Posts By: Gene Osofsky

Q. My mother just died, and her will leaves her estate equally to us three children. I am fairly well-off, but my two brothers are not quite as fortunate. Is there a way that I can redirect some or all of my share to them in a tax efficient way?

A. The answer may very well be “yes.” One way to accomplish this is by the use of a disclaimer. A disclaimer is a renunciation of one’s right to receive a gift or bequest, whether the gift is left in a will, trust, or by beneficiary designation.

However, whether it will accomplish your purpose in routing your share to your siblings depends upon how your mother structured her will. Here is why: in order for a disclaimer to be effective, it must pass to the next person in line without any direction on your part. In other words, it must pass to the successors whom your mother, herself, has chosen to take in the event you predeceased her. A couple of examples will help illustrate the matter:

Example #1: let us suppose your mother’s will recites as follows:

“ I leave everything to my three children, equally, but if any of my children predecease me, then I leave that deceased child’s share to my other surviving children, equally.”

Example #2: now, let us suppose your mother’s will, instead, recites as follows:

“ I leave everything to my three children, equally, but if any of my children predecease me, then I leave that deceased child’s share to his own surviving children”.

In example #1, your mother provides that the share of any predeceased child would go sideways to your siblings, while in example #2, she provides that it would go downward to your own children. In example #1, a disclaimer by you would accomplish your purpose, but a disclaimer by you in example # 2 would not.

A disclaimer is treated as if the target beneficiary had predeceased the decedent. So, before exercising a disclaimer, it is very important to first determine whom the decedent, herself, has selected as the successors. If the decedent died without a will, then the successors would be determined by state law.

The nice thing about a disclaimer is that it is treated for tax purposes as if you never owned the asset; it passes to the successors without any adverse tax implications to you. As a result, a disclaimer can be a very tax efficient way of postmortem planning. By contrast, if you first accept your share and then re-gift it to your siblings, the gift tax scheme would be implicated: you would need to file a Gift Tax Return for amounts over $14,000 per recipient (in year 2014), and the gifts to your siblings would reduce your own lifetime exemption from gift and estate tax (currently $5.34 Million per person in year 2014), making less available for you later on to shield bequests to your own beneficiaries.

To be effective, a disclaimer must meet certain requirements: it must be in writing, it must be made before you accept the gift or any of its benefits, and it must be made not later than nine months after your mother’s death. Caution: a person receiving public benefits, such as Medi-Cal or SSI, should never make a Disclaimer without getting professional guidance, as doing so would be treated as a prohibited transfer of assets and could jeopardize continued eligibility for public benefits.

Posts By: Gene Osofsky

Q. “Mom suffered a stroke and is in the hospital in ICU.  I do not have signing power on her bank accounts and I need to pay her bills.  I am told that I need a Power of Attorney so that I can take care of her finances. Can you help?”

A. We frequently receive frantic calls like the above, and it saddens me that I usually have to advise the caller that it may now be too late.  A Power of Attorney is a legal document and can only be signed when the signer, also called the principal, has legal capacity.  If the principal is delirious, in a coma, or otherwise mentally incapacitated,  he or she does not have the required capacity to sign a power of attorney or, indeed, any other legal document.  This advice often comes as a surprise to the well-intentioned family member who hopes to help a loved one manage his or her affairs.

In cases like this, I find myself wishing that the caller had contacted us sooner, before the crisis, so that we could have prepared the necessary documents to deal with just this problem.  Incapacity, especially if brought on suddenly by an injury, stroke or other acute event, can strike without warning, and is especially problematic for seniors in declining health.  Incapacity can also be a gradual process, brought on by declining memory, dementia or other mental problems.

Keep in mind that signing a Durable Power of Attorney (“DPOA”) does not necessarily mean that the signer instantly gives up control over his financial affairs.  Indeed, the DPOA can be a “springing power”, which means that it only becomes effective when, for example, a physician certifies in writing that the principal no longer has capacity to manage his or her affairs.  It can also provide that the principal’s power to manage his own affairs is restored if he later regains capacity.  Further, a DPOA can be a comprehensive legal document which delegates to a trusted agent authority to do almost everything that the principal could do on his own, or it can be a limited power which authorizes the agent to handle only certain types of transactions, such as the payment of bills from a specific checking account.

