Dying without a will, or intestate, means that your estate will be distributed according to the default provisions of state law. For a variety of reasons, this can make the administration of your estate take longer, cost more, and create divisions within a family. Why? Without an up to date will, it is easy for arguments to arise about your true intentions. Furthermore, simply going through the probate process will require payment of an inventory fee and compliance with state law regarding the administration of your estate. State procedures can often be cumbersome and time-consuming. Creating a will is a simple step toward taking responsibility for your affairs and reducing the turmoil that can result for your survivors from an unplanned estate.

The Department of Human Services for the State of Michigan has announced new numbers for 2009. Every year the numbers concerning Medicaid eligibility for long-term care are adjusted to reflect increases in the cost of living.

The new community spouse resource allowance is a minimum of $21,912.00 and a maximum of $109,560.00. This number is important for married persons with a spouse in the nursing home. It determines how much in cash and otherwise non-exempt assets the spouse living in the community will have to spend down before qualifying for Medicaid.

The community spouse income allowance, which is the income that the community spouse can keep each month and not have to pay to the nursing home has been increased from a minimum of $1,750.00 to $2,739.00. The new utility allowance (which provides additional income protection for the community spouse above the minimum protected amount) is $550.00 per month. However, it is important to note that these numbers do not adjust until April of this year.

Initially the state of Michigan did not include a new divestment penalty divisor in the 2009 figures. After much prodding by the elder law bar, it has been announced that the new penalty divisor is $6,362.00. What that means is that for every $6,362.00 gifted by a nursing home patient within the look back period, the state will withhold nursing home care for 1 month. So if a senior has given away $63,620.00 during 2009 and needs nursing home care, the state will impose a penalty of 10 months.

For many seniors, these numbers may be discouraging: particularly those related to the community spouse. DHS will require an unadvised senior to spend down to ½ of the family’s total assets with a maximum of $109,560.00 before qualifying for Medicaid. Furthermore, the income allowance is very seldom any higher than $1,750.00 based on cost of living expenses alone. With effective advocacy, however, it is not uncommon for these figures to be increased by court order.

It is very common to hear annuities described as “Medicaid friendly.” Most people hearing the words “Medicaid friendly” would assume that assets placed in such an annuity will be protected from the cost of long term care and indeed, they may even be told so by an insurance professional or financial advisor. But under Michigan law, an annuity by itself does nothing to protect assets from the cost of long term care. In fact, without careful planning, simply investing in a Medicaid friendly annuity may result in the unnecessary loss of assets. Understanding why this is the case requires some understanding of estate planning, elder law, and annuities. But taking the time to understand these things can easily save tens if not hundreds of thousands of dollars. Moreover, understanding these points can help you to see why your estate plan must work in conjunction with your financial plans in order to receive the full benefit of an annuity.

Estate planning is traditionally thought of as the field of law concerning the distribution of assets at the time of one’s passing. Modern estate planning encompasses planning not only for distribution on death, but also planning for disability and asset protection. Planning for disability will greatly increase the likelihood of having something to pass on to heirs, while at the same time reducing stress and maximizing one’s own independence. But in order to effectively manage a one’s affairs through a period of disability, there must be a close relationship between the estate plan and the financial arrangement, including the types of investments used.

Annuities can have many different features. Sorting them all out would be beyond the scope of this brief article, but it is important to note that without effectively combining the estate plan and the annuity, you cannot achieve the maximum benefit of either one. To understand why this is so, a few common features of annuities are worth mentioning.

Annuities can be either assets or income streams. When initially purchased, most annuities are like certificates of deposit with a longer term and a greater penalty for early withdrawal. Such annuities are assets and are said to be “deferred.” Money can be taken out of the annuity at this stage, but like a certificate of deposit, there will be a penalty or surrender charge imposed if the withdrawal is taken too soon.

