid spousal impoverishment figures, the long-term care insurance deductibility limits, and Medicare premiums and co-pays, and Social Security Figures:  

Medicaid Figures for 2010 

Unlimited Exemption (Estate Tax Temporarily Repealed for 2010).  Exemption currently set to revert to $1 million in 2011.

 Annual Gift Tax Exclusion: $13,000  

Social Security Figures for 2010

         (Click here for SSA Press Release)
         (Click here for SSA Fact Sheet) 

• Cost of Living Increase: 0 percent 
• Maximum Taxable Earnings: $106,800   

SSI Federal Payment Standard:  

• Individual: $674/mo.
• Couple: $1,011/mo.

Sorry for the last minute notice, but I just found out that my church, Fairfax United Methodist Church (10300 Stratford Avenue, Fairfax, VA  22030), has space left for a course I’m teaching tomorrow evening entitled What Does the Bible Teach us About Estate Planning?This is a brand-new two part course seminar that I’ve just put together as part of my church’s Paths of Faith educational outreach program.  

I’d love for you to attend if you’re able to make it, and bring your friends and family! Tuition for both sessions is $25.  To register, please call the church at 703-591-3120 ext. 105.  I hope to see you there!

In June of last year, I wrote that “in the near future, life estates will no longer be considered exempt assets when applying for Medicaid.” This was due to the fact that the Virginia General Assembly had recently passed legislation instructing DMAS (the Department of Medical Assistance Services, the agency that oversees the Virginia Medicaid program) to amend the State Medicaid Plan to consider all life estates as countable resources in the determination of Medicaid eligibility. After my column, the new change in Medicaid policy did indeed go into effect. However, since then, the policy has been changed yet again. This article will summarize the changes in the life estate law and explain the current Virginia Medicaid policy.

Life Estate Rule Made More Restrictive
Prior to August 2008, the Virginia Medicaid State Plan treated life estates in real property as exempt resources, meaning that the ownership of a life estate did not affect Medicaid eligibility. Effective August 28, 2008, the aforementioned change in Medicaid policy made life estates created after that date countable resources under most situations, though subject to the same exclusions that apply to other residential real estate (e.g. the home subject to the life estate would be exempt if the Medicaid Applicant, or a spouse or dependent child, was living in the home or the Medicaid Applicant was using “reasonable efforts” to sell the property interest, or during the first 6 months of institutionalization provided the Medicaid Applicant intended to return home).

The American Recovery and Reinvestment Act of 2009 (Recovery Act) that President Obama signed into law on February 17, 2009 provided increased federal funding for state Medicaid programs. To be eligible for the enhanced federal financing, states may not have eligibility standards, methods or procedures in place that are more restrictive than those effective on July 1, 2008. States that implemented more restrictive policies after July 1, 2008 had until July 1, 2009 to reverse these restrictions to receive the increased funding.

More Restrictive Life Estate Rule Rescinded
The August 28, 2008 change in Virginia Medicaid policy regarding life estates created a more restrictive eligibility standard than was in existence in Virginia on July 1, 2008. Therefore, in order for Virginia to qualify for the increased federal funding, the more restrictive life estate policy needed to be reversed. As of May 15, 2009, the more restrictive life estate policy was rescinded. Accordingly, we now have two diferrent Medicaid rules for life estates, depending on the date that the life estate was created:

* As a general rule, life estates created prior to August 28, 2008, or on or after February 24, 2009, are considered exempt assets.
* Life estates created on or after August 28, 2008, but before February 24, 2009, are treated in the same manner as other real property, subject to any applicable residential real property exclusions as mentioned above.

How Can Life Estates Now Be Used in Medicaid Asset Protection Planning?
Life estates have been used throughout Virginia history for many different purposes – Medicaid asset protection planning, estate planning, probate avoidance, and tax planning.

One asset protection strategy involves a parent purchasing a life estate in the home of a child. This strategy is specifically allowed by Medicaid under current law so long as the parent actually resides in the home for at least a year after the purchase of the life estate.

Another planning strategy involves the sale of real estate to a child, coupled with the retention of a life estate. This allows the parent to effectively sell the home for a discounted value, retain the lifetime right to live in the home, and avoid probate, while also preserving a step-up in basis for capital gains purposes on the death of the parent.

A third planning strategy involves the gift of real estate to a child, coupled with a retained life estate. Although this gift will trigger a period of Medicaid ineligibility if application for Medicaid is made within five years of the transfer, because the value of the remainder interest is lower than the full value of the entire piece of real estate, a gift of a remainder interest results in a shorter Medicaid penalty period than a transfer of the entire house.

A parent retaining a life estate in a home that is being sold or gifted to a child has several advantages:

1) The parent continues to qualify for any property tax exemptions such as senior citizens exemptions that were available prior to the transfer.
2) The parent retains the legal right to live in the property.
3) The parent retains the legal ability to obtain a reverse mortgage (with the agreement of the remainder beneficiary).
4) The child receives a stepped-up basis for capital gains tax purposes.

Life Estate transactions, and the financial and life expectency calculations that must be made in connection with these transactions, are extremely complicated and must be done pursuant to the applicable Medicaid regulations. It is essential that these types of transactions be done under the direct supervision of an experienced Elder Law firm such as the Farr Law Firm.