It is a common misconception that powers of attorney are all alike.  They are not.  Indeed, a DPOA can be as broad, or as limited, as the need and comfort of the principal requires.  By way of example, it can authorize the creation or modification of Living Trusts, the purchase or modification of insurance policies, the making of gifts to loved ones, and/or Medi-Cal planning for long-term care.  The important point, however, is to take steps to create one which meets your needs before a crisis strikes and while you are in full possession of your faculties.  In that way, it can serve you and your loved ones well in the event of future need, and likely avoid the need for a court-supervised, and often expensive, conservatorship proceeding.

 


Posts By: Gene Osofsky

 Q.  My wife and I are both age 60, in good health and have very modest incomes. We are not yet eligible for MediCare.  In the past, we were told that we were not eligible for Medi-Cal because we have some savings and because we are not disabled. Has any of this changed under the new health care law? 

A. Yes, indeed. Under the Patient Protection and Affordable Care Act (“ACA”), aka Obamacare, Medi-Cal coverage will now be available to individuals aged 19 to 64 based upon their incomes, alone, and without regard to the value of their assets or whether  they are disabled.  The goal is to expand health care coverage for an estimated one million Californians who could not previously qualify because of the traditional asset or disability test. This provision of the ACA is called “Medi-Cal Expansion”. 

This expansion coverage – available only for those under age 65 and not on MediCare — represents a significant break with traditional Medi-Cal. Formerly, to qualify for Medi-Cal, all applicants had to show that they were disabled or over age 65 and that they had less than $2,000 in the bank. 

To qualify for  coverage, annual household income must be less than 138% of the Federal Poverty Level, which calculates as follows for 2014: One person: $15,856; Two Persons: $21,404; Three Persons: $26,951; Four persons: $32,499. Persons whose household modified adjusted gross incomes are less than these ceilings will now be eligible for Medi-Cal regardless of the value of their assets and regardless of disability.  Further, they will not be obliged to purchase private health care insurance,  will have no premium cost for healthcare coverage, and will incur no share of cost (“co-pay”) for health care services. 

This Expansion Medi-Cal coverage will potentially benefit all persons under age 65 with modest incomes.  However, the coverage groups that will likely most benefit will be the following: 

a) Long-Term Unemployed: persons in this group no longer have employment-based health coverage and typically have very modest incomes, even though they may have significant savings from prior employment; 

b) Persons Caught in the Two-Year Medicare Wait Period: persons under age 65 who become disabled and qualify for Social Security Disability find that there is a two-year wait before they qualify for Medicare. These individuals may now qualify for Medi-Cal during this coverage gap; 

c) Disabled Persons with Some Assets: formerly, disabled persons who needed Medi-Cal coverage could not accumulate savings of more than $2,000.  In order to preserve eligibility, excess resources would have to be spent down or transferred into a Special Needs Trust to be managed by others.  Under the new rules, disabled persons under age 65 will now be able to accumulate savings and, if able to do so, manage their own resources without disqualifying themselves from Medi-Cal healthcare coverage. 

In short, for those uninsured persons under age 65 and not on MediCare, the Expansion Medi-Cal program offers a real opportunity to secure healthcare coverage.  To apply go to www.CoveredCa.com or call 1-800-300-1506. 

Note:  When these individuals later turn 65, and should they then desire to retain Medi-Cal coverage (e.g., to help with MediCare co-pays, In Home Supportive Services, or nursing home costs), they will need to re-qualify under the more traditional asset-based rules.  If they then need to reduce their countable assets to maintain eligibility, they should seek professional guidance to avoid running afoul of the Medi-Cal asset transfer rules.

Reference:  2017 Federal Poverty Level Rates, published in ACWDL 17-10 (03/03/2017);

2021 Federal Poverty Level Rates, published in ACWDL 21-01 (01/27/2021)

 

Posts By: Gene Osofsky

Q. My brother-in-law wants to appoint me as his agent under his Power Of Attorney to handle his money and other affairs in the event of his incapacity.  If I accept the appointment, are there any rules that I should observe?

