Qualifying for Medicaid

As clients face long term care, they often inquire about the eligibility rules for qualifying for Medicaid. A basic understanding of the rules pertaining to Medicaid can be helpful in financial planning. In early 2006, Congress passed the Deficit Reduction Act and President Bush signed the law on February 8, 2006. There are significant eligibility rule changes which affect our aging population. In order to qualify for Medicaid, an applicant must have a covered medical need such as skilled nursing care, have income less than the monthly private pay costs and meet the resource (asset) test. If the applicant's income is less than the private pay costs, then the applicant meets the income test. With respect to resources, the Department of Social and Rehabilitation Services (SRS) will divide resources into two broad categories, exempt and nonexempt assets.

Examples of exempt assets are a residence of less than $500,000, a vehicle of any value, life insurance with a death benefit of $1,500 or less, household goods, pre-paid funeral plans up to $5,000, not including casket, grave marker, and gravesite. In the case of a husband and wife, SRS does not take all the assets that can be used by the at-home spouse. The other joint assets (investments), will have to be spent down to $199,080 (this fi gure adjusts annually). At that time, the couple will divide their assets in half. The at-home spouse retains $99,540 and the institutionalized spouse must use his or her assets for extended care costs and other proper spend down expenses such as a funeral plan, vehicle, repairs or remodeling the residence. Once the assets are spent down to $2,000, the institutionalized spouse qualifies for Medicaid. The at-home spouse then retains the exempt assets and his or her own assets. In addition, the at-home spouse retains monthly income of $1,650 plus an excess shelter allowance up to $839 monthly, for a total of $2,489 monthly.

When gifts or transfers are made to third parties, without consideration, there is a penalty period. The new law now provides for a fi ve (5) year look-back period for transfers made after February 8, 2006. Prior to that time, the look-back period was three (3) years and monthly gifts under $3,000 were allowed. There are techniques that are permissable. In the event a child is residing at home, and is assisting the parent(s) with care, a transfer of the residence is permissable. Also, a care contract that pays for services such as food preparation, cleaning, and personal care may be permitted if reasonable. Transfers at or near market value are permitted.

The Importance of Naming a Fiduciary

An important step in creating your estate plan is the person you designate as a fiduciary. The fiduciary is your Executor, Trustee, and Agent under Financial Power of Attorney or Health Care Power of Attorney. When you meet with your attorney, you should have already given careful consideration to the person you designate. That person should have some experience, be trustworthy, able to handle the affairs expeditiously, to communicate, and avoid conflicts of interest. Careful consideration can avoid later problems. Most often spouses name each other and in the alternative a child or children. That person should be able to carry out your directions in whatever capacity they are serving. You should clearly communicate with the designated person and verbally advise other children of your decision. Each of them should have a clear idea of your intent and directions. Both written and verbal direction can prevent later problems. Everyone will know your intent. In some cases, you may consider a third party, independent of your immediate family. That person may be able to handle the estate affairs professionally and impartially. An independent third party would begin with no special bias or interest and may be able to discuss matters more freely with each benefi ciary. An example of an independent third party is a bank trustee. There are fees associated withserving in such function, but the costs may be well worthwhile.

Following are the most common roles of a fiduciary:

Executor: This is the person or institution that you designate in your Will to perform all matters in the finalization of your affairs, after death. You may name co-executors, and name a succession of Executors, in the event the first named Executor cannot serve. The Executor collects your assets, pays bills, and makes distribution according to your written Will. The Executor has control only over assets that are subject to Probate.

Administrator: When there is no Will, this is the person or institution that is appointed by the Court, after death, to handle your affairs. The function is the same as an Executor.

Trustee: The Trustee is the person or institution that is designated to hold, manage, invest and pay your assets that are placed in Trust. Most Living Trusts designate a successor Trustee, who, at death, takes control and distributes assets according to the Trust document. In that case, the function is similar to an Executor or Administrator, without the necessity of Probate. Kansas has implemented a Uniform Trust Code, that provides a Trustee should provide a copy of the Trust document and periodic accounting, to the trust beneficiaries and sets out other duties.

Agent under Power of Attorney or Health Care Power of Attorney: The agent under the fi nancial power of Attorney or Health Care Power of Attorney takes control during your life-time (as opposed to death). The powers under a fi nancial power of attorney are spelled out in the
document. Generally, under a General Durable Financial Power of Attorney, the Agent has broad discretion in handling your financial affairs. The agent generally would have the ability to pay bills, collect sums due to the Principal (the person giving the power of attorney), sell property, including the homestead, and handle insurance matters. The agent has a duty to the Principal. You can designate that the power of attorney takes effect immediately, or only upon disability. The agent under the power of attorney has the duty to account to the Principal (the person giving the power of attorney) and to others, if required by the instrument. For example, the agent may be required to provide accountings to other family members or Principal's attorney. An agent under the Health Care Power of Attorney has the ability, to consent to medical treatment, withhold consent and withdraw consent. In addition the agent is entitled to receive medical information from health care providers.