Annuities can be converted into guaranteed income streams. Once this is done, the annuity no longer has any cash value, but will instead pay out a fixed sum of money on a regular basis for a period of time. This process is often called “annuitizing” the annuity. Once annuitized, the funds placed in an annuity can no longer be accessed. What has really happened here is that an asset, the annuity or cash used to purchase the annuity, has been converted into an income stream. This is a permissible form of spending down for Medicaid eligibility provided that the requirements of Medicaid law (described below) are met. An annuity that will meet these requirements is fairly described as “Medicaid friendly.”

According the Program Eligibility Manual (Section 401, pp.4-5) for the state of Michigan, an annuity must have several different characteristics in order to avoid being considered a divestment for purposes of Medicaid qualification, including:

1. The annuity must be irrevocable and non-assignable;
2. The annuity must pay out on an actuarially sound basis;
3. The annuity must pay out in level installments;
4. The state must be named as a remainder beneficiary to the extent of Medicaid benefits received.

Any annuity that does not comply with these rules will be considered a divestment and subject to penalty. But any annuity that does comply with these rules will go to pay the cost of nursing home care in two ways. First, the regular income from the annuity will have to be paid to the nursing home on a monthly basis. Second, if the owner of the annuity should pass away before the annuity has paid out the entire balance, the remainder would go the state to the extent that any assistance had been provided. The owner of the annuity will have to pay the entire nursing home bill sooner or later. Medicaid friendly indeed!

It is at this point that the need to consult with and elder law attorney regarding annuities becomes clear. Elder law is the practice of law related to serving the needs of senior citizens and their families. It often involves planning for health care costs and interactions with Medicaid and Veterans benefits. Medicaid law in Michigan and many other states has changed a great deal since the Deficit Reduction Act of 2005 was passed and this law has dramatically changed the meaning of “Medicaid friendly.” Great care must be taken under this new law to either avoid or carefully manage penalties for transferring assets and yet maximize the benefits available with annuities. Without proper planning, precisely because an annuity can be described as “Medicaid friendly” it would almost certainly have to be exposed to the cost of long term care. But a modern estate plan developed in consultation with an elder law attorney can avoid exposing funds placed in an annuity to the cost of long term care while still obtaining the other benefits of the annuity itself. Careful estate planning can render an annuity safe from spend down for Medicaid qualification and make it truly Medicaid friendly.

*Jerrold E. Bartholomew is a licensed attorney in the state of Michigan. He is not licensed for insurance products or securities.

The Center for Medicare and Medicaid Services (CMS) has apparently rejected Michigan’s proposed estate recovery program. Michigan’s proposed legislation was unique not only for being last in the union to be enacted, but also for being exceptionally lenient. It is therefore reasonable to assume that Michigan will be required to enact a more aggressive approach to estate recovery.

This issue has been appealed by the state of Michigan with a hearing set for January. There will be much more to say on this issue as it develops.

Many veterans are unaware of the Aid and Attendance Pension that is available to help them with their medical expenses, which include the cost of assisted living. Some veterans are simply unaware of this benefit. Others have been told that they do not qualify based on “having too much money.” It is important to understand the scope of the Aid and Attendance pension as a starting point. It is also important to realize that veterans who meet the service requirement and who have significant, reoccurring medical expenses can be eligible for this valuable and well-deserved benefit with proper estate planning.

The aid and attendance pension is available to veterans who served during a time of war. It is not necessary to have participated in combat, but simply to have been in the military during a time of war. In addition to the service requirement, it is also necessary to be medically eligible and to meet the income and asset test.

Medical eligibility generally means that the veteran needs assistance with activities of daily living, such as grooming or eating. This requirement is often fairly easily met.

Finally, there are the income and asset tests. The income and asset tests can be the most difficult barrier to qualification for the aid and attendance pension. Among other things, the successful applicant will need to show that reoccurring medical expenses along with standard expenses of daily living exceed monthly income. Regarding assets, there are no hard and fast rules, but having more than $80,000.00 in cash or readily available assets is likely to disqualify a married applicant.