A.  Yes, and while it may be an honor to be asked to serve, there are definite guidelines you should follow when performing your duties.  In the eyes of the law, you will be considered a fiduciary, and as such you will have the highest duty to act in your brother’s best interest.  Here are some rules you should observe when handling your duties:

(1) Act Only in Your Brother’s Best Interest: this means that you must make decisions and take actions based upon what is best for your brother and not what is best for you or anyone else.  Example: let’s suppose your brother’s grandson could use some help with college tuition and you would like to use some of your brother’s money to make a gift to his grandson for that purpose.  Under fiduciary principles, you cannot do so unless the power of attorney (“POA”) document expressly authorizes this action.  Remember, you cannot make gifts of your brother’s money, even to his own family members, unless the power to do so is contained in the POA, a rule that often comes as a surprise to many persons in your position.

(2) Manage Your Brother’s Money Carefully: you can pay bills, oversee bank accounts and pay for things that your brother needs, but always use good judgment and common sense.  As a fiduciary, you must be even more careful with your brother’s money than you might be with your own.  Pay bills on time and invest his money where it will be safe.

(3) Keep His Money and Property Separate from Your Own: keep your brother’s money in a bank account in his own name and do not commingle his funds with yours.  When you sign checks or other documents you should do so in a special way.  Let’s suppose your brother’s name is John Doe and you are Bruce Smith.  You should then sign his name as follows: “John Doe, by Bruce Smith, his Attorney in Fact.”  Never sign just “John Doe”.  The fact you are acting as a fiduciary should always be clear whenever you sign for him.

(4) Keep Good Records: keep a detailed list of everything that you receive or spend on behalf of your brother, avoid paying in cash and keep receipts for even small expenses.  Someday you may need to render an accounting to one of his heirs and/or possibly to the court if a dispute arises  about the manner in which you have managed his money.

The above rules apply generally to all situations where someone else has been appointed to handle someone else’s money or oversee his affairs.  In addition, actions by court-appointed fiduciaries, such as executors and conservators, often also require court approval. In your case, by following the above rules and using good judgment and common sense you can serve your brother well and avoid problems for yourself.

Posts By: Gene Osofsky

Q.  My wife and I have a wonderful caregiver who has enabled us to remain at home.  We would like to make a significant bequest to her in our wills.  Can we handle the bequest by just handwriting a codicil to each of our wills?

A.  The simple answer is, no.  Here’s why: California lawmakers have become concerned with cases of caregivers who have taken advantage of seniors and other dependent adults in their care, by stealing vast amounts of money from them.  You have probably read news accounts of these sad situations.  As a result, they passed a law which now presumes that a bequest made by a dependent adult to a paid care custodian is the result of fraud or undue influence and therefore void, unless a very critical special step is taken in connection with the proposed gift or bequest. That critical step is designed to protect vulnerable dependent adults.

Here is the critical special step: in connection with making the gift or bequest, you and your wife must be interviewed by an independent attorney, outside the presence of your care custodian, for the purpose of determining that your intended gift is not the result of fraud or undue influence.  The attorney must be your attorney, and not the attorney for the caregiver.  If your attorney concludes that it is not so tainted, then he or she may then so certify in writing by signing a Certificate of Independent Review in the form prescribed by law.  That certificate must then accompany your gift or bequest in order to validate it. Without that certificate, the gift or bequest is presumed invalid and will likely be declared void by a judge.

The same rule would apply if you wished to give her a big check this holiday season or to name her as a beneficiary on your insurance policy.  Unless the gifts fell within an exception, the law would presume them to be the product of fraud or undue influence and therefore void.

Exceptions:  The following gifts would not be void under this rule:  (1) a smaller gift of less than $5,000 (provided that the value of the donor’s estate is at least $184,500; this is the threshold value as of April 1, 2022, is indexed to inflation and is updated every 3 years.);   (2) a gift to a caregiver who is also a family member, and (3) a gift to a caregiver who performs services without pay, providing there was a pre-existing personal friendship.  There is also an exception where the care custodian is able to prove to a judge, with clear and convincing evidence, that the gift was not the result of fraud or undue influence. But, a caregiver who goes this route takes a risk: if she fails to so convince the judge, she will then have to pay all costs of the court proceeding including reasonable attorney fees to the other parties.

So, making a sizable gift or bequest to your caregiver is not a do-it-yourself job.  To validate the gift, you need to engage an independent attorney to conduct the appropriate evaluation and sign the required Certificate of Independent Review.  If this requirement is followed, then your gift or bequest should be honored and your caregiver will then enjoy your loving tribute without the need to defend it in court.