The roles in each case are different and you may name different persons. For instance, the agent under the Healthcare Power of Attorney may have health experience and be designated for that reason. The agent under the Financial Power of Attorney may have business experience and be designated for that reason. When designating a relative, this is often the fi rst time that the person has acted in such capacity. The agent should meet with the person for whom he/she is handling the affairs, and with the attorney. A clear understanding of the duties and the expectations is needed. Compensation should be discussed. Many families start out with no idea of asking for or expecting compensation, but after a year or more, depending on the monthly duties performed, perhaps the agent should receive a monthly payment for services.

Individual Retirement Accounts

Individual Retirement Accounts are increasingly a signifi cant portion of a client's assests. Taxable retirement accounts, including traditional IRA's 403(b), and 401(k)'s continue to grow. The income and gains within the plan grow tax-deferred. When distributions are made from the plan, the income is taxed at ordinary income rates. Roth IRA's also grow tax deferred, but distributions are non-taxable. There have been recent changes in rules affecting distributions. Distributions from a plan after the owner has reached age 59 1/2 are permissable, and the distributions are taxed at the ordinary income rate of the individual. Many clients keep assets
in their plans, however, until they reach the Required Minimum Distribution age of 70 1/2. At that age you are required to take the Required Minimum Distribution. The amount isdetermined by reference to IRS Publication 590. The value of the IRA for December 31 of the year before is divided into the remaining years of your life expectancy and hypothetical beneficiary 10 years younger. Your estate plan will not directly affect the ownership of your IRA, 403(b) or 401(k). Your retirement account is owned by you, individually. The ownership should not be transferred to a Trust, or held jointly. However, you should carefully consider beneficiary designations. Your spouse can roll-over the inherited retirement account into his or her plan. If the plan is rolled over, then the spouse can delay the start of the Required Minimum Distribution until the spouse attains 70 1/2. Or, the spouse can treat the retirement plan as an inherited IRA and be guided by the Single Life Expectancy Table and the required minimum distribution would be made to the spouse either on or before December 31 of the year following the calendar when you died, or December 31 of the year when you would have attained 70 1/2.

When you die, the nonspouse individual beneficiaries of the retirement plan must begin taking an annual distribution. The distribution amount is calculated by dividing the prior yearend
account value by the applicable divisor. The beneficiary can use his or her own age to determine the applicable divider. This is an advantage, as a younger beneficiary may be able to stretch out the value over a longer period of time, often 30-40 years. This is referred to as stretching out the benefi ts to avoid higher tax on a larger distribution sum. If you name the successor Trustee of a Living Trust as the beneficiary, the Trustee controls the distribution. If the Trust is a qualified Trust, the Trustee can also elect to stretch out the Required Minimum Distribution. A Trust is qualified if it meets all of the following criteria: the trust is valid under state law, it is irrevocable upon death, the trust beneficiaries are identifiable and a copy of the Trust is delivered to the plan administrator. In order to achieve separate account treatment for everal trust beneficiaries, you should name separate sub-trusts for each beneficiary. Then specifically identify by name each sub-trust on the plan's beneficiary designation form, assigning a percentage or fraction of the plan to it.

Scott Mann Recently Honored

Evans & Mullinix partner, Scott Mann, was recently announced as one of only three family law attorneys honored in the Kansas City Business Journal's 2006 Best of the Bar Award. The prestigious honor is based on peer rated recognition of attorneys by other attorneys. "It was truly an honor," Scott agreed. "To be named by your peers has special meaning." Scott is a 17-year-veteran of the legal professional who specializes in family law and has been with Evans & Mullinix for 7 years. He said family law is especially challenging because it is changed almost every year by state legislatures and appeals court rulings. Scott practices in both Missouri and Kansas. "The legislatures make significant changes every year," he said. "And the courts of appeals almost weekly seem to be handing down new decisions that create either new nuances, or change dramatically our laws. Part of the reason I find it interesting is that it is ever changing, but you have to stay abreast of these changes to serve your clients to your best ability." The father of two children, aged 9 and 11, Scott recently completed a four-year term on the Fairway, KS. City Council. He is also secretary treasurer of the family law section for the Kansas Bar Association. He earned his law degree from the University of Missouri School of Law and is a Kansas City native.