An elder law attorney can accelerate qualification for an otherwise eligible veteran who exceeds the asset or income thresholds. The asset test can be satisfied by use of an asset protection trust. This will allow assets to be preserved for future needs without interfering with qualification for benefits. Moreover, a plan of this kind will facilitate qualification for Medicaid in the future in case nursing home care is required.

Successful applicants for the Aid and Attendance Pension can receive more than $1,800.00 per month in assistance. This money, when combined with the social security and perhaps a pension, is often enough to pay for assisted living and to prolong assets almost indefinitely.

Many seniors receive group health insurance coverage from their spouse’s retirement plan. What many seniors don’t realize is that losing one’s spouse can also mean losing that group health insurance coverage. For seniors on a fixed income, the additional health insurance premium can be an unpleasant surprise. This article from AARP explains that there are several options when group health coverage is lost. First, check into COBRA coverage. It might be possible to extend the less expensive group policy that was available under your spouse’s employer. Second, your rights under HIPAA may allow you to continue coverage from one group policy to the next. Third, it may be that you belong to an organization of some kind that will allow you to get group coverage, such as a local chamber of commerce. If all else fails, you may need to get individual coverage. Be sure to check all of your options and to speak with an insurance agent that you trust.

The loss of group coverage for health insurance could have a significant impact on your cash-flow and monthly budgeting in retirement. Your estate plan should take into account the possible need for individual health coverage in the future and the anticipated costs of meeting that need.

Question: I approached my local Veterans’ Administration office for information about the Aid and Attendance Pension. They told me I had too much money to receive the pension. But I have reoccurring medical expenses of more than $1,000.00 per month. Is there anything I can do?

Answer: This is a delicate situation. On the one hand, some estate planning could allow you to qualify for the Aid and Attendance Pension. On the other, you would be mistaken to think that qualification for the Aid and Attendance Pension alone is sufficient. You need to be planning ahead for Medicaid long-term care at the same time that you are qualifying for veterans’ benefits.

There are several different ways that you could adjust your estate plan in order to qualify for the veterans’ benefits. It is not uncommon to hear of people hoping to convert their assets into income using an annuity in order to qualify for the Aid and Attendance Pension. But this sort of planning could be very short-sighted. If the veteran ever needs Medicaid, the money placed in the annuity will have to go toward payment of the nursing home care. What’s even worse, the state of Michigan will have to be named as a remainder beneficiary. That means that if there is any money left in the annuity at the time of the veterans’ death, it will go to the state of Michigan to repay any Medicaid benefits received. Annuities can have a place in long-term care planning, but they must be used carefully.

It is very often possible to accelerate qualification for veterans’ benefits, but it must be done by an experienced estate planner in order to avoid problems with Medicaid qualification later on.

QUESTION: I have heard that you are allowed to keep some things and qualify for long-term care Medicaid. What are you allowed to keep?

ANSWER: It is true that some property may be exempt for purposes of Medicaid qualification. And indeed, converting non-exempt assets to exempt assets is one valuable method of spend down. The following items are generally exempt:

• Home, up to $500,000.00 in equity value. The home must be the principal place of residence and the resident may be required to show some intent to “return home” even if this never actually takes place.
• Household and personal belongings such as furniture, appliances, jewelry and clothing.
• One vehicle (a car or truck or van)
• Pre-paid funeral plans and burial plots
• Cash value of life insurance policies – Up to $1,500 in cash surrender values may be exempt, along with term life insurance, depending upon your situation.

With careful asset positioning, an elder law attorney may be able to help you exempt additional property. You should also know that in some cases, assets may also be excluded from being counted for Medicaid purposes.

QUESTION: I am concerned about my parents. My dad just entered the nursing home. His care costs more $6,000.00 per month and my mother is almost out of savings. Does she have to sell the house (which is worth about $250,000.00) to pay for my dad’s care? And what about estate recovery? What is that?

ANSWER: Your mother does not have to sell the house and for now, it is safe as long as you follow the proper procedures to qualify for Medicaid. But there are still several concerns here.