Posts By: Gene Osofsky

Q. I plan to hire a full-time caregiver for my husband, and I want to make sure that I handle everything legally.  Do you have any suggestions as to how I handle payment or anything else?

A.  Yes.  There are specific rules about handling the payroll, tax and employment law aspects of hiring household help, especially a caregiver.  Here are some tips:

1.  Classify Your Hire Correctly: one of the most common mistakes is to treat the hire as an independent contractor, when they are really an employee.  If you have the right to control how, when and in what manner your caregiver handles the job, the individual is an employee and should be so treated.  As such, you must make proper payroll deductions when you pay her, and furnish a form W-2 Wage and Tax Statement to her each year.  Knowingly mis-classifying your hire as an independent contractor could be viewed as tax evasion and could subject you to penalties and back tax payments.

2.  Do Not Confuse Gross Pay with Net Pay: gross pay, less payroll deductions, equals net pay.  Make sure that both you and your hire are on the same page.  At the time of employment, prepare a sample payroll stub which shows gross income, deductions, and net pay and discuss this.  Doing so can go help avoid misunderstandings.  Both the IRS and the Franchise Tax Board have easy-to-follow publications to assist you.  You might ask your tax preparer to show you how to do this once, so you can do it yourself each payroll period thereafter.  He or she can also prepare quarterly reports for you to send to the IRS and FTB. You might also handle this by using an online payroll service (e.g.Payroll.Intuit.com, or Care.com/HomePay) to do it for you.  

2.  Pay Overtime Correctly.  A new California law will take effect in 2014, called the Domestic Worker Bill Of Rights.  It will require the payment of overtime to a person employed to assist with domestic work (including caregiving) if they work more than 9 hours in any single day or more than 45 hours in the work week.  Overtime is at the rate of 1.5 times the regular hourly rate.  This requirement cannot be circumvented by offering a fixed salary: fixed salaries are legal for “exempt” workers (generally white-collar professionals), but are illegal when employing a nonexempt work such as a caregiver.

3.  Secure a Workers Compensation Insurance Policy.  Protect your hire, as well as yourself, in the event he or she is injured on the job.  Families who do not have workers compensation coverage expose themselves to significant financial liability.  You may be able to do this by purchasing a special endorsement to your homeowner’s policy, often at modest expense.  Be sure to tell your insurance agent that you are seeking an endorsement for an employee performing domestic work in your home on a regular basis, and not for someone performing occasional work on your premises.

4. Confirm “At Will” Employment in Writing. You should prepare a simple employment agreement which recites that the employment arrangement remains “at will” and may be terminated by either party with or without cause.  This affirms basic California employment law, but may spare you a lawsuit in the event the relationship sours.

Handling the employment relationship appropriately can be mutually beneficial: you will be complying with law, protecting yourself from financial surprises, and may find that your payments to your caregiver are tax-deductible.  At the same time, you will create benefits for your employee in the form of contributions toward Social Security, Medicare, unemployment and state disability, and provide a documented source of employment income to enable her to apply for credit.  Following these basic guidelines will help foster a long-lasting relationship.

Posts By: Gene Osofsky

Q. I took out a HECM reverse mortgage loan a few years ago and was advised not to include my younger wife on the loan documents so that I could qualify for a bigger loan. When I die, will the bank be able to take over our home to pay the loan and evict my spouse if she survives?

A. Here’s the situation: the U.S. Department Of Housing And Urban Development (“HUD”), which ensures reverse mortgages placed by banks under the popular Home-Equity Conversion Program (“HECM”), currently has a regulation which requires reverse mortgage loans to be fully payable upon the death of the borrower, unless survived by a joint-borrower who is also on the loan. Where a husband and wife both sign the loan documents, they would be considered joint borrowers, the loan would only be due and payable upon the death of the survivor, and the concern that you raise would not arise.

However, sometimes couples are advised by lenders to take out a reverse mortgage only in the name of the older spouse, so as to qualify for a bigger loan. Remember, the size of the available loan is based, in part, upon the age of the borrower; the older the borrower, the more money he or she can access under a reverse mortgage. In those cases, the younger spouse would not be on the loan, and would therefore not qualify as a surviving joint-borrower. Upon the death of the older spouse, the lender would then demand full payment of the loan. If the survivor were unable to pay off the full loan balance, the lender could then begin the foreclosure process to force a sale of the home and evict the surviving spouse. This is the scenario that concerns you.

