10 ESTATE PLANNING MYTHS
A WILL AVOIDS PROBATE
Actually just the opposite is true, if you have a will the only way it is given effect is through the Probate Court. Having a will insures that your property will pass according to your wishes, but it will be handled in the Probate Court. Having a Will is a good idea however. It allows you to name who will handle your estate, specify who will get your assets, and under what terms. With a properly drafted will, you can benefit children or grandchildren, set money aside for college, benefit charities, and leave assets to children (or others) with protection from their creditors.
I CAN GIVE AWAY $10,000 A YEAR.
The annual gift tax exemption this year is actually $12,000.00 not $10,000.00, and it applies to each person to whom you make a gift. HOWEVER there are two things that most people don’t realize about this gift exemption. First, the only time you would need to worry about ever paying a gift tax is if you gave away more than $1 million during your lifetime and/or had an estate greater than $2 million. So, for most people, a gifting plan to use their annual exclusion amount makes little sense. Second, and most important, the annual exclusion has to do with Gift and Estate taxes, it has nothing to do with Medicaid Planning! Under the new Medicaid rules following the Deficit Reduction Act of 2005, any gifts made within 5 years of applying for Medicaid (the “look back period”) will result in a Medicaid penalty. The way the new rules apply the penalty could have disastrous consequences for the elderly.
MEDICAID/ THE NURSING HOME WILL TAKE MY HOUSE
No matter how nice your house is, neither Medicaid nor the Nursing Home want it, but it doesn’t mean its entirely safe. Your house, or at least $500,000.00 in equity value, is an ‘exempt asset’ for Medicaid purposes as long as you live provided you claim it as your primary residence, even if you will never physically be able to return to live in the home. The problem arises when you die. If the house passes through Probate to go to your heirs, Medicaid may claim reimbursement and the house might have to be sold to pay the claim. There are simple ways to avoid this and preserve your house for your heirs.
A REVOCABLE TRUST PROTECTS ASSETS
Again, actually the reverse is true. Property held in a Revocable Living Trust is considered as your individual property and treated as if the Trust did not exist. This is true generally and for Medicaid purposes, except for your house. If your house is titled in the trust, for Medicaid purposes it loses it’s exempt status and becomes a countable resource. While Revocable Living Trusts can be an excellent Estate planning method, they are not for asset protection and they need to be carefully considered if nursing home planning might be needed.
IT WON’T HAPPEN TO ME (or I DON’T NEED PLANNING NOW)
You can never tell when something bad will happen. People of all ages have unexpected accidents or illnesses that can leave them incapacitated or dead. While many people think that Estate Planning is just for the wealthy or the elderly, consider the case of Terri Schiavo. She was a young woman, yet the whole country got involved in her healthcare because she hadn’t done the necessary planning for her end of life care. And end of life care is not the only thing. Her husband had to go to Probate Court to be appointed her Guardian so he could handle legal and financial matters, as well as medical decisions. All of that could have been avoided with proper planning. She could have done an Advance Medical Directive to specify who would make medical decisions and what kind of medical treatment and life sustaining treatment she wanted. She could have done a Durable Power of Attorney to allow her husband, or someone else, to manage her financial affairs. And what about her children (if any)? With proper advance planning she could have provided for them, even named someone other than her husband to handle their money and see that it was preserved for college. Yes, the elderly and infirm need to do proper planning, but so does everyone else.
EVERYTHING IS JOINT, MY SPOUSE CAN HANDLE IT ALL
This isn’t exactly true. While your spouse may have access to some joint property, such as bank accounts or investments, it doesn’t cover everything. If you own land jointly, you still have to sign any legal documents to transfer it or to mortgage it. You need to sign legal documents, various insurance forms, and lots of other things. And just because someone is your spouse doesn’t mean they can make medical decisions for you. You need to have documents in place to give those powers. That is why everyone, single or married, once they reach 18, should consider Advance Medical Directives and Durable Powers of Attorney.
I HAVE TO SPEND ALL MY MONEY TO GET MEDICAID
This is nearly true, if you are single. While your house is protected and you can set aside some money for burial, you cannot have more than $2000.00 in countable assets and qualify for Medicaid ($5000.00 for community Medicaid). However, married couples can have up to $103,640.00 and get coverage for a spouse in a nursing home. Also, not all assets are countable, so things like cars, certain retirement plans and income producing property, to name a few, may be not countable.
I NEED A CIVIL UNION TO PLAN FOR MY PARTNER
This is not true at all. With most ‘Estate Planning’ documents, you can name anyone you want in whatever capacity you want. In the estate planning context, Civil Unions are important for those who have not done other planning. With proper Estate Planning documents you can name your partner to handle your financial affairs, make medical decisions for you, talk to you health care provider and inherit part or all of your estate, all without needing a Civil Union.
I CAN’T LEAVE ANYTHING TO MY SPECIAL NEEDS CHILD
Many parents of disabled or special needs children, who receive various types of government benefits, think that if they leave any money or property to that child the child will lose benefits. They are correct if the child received money outright, the child would lose benefits. However, money can be left in a Supplemental Needs Trust for the child without jeopardizing benefits. Money in such a trust can be used to provide all types of things to improve the child’s quality of life, from housing to travel to additional medical procedures and equipment. A SNT can be a very powerful planning tool to provide for a disabled or special needs child.
I CAN DO IT MYSELF
Sure, there is a lot of information available about Estate Planning and Medicaid. There are websites and computer programs and free forms that will allow you to create Wills, Advance Directives, Powers of Attorney and other documents all by yourself. But be aware that each state has its own requirements for each of the various legal documents. If you create your own and don’t meet the Vermont requirements, your documents may not be effective. If you are dead or disabled when that is discovered, its too late. Similarly, Medicaid is very state specific. The rules that govern Medicaid in Vermont are completely different from the rules in New Hampshire or California or Florida. What you read about online or in magazines may work somewhere, but might not work here. Even ‘simple’ estate and Medicaid planning isn’t simple. There are legal requirements for documents, gift tax, estate tax, capital gains tax and income tax issues in even small estates, Medicaid issues, etc. Money spent to consult an attorney who can guide and advise you and draft proper documents for you is money well spent. It is easy to be ‘penny wise and pound foolish’, saving a few hundred dollars by doing it yourself and then costing thousands in taxes or probate costs or additional nursing home expenses.