First, most people needing nursing home care will end up receiving Medicaid assistance at some point. Many people make the mistake of thinking that they should just pay the nursing home each month without realizing that there are often estate planning options that can prevent the need for a full spend down. Seeing an elder law attorney during a nursing home spend down is a lot like seeing an accountant at tax time: there are a lot of deductions and exclusions that you would not otherwise know about that can cut your tax bill. An elder law attorney can help you minimize your nursing home bill in the same way.

With respect to your home, it is an exempt asset for purposes of Medicaid qualification. A nursing home patient in Michigan can own a home and still qualify for Medicaid. But there are exceptions to this rule and any non-homestead real estate would not be exempt.

Second, a house occupied by a nursing home patient’s spouse is not currently subject to estate recovery. Estate recovery is the process by which the state seeks reimbursement from a Medicaid recipient’s estate. Under current law, the state will not seek to recover costs against the home of a Medicaid recipient that is occupied by the recipient’s spouse. So that is not an immediate concern. But that law could change or it could be that the spouse living at home will have a dramatic change in health and perhaps need Medicaid assistance as well. At that point, the house would become subject to estate recovery and so it would make sense to begin planning for some of these potential problems now.

Recent litigation over the estate of Martin Luther King, Jr. provides an illustration of problems that can develop in the administration of a trust or estate and an opportunity to discuss ways to avoid disputes in estate and trust administration. In the case of the King family, Dexter King is president of the Estate of Martin Luther King, Jr. Corporation. This company controls the use of the image and property of the late Martin Luther King, Jr. Bernice King and Martin Luther King III have sued Dexter King, alleging that he obtained control of assets that were the property of the estate of Corretta Scott King. The lawsuit further alleges that Dexter has mishandled the property of the Estate of Martin Luther King, Jr. Corporation and that Dexter has refused to provide information to beneficiaries and shareholders regarding his activities. This litigation highlights several issues to consider in estate planning and administration.

First of all, it is not uncommon for there to be confusion over what exactly is estate property. What happens, for example, if Fred provides a $5,000.00 gift in his will to Joe and he also names Joe as a beneficiary on a savings account worth about $5,000.00? Should the savings account satisfy the gift in the will, or does Joe get an additional $5,000.00 from the estate? In the litigation over the King estates, there seems to have been confusion over what was part of Coretta Scott King’s estate (the probate assets) and what belonged to the Martin Luther King, Jr. Corporation (a non-probate asset). Any estate can be set up to avoid this kind of confusion and avoid misunderstandings between family members down the line by consolidating the estate to a trust.

A second issue presented in the King litigation involves the handling of personal property. Most wills give the personal representative direction to sell personal property and use the proceeds to pay estate obligations and make distributions to heirs. But in many cases, family members may disagree with the sale of personal property–either because the item has more sentimental value or, as in the case of Martin Luther King, Jr.’s estate, the property is very valuable and the sale price is subject to second-guessing. The reports have insinuated that Dexter King’s decision to sell substantial property of the corporation for $30 million may not have been supported by his siblings. There is also the possibility that the sale was below fair market value. Indeed, rather than sell at a public auction with Sotheby’s, and potentially obtain a better price, the corporation’s property was sold privately at the eleventh hour. Disposition of assets by public auction is clearly a safer route for fiduciaries. Beneficiaries who believe the property more valuable than the asking price have the opportunity to purchase the property themselves and obtain that better price.

Finally, there are allegations that Dexter has refused to provide documentation of his handling of the corporation. My advice to trustees, personal representatives and other fiduciaries is simple: stay organized, be honest, and keep a paper trail. Estate inventories and accountings are provided to beneficiaries as a matter of right. Keeping interested parties informed is the easiest way to avoid disagreements and distrust.

Simple procedural safeguards can be required by estate plan documents to diffuse arguments before they start. Indeed, careful drafting can help prevent disagreements like these and keep families together–and out of court.