Many other couples around the nation have found themselves in this very situation and many have lost their homes to foreclosure upon the death of the borrowing spouse.

The good news is that, on September 30, 2013, a federal court in Washington DC issued a ruling finding that HUD’s regulation violates federal law, declaring that it was Congress’ intent to protect surviving spouses even if they were not on the loan. The court ordered HUD to fashion an appropriate remedy to protect surviving spouses in these situations. The case was initiated by AARP and entitled Robert Bennett, et. al v. Shaun Donovan.

Caution: It is not yet clear how HUD will correct the problem, and experts believe that the court ruling does not mean that couples can now safely take out a reverse mortgage and leave one spouse off the loan. Therefore, until HUD issues new regulations, it is still unwise for a spouse to be intentionally left off the loan documents. Likewise, in situations where an unmarried individual takes out a reverse mortgage loan and later remarries, he or she would be well advised to discuss with the lender the possibility of modifying the loan to add his or her new spouse as a joint borrower, so as to protect the surviving spouse from the risk of foreclosure.

Posts By: Gene Osofsky

Q. My wife and I are looking into purchasing long-term care insurance policies for the future, but we are concerned about the premium cost. Are there any ways to reduce the cost?

A. Yes. While long-term care insurance is a good way to plan for the future, the premiums are not inexpensive as you have discovered. However, there are some ways that you can tinker with the policy terms in order to reduce that cost:

1) Shorter Benefit Period: probably the most significant cost saving step is to purchase a policy which covers a limited term of years, rather than for the balance of your lifetimes. Unless you have a family history of a chronic illness, it is not likely that you will need coverage for more than 5 years. According to a study from the American Association of Long-Term Insurance, only 8% of people who needed coverage needed it for more than 5 years. By purchasing coverage for 3, 4 or 5 years, rather than for your lifetimes, you can save thousands of dollars in annual premiums. Alternatively, if you do have chronic illness in your family, perhaps you may wish to consider a policy with a longer fixed duration, e.g. 10 years.

2) Longer Waiting Period: most policies have a waiting period before coverage begins, which is typically between 30 and 90 days. The longer you make this waiting period, the cheaper your premiums. Remember, though, that you will have to pay the cost of care out of your own resources during this waiting period.

3) Reduce Daily Benefit: instead of purchasing the maximum daily benefit you might need in a nursing home, you might consider insuring for only a portion. A lower daily benefit will mean a lower premium. But you will then have to pay from your own resources for the uninsured portion.

4) Shared Care Policy: if you buy a policy to cover both you and your spouse, a shared care policy might give you more coverage for less money. With the shared care policy, you buy a pool of benefits which you and your spouse can split. For example, if you buy a five-year policy, you would have a total of 10 years between you and your spouse. If your spouse uses 2 years of coverage under the policy, you will have 8 years remaining. A shared care policy may cost more than separate policies for the same benefit, but it will allow you to buy a shorter term policy at less premium cost.

5) Inflation Protection: inflation protection increases the value of your benefit to keep up with inflation and is generally recommended. But you can save on premiums by choosing the method of inflation protection, e.g. based upon compound interest increases or on simple interest increases. If you are younger than age 62, you should purchase a compound inflation protection. Doing so, however, can more than double your premium. If you are older, some experts believe that simple inflation increases should be enough, and opting for this arrangement will save on premium cost.

Remember, also, that a portion of your premium may be tax-deductible, depending upon whether your total unreimbursed medical expenses are enough to meet certain thresholds for deductibility. Also, before you decide upon an insurance company, check its rating for paying claims and the historical stability of its premium adjustments over time.

 

Posts By: Gene Osofsky

Q.  One of our adult children has a disability and receives SSI and Medi-Cal. We are concerned that an inheritance may terminate his benefits.  We have heard something about a Special Needs Trust. Can you tell us more about that?

A.  Sure. As you apparently know, your son cannot have more than $2,000 in savings or other nonexempt assets and still remain eligible for these benefits.  The receipt of an inheritance from you would likely put them over that ceiling and thereby terminate his eligibility.  However, the law permits you to create a Special-Needs Trust (“SNT”) to receive his inheritance without jeopardizing his public benefits.  The law’s purpose is to allow you to set aside “private funds” to supplement his SSI and/or Medi-Cal, and to thereby enhance your son’s quality of life in a kind of public–private partnership.

You would create the SNT as part of your own estate plan, and you would designate someone other than your son to be the trustee, such as one of your other children, a relative or even the trust department of a bank. So long as properly created and properly managed, the funds in the SNT would supplement his needs by direct payment to third-party providers of goods and services, while preserving your son’s public benefits.

Currently, a single individual on SSI, living independently, would receive  $866.40 per month in California and $921.40 if blind. Since the SSI program is designed to cover food and housing expense, it would be best for the SNT to pay for things which are not food or housing, e.g.  transportation, cell phone, computer, etc.  Reason: payments for expenses which are not food or housing would result in no reduction in his SSI or Medi-Cal benefits.

However, the SNT could even assist with the cost of food or housing, but in exchange for only a modest reduction in SSI.  Example: if the cost of an apartment were $1500 per month, your son could pay $500 of the cost out of his SSI, and the SNT could pay the $1,000 balance directly to the lessor.  Your son’s SSI would only then be reduced by only $257 per month. Not a bad trade-off.  Further, if the SNT had sufficient assets, it could actually pay much more than $1,000 per month to providers of goods and services for his benefit, and here’s the beauty about how this works: no matter how much the SNT pays toward your son’s monthly housing or food expense,  the maximum reduction in his monthly SSI benefit would never exceed $257.  Thus, a well endowed SNT could generate a substantial benefit to a person with a disability, with only a modest reduction in his or her SSI and usually none to his or her Medi-Cal eligibility.  The SSI rules which govern here are referred to as the “ISM Rules”, where ISM stands for In Kind Support and Maintenance.

Caution: the SNT should never distribute money directly to your son, as there would then be a dollar for dollar reduction in his SSI. Rather, payments should always be made to third-party providers of goods and services on his behalf.

Parents who have a child receiving public benefits, such as SSI or Medi-Cal, should almost always consider creating an SNT as part of their estate plan and thereby preserve their child’s continuing access to those benefits while providing a funding source for the child’s supplemental needs.

Posts By: Gene Osofsky

Q.  My husband and I would like to make wills, but I am concerned because he has been diagnosed with early-stage dementia. Legally, can he still make a will?

A.  It depends, but very often the answer would be yes. Under the law, he must have what is called “testamentary capacity”. This means that at the time he signs a will he must understand what he is signing and the implications of making a will. Simply because he has been diagnosed with a form of mental illness or disease process, does not necessarily mean he lacks legal capacity to make a will.

Generally speaking, he would be considered mentally competent to make a will if: (1) he is able to understand that he is making a will, (2) he understands what he owns, and (3) he knows and understands who his family relations are.  Further, he would only need to meet these requirements at the time he signs his will.  Some persons are more lucid at certain times during the day, and he should sign his will during those lucid periods.

A related question is whether he would also have sufficient capacity to make a trust. The question here is whether signing a trust requires a greater degree of capacity than signing a will. A California court recently addressed this question in a case called Anderson vs. Hunt. In that case, a father made an amendment to his original trust, created years earlier, to leave a 60% portion of his estate to his longtime romantic part, thereby reducing the share going to his three children. When the father died, his children contested the trust on the ground that their father lacked sufficient capacity, urging that the act of creating a trust required a greater degree of capacity than signing a will.  On appeal, the court upheld the trust amendments, concluding that they were rather simple in nature and therefore the law concerning the capacity to make a will should control. The lessons: (1) if a trust document were drafted to be relatively simple and straightforward, then the requirement of capacity would likely be construed under the more relaxed standard applicable to the making of wills; (2) alternatively, for a person whose capacity were questionable, perhaps a will would be the better choice.

If there is concern that capacity may later be questioned, it would be helpful to have evidence of your husband’s capacity at the time he signs the will or simple trust, such as a current letter from his physician attesting to his capacity and/or a video taped pre-signing interview conducted by the attorney preparing the will.

If your husband has sufficient capacity to meet the relaxed standards for making a will, or even a simple trust, I would urge him to do so as soon as possile. Further, if he does not plan to disinherit any children, or to treat them differently in the overall division, the chance of a later contest is much